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Government not as Concerned with Bankruptcy Fraud


One would think that with the country going through the worst economic downturn since the Depression years that the government would be a bit more concerned with people trying to commit fraud when they file for bankruptcy. Yet in the last fiscal year (ending September 30) the government had conducted the fewest number of fraud investigations since 1986.

In the last fiscal year the number of people filing for bankruptcy has increased by approximately 30 to 35%; nearly 1.4 million people filed in fiscal 2008. This increase comes on the heels of two years (2006 and 2007) in which there was a decrease in filings. That was due to laws being passed in 2005 making it more difficult for people to file and be approved for bankruptcy (with the aim of decreasing the number of people trying to file). As economic times worsened that number was bound to come up like it did.

With such a dramatic increase it would seem logical that the government would increase the number of agents involved in investigating bankruptcy fraud cases. Instead that number has seen a reduction. Ever since the terrorist attacks on 9/11 the government has been dedicating more resources to national security. This has inevitably led to fewer agents available to investigate white collar crimes. Since there are fewer agents, they have been forced to prioritize their efforts.

White collar investigations have been geared towards larger criminals than potential fraudulent bankruptcy filers. The focus has been more towards stopping securities and mortgage fraud and the next Bernie Madoff from getting away with $65 billion of honest peoples’ money. Whenever the FBI has been able to assign more agents to white collar crimes it is typically for securities or mortgage cases. Bankruptcy fraud does not even register in the top five as far as investigation priorities go according to the section chief for financial crimes in the Washington FBI office, Sharon Ormsby.

For the fiscal year ending September 30, the government had investigated 82 cases which they looked upon as bankruptcy fraud. There could possibly be other cases involving bankruptcy fraud, but that would be where the bankruptcy fraud would be secondary to a larger crime, i.e. securities fraud. Numbers from 2003 estimated that a potential 10% of cases filed were fraudulent to some extent. It would be hard to tell right now with such limited resources whether or not that number is any better or worse.

Some judges have found it a little frustrating. Whenever they are suspicious that fraud may have been committed in a case they can recommend that the FBI investigage, but clearly there are not enough resources directed toward the problem.

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