Bankruptcy Fraud


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A planned bankruptcy is basically a merchandising swindle based on the abuse of credit. In this type of scheme, credit that has been legitimately obtained is used to purchase inventory to sell, or otherwise dispose of, at a pure profit. Meanwhile, the perpetrator plans to defraud creditors by not paying the bill, loan, or other form of credit, eventually filing for bankruptcy, either voluntarily or involuntarily.

In a typical planned bankruptcy scheme, the perpetrator creates a new business, opens a bank account, and leases operating space to create a front of legitimacy. In some cases, a planned bankruptcy operator will simply purchase, on a delayed payment basis, an existing business with a favorable credit rating, thereby eliminating the need to establish a credible business front.

Operators then begin to order merchandise. The bills for initial purchases are either pre-paid or paid promptly to establish a favorable credit rating.

The operators often invent credit histories and provide false financial statements and trade references. The names, addresses and phone numbers of the references are developed with relatives, business associates and friends. The references are often other "bust-out" operators at work. As well, many of the references turn out to be "legitimate" merchants who are buying the defrauded goods from these bust-out operators.

Then the operators begin to purchase additional merchandise from new suppliers, while beginning to slow payment to old suppliers. Eventually, increasingly large orders are placed with all suppliers. The increased inventory is then quickly sold, often below cost.

Once the perpetrator receives payment for the sold, but unpaid for, merchandise, he or she either absconds with the profits or files for bankruptcy.

The individual creditor ends up just writing it off as a bad debt, rarely pursuing the claim past the "no assets" statement filed with the bankruptcy court.

Cons often use trade shows to target many companies simultaneously and place multiple orders. This way they avoid prosecution under the U.S. federal mail and wire fraud statutes, since they don't use the mail or telephone lines to transmit the fraudulent information.

Partial segments courtesy of  Crimes of Persuasion: Schemes, scams, frauds.

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