Definition
“Bust-Out” is a fraudulent activity, usually associated with credit card scams, where an individual increases their credit score to gain more credit, maxes out all credit lines, and then fails to repay the debts. It often implicates setting up a fake company and using it to purchase goods and services on credit, which they then resell for cash. Once all credit has been exhausted, the person or company then ‘busts out’ by disappearing or declaring bankruptcy.
Key Takeaways
- “Bust-Out” is a fraudulent activity that involves the deliberate overuse of a line of credit with no intent on paying back the debt. It is a form of credit card fraud where a person pumps up their credit limits with good behavior, then maxes out their account and never pays it back.
- It impacts both the financial institutions issuing the credit and the consumers since it leads to increased credit costs and tighter credit availability. “Bust-Out” scams can be challenging to detect because the fraudster mimics the behaviour of a legitimate borrower for several months before busting out.
- Modern financial institutions use artificial intelligence and machine learning systems to identify suspicious activities and signs of possible “Bust-Out.” Some signs include sudden changes in purchasing behaviour, the rapid escalation of debt, or the simultaneous maxing out of all lines of credit.
Importance
The finance term ‘Bust-Out’ is important primarily in the context of consumer-based financial fraud.
Bust-out is a fraudulent scheme where a person applies for credit, maintains a good payment history to increase the credit limit, after which they max out the credit and disappear, leaving the credit company at a loss.
It highlights the crucial importance of vigilant credit monitoring and risk management strategies for financial institutions.
The term is also used to describe a similar scheme in poker, implying the notion of risk, prediction, and financial loss.
Understanding the concept of Bust-Out can help financial institutions to implement appropriate measures to identify any potential fraud at an early stage and limit their exposure to such fraudulent activities.
Explanation
Bust-Out is a type of financial fraud generally used within the credit industry. The main purpose of this fraudulent practice is to maximize credit lines with the intent to decline payment thereafter.
Fraudsters intending to commit this type of fraud will initially make regular payments to build trust and maintain a good credit history, thereby encouraging banks or other lending bodies to increase their credit limit. Once an ample credit line is established, the fraudster will rapidly exploit this limit and then disappear or “bust out” without returning the borrowed funds.
Bust-Out is primarily used for obtaining large sums of money from credit providers. Fraudsters purchasing goods with credit often resell those for cash, leaving the lending bodies to bear the losses when the debts are not paid.
In many instances, goods are purchased for export, making recovery even more challenging. The harmful repercussions of this practice impact not only direct victims (the credit providers) but also the overall economy, as the losses usually translate into higher credit costs for honest consumers.
Examples of Bust-Out
“Bust-out” is a fraudulent scheme where a credit card is used to the extreme limit through rapid purchases, which are usually not paid off. This term can also refer to a scenario in a business setting where an entrepreneur takes over a company, only to make it insolvent through draining its assets. Here are three real-world examples:
Business Bust-Out: In 2020, DC Solar owners Jeff and Paulette Carpoff pled guilty in a billion-dollar Ponzi scheme. The owners engaged in fraudulent activities including buying a NASCAR sponsorship and luxury real estate by inflating the financial return of their mobile solar generator company. This scheme led to their bankruptcy and the loss of hundreds of jobs.
Personal Bust-Out: In 2017, Universal Processing Services of Wisconsin, LLC v. Hicks case involved the use of a ‘bust-out’ scheme. In this case, the defendant, Hicks, received $150,000 in a credit card ‘bust-out’ scheme. This means he ran up credit card debt with no intention of repaying it and then filed for bankruptcy to protect himself from the debt he had accrued.
Bankruptcy Fraud Bust-Out: This type of bust-out scheme is committed by businesses that obtain large amounts of credit with the intention to declare bankruptcy once the credit is used up. In the 1990s, then-billionaire businessman Robert Campeau engaged in a bust-out scheme. Campeau orchestrated leveraged buyouts of numerous retail stores, then drove these companies into bankruptcy while siphoning off the assets for himself. The fallout from Campeau’s bust-out scheme led to the largest retail bankruptcy in history at that time.
Frequently Asked Questions About Bust-Out
1. What does Bust-Out mean in finance?
Bust-Out in the financial term refers to a type of fraud that involves the use of a business, bankruptcy, and complex, typically illegal, maneuvering to steal money, evade creditors or strip assets.
2. Can a Bust-Out be prevented?
Yes, a Bust-Out can be prevented. A keen eye for unusual business transactions, proper background checks and regular risk assessments are effective measures in preventing Bust-Out.
3. How are Bust-Outs identified?
A Bust-Out is usually identified by sudden changes in a company’s purchasing behavior, sudden increase in orders, or rapid changeover of company management.
4. Who are usually the victims of Bust-Outs?
Usually, lenders, suppliers, or creditors are the victims of Bust-Outs since they are left with unpaid bills or goods sold without payment.
5. Can Bust-Out perpetrators be prosecuted?
Yes, they can be. Bust-Out is a form of fraud which is a punishable offense under law. It can result in severe penalties including fines and imprisonment.
Related Entrepreneurship Terms
- Credit Card Fraud
- Bankruptcy
- Identity Theft
- Debt Collection
- Asset Stripping
Sources for More Information
- Investopedia: A comprehensive resource for investing education, personal finance, market analysis and free trading simulators.
- Financial Times: A world renowned financial news organization providing key insights and analysis into the global economy.
- Bloomberg: A leading multi-platform news and financial information provider, known for its up-to-the-minute coverage of global financial markets and industries.
- The Balance: Offers expertly crafted content with the goal of making personal finance easy to understand.
