Skip to main content

Don’t become a victim of bankruptcy fraud




Your company has landed a lucrative new account, and the customer has already placed several small orders, paying in full, on time. Now the customer wants to place a larger order, but has requested that you first expand its credit account. Warning! There’s a chance that you could become a victim of bankruptcy fraud. Your new customer may be planning a “bust-out” — a common bankruptcy-related scam.

Bust-out scams

In a bust-out, fraudsters create a bogus company — often with a name similar to that of an established, reliable business — to order goods they have no intention of paying for. In fact, they plan to sell the products for fast cash, file for bankruptcy and leave you, the supplier, holding the empty bag.

In a variation of the scheme, bogus operators buy an existing company and use its good credit to order the goods. Either way, they sell the products they order below cost, for cash, and then file for bankruptcy, writing off the amounts of the supplier’s bill.

You can avoid becoming a bust-out victim by carefully vetting businesses that were formed only recently. Also be wary of established companies with new ownership — particularly if the new owners seem to want to keep their involvement under wraps. And pay particular attention to customers that have:

• Warehouses stuffed with high-volume, low-cost items, • Disproportionate liabilities to assets, • No corporate bank account, and • Principals previously involved with failed companies.

Fraudulent conveyance schemes
Bust-outs are far from the only bankruptcy-related scams. In fact, the most common type of bankruptcy fraud is concealing assets — or fraudulent conveyance. This scheme involves hiding or moving assets in anticipation of a bankruptcy. The owner of a business on the brink of collapse may, for example, transfer property to a third party — most commonly, a spouse — for little or no compensation. The third party holds the property until bankruptcy proceedings have concluded, and then transfers it back to the business owner.

Alternatively, the business owner files for bankruptcy and then, with the court’s approval, sells property below value to a straw buyer. The owner’s relationship with the buyer isn’t disclosed, but the buyer holds the property until the owner is ready to reclaim it at an agreed-upon price.

In either case, the goal is the same: to keep property and monetary compensation out of the hands of creditors.

Prevention first

Fighting bankruptcy fraud typically requires professional legal and financial help. The best protection is prevention, but if you suspect one of your customers is trying to pull a fast one, contact us.

Please contact us for additional information

© 2018

Popular posts from this blog

IRS Announces New Pilot “Pre-Audit” Compliance Program for Retirement Plans

  On June 3, 2022, the IRS announced a new pilot pre-examination compliance program for retirement plans beginning in June 2022.   Under the new program, the IRS will send letters to plans advising them that they have been selected for an examination and will have a 90-day window to self-review the plan’s documentation and operation to determine if they meet current tax law requirements. If the plan does not respond within 90-days, the IRS will audit the plan. If self-review reveals non-compliance, the plans will be able to self-correct the mistakes using the correction principles in the IRS voluntary compliance program (EPCRS).    EPCRS’s self-correction program will be available. If a mistake cannot be self-corrected, an IRS closing agreement under EPCRS will be available based on the voluntary compliance program (VCP) fees rather than the normal closing agreement fees. If the plan does respond within 90 days, the IRS will review the submitted documentation, determine whether it

CARES and Family First Acts provide potential relief for Unions

The Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Families First Coronavirus Response Act both provide potential relief for nonprofit associations. We are still awaiting important details on the many provisions of the Acts, but we wanted to provide a summary of some of the programs which will be of interest to our Union clients. We will update this bulletin as additional information becomes available. Update for Union Clients