A guilty verdict on a charge of embezzling funds from a company can result in serious fines and prison time. This makes it important to avoid the appearance of fraud. Sometimes bankruptcy filers attract government suspicion if they overspend just before filing.
If you own a business that is financially struggling, you should understand how law enforcement might look at your spending activities just before you declare bankruptcy.
Abusing the bankruptcy system
The purpose of bankruptcy is to help people and businesses relieve themselves of burdensome debts and rebuild their finances. In the case of Chapter 7 bankruptcy, a person or business liquidates their assets to pay off certain debts while discharging the rest.
According to Bankrate, law enforcement can become suspicious if someone increases their spending just before going bankrupt. This makes it seem like the bankruptcy filer is accumulating a lot of debt on purpose in the belief a bankruptcy court will discharge it. Law enforcement looks at such spending as an abuse of bankruptcy.
Defining pre-bankruptcy overspending
Making purchases just before bankruptcy is not always a problem. Some people need to stock up on household necessities prior to going bankrupt. Problems generally arise if a bankruptcy filer spends a lot on luxury items and frivolities. A bankruptcy judge may look at these expenses as fraud.
Unnecessary purchases with company funds could qualify as embezzlement. Bankruptcy filers should retain their receipts and be ready to explain their pre-bankruptcy purchases if necessary. If you feel you cannot justify a company purchase with bankruptcy looming, you might avoid legal problems by not taking a chance on the expense.