Federal Bankruptcy Fraud: 18 U.S.C. § 157 Explained

Bankruptcy is a provision in federal law designed to give honest individual debtors and businesses a fresh financial start while ensuring creditors receive an equitable distribution of available assets.

However, when an individual or business misuses the bankruptcy court system to intentionally deceive creditors or conceal property, it becomes a federal crime.

Under 18 U.S.C. § 157, federal bankruptcy fraud criminalizes executing or attempting to execute a scheme to defraud in connection with a bankruptcy filing or proceeding.

What Is the Statutory Language of 18 U.S.C. § 157?

The official statutory text under federal law states:

A person who, having devised or intending to devise a scheme or artifice to defraud, for the purpose of executing or concealing such a scheme or artifice or attempting so to do—

files a petition under title 11;

files a document in a proceeding under title 11; or

makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserting to be a proceeding under title 11, shall be fined under this title, imprisoned not more than 5 years, or both.

What Are Key Statutory Definitions Under 18 U.S.C. § 157?

To understand federal bankruptcy fraud charges, courts rely on specific legal definitions:

Scheme or Artifice to Defraud: A deliberate plan or course of action intended to deceive others, deprive them of property or money, or gain an unfair financial advantage.
Title 11: The portion of the United States Code that governs all official federal bankruptcy proceedings, including Chapter 7 (liquidation), Chapter 11 (reorganization), and Chapter 13 (individual debt adjustment).
Fraudulent Intent: Actively taking steps with the specific purpose of deceiving the court, the bankruptcy trustee, or creditors, rather than making an honest mistake or clerical error.
Bankruptcy Estate: All legal and equitable interests of the debtor in property at the time the bankruptcy petition is filed.

What Must Federal Prosecutors Prove to Convict You of Bankruptcy Fraud?

To secure a conviction under 18 U.S.C. § 157, federal prosecutors must establish four core legal elements beyond a reasonable doubt:

Existence of a Scheme: The defendant devised or intended to devise a scheme or artifice to defraud creditors or the bankruptcy court.
Specific Intent: The defendant acted with specific intent to defraud, meaning they knowingly made false representations or hid assets rather than acting out of confusion or oversight.
Execution of the Scheme: To execute, conceal, or attempt to execute the scheme, the defendant knowingly filed a Title 11 petition, submitted a fraudulent document, or made a false claim/representation.
Materiality: The false statements, documents, or concealed facts were material—meaning they had a natural tendency to influence or were capable of influencing the bankruptcy trustee or court decisions.

What Are Common Examples of Federal Bankruptcy Fraud?

Bankruptcy fraud can take several forms, including:

Concealing Assets: Intentionally failing to list bank accounts, real estate, vehicles, or offshore holdings on bankruptcy schedules to prevent them from being liquidated for creditors.
Undervaluing Assets: Misrepresenting the true fair market value of real estate or personal property (e.g., listing a $300,000 property as worth $100,000) to keep equity out of reach.
False Statements and Oath Violation: Lying under oath during a Section 341 Meeting of Creditors or submitting false income, debt, or business expense figures on court schedules.
Petition Mills: Operating or utilizing deceptive services that offer fake bankruptcy filings to delay evictions or foreclosures while charging victims recurring fees without providing legitimate legal relief.

What Are the Criminal Penalties for Bankruptcy Fraud?

A conviction under 18 U.S.C. § 157 is a federal felony carrying severe penalties:

Prison Sentence: Up to 5 years in federal prison per count.
Fines: Fines up to $250,000 for individuals or up to $500,000 for business entities.
Restitution: Court-ordered repayment to affected creditors to cover financial losses caused by the scheme.
Supervised Release: Up to 3 years of mandatory court supervision following release from custody.

Federal judges determine exact sentences using the United States Sentencing Guidelines (U.S.S.G.), taking into account total calculated financial loss, degree of planning, prior criminal history, and aggravating or mitigating factors under 18 U.S.C. § 3553(a).

What Are Common Defense Strategies Against Bankruptcy Fraud Charges?

Defense Strategy	Legal Basis	How It Counters the Prosecution
Lack of Fraudulent Intent	Good-Faith Mistake / Confusion	Proves the omission or misstatement was an honest error, clerical oversight, or result of complex tax/financial guidance rather than a conscious effort to deceive.
Reliance on Advice of Counsel	Good-Faith Reliance	Demonstrates that all financial records and assets were fully disclosed to a bankruptcy attorney, and filings followed legal advice in good faith.
Immateriality of Misstatement	Insignificant Discrepancy	Argues that the omitted information was so minor or trivial that it had no impact on the bankruptcy estate or creditor outcomes.

