The most important thing creditors should do is to have a good bankruptcy notification process in place, so that they can stop credit card use or shut down accounts that have open credit. They can also be aware of multiple filings if they have a notification process in place.

For larger balance accounts, they will want to review the bankruptcy schedules and the plan. If a customer’s loan is for property that is mostly in a vacation home area, creditors can make sure that the property is listed properly in the schedules, and if they aren’t they should contact the Trustee immediately. If your customer deals largely with commercial debt, they should watch these accounts extra closely, especially those with large balances,  because businesses are where the larger bankruptcy fraud cases take place; and it usually takes place in conjunction with other white collar crimes.

In particular, creditors should watch for the following bankruptcy fraud warning signs:

• Concealment of assets
•  Multiple bankruptcy flings
•  Unusual depletion of assets shortly before the bankruptcy filing
•  Unanswered questions or incomplete information on debtor’s schedules and statement of financial affairs
•  Frequent amendments to schedules, statements of financial affairs and monthly operating reports.
•  Inconsistencies among recent financial statements, tax returns and debtor’s schedules and statements of financial affairs.
•  Frequent dealings in cash rather than recorded transactions
•  Transfer of property to relatives or a real estate management company
•  Payoff of loans to family members

In the end, it’s really a case-by-case decision on whether to report bankruptcy fraud. If your balance is small, is it worth having your name in the news for going after a consumer?

Bankruptcy fraud cases are investigated by the Internal Revenue Service’s Criminal Investigation’s Bankruptcy Fraud Program. Cases are then referred to the Department of Justice for prosecution

If you report, you need to make sure to have enough proof so that the IRS can do its job and take the action needed to bring the fraudster to justice. If you do suspect bankruptcy fraud, and do want to report it, information can be reported to:

USTP.Bankruptcy.Fraud@usdoj.gov

Or by mail to:

Executive Office for U.S. Trustees
Criminal Enforcement Unit
20 Massachusetts Avenue, NW
Suite 8000
Washington, DC 20530

There are 4 main types:

1. Concealment of Assets:  This is the most prevalent type of bankruptcy fraud and constitutes approximately 70% of the bankruptcy fraud that takes place. Concealment of assets happens when a person either hides assets (property, vehicles, etc.), or transfers them to another person just prior to filing bankruptcy. Concealment of assets is on the rise because of the new “means test” that a person has to go through before filing for bankruptcy. For the means test, one thing a person has to prove is that they don’t have enough assets to pay off their debts. While they are not required to sell their primary residence or their main mode of transportation in order to pay their creditors, things like vacation homes, cabins, boats and collector cars could be considered an asset that could be liquidated in order to pay off creditors. If the bankruptcy debtor wants to keep these things they will often times try to hide these assets or temporarily transfer them into someone else’s name.
2. Multiple Filings:  Multiple filings take place when individuals file for bankruptcy in more than one state, using their real names and information (such as Social Security Numbers), false names and information, or a combination of the two to file the claims. The filers tend to list the same assets on each fraudulent claim but deliberately fail to include every asset. This, like concealment of assets, fraudulently protects their valuables from total liquidation when debts are paid. Another type of multiple filing occurs when a debtor files one bankruptcy right after another in order to not pay a debt that was found non-dischargeable in a previous bankruptcy filing.
3. Petition Mills:  Petition Mills are a fraud in which the perpetrator poses as a financial advisor, sometimes as a credit counselor or paralegal, filing hastily-prepared bankruptcy documents in the name of victims who come to the advisor as clients. The bankruptcy filing is often both incomplete and inappropriate for the victim’s condition; and, often, the victim does not even realize that a bankruptcy has been filed. This happens a lot in situations where the debtor is about to be evicted, and the perpetrator proposes to help them avoid the eviction. This also happens a lot in situations where the victim does not speak English.
4. Bustouts:  A Bustout is conducted by a company that is set up to fail from the outset. The operator obtains merchandise from creditors, disposes of the goods (usually for cash), does not pay suppliers and then files bankruptcy. Another type of  Bustout and one that that our credit card clients would generally see is a debtor who racks up high bills on luxury items on credit cards and then files bankruptcy shortly after the items are purchased.

These are the most common types of bankruptcy fraud, but how should creditors address the problem? We’ll tackle that in our next post.

