Guest Author - Consuelo Herrera, CAMS, CFE
You could look out of professional shape even if you are a brilliant accountant if you have no clue about bankruptcy proceedings.
BM & Crooks, Inc., which was involved in the business of paper brokerage and procurement began experiencing financial problems and decided to transfer many of the company’s assets, worth approximately $2.2 million, to a new business. Simultaneously the partners transferred money from the newly created corporation to a second account they opened in the Cayman Islands. When it happens individuals involved are usually convicted of engaging in money laundering conspiracy to transfer funds to and from the United States, knowing that the funds are the proceeds of unlawful activity, and in order to conceal the nature, location, source, ownership, and control of the funds before the bankruptcy proceedings.
Cases like this occur every day. Successful forensic accountants are well versed about the bankruptcy law since many corporations and individuals are seeking that option as the only way to have a fresh start.
The two goals of the Bankruptcy law are:
o To protect a debtor by giving him or her a fresh start free from creditors’ claims
o To ensure equitable treatment to creditors who are competing for a debtor’s assets.
The Bankruptcy Code compiles the latest regulations in this matter. A major change as one of its goals is to require customers to pay as many of their debts as they possible can instead of having those debts fully discharged in bankruptcy.
Many fraud schemes and crimes are linked to bankruptcy proceedings. Uncovering hidden assets through examination and analysis of financial statements and tax records is a permanent source of engagements for forensic accountants.
The Bankruptcy Code has eight chapters: Chapters 1, 3, and 5 contain general definitional provisions, as well as provisions governing case administration, creditors, the debtor, and the estate. These three chapters generally apply to all kinds of bankruptcies. The following five chapters of the Bankruptcy Code set forth the different types of relief that debtors may seek. Here is a brief of them:
o Chapter 7: Provides for liquidation, the sale of all non exempt assets and the distribution of the proceeds to the debtor’s creditors.
o Chapter 9: Governs the adjustment of a municipality debts.
o Chapter 11 : Governs reorganizations.
o Chapters 12 and 13: Provide for the adjustment of debts by parties with regular incomes.
It is important to know that a debtor need not be insolvent to file for bankruptcy relief under any chapter of the Bankruptcy Code. Any one obligated to a creditor can declare bankruptcy.
The Chapter 7 of the Bankruptcy Code is known as Ordinary or Straight Bankruptcy. A Debtor turns all his or her assets over to a trustee. The trustee sells the non-exempt assets and distributes the proceedings to creditors and the remaining debts are then discharged (Be aware of the exceptions).
One type of fraud you should be aware of is the bankruptcy “bust-out” scheme. Individual engaged in this type of scheme frequently buy businesses, liquidate their assets and divert the proceeds to their personal use, leaving the businesses to sort out their dealings in bankruptcy court.
Bankruptcy proceedings are initiated by the filing of a petition in bankruptcy. This petition can be voluntary, when the debtor files the petition, or involuntary, when one or more creditors file a petition to force the debtor into bankruptcy. The required schedules must be filed within forty five days after the filing of a petition , unless an extension of up to forty five days is granted. Accountants play an important role when preparing the schedules in a voluntary petition. It must contain:
o A list of both secured and unsecured creditors, their addressed, and the amount of debt owed to each.
o A statement of the financial affairs of the debtor.
o A list of all property owned by the debtor, including property that the debtor claims is exempt.
o A list of current income and expenses.
o A certificate from an approved credit counseling agency.
o Proof of payments received from employers within sixty days prior to the filing of the petition.
o A statement of the amount of monthly income, itemized to show how the amount is calculated.
o A copy of the debtor federal income tax return for the most recent year ending immediately before the filing of the petition.
It is extremely important to provide complete and accurate information. Conceal assets and knowingly supply false information of these schedules is a federal crime.