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 scam detection.

  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 losses.

  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 ⁽⁴⁾.

  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.

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

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

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