Bankruptcy Fraud
Judges Admit Trustees do Fraud

SMR concluded a national study demonstrating the prevalence of bankruptcy fraud. The shortcomings of the study is that it fails to address how many companies and individuals are shafted by the bankruptcy courts that allow scamsters to wash their hands of their crimes in the bankruptcy court.

Furthermore, the study fails to address the problem of Panel Trustee's engaging in fraud or the identity theft problem that uses the bankruptcy system. The study, however, provides evidence that the system is broken and fails people.

A Study of Bankruptcy Cases

SMR's study on bankruptcy filers. The full study is on sale at their web site. See below for the details and address.

Summary of the Study

There are many reasons for bankruptcies. The one that�s been hard to pin down is the degree to which filings result from fraud, abuse, and "bankruptcies of convenience," where debtors could pay but won�t.SMR gathered a random sample of Chapter 7 petitions in 24 states, all filed the same day: June 5, 2002.

It was the day in the middle of the worst year for filings. The sample size was 7.9 percent of all the Chapter 7 filings of that day. All the cases studied were successfully discharged. SMR created a database of asset, debt, income, and living expense numbers and looked at the statistical results.

SMR also did something judges don�t always do: Read some of the petitions carefully.

The FBI estimates that 10 percent of bankruptcy filings involve fraud of some kind. But fewer than 0.1 percent of filers are convicted. Statistical analysis suggests that the 10 percent fraud estimate is probably low.

For instance, in what amounts to a wild supposed coincidence, nearly one-third of filers say they spent their last cash on their legal and filing fees. Among individual petitions, one after another stretched credibility to its limits.

SMR illustrated with 30 case studies, all clear items:

James, who had $800,000 of unsecured debt but claimed the assets he acquired were gone after being struck by lightning.

Russ in California had no job, no income, and no cash but somehow maintained his monthly gym membership.

Brian owed money on a hot tub he claimed was stolen (by a gang of patient thieves, apparently; it takes hours to drain one and at least six large men to lift the shell.)

Bob and Susan had $120,000 of annual income but couldn't pay their debts for one big reason: $826 per month they spent on a SeaRay boat. Still, they reaffirmed the boat loan.

Alexis filed, owing only $2,088 in total debt, even though she had a good job and could have paid half the debt with what she spent on lawyer and filing fees.

On cost issues, SMR compiled more than 5,000 different debt claims of the petitioners. The study classifies debts by type, and evaluates the frequency, cost distribution, and total cost of each.

SMR offers a new idea to attack the fraud issue. Risk management executives also can use this study to benchmark their costs against national averages. Legal and government affairs executives may find it helpful in Washington. The study is 80 pages, spiral-bound.

Highlights Bankruptcy Fraud & Filings of Convenience

Most bankruptcy fraud involves hidden assets, according to the FBI. So, if you study what the filers do report, can you learn anything about fraud or "filings of convenience?"

Average debt per petition for recently made store and other credit card charges was $21,576. But the average value per petition of all household-type assets accumulated over a lifetime was $2,009. What happened to all the other stuff they just bought?

More than 28 percent of filers, by their own admission, have take-home income higher than their monthly living expenses. This is true even though "take-home" income is often reduced by voluntary deductions, and expenses often seem inflated.

Jerry, a single New Jersey teacher. He moves income into a "tax shelter" and spends hundreds of dollars a month on bowling, other recreation, and unspecified "emergencies."

About 9.5 percent of filers claim that, in a wild coincidence, their bankruptcy fees of about $1,000 were their last cash, down to the penny. Nearly one-third of filers claimed they were nearly penniless after paying these fees.

In some cases, filers reaffirm debts they cannot pay, if you believe the rest of their petitions.

Louise. She reported total life savings of $300. Her only income for years has been $500 per month in social security. Yet, she reaffirmed two mortgages and a loan on a Chevy van. She owns a pickup truck, too, but that�s paid off.

Using statistics from petitions and vignettes from real cases, this study paints a clear picture of bankruptcy abuse from just one day�s filings.

About SMR

Founded in 1984, SMR Research Corporation is a business and market research firm specializing in financial subjects. It's the nation’s largest publisher of strategic research studies on the home mortgage market, home equity lending, credit cards, and bankruptcy and credit risk.

SMR offers Predictive Scoring Services as well for loan marketing and credit card collections.

Clients for various SMR products and services have included executives at a majority of the nation’s largest banks, thrifts, mortgage companies, life insurance companies, consumer finance companies, non blank financial companies, retailers, and oil companies. More than 4,000 executives at more than 800 companies have been clients.

To read more about their services or to order the full bankruptcy study, visit their web site at: SMR Research.

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