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For $800 and the Deed To Your Home--
Bankruptcy Foreclosure Scams
Target Distressed Home Owners
Executive Office for
United States Trustees
"Attention Home Owner: Save your homes--Stop foreclosure now! Before
you file bankruptcy call me first. We refinance mortgages regardless of your
credit history!" Unless your home has been listed for foreclosure, you've
probably never received an advertisement like this in your mailbox, but you may
have seen similar solicitations printed in the local newspaper or posted on the
grocery store bulletin board. These solicitations may signal that a lucrative
type of fraud--the bankruptcy foreclosure scam--has established a foothold in
In May 1998, the Bankruptcy Foreclosure Scam Task Force of the United
States Bankruptcy Court for the Central District of California issued its final
report describing several bankruptcy foreclosure scams operating in the region;
explaining how they hurt bankruptcy courts, lenders, and homeowners; and
recommending ways to combat them in the Central District of California.
But bankruptcy foreclosure scams should not be dismissed as solely "an
L.A. problem." The most complex and lucrative bankruptcy foreclosure scams have
arisen in major metropolitan areas on the West Coast; in August 1998, one Los
Angeles-area perpetrator was sentenced to 71 months in prison and ordered to pay
more than $72,000 in restitution for running a scam involving more than 200
fraudulent bankruptcy filings. However, Mom-and-Pop operations are appearing
even in mid-size Midwestern cities. And some perpetrators are not only reaching
across state lines to recruit local "customer representatives," but are also
seeking referral affiliations with local consumer bankruptcy attorneys.
Reports from United States Trustee Program personnel around the
country make clear that bankruptcy foreclosure scams are geographically
widespread, as well as varied in their methodology.
Types of Foreclosure Scams
"For the cost of a bankruptcy filing fee, a debtor can immediately
obtain one of the most powerful injunctions available under American law: the
automatic stay," the foreclosure scam task force pointed out. The task force
report described bankruptcy foreclosure fraud as the practice of filing for
bankruptcy to delay or defraud creditors, without intending to comply with the
requirements for obtaining a bankruptcy discharge or completing a repayment
The foreclosure scam most commonly associated with the West Coast is
the fractional interest transfer. Typically, a partial interest--perhaps 5
percent or 10 percent--in property held by a homeowner facing foreclosure is
transferred to a real or fictional entity already in bankruptcy. Because the
property interest is then held by a bankruptcy debtor, the original owner's
creditor cannot foreclose until the bankruptcy court lifts the automatic stay.
Some scams involve fractional interests transferred with the knowledge
of the original property owner. Often, however, the original owner first
transfers the property to the perpetrator of a foreclosure scam, who then
transfers the fractional interest without the original owner's knowledge.
Sometimes a property is moved from case to case as the stay is lifted; one
residential property was linked to 24 different bankruptcy cases.
The task force report explained how one homeowner facing foreclosure
was persuaded by a scam perpetrator to sign deeds of trust and grant deeds
transferring fractional interests in her property. The homeowner paid the
foreclosure consultant several hundred dollars per month so she could stay in
her home. The fractional interest recipients included apparently fictitious
individuals as well as homeless persons recruited for a fee to participate;
eight recipients filed for bankruptcy one after the other. Each filing stayed
foreclosure on the property, causing a 10-month delay between the first filing
and the completed foreclosure.
Many more variations of bankruptcy foreclosure fraud are surfacing
around the country. Probably the most widespread involves the use of foreclosure
notices to identify individuals facing the loss of their homes. The scam
perpetrator contacts the home owner, advertising "mortgage assistance" or
"foreclosure counseling" and promising to work out the home owner's problems
with the mortgagee or to obtain refinancing for an up-front fee typically
ranging from $250 to $850. The perpetrator may direct the home owner to "fill
out some forms," including a blank bankruptcy petition, or may collect the
information needed to complete a petition later. The perpetrator subsequently
files a bankruptcy petition in the home owner's name, after filling in the
bankruptcy papers signed by the home owner or forging the home owner's
signature. The bankruptcy petition invokes the automatic stay, the imminent
foreclosure is postponed, and the home owner stops receiving collection calls
In most cases, the perpetrator does not tell the home owner about the
bankruptcy petition, instead convincing the home owner that foreclosure activity
has ceased because mortgage problems have been worked out. The perpetrator may
tell the home owner that he or she might receive a notice from the court, which
should be ignored. The home owner may even be told that the perpetrator has gone
to court on the home owner's behalf. No one appears at the Section 341 meeting,
the case is dismissed, the foreclosure goes forward, and the home is lost.
Permutations of this scam include the perpetrator's collecting monthly
mortgage payments from the homeowner, falsely stating that they will be
forwarded to the mortgagee. In these cases, each defrauded homeowner pays not
only the up-front fee for "services," but also hundreds or thousands of dollars
in mortgage payments.
