Types of Bankruptcy Fraud (Part III)

Type 2: Bustouts

In bustouts scheme, perpetrators starts and operates his business from the very beginning with intention to defraud creditors. This scheme usually conducted by obtaining merchandise from creditors, dispose the goods for cash and does not pay the suppliers. The following diagram explained the typical bustouts scheme:

Diagram 1: How perpetrators conducted bustouts scheme (Kerwin, 1995)

Examples of Bustouts (Brown, Netoles, Rasnak & Tighe, 1999):

1. Distributors of Consumer Products

Company usually will operate for a short period of time and establishes good credit ratings with large suppliers. After that, orders will suddenly increase and no payments are made. Lulling technique will be used to forestall supplier. Then, the perpetrators will sell the products to retailer with lower cost and for cash. Finally, they files for bankruptcy to avoid payment to creditors. Schedules filed by the debtor after the bankruptcy filing will show high trade creditors with unusually low inventory.

2. Retails Bustouts

The company rent retail space and not paying the rent. The company later files for bankruptcy to stop eviction and to gain more time to run the illegal operation. Usually, retails store are part of the distributor bustouts because they provide outlets for the consumable goods.

3. Tax Bustouts

In this scheme, an individual usually runs a series of business in the same industry but never pay taxes. He will files bankruptcy for the company prior or at the the the tax authority files lien on the debtor's assets. The business will continue its operation for a brief period of time before the case is converted or dismissed. The perpetrator starts a new business using the debtor's assets. 

4. Credit Card Bustouts

Perpetrators will accumulate large consumer credit card debt and then files for bankruptcy. They will purchase goods and obtain cash advances in a short period of time. Usually, the same individual will files for bankruptcy for several times, using false identity and aliases. This scheme usually involves false statement on credit card applications and all assets acquired from the fraud are concealed when the bankruptcy is filed.

5. Travel Agent Bustouts

Perpetrators will open and secure authorizations plates from the airline cooperative agency to write tickets. They will pay the first few bills to gain trust. After that, a huge number of tickets are issued and not paid for. These tickets are sold for cash in the market. When the airline try to recover, the perpetrators will report the authorization plate was stolen and continue the scheme.

References:

Brown, J.B, Netoles, B., Rasnak, S.T., & Tighe, M. (1999). Identifying Bankruptcy Fraud, Credit Research Foundation.

Kerwin, R.J. (1995). Bankruptcy Fraud. The Secured Lender, 51 (6), 84-90.