Asian Journal- The Filipino-American Community Newspaper

THE general rule is that if you are dishonest in your bankruptcy petition, or you cheat or lie in your bankruptcy petition, the Feds are going to go after you for bankruptcy fraud, a felony punishable by 5 years imprisonment. It also carries a penalty of $250,000. Bankruptcy fraud is a crime. If you are going to ask the court for bankruptcy relief from your debts, be honest, and disclose all financial transactions, assets and debts, to your bankruptcy lawyer. He or she will tell your tale of financial woes to the court without you having to go to jail. The most common fraud perpetrated by debtors in bankruptcy is hiding assets from the court. However, some debtors are truly bold and fearless. They try to hide major assets from the court.

Lorenzo Espinoza, a bankruptcy debtor in California pleaded guilty to two counts of bankruptcy fraud committed in 1999 when he filed for bankruptcy and failed to disclose that he owned a Rolex watch, two Ferraris and a Lamborghini. In late 2002, Espinoza laundered the proceeds of his bankruptcy fraud when he sold the Ferraris for $127,000. Mr. Espinoza was a morally bankrupt individual it seems. Aside from committing bankruptcy fraud, he also pleaded guilty in December of 2006 to conspiracy to defraud the Department of Housing and Urban Development (HUD) by fraudulently obtaining mortgage loans that went into default. He admitted that from April 1995 until about May 2001, he and his associates fraudulently purchased nearly 100 residential properties. The properties were sold at inflated market values to "straw buyers,’ who were unable to make mortgage payments. Of course, he pocketed the difference between his cost for buying the houses, and the inflated selling prices to ‘straw buyers.’ In other words, he orchestrated a criminal empire in buying and selling houses. He and his associates supplied the down-payments for the ‘straw buyers’ and in many cases obtained bogus tax forms and paycheck stubs that were submitted with the loan applications. The lenders relied on the false documents when they approved the loans, and HUD relied on the false documents in insuring the home loans. Thus, the HUD was left holding the bag.

When the ‘straw buyers’ defaulted on the home loans and the lenders foreclosed on the properties, HUD reimbursed the lenders for their costs and took possession of the properties. HUD ultimately suffered losses of more than $2 million when it sold the properties for far less than the fraudulent purchase prices of the homes.

Not deterred by his ongoing criminal activity, Espinoza went one step further. He also pleaded to willfully failing to pay income tax, admitting that he did not pay $200,000 due for the 1996 tax year. The prosecution pointed out that Espinoza had not filed tax returns for more than 10 years and owes the IRS more than $5 million in taxes, interest and penalties. In rejecting the defendant’s request for leniency, the judge noted the multifaceted nature of Espinoza’s fraud and his ‘EXTREME GREED.’

If Espinoza were not a criminal and was just a normal debtor who did not hide assets in his bankruptcy, he would have been able to discharge taxes owed in 1996 if he did file his tax returns for that year. Let’s say he timely filed his 1996 tax returns without any kind of fraud involved. The tax returns showed that he owed $200,000 for 1996. He did not pay the IRS any portion of the $200,000. In ten years, he would probably owe the IRS a million dollars. If he filed for bankruptcy relief after ten years, whatever he owed the IRS would have been discharged. This is assuming he was an honest debtor, and the IRS had assessed what he owed at least 260 days prior to his bankruptcy filing. Barring any kind of fraud in his 1996 tax returns, he would have wiped out over a million dollars owed to the IRS in his bankruptcy. Bankruptcy is so powerful IRS debts are discharged!

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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.