In another increasingly common alternative, the scam perpetrator
convinces the home owner to quit-claim the residence to the perpetrator or to
sell the residence for a nominal fee such as $1. The home owner agrees to
transfer title because he or she has little or no equity in the property. The
perpetrator charges the home owner "rent" or a "consultant's fee" or "management
fee" to stay in the residence while the mortgage problems are worked out, after
which the home owner will be able to "apply for repurchase" of the property or
share the profits if the perpetrator sells the property.
But it costs money for the perpetrators to file all of these
bankruptcy cases. To avoid bankruptcy filing fees, some perpetrators transfer an
interest of the home owner's quit-claimed property into the name of an existing
bankruptcy debtor--perhaps a Chapter 11 business debtor across the country--in a
variation of the fractional interest scam. Typically, the debtor learns that a
property interest has been transferred into its bankruptcy estate when it is
contacted by counsel for the property owner's secured creditor, who has learned
it cannot foreclose because the property is owned by a bankruptcy debtor.
Detecting and Reporting Scams
Bankruptcy foreclosure scams can be exceptionally difficult to detect
because the cases are usually dismissed for failure to participate, leaving no
sign of the defrauded home owner. Many cases proceed no further than the Section
341 meeting, so Chapter 7 and 13 trustees form the "front line" of foreclosure
Warning signals to tip off a trustee that a home foreclosure scam is
operating include: a proliferation of pro se petitions filed with no schedules;
a series of debtors with similar petitions or schedules; debtors' failure to
show up at the Section 341 meeting; multiple debtors represented at the meeting
by a bankruptcy petition preparer or other non-attorney; debtors who attend the
meeting but are confused about whether they are in bankruptcy; and a rash of
debtors who clearly lack sufficient income to fund a Chapter 13 repayment plan.
Bankruptcy judges are another valued source of information. Suspicious
cases have been flagged by judges in districts across the country, from Los
Angeles to Detroit to Baltimore to Miami. One judge noticed that an attorney was
filing many cases that were not being properly serviced. This can indicate that
a scam perpetrator is either referring home owners to an attorney to assist them
in filing bankruptcy, or sending completed bankruptcy papers to the attorney to
file in court with or without the home owners' knowledge. Scam perpetrators use
the latter method to avoid liability for violating Bankruptcy Code Section 110's
restrictions on bankruptcy petition preparers.
In addition, secured lenders can flag foreclosure scams, because they
have unique access to relevant documentation. A secured lender receives all of
the bankruptcy cover sheets on a particular piece of property. These documents
may disclose that different debtors are all linked to the property. The secured
lender may the only entity that can pull together this revealing information.
Consumer bankruptcy attorneys can also help bring foreclosure scams to
light. A home owner whose bankruptcy case is filed by a scam perpetrator and
dismissed for lack of participation may have to file for bankruptcy again. A
client's story told to a bankruptcy attorney may reveal that the client was
burned by a bankruptcy foreclosure scam.
Debtors' counsel should be aware that perpetrators seek out
attorneys--sometimes inexperienced attorneys without a well-developed reputation
in the bankruptcy community--and offer case referral. Frequently, the attorney
is expected to kick back part of the legal fee to the perpetrator in exchange
for the referral.
Some scams are reported by victimized home owners, although many home
owners never realize they were defrauded. A victim who complains to the
perpetrator after foreclosure occurs--assuming the perpetrator is still
operating in the area--may be told that the mortgage problems were too serious
to work out or the home owner's credit was too bad to obtain refinancing.
Sometimes, however, receipt of notice from the bankruptcy court prompts the home
owner to call the court, the United States Trustee, the case trustee, or a
bankruptcy attorney. Other complaints are brought by home owners who apply for
credit and discover a bankruptcy filing listed on their credit records.
Foreclosure scams are most likely to flourish, and least likely to be
detected, in judicial districts inundated with bankruptcy filings. If the
private trustee can quickly identify a case as improperly filed and obtain its
immediate dismissal, avoiding a six- to 12-month delay in foreclosure, a home
owner may be more likely to complain about a "mortgage consultant's" poor
service. However, with high bankruptcy case loads causing substantial delays in
relief from stay, some defrauded home owners decline to report the scams,
apparently deciding that the extra months of living in their homes offset their
The most dramatic method of detecting bankruptcy foreclosure scams is
through undercover investigations like "Operation Churn 'N Burn," a 1995 sting
that resulted in seven convictions. In Churn 'N Burn, fictitious foreclosure
actions were filed in the county court. Scam perpetrators zeroed in on two
apparently distressed home owners, unaware that the "spouses" were Federal
Bureau of Investigation agents and their "home" was provided by the U.S.
Department of Housing and Urban Development.
But undercover operations targeting bankruptcy fraud are rare. In
combating bankruptcy foreclosure fraud, the United States Trustee Program relies
upon tipoffs from participants in the bankruptcy system--the trustees,
bankruptcy judges, bankruptcy clerks, secured lenders, and attorneys.
Who Are the Victims?
