Ponzi schemes have been around for many years. The scary thing about Ponzi schemes is this – you may not know you are in one until your money is long gone. Sure, it is possible to put money in a Ponzi scheme, and get out in time to not lose your money, but it would be at others’ detrimental expense. Eventually the scam will reveal itself, and you can be charged with receiving stolen goods, even if you knew nothing. Bernard Madoff managed to convince thousands of people that the high returns they were “receiving” on their investments were real. This could not be farther from the truth.

Here is how a Ponzi scheme works: The scammer, Madoff in this case, has to constantly look for new investors. Why? Because he has to use their new money to pay the older investors’ returns! Madoff promised the new investors out-of-this world profits, so they handed over their cash. Then, he turned around and used some of that money to pay older investors who wanted to draw from their so-called portfolios. It’s a delicate balancing act that, as we have come to see, and will implode eventually. You really can’t blame some of the victims here, as they really had no clue as to what they were getting into. After all, he was Bernard Madoff, a trustworthy member of society at the time.

As of May 14, there are 8,848 people claiming losses from Madoff. An involuntary petition for Chapter 7 bankruptcy (liquidation) was filed by Madoff’s creditors on April 13 of this year. The court appointed trustee, Irving Picard, told reporters that legal action against Madoff’s family “is a matter being looked into”. Picard has also alleged that Madoff’s immediate circle of family and friends spent investor money carelessly, financing their posh lifestyles. The allegation appeared in bankruptcy court filings. This circle would include Madoff’s wife, sons, brother, and a few key employees. As the court-appointed trustee, Picard has the responsibility to try and locate as many assets as possible to pay Madoff’s customers. Picard has already filed suits in bankruptcy court attempting to get large investors and hedge fund managers to return $10.1 billion in profit paid out by Madoff over the years. Of course, Madoff claims that everyone was in the dark – including his lawyers.

Although Madoff did plead guilty to securities fraud in March of this year and is facing 150 years in prison, it is interesting to note that recently as November 2008, investors received statements claiming their assets had grown to $65 billion total. Picard says that only $1 billion in useable assets has been identified so far. That is undeniably a $64 billion dollar mistake. What does this tell us? Had Madoff not been caught, he would have continued to steal money!  Stephen Harbeck, head of Securities Investor Protection Corporation, or SIPC, is vowing to get tough with anyone else who is a part of this Ponzi scheme. Congress has authorized the SIPC to guarantee brokerage accounts for up to half a million dollars – and SIPC has definitely stepped in to cover a portion of the claims, estimating a payout of $61.4 million to 125 victims by the end of next week.

An involuntary chapter 7 bankruptcy petition can be filed by your creditors when a significant amount of money is owed.  Once filed, you have 20 days to file an objection. If no objection is filed, bankruptcy proceedings commence. If you do file an objection, the case goes to trial. Don’t be surprised by an involuntary petition! If you are having problems paying your debt, contact a bankruptcy lawyer today.