By Dean Kaplan+
Most companies filing for bankruptcy are legitimately attempting to reorganize and get a fresh start, or in the worst case scenario, equitably distribute non-exempt assets to the creditors who are owed money. Bankruptcy fraud occurs when a company utilizes the bankruptcy system to hide assets or otherwise conduct a scam where they end up debt free and Scott free. Debt collectors may be helpful if bankruptcy fraud occurs and the debtor disappears. Professional debt collectors know how to find debtors who do not want to be found, and how to motivate debtors to pay. This is the final article of a six part series of articles about the business of fraud. This article will focus on bankruptcy fraud.
Below are some red flags to watch for which may represent a customer committing bankruptcy fraud.
a. The fraudulent company attempts to hide some of its assets.
b. The customer has a history of serial bankruptcy cases.
c. A lack of normal business records.
d. Business records that are missing or not complete.
e. Their business conduct falls outside normal parameters within the industry and for businesses in general.
f. Assets were mysteriously depleted just prior to the bankruptcy filing.
g. An unusual level of recent departures of key management personnel from the company.
h. The company fails to answer questions about their debt payment schedule or other aspects of their current financial status.
i. Numerous amendments are made to debt payment schedules or monthly financial information provided to the creditor.
j. Inconsistencies appear when comparing financial information and tax returns provided to the creditor.
k. Be on high alert if you are consistently unable to contact key management personnel at the telephone number and location listed for the debtor.
l. If the customer suddenly begins dealing in cash, this is a red flag.
m. If the customer’s inventory is suddenly depleted just after the petition for bankruptcy was filed, be wary.
n. Take note if key management suddenly is given unscheduled salary hikes or bonuses or if officers or other company insiders withdraw cash from the business.
o. Be wary if property is suddenly transferred to insiders, owners or relatives shortly before the bankruptcy filing.
p. Another red flag is if loans are paid off to owners, directors, shareholders, relatives or other insiders just prior to the bankruptcy filing.
q. If you see unusual transactions occurring with non-debtor subsidiaries, parent companies or companies affiliated with the same owners or relatives of the owners, this is a red flag.
r. If the customer has a history of breach of contract or other frauds, be on high alert.
s. If the customer has very complicated company structures this can be a red flag.
t. If there was a fire or loss of some kind, including theft prior to or following the bankruptcy filing this can indicated bankruptcy fraud.
Collection agencies often become involved in tracking down debtors who have disappeared. The state of the art search techniques employed by collection agencies enables them to successfully find dead beat debtors much more often than in-house debt collectors. They are experts in finding debtors and collecting the debt owed. Bankruptcy fraud is just one more scam used by a customer to buy product with no intention of paying. The biggest problem with bankruptcy fraud is that the debtor finds a way to hide or distribute assets illegally. While collection agencies are well versed in locating debtors, they do not have a lot of success with collecting from fraudulent customers. Collection agencies will go through the same debt collection process they do for any other collection file, however, their success rate will be less than their typical success rate for more collectible files. A professional debt collector will investigate to determine if assets exist to pay the debt, however, scammers can be much more sophisticated than the average debtor, so the chances of success are less. Since most collection agencies work on a contingency basis, they do not get paid unless the debt is collected. When dealing with scammers who are very sneaky and slick in their ability to avoid paying what they owe, using a collection agency can be very cost effective and can sometimes increase the chances of debt collection success.
If you missed any of the previous articles in this series, be sure to check them out below:
- Types of Fraud
- Commonly Scammed Businesses and Fraud Red Flags
- How to Identify A Fraudulent Company
- The Unsolicited Order Scam
- Unmasking Ownership
- Bankruptcy Fraud
The Kaplan Group is a boutique collection agency specializing in large (over $10,000) debt collections due from businesses. Founded in 1991, the company has a stellar reputation (A+ rating with the Better Business Bureau) and is recognized as one of the leading collection agencies for results on large and complex matters.