Teresa and Joe Giudice, stars of Bravo’s Real Housewives of New Jersey, are leading a double life these days, running back and forth between arraignments and media appearances. Last week, the couple pleaded not guilty to 39 counts of bankruptcy fraud, mail and wire fraud, and tax fraud. The Giudices allegedly inflated their income when applying for loans, then underreported their income to the bankruptcy court.
The sad truth is that the Giudices are an exception to the rule: most people don’t get caught. Bankruptcy fraud largely goes undetected due to government budget cuts that have halted all audits of consumer bankruptcy cases for fiscal year 2013, even though, according to government reports, auditors found “material misstatements” in 25% of audited cases in 2012.
In addition to a low probability of detection, bankruptcy fraudsters also generally face fairly light penalties if they are caught. For example, an Illinois man, whose fraud was discovered not by a government auditor but by a fluke, was recently convicted of concealing a $113,867 class action settlement from the bankruptcy court. He was sentenced to pay a $2,100 fine and to complete 30 hours of community service. With punishments this light, it’s no wonder so many people lie to the bankruptcy court.
Things may be turning around, though. Rumors have been spreading that the prosecutor in the Giudice case will make an example of the infamous couple by seeking jail time, a hefty fine and, for Joe, who is an Italian citizen, deportation. The media’s speculation may not be so far-fetched. Just last week, a Mississippi lawyer named Michael Earwood was sentenced to nearly four years in prison and a $792,228.53 fine for defrauding the bankruptcy court. The government may not have the money to conduct more audits, but stricter penalties combined with a well-publicized celebrity case may be just enough to keep some potential fraudsters honest.
Until that happens, there are people like us. We are routinely called upon to help creditors unearth hidden assets. We can also verify whether investors, debtors or spouses have what they say they have (or don’t have, as the case is here), even without the unfettered access to bank account information that the bankruptcy courts have. A little poking around and a few interviews can go a long way. For example, the Giudices allegedly said that they had earned no income in the two years prior to their October 2009 bankruptcy filing, even though they had already appeared on Real Housewives since May 2009. Their alleged claims could not have survived even the most cursory of media searches or a single interview.