There were just over 1.4 million bankruptcies filed in 2009 and almost 1.6 million filings in 2010. The Bankruptcy Act change of 2005 was meant to reduce the number of people filing for bankruptcy, and for those who did file, it was meant to push more towards chapter 13 so they would repay their creditors rather than discharge their debts in a chapter 7. However, just 5 years after the Act went into effect, we are back to pre-2005 filing rates, and even higher. Additionally, as a result of some of the changes in the act, a new situation is coming forward; bankruptcy fraud. According to the Department of Justice, approximately 10% of the bankruptcy cases filed contain some sort of bankruptcy fraud.

While creditors can be pro-active and monitor for bankruptcy filings, bankruptcy fraud is something that isn’t as easily detected. Even if they know the warning signs to look for, it is often too much work to try to bring a fraudster to justice.

If the Department of Justice’s figure is correct, and 10% of the case field has some sort of bankruptcy fraud, that means that in 2009, when there were 1.4 million cases filed, there would have been 140,000 cases of bankruptcy fraud. However, according to figures posted by the IRS in 2009 only 18 investigations were initiated and only 13 people were sentenced.

So why don’t more people get prosecuted for bankruptcy fraud?  Well first, they have to be caught.  Bankruptcy attorneys and trustees take the debtor at their word when they file for bankruptcy. They generally don’t do any checking for assets. Although more recently, trustees have been starting to dig a little deeper to look for assets on chapter 7 cases. This is because the rules have changed as to how trustees get paid for chapter 7 cases. It used to be a flat fee, but now they are given a percentage of the assets they find that can be liquidated.

Another reason that more people aren’t prosecuted is that they simply aren’t reported, or if they are reported there isn’t enough information available to proceed. While the reporter of the fraud doesn’t have to give their name or company info, if they don’t give that info, and there isn’t enough info to proceed, the IRS will simply drop the case. If the reporter gives their name or company info, then there is a chance for bad press if the info gets out to the public. So much of this fraud continues to go undetected.

For these reasons it is absolutely critical that creditors understand that risks of bankruptcy fraud, and the steps they can take to try to mitigate them. In our next post we’ll look at the 4 common types of bankruptcy fraud.

Below are some general national bankruptcy demographics*:

• Average age of 38
• 44% couples
• 30% women filing alone
• 26% men filing alone
• Slightly better educated than the general population
• 66% have lost a job
• 50% have experienced a serious health problem (75% of which have health insurance)

One way to predict the potential for a bankruptcy filing is to regularly conduct data monitoring or to use a solution that can provide alerts when certain actions are taken. The primary reasons for bankruptcy filings are medical issues, job loss/unemployment, divorce and foreclosure and data monitoring and/or alerts can monitor for these events to alert collections professionals to the potential for a bankruptcy filing. Creditors should also look for these warnings signs – if on a customer service call a debtor mentions a trigger that is a sign for a potential bankruptcy filing, the creditor should consider policies moving for settlement rather than arranging a payment schedule.

Even with a plan in place to detect and prevent bankruptcies, they will still happen, and if the current data is any indication they will begin happening with increasing frequency in the coming years. When a bankruptcy occurs the most important step is to properly identify and quickly handle the account. To have any chance at recovering debt on a bankrupt account a collector or creditor must a submit a Proof of Claim form along with any necessary documentation within the required time frame (usually 90 days from the 341 meeting for non-government debt). The reality is that in every case there is a limited pool of bankruptcy dollars available for distribution and the monies that are paid out are often decided on a first-come-first-serve basis. Technology-based solutions offer a distinct advantage in allowing companies to more easily and efficiently submit Proof of Claim documentation and to collect on bankrupt accounts.

The bottom line is that the more information a collector or credit is able to collect the better they can work with a debtor find ways to avoid bankruptcy. When a bankruptcy does occur an effective Bankruptcy Management Program can automate and streamline the steps that need to be taken to minimize manual involvement and will enable a creditor or collector to generate and maintain an ongoing collections stream.

Download our free white paper on bankruptcy management.

*Elizabeth Warren, The Fragile Middle Class: Americans in Debt, Harvard Law School

In addition to understanding shifting consumer attitudes, debt collectors must also take into account state and federal legislative responses to economic conditions in the U.S., and decisioning trends among credit grantors. For example, The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 seeks to establish fair and transparent practices relating to the extension of credit, and requires card issuers to modify a host of business practices that undoubtedly affected credit card companies’ cash flows. In order to comply with this legislation, card issuers have introduced strategies that diminish balance sheet risk by gravitating toward dependable credit and jettisoning cardholders that historically had been financial institutions’ bread and butter, and severely curtailing future offers of credit to borderline consumers.