What Is a Hypothetical Example of 18 U.S.C. § 157 Bankruptcy Fraud?

Scenario: Sarah owns a local consulting business facing $400,000 in credit card and vendor debt. Before filing for Chapter 7 bankruptcy, she transfers $80,000 from her business account into a personal bank account opened in her sister's name. When filing her official bankruptcy petition and schedules under Title 11, Sarah omits any mention of the $80,000 transfer and claims under oath that she has no remaining liquid assets.

Outcome: The bankruptcy trustee conducts a forensic audit, uncovers the undisclosed transfer, and refers the case to the Special Investigations Unit. Federal prosecutors indict Sarah under 18 U.S.C. § 157 for filing fraudulent bankruptcy documents and making false representations with specific intent to defraud her creditors.

What Are Related Federal Offenses and Why Do They Matter?

Understanding related federal bankruptcy statutes is critical because prosecutors often stack multiple related charges in a single indictment to increase leverage and financial-loss calculations during plea negotiations.

18 U.S.C. § 152 – Concealment of Assets, False Oaths, and Bribery: Criminalizes hiding estate property, making false oaths or accounts, or presenting false claims in bankruptcy cases.
18 U.S.C. § 153 – Embezzlement Against Estate: Penalizes bankruptcy trustees, officers, or court custodians who misappropriate estate assets under their control.
18 U.S.C. § 154 – Adverse Interest and Conduct of Officers: Prohibits bankruptcy officers and trustees from purchasing estate property or refusing reasonable inspection of records.
18 U.S.C. § 155 – Fee Agreements in Cases Under Title 11 and Receiverships: Makes it illegal for parties to enter into secret agreements regarding attorney or trustee fees.
18 U.S.C. § 156 – Knowing Disregard of Bankruptcy Law or Rule: Penalizes bankruptcy petition preparers who knowingly disregard federal bankruptcy rules or laws, causing loss.

Frequently Asked Questions About Federal Bankruptcy Fraud

What is the statute of limitations for federal bankruptcy fraud?

The standard federal statute of limitations for bankruptcy fraud under 18 U.S.C. § 157 is five years. The five-year period generally begins when the fraudulent act occurred or when the bankruptcy proceeding concluded.

Can you go to federal prison for accidentally forgetting an asset on bankruptcy forms?

No. Bankruptcy fraud requires prosecutors to prove specific intent to defraud. An accidental omission, honest mistake, or failure to recall an asset does not constitute a crime unless evidence shows you deliberately omitted it to deceive the court or trustee.

What is the difference between 18 U.S.C. § 152 and 18 U.S.C. § 157?

While 18 U.S.C. § 152 targets specific acts like hiding assets, committing perjury under oath, or taking bribes, 18 U.S.C. § 157 targets the overarching scheme to defraud that involves filing a petition, filing a proceeding document, or making false claims to carry out the fraud.

How do federal authorities discover bankruptcy fraud?

Federal bankruptcy fraud is typically uncovered through audits by the United States Trustee Program (USTP), tips from disgruntled business partners or ex-spouses, forensic accounting reviews of bank transfers prior to filing, or questions raised by creditors during the Section 341 meeting.

Can a bankruptcy discharge be revoked if fraud is discovered later?

Yes. If a debtor obtains a bankruptcy discharge through fraudulent actions or false representations, the bankruptcy court can revoke the discharge, leaving the individual fully liable for all original debts while facing federal criminal prosecution.

How Our Federal Criminal Defense Attorneys Can Help

Facing federal bankruptcy fraud charges under 18 U.S.C. § 157 places your freedom, professional reputation, and financial future at risk.

Federal investigations by the FBI, IRS Criminal Investigation, or the U.S. Trustee Program move quickly and can lead to severe prosecution. Our experienced federal defense attorneys can intervene early to protect your rights:

Pre-Indictment Intervention: We negotiate directly with Assistant U.S. Attorneys (AUSAs) during the investigation phase to clarify misunderstandings, demonstrate a lack of intent, and work to prevent formal criminal charges from being filed.
Comprehensive Defense Strategy: We perform independent financial and accounting audits to establish good faith, lack of materiality, or reliance on professional advice.
Federal Court Representation: Whether through aggressive plea negotiations to minimize sentencing exposure under the Sentencing Guidelines or defending your case before a federal jury, we provide rigorous representation at every stage.

A federal criminal defense lawyer at the Esfandi Law Group in Los Angeles can help you. To schedule your free consultation, call (310) 274-6529 or use the contact form.

Bankruptcy Fraud