Bankruptcy foreclosure scams claim many victims, but the one that
suffers the greatest harm is the bankruptcy system. The task force report noted
that bankruptcy cases filed solely for delay take disproportionately more
clerical and judicial time and attention because they usually involve more
relief from stay motions, orders to show cause, and motions and orders to
dismiss. Nationwide, foreclosure scams may cause the inappropriate filing of
thousands of bankruptcy cases, including cases filed without the petitioners'
knowledge, cases knowingly filed by property owners seeking only to benefit from
the stay, and cases voluntarily filed by home owners after being strung along by
Lenders also suffer from foreclosure scams, receiving no payments for
months or years while the repeated transfers and bankruptcy filings invoke the
automatic stay. When the case involves a federally insured mortgage loan, such
as a Veterans Affairs or Federal Housing Administration loan, the government is
ultimately a victim of bankruptcy fraud because it must cover the mortgagee's
Home owners who place their trust in scam perpetrators--who may play
up religious or ethnic identities with names like Christians Helping
Homeowners--can end up financially devastated. "We'll help you keep your piece
of America," promised advertisements distributed by a Dallas "consultant" who
was sentenced in August 1998 to 24 months in prison and ordered to repay $58,000
in restitution for bankruptcy fraud and bank fraud. Defrauded home owners paid
the defendant from $2,000 to $15,000 in fees and mortgage payments; around 30
home owners are believed to have lost their homes due to her activities.
Foreclosure scams can look like easy money and can reach huge
proportions. A successful criminal prosecution sends the message that scams will
not be allowed to flourish. One Los Angeles-area defendant was sentenced in
August 1998 to 71 months in prison and ordered to pay more than $72,000 in
restitution for operating a massive bankruptcy foreclosure scam involving more
than 200 fraudulent bankruptcy filings. Another L.A.-area defendant was charged
of running a foreclosure scam affecting more than 500 homes.
Attorneys and analysts from the United States Trustee Program work
closely with federal, state, and local prosecutors in cases involving bankruptcy
foreclosure scams. Often, United States Trustee Program personnel not only put
together the initial referrals--a lengthy documentation process--but also assist
in the investigation and development of the case. Criminal cases frequently
involve charges under 18 USC 157, which imposes fines and/or imprisonment for
the use of the bankruptcy system as part of a scheme or artifice to defraud.
Alternatively, state and local authorities may bring charges under state
But bankruptcy fraud rarely ranks first among criminal prosecution
initiatives, because of limited investigative and prosecutorial resources. The
bankruptcy foreclosure fraud task force asserted that "the criminal process is
too slow and too limited to be the primary line of defense against bankruptcy
fraud." The amount of loss per case is small, witnesses often move without
leaving forwarding addresses, paper trails are hard to follow, and positive
identification can be elusive.
That makes it crucial to explore other ways to fight bankruptcy
foreclosure scams. United States Trustees have successfully litigated civil
actions against foreclosure scam perpetrators under Bankruptcy Code Section 110.
In addition, active enforcement of state unauthorized practice of law
provisions, as well as a vigilant state bar, can create an inhospitable
atmosphere for petition preparers and lawyers who would engage in unlawful or
The bankruptcy foreclosure fraud task force made several suggestions
for combating bankruptcy foreclosure scams, including amending Section 362 to
explicitly authorize the bankruptcy court to enter an "in rem" order--that is,
an order stating that a lift-stay order will remain effective as to a particular
property in any future bankruptcy case, without the creditor's seeking further
relief from stay. The National Bankruptcy Review Commission made a similar
recommendation in its final report, and several bankruptcy reform bills have
included language to this effect. This position is not without controversy,
however; despite the task force's view, even some of the bankruptcy judges in
the Central District of C
alifornia believe they lack jurisdiction to issue such orders.
The task force also advocated amending Bankruptcy Rule 5005 to let the
bankruptcy clerk reject a bankruptcy petition if the filer does not provide
identification. This recommendation was intended to prevent scam perpetrators
from filing petitions without the named debtors' consent or with the use of
false names or Social Security numbers. The United States Trustees are also
considering steps they may take to protect against these abuses, including
requiring identification at the Section 341 meeting.
Bankruptcy foreclosure fraud is a growing problem that threatens the
integrity of the bankruptcy system as it takes advantage of families in
distress. The United States Trustee Program is working hard to identify
bankruptcy foreclosure scams around the country and to take appropriate action
through criminal referrals and civil suits, but we need help from members of the
The United States Trustee Program welcomes information that will help
detect bankruptcy foreclosure scams, and is indebted to those trustees, judges,
clerks, secured lenders, bankruptcy attorneys, and private citizens who report
suspicious fact patterns. We also appreciate the efforts of federal and state
law enforcement authorities who target these operations. We will continue to
coordinate with all participants in the bankruptcy system to eradicate this
destructive form of fraud.
Bankruptcy Basics - For Cases Filed on or after October 17, 2005 (pdf)
Basics - For Cases Filed before October 17, 2005 (pdf)
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