Bankruptcy Fraud

Receivership and bankruptcy types, the parties involved, and concealment, conveyance and planned bankruptcy schemes.

5 minutes 5 Questions

Bankruptcy fraud, within the Certified Fraud Examiner (CFE) body of knowledge, refers to the intentional misuse of the bankruptcy system to deceive creditors, the court, or the trustee for personal or corporate gain. Because bankruptcy is designed to give honest debtors a fresh start while treating…

Concepts covered
Bankruptcy Fraud SchemesKey Parties in Bankruptcy and InsolvencyTypes of Receivership and Bankruptcy
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CFE - Bankruptcy Fraud Example Questions

Test your knowledge of Bankruptcy Fraud

Question 1

In a reorganization bankruptcy, the debtor's business typically continues operating while its debts are restructured under a plan approved by the court, rather than its assets being sold off.

Correct Answer: True

Reorganization lets a financially troubled debtor keep operating while it restructures its obligations to creditors under a court-approved plan. Liquidation is different: the debtor's nonexempt assets are collected and sold by a trustee, liquidator or receiver, and the proceeds are distributed to creditors.

Question 2

In a liquidation, the bankruptcy judge is the party who takes control of the debtor's nonexempt assets in order to sell them for the benefit of creditors.

Correct Answer: False

The court does not administer the estate itself. It oversees the case, resolves disputes and approves key actions. A trustee, liquidator or insolvency practitioner (administrator) is the party who takes control of the debtor's nonexempt assets, converts them to cash and distributes the proceeds to creditors.

Question 3

A fraudulent conveyance scheme involves a business that establishes credit with suppliers, orders large quantities of merchandise on credit, sells it quickly, then files for bankruptcy without paying the suppliers.

Correct Answer: False

The statement is false because the pattern described is a planned bankruptcy, also called a bust-out. In a bust-out, the perpetrator builds credit, buys goods on credit, sells or diverts them for cash, and then abandons the business or files for bankruptcy. A fraudulent conveyance is a transfer of a debtor's property, often to a relative, insider or related entity, made to hinder, delay or defraud creditors or made for less than reasonably equivalent value while the debtor is insolvent.

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