Due to an increased acceptance of bankruptcy and a changing economic climate, there has been almost a 500% increase in bankruptcy filings within the past three decades. However, this dramatic increase in bankruptcies has been accompanied by an associated rise in the crime of bankruptcy fraud.

 

One way that scam perpetrators might abuse the bankruptcy system to defraud others is through bankruptcy foreclosure scams. These scams can potentially harm several victims including bankruptcy courts, lenders, homeowners and innocent bystanders.

 

One way that someone might seek to misuse bankruptcy is through the commission of a bankruptcy foreclosure scam. Such scams typically involve the practice of filing for a bankruptcy for the sole purpose of delaying a foreclosure. The filing debtor has no intention of actually following through with the bankruptcy, but they use the system to take advantage of the automatic stay. The automatic stay is immediately issued upon the bankruptcy filing. The stay "buys time" for the debtor by temporarily stopping all creditors from instituting any debt collection, foreclosure and/or wage garnishment actions against them.

 

There are several specific types of bankruptcy foreclosure scams involving a variety of perpetrators and victims. Forms of foreclosure scams include:

All of the above scams are a form of bankruptcy fraud, which is a criminal offense.

 

In this type of scam, the party facing foreclosure might transfer a five or ten percent interest in their property to a debtor that is in bankruptcy. The bankruptcy debtor is protected by the automatic stay. Since the bankruptcy debtor holds an interest in the owner's property, the automatic stay afforded to the bankruptcy debtor also shields the property owner's interest. The owner's mortgage cannot be foreclosed upon until the bankruptcy court lifts the automatic stay off of the bankruptcy debtor's interest.

 

Various parties may be involved in this type of scam. For example, one case involved a woman facing foreclosure and an outside scamming "mortgage consultant." The woman innocently agreed to pay the consultant a fee for his services. The consultant advised that she sign deeds of trust to transfer fractional interests in her property, which she did. The consultant delivered the signed interests to fictitious parties and had the fictitious parties file for successive bankruptcies to obtain several automatic stays, delaying the inevitable foreclosure for 10 months. The property was ultimately foreclosed upon but the consultant had already been paid thousands of dollars in fees.

 

Another type of foreclosure sale scam is serial or multiple filings of bankruptcy to take advantage of the automatic stay. In these types of scams, the same party or related individuals file successive bankruptcies to delay a foreclosure on the same property.

 

In a Chapter 13 bankruptcy, the debtor is requesting to "reorganize" their debt into a manageable payment plan. The debtor proposes a three to five year plan of repayment and the case is closed upon successful completion of the plan. As with any other form of bankruptcy, filing for Chapter 13 triggers the automatic stay. However, if the debtor fails to make a monthly plan payment, the case is dismissed, the stay is lifted and the debtor may not re-file for bankruptcy for 180 days. In a voluntary dismissal foreclosure scam, the debtor voluntarily dismisses their case and the "180 day rule" does not apply. Once they voluntarily dismiss, the debtor is free to re-file immediately to renew their automatic stay.

 

Typically, bankruptcies are voluntarily filed by debtors who need help to discharge or manage their overwhelming debt. However, bankruptcy laws also permit involuntary bankruptcies whereby a creditor may file petitions against a debtor in default. In an involuntary petition scam, a debtor facing foreclosure pays an entity a fee to file an involuntary bankruptcy petition against them. The involuntary bankruptcy triggers the automatic stay which protects the debtor from the threatened foreclosure. Section 303(b)(1) of the Bankruptcy Code has been amended to provide that a creditor may not commence an involuntary case if the debtor's liability on a claim or the amount of the claim is subject to a bona fide dispute.

 

In a phony alias amendment scam, debtors that have filed for bankruptcy "amend" their petition to add alias names of themselves. However, the alias is actually an individual unrelated to the debtor. The amendment serves to stop foreclosure against the unrelated person through an automatic stay. In turn, this protects the debtor since the automatic stay is essentially renewed on the same (or the debtor's own) property.