Bankruptcy is tried in civil court, but bankruptcy fraud comes under the criminal court system. The consequences can be severe.
The Fraud
Concealing property is the major form of bankruptcy fraud. Seven out of ten bankruptcy frauds involve concealment in one form or another. Failing to list all assets when filing for protection in bankruptcy court and hiding those assets by transferring them to relatives or cohorts makes it impossible for creditors to liquidate them and secure what's owed them. (This is also a divorce strategy.)
Busting out is an infamous twist on bankruptcy fraud.A bustout occurs when a new business is formed, credit relationships are established with suppliers, and an inventory is built up. The inventory is either quickly sold off at a discount or trucked to some hidden location and the proprietor(s) can't be found. Creditors are forced to file involuntary bankruptcy against the fraudster business, but can never collect their losses.
Another kind of bankruptcy fraud is filing in more than one state at a time. Bankruptcy fraud is a very major federal crime.
The Flaw
In the past few years, the bankruptcy laws have been tightened up, but where there's a will, there's a way to con unwary vendors too anxious to record a sale.
The Fix
Creditors must be more selective as to who they sell to on an open account. Sales should be secured by collateral of some sort if at all possible. Secured creditors come out better than unsecured creditors, but not by much.