The economic crisis confirmed the notion that the future success of Accounts Receivables Management  companies is fundamentally dependent on a broader U.S. economic recovery. That recovery may be a long time coming – the need to increase the debt ceiling, the potential U.S. credit-rating downgrade and a 9.2% unemployment rate don’t inspire much confidence. That said, informed conclusions can be drawn about the future foundation for ARM industry growth. These factors include:

Material employment gains: The single greatest drag on collection industry recovery performance is assignable to debtors maintaining gainful employment. Real wage gains, however unlikely, would further bolster the impact of reduced unemployment.

Resurgence of the U.S. housing market: Because consumers’ largest assets are typically their houses, keeping existing mortgage-holders in their homes, reforming lending guidelines for first time entrants to the market, and stabilizing prices of existing home inventories to stimulate new real estate investments is vital to rebuilding the equity in consumers’ homes and increasing revenue in related industries such as manufacturing and construction.

Renewed consumer confidence and spending: Consumer spending drives approximately two thirds of GDP and thus serves a crucial role as an engine of economic revitalization.

Increased access to credit: Consumers must be able to borrow and spend on the basis of open access to credit. Similarly, players in the ARM industry must also utilize new sources of open capital to fund not only operating expenses, but product and service line development, capital expenditures, and M&A activity in order to effectively grow their businesses.

Calculated ARM industry responses to legislative and regulatory reforms: The debt collection industry can do little to stem the current tide of pro-consumer reforms. Its true capacity to affect change will be determined by the degree to which responses to new regulations are carefully considered and level-headed.

Flexibility in the face of adversity: Simply put, complacency is the death knell of receivables management collection agencies in the wake of the current economy. In order to thrive, collection agencies must put aside antiquated notions of debtors as adversaries and re-imagine both creditors and debtors as clients. They must do away with one-track service offerings, filial allegiance to unprofitable clients, outmoded technology platforms, vulnerable security protocols, and obsolete accounting methodologies.

Are there other factors that you think will affect the growth of the ARM industry? What is your business doing to continue growing and evolving during this time of economic recovery?

This economic environment continues to present very real challenges for accounts receivables management (ARM) companies and departments. In order to meet these challenges the ARM industry needs to act decisively to mitigate the risks to their future success.

Accomplishing this will require ARM executives to engage in a significant ideological shift: while creditors across various industries will continue to be defined as ARM clients, the industry would be well served to redefine its customers as the debtors from whom they collect.

Knowing those debtors—how they think and behave, the daily pressures they confront, and the ever expanding resources (both to meet and avoid their financial obligations) at their disposal—is of paramount importance.

The first step in knowing your debtor is to understand and appreciate the hierarchy of payments theory which suggests that consumers under financial duress will elect to pay certain debts before others, allowing certain obligations to default more frequently. Although the premise is simple, quantifying when and how debtors make these choices is challenging.

Conventional wisdom suggests that many American consumers have traditionally obeyed a pattern of “mortgage-then-auto then-credit cards” hierarchy. The theory assumes that protecting the family home against foreclosure is the highest priority for consumers. But the U.S. housing catastrophe may have irrevocably changed this dynamic. According to RealtyTrac®, the leading online marketplace for foreclosure properties, nearly 2.9 million U.S. properties received a foreclosure-related filing in 2010, an increase of nearly 2 percent from 2009 and a 23 percent increase from 2008. As a result, it is possible that consumers drowning in unsustainable mortgage debt are likely to realign their payment behaviors in such a way that a monthly car payment—the literal and metaphoric vehicle that gets them to the job that pays their bills—now assumes the central position in the hierarchy. Other consumers, however, may respond to the difficult economic conditions by assigning a greater level of importance to continued spending, and thus expand credit card payments to shore up the foundation of the pyramid in order to facilitate that aim.

Creditors and their ARM service providers are paid based on a changing but typically finite household wallet share. It should come as no surprise that under economic duress, monthly household budgets are not growing in any material way, but they are continually changing and vary widely based on an individual debtor’s employment and housing status, geographic location, and numerous other demographic characteristics. In future posts we will explore how the ARM industry can secure future profitability and sustainability by more precisely understanding debtors and how they are coping with the current economic environment.

