Combating Bankruptcy Fraud with SOFA and SOAL Forms

Combating Bankruptcy Fraud with SOFA and SOAL Forms 

The bankruptcy process has evolved over the years to try and limit fraud. Bankruptcy is a valuable process for individuals or organizations that are burdened by overwhelming debt. The process gives bankrupt individuals and businesses, also known as the debtor, the opportunity to develop a plan to pay back creditors. The process is extremely valuable to struggling individuals and organizations as it gives them the opportunity to start fresh after emerging from bankruptcy. 

However, over the years, people and organizations have taken advantage of the bankruptcy process regardless of their solvency. Two of the most common ways corporations or individuals try to defraud the system is to conceal or transfer assets. 

Concealment of Assets 

The concealment of assets is the most common form of bankruptcy fraud that occurs in the U.S. Debtors will often fail to declare assets that they own. When filing for bankruptcy, the bankruptcy court requires that a debtor provide a detailed listing of all cash, property, and assets. This listing of assets is important to determine whether a debtor is insolvent.  

Debtors will use the bankruptcy court as a forum to gain leverage to renegotiate leases, loans, or other debt obligations. However, if a company has more assets than liabilities, it is not allowed to use the court to file bankruptcy. It must find other ways to negotiate with its creditors. Concealing assets from the court could help a debtor prove insolvency by showing less assets in value than liabilities. 

Fraudulent Transfers 

When an individual or business is unable to repay its debts, they can seek relief from these obligations by filing for bankruptcy. As mentioned above, the bankruptcy process allows individuals and businesses to hit the “refresh button” when they can no longer pay their debts. 

 If a person or company is contemplating bankruptcy, they might make certain financial decisions to hide cash and other assets from the bankruptcy court. The transfer of cash and assets from the debtor to a different non-debtor person or company is considered a fraudulent transfer and could be subject to a claw back or undoing of a transfer. All recent transfers and bank transactions need to be provided to the court by the debtor through a second bankruptcy form. 

SOFA & SOAL in the Bankruptcy Processes 

Schedule of Assets and Liabilities (SOAL) 

The Schedule of Assets and Liabilities (SOAL) provides the itemized value of all the debtor’s assets and liabilities as of the day the company files for bankruptcy (petition date). The bankruptcy court, U.S. Trustee, and creditors will focus on the details provided in Schedule A/B. Schedule A/B details all assets and potential sources of value of the bankrupt company.  

This bankruptcy court document contains more than 80 questions to help prevent companies from committing fraud. The detailed questions cover assets of all types, from cash and receivables to collectibles and other extravagant assets. If an individual or company intentionally omits assets from the SOAL, then the debtor could face serious repercussions including fines or imprisonment. 

Statement of Financial Affairs (SOFA) 

The Statement of Financial Affairs (SOFA) focuses on the financial situation that caused the debtor to become insolvent. The court, trustee, creditors, and debtor’s advisors will use the SOFA to look more closely at the debtor’s business and financial situation.  

The questions on this form look at all payments made within the last 90 days to determine if there was preferential treatment or payments made outside of the ordinary course. In addition, the debtor must provide details of payments to insiders at least one year prior to the bankruptcy petition date. The court, trustee, and creditors will examine this activity to review that transfers were not made by the company to conceal assets or deplete cash.  

Ultimately, SOFAs are intended to highlight any potential fraudulent transfers or transfer of property with the intent of defrauding creditors as well as make sure there was no wrongdoing by the debtor. 

How SOFA and SOAL Help Detect and Prevent Fraud 

By requiring full disclosure, these forms make it difficult for debtors to hide assets or liabilities. Trustees and creditors review these forms to verify the debtor's financial situation. Any discrepancies, omissions, or suspicious valuations can trigger further investigation. These forms serve as critical tools in detecting and preventing fraud to help protect the integrity of the bankruptcy process. 

Legal Implications and Requirements for SOFA and SOAL 

Both the SOFA and the SOAL are detailed questionnaires that each debtor must complete to provide transparency into the financial situation. Accurate and timely completion of these forms is mandatory, as any misrepresentation or omission can result in severe legal consequences, including perjury charges, dismissal of the bankruptcy case, denial of discharge, and recovery actions for fraudulent transfers. Debtors should seek legal counsel and maintain detailed records to comply with these requirements and avoid potential legal repercussions. 

Whether for individuals or organizations, bankruptcy offers a fresh start by allowing debtors to create repayment plans. Unfortunately, some entities exploit this system, concealing assets or staging fraudulent transfers. If proper protocols and requirements aren’t met, there is a very real risk of legal repercussions. Consider hiring a trusted professional to help you navigate the complex steps and guide your organization through the bankruptcy process.