Foreclosure Fraud Alert-Bankruptcy Foreclosure Scams Part 1

For $800 and the Deed To Your Home--
Bankruptcy Foreclosure Scams
Target Distressed Home Owners

Written by:
Jane Limprecht
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 your community.

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 plan.

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 ⁽³⁾.

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.