Bankruptcy fraud, which lessened during the pandemic, could increase this year

U.S. bankruptcies — and bankruptcy fraud — greatly decreased during the pandemic because of temporary lifelines. But as government stimulus, pliant lenders, and cheap and easy funding dissipates, we’re seeing crimes rise. Changes in U.S. federal bankruptcy law could accelerate prosecution of bankruptcy fraud.

Just before he filed for Chapter 7 bankruptcy, Alan Russell Cook, the CEO of a private jet charter company, transferred $350,000 to his former girlfriend and had her open accounts in her name and in the name of a fake company to receive his personal property.

Yet he failed to tell creditors about this — or that his other bank accounts contained thousands of dollars in casino cash-outs — claiming that his company hadn’t generated a penny since 2017. In December 2021, Cook was convicted of multiple fraud charges tied to the bankruptcy case after he discharged over $6 million in personal debt. (See “CEO of Private Jet Charter Company Convicted of Bankruptcy Fraud,” the U.S. Department of Justice, Dec. 8, 2021.)

Bankruptcies such as this may have fallen drastically in 2021, but the pace of Chapter 7 and 13 filings is expected to pick up in 2022 as lifelines for those struggling financially disappear.

During the pandemic many corporations avoided seeking court settlements and stayed afloat thanks to government stimulus and pliant lenders, as well as easy and cheap funding in the capital markets. However, that could all change as states withdraw support, interest rates start to rise, and markets become tougher to access. (See “US corporate bankruptcy pace likely to speed up in 2022,” S&P, Oct. 11, 2021, and “‘2022 could be the year of financial reckoning’: Bankruptcies fell dramatically in 2021, but these challenges await,” MarketWatch, Jan. 8, 2022.)

The federal government helped fill the economic void for those Americans and businesses hit by the downturn following the outbreak of COVID with nearly $5 trillion in relief and stimulus packages. Additionally, eviction moratoriums kept citizens in their homes when they weren’t able to pay the rent. However, most of those packages have expired. And many U.S. businesses are facing sink-or-swim situations.

Experts predict that 2022 may be the year of financial reckoning. “There are many forces that are pushing people to not file bankruptcy right now and definitely throughout 2021,” said Professor Pamela Foohey, J.D., a consumer bankruptcy expert teaching at Yeshiva University’s Benjamin N. Cardozo School of Law. “2022 could be the year of financial reckoning where people start having to pay more on their debts,” Foohey said. (See the Jan. 8 MarketWatch article.)

U.S. bankruptcy filings actually declined in 2021, primarily because of the government’s intervention of financial aid extended to businesses and individuals. (See “Bankruptcy Filings Drop 24 Percent,” United States Courts, Judiciary News, Feb. 4, 2022.) But the U.S. Supreme Court struck down the Center for Disease Control’s evictions moratorium in August 2021, and mortgage interest rates have risen in 2022 — fulfilling Foohey’s prediction about the cost of debt. Forbearance agreements (in which lenders agree to reduce mortgage payments — or even suspend them entirely) reached in 2020 and 2021 are expiring. Plus, courts have adapted to conditions COVID imposed on hearings and are now handling increasing caseloads. All signs point to an uptick in filings.