The most important thing creditors should do is to have a good bankruptcy notification process in place, so that they can stop credit card use or shut down accounts that have open credit. They can also be aware of multiple filings if they have a notification process in place.

For larger balance accounts, they will want to review the bankruptcy schedules and the plan. If a customer’s loan is for property that is mostly in a vacation home area, creditors can make sure that the property is listed properly in the schedules, and if they aren’t they should contact the Trustee immediately. If your customer deals largely with commercial debt, they should watch these accounts extra closely, especially those with large balances, because businesses are where the larger bankruptcy fraud cases take place; and it usually takes place in conjunction with other white collar crimes.

In particular, creditors should watch for the following fraud warning signs:

• Concealment of assets
• Multiple bankruptcy flings
• Unusual depletion of assets shortly before the bankruptcy filing
• Unanswered questions or incomplete information on debtor’s schedules and statement of financial affairs
• Frequent amendments to schedules, statements of financial affairs and monthly operating reports
• Inconsistencies among recent financial statements, tax returns and debtor’s schedules and statements of financial affairs
• Frequent dealings in cash rather than recorded transactions
• Transfer of property to relatives or a real estate management company
• Payoff of loans to family members

In the end, it’s really a case-by-case decision on whether to report bankruptcy fraud. If your balance is small, is it worth having your name in the news for going after a consumer?

These types of fraud cases are investigated by the Internal Revenue Service’s Criminal Investigation’s Bankruptcy Fraud Program. Cases are then referred to the Department of Justice for prosecution.

If you report, you need to make sure to have enough proof so that the IRS can do its job and take the action needed to bring the fraudster to justice. If you do suspect bankruptcy fraud, and do want to report it, information can be reported to:

USTP.Bankruptcy.Fraud@usdoj.gov

Or by mail to:

Executive Office for U.S. Trustees
Criminal Enforcement Unit
20 Massachusetts Avenue, NW
Suite 8000
Washington, DC 20530

There are 4 main types:

1. Concealment of Assets: This is the most prevalent type of bankruptcy fraud and constitutes approximately 70% of the bankruptcy fraud that takes place. Concealment of assets happens when a person either hides assets (property, vehicles, etc.), or transfers them to another person just prior to filing bankruptcy. Concealment of assets is on the rise because of the new “means test” that a person has to go through before filing for bankruptcy. For the means test, one thing a person has to prove is that they don’t have enough assets to pay off their debts. While they are not required to sell their primary residence or their main mode of transportation in order to pay their creditors, things like vacation homes, cabins, boats and collector cars could be considered an asset that could be liquidated in order to pay off creditors. If the bankruptcy debtor wants to keep these things they will often times try to hide these assets or temporarily transfer them into someone else’s name.
   
2. Multiple Filings: Multiple filings take place when individuals file for bankruptcy in more than one state, using their real names and information (such as Social Security Numbers), false names and information, or a combination of the two to file the claims. The filers tend to list the same assets on each fraudulent claim but deliberately fail to include every asset. This, like concealment of assets, fraudulently protects their valuables from total liquidation when debts are paid. Another type of multiple filing occurs when a debtor files one bankruptcy right after another in order to not pay a debt that was found non-dischargeable in a previous bankruptcy filing.
   
3. Petition Mills: Petition Mills are a fraud in which the perpetrator poses as a financial advisor, sometimes as a credit counselor or paralegal, filing hastily-prepared bankruptcy documents in the name of victims who come to the advisor as clients. The bankruptcy filing is often both incomplete and inappropriate for the victim’s condition; and, often, the victim does not even realize that a bankruptcy has been filed. This happens a lot in situations where the debtor is about to be evicted, and the perpetrator proposes to help them avoid the eviction. This also happens a lot in situations where the victim does not speak English.
   
4. Bustouts: A Bustout is conducted by a company that is set up to fail from the outset. The operator obtains merchandise from creditors, disposes of the goods (usually for cash), does not pay suppliers and then files bankruptcy. Another type of Bustout and one that that our credit card clients would generally see is a debtor who racks up high bills on luxury items on credit cards and then files bankruptcy shortly after the items are purchased.

These are the most common types of bankruptcy fraud, but how should creditors address the problem? We’ll tackle that in our next post.

