In our previous post, we spoke a bit about civil asset forfeiture and its use—and potential abuse—by law enforcement in criminal investigation. As we noted, civil asset forfeiture can impact bankruptcy cases, both for creditors and debtors.

For debtors, of course, having assets seized and forfeited reduces the amount of solvency they bring to the table in a bankruptcy filing. Whether or not a debtor is found guilty of a crime, forfeiture can have a significant negative financial impact. For creditors, asset forfeiture can impact the distribution of assets under the Bankruptcy Code, not only in terms of reducing payments on debt, but also by introducing an alternative distribution scheme. This can be especially seen in cases where assets are seized in the investigation of fraud crimes where multiple victims are involved.  

In cases where seized assets are determined to be tied to crimes of fraud, whether committed by the debtor or not, authorities typically use the proceeds to compensate victims. General creditors of a debtor who has had assets forfeited, however, are not compensated in this process unless they are themselves victims of fraud. If the debtor files for bankruptcy, creditors may be compensated, but according to the distribution scheme set forth in bankruptcy law. The scheme for compensating creditors under the Bankruptcy Code is not compatible with the approach the government uses to distribute forfeited assets.

Debtors who have had assets unfairly seized in a criminal investigation should, of course, seek legal help in recovering those assets. For creditors involved in a bankruptcy case where assets have been forfeited as part of a criminal investigation, it is important to work with an experienced attorney to ensure their rights under bankruptcy law are protected. This is all the more important given the tensions between the way assets are dealt with in asset forfeiture proceedings and the bankruptcy process.

Sources: American Bar Association, “What Just Happened? How Asset Forfeiture Affects Bankruptcy Distributions,” Henry C. Kevane, June 21, 2012.