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 scam perpetrators.

  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 loss.

  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.

Varied Remedies

  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 anti-fraud provisions.

  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 unethical behavior.

  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 ⁽⁵⁾, 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.

The Foreclosure Fraud Alert Website http://www.foreclosurefraudalert.com/

The Foreclosure Fraud Alert Blog  http://www.foreclosurefraudalert.com/fraudblog

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