There were just over 1.4 million bankruptcies filed in 2009 and almost 1.6 million filings in 2010. The Bankruptcy Act change of 2005 was meant to reduce the number of people filing for bankruptcy, and for those who did file, it was meant to push more towards chapter 13 so they would repay their creditors rather than discharge their debts in a chapter 7. However, just 5 years after the Act went into effect, we are back to pre-2005 filing rates, and even higher. Additionally, as a result of some of the changes in the act, a new situation is coming forward; bankruptcy fraud. According to the Department of Justice, approximately 10% of the bankruptcy cases filed contain some sort of bankruptcy fraud.

While creditors can be pro-active and monitor for bankruptcy filings, bankruptcy fraud is something that isn’t as easily detected. Even if they know the warning signs to look for, it is often too much work to try to bring a fraudster to justice.

If the Department of Justice’s figure is correct, and 10% of the case field has some sort of bankruptcy fraud, that means that in 2009, when there were 1.4 million cases filed, there would have been 140,000 cases of this type of fraud. However, according to figures posted by the IRS in 2009 only 18 investigations were initiated and only 13 people were sentenced.

So why don’t more people get prosecuted for bankruptcy fraud? Well first, they have to be caught. Bankruptcy attorneys and trustees take the debtor at their word when they file for bankruptcy. They generally don’t do any checking for assets. Although more recently, trustees have been starting to dig a little deeper to look for assets on chapter 7 cases. This is because the rules have changed as to how trustees get paid for chapter 7 cases. It used to be a flat fee, but now they are given a percentage of the assets they find that can be liquidated.

Another reason that more people aren’t prosecuted is that they simply aren’t reported, or if they are reported there isn’t enough information available to proceed. While the reporter of the fraud doesn’t have to give their name or company info, if they don’t give that info, and there isn’t enough info to proceed, the IRS will simply drop the case. If the reporter gives their name or company info, then there is a chance for bad press if the info gets out to the public. So much of this fraud continues to go undetected.

For these reasons it is absolutely critical that creditors understand the aforementioned risks, and the steps they can take to try to mitigate them. In our next post we’ll look at the 4 common types of bankruptcy fraud.

Move from knowing to doing; read our post about what creditors should do about bankruptcy fraud.

This economic environment continues to present very real challenges for accounts receivables management (ARM) companies and departments. In order to meet these challenges the ARM industry needs to act decisively to mitigate the risks to their future success.

Accomplishing this will require ARM executives and debt recovery professionals to engage in a significant ideological shift: while creditors across various industries will continue to be defined as ARM clients, the industry would be well served to redefine its customers as the debtors from whom they collect.

Knowing those debtors—how they think and behave, the daily pressures they confront, and the ever expanding resources (both to meet and avoid their financial obligations) at their disposal—is of paramount importance.

The first step in knowing your debtor is to understand and appreciate the hierarchy of payments theory which suggests that consumers under financial duress will elect to pay certain debts before others, allowing certain obligations to default more frequently. Although the premise is simple, quantifying when and how debtors make these choices is challenging.

Conventional wisdom suggests that many American consumers have traditionally obeyed a pattern of “mortgage-then-auto then-credit cards” hierarchy. The theory assumes that protecting the family home against foreclosure is the highest priority for consumers. But the U.S. housing catastrophe may have irrevocably changed this dynamic. According to RealtyTrac®, the leading online marketplace for foreclosure properties, nearly 2.9 million U.S. properties received a foreclosure-related filing in 2010, an increase of nearly 2 percent from 2009 and a 23 percent increase from 2008. As a result, it is possible that consumers drowning in unsustainable mortgage debt are likely to realign their payment behaviors in such a way that a monthly car payment—the literal and metaphoric vehicle that gets them to the job that pays their bills—now assumes the central position in the hierarchy. Other consumers, however, may respond to the difficult economic conditions by assigning a greater level of importance to continued spending, and thus expand credit card payments to shore up the foundation of the pyramid in order to facilitate that aim.

Creditors and their ARM / debt recovery service providers are paid based on a changing but typically finite household wallet share. It should come as no surprise that under economic duress, monthly household budgets are not growing in any material way, but they are continually changing and vary widely based on an individual debtor’s employment and housing status, geographic location, and numerous other demographic characteristics. In future posts we will explore how the ARM industry can secure future profitability and sustainability by more precisely understanding debtors and how they are coping with the current economic environment.

Download our free white paper on bankruptcy management and debt recovery.