"Foreclosure Rescue" Operators Abusing the Federal Bankruptcy Courts

"Equity Skimming" is one type of fraud commonly utilized by a "foreclosure rescue" scammer, particularly when working with a financially distressed homeowner facing foreclosure who doesn't have a significant amount of equity in their home. It refers to the process by which the scammer collects rent from a property without making the neceesary mortgage payments and the bank or other mortgage holder ultimately forecloses on the home.

Logically, it stands to reason that the longer the "rescue" scammer can delay the foreclosure legal process, the longer he can continue to collect money from the property without making the mortgage payments, thereby increasing the money he makes.

In an effort to extend the period of time that money can be collected from a property that is going through the foreclosure process, some "rescue" scammers have resorted to an abuse of the Federal Bankruptcy system to extend that time period by filing "last minute" bankruptcy petitions, multiple petitions, and by engaging in other conduct constituting abuse of the Bankruptcy Courts.

Beacuse of the rampant abuses of the bankruptcy system, the Bankruptcy Foreclosure Scam Task Force of the United States Bankruptcy Court for the Central District of California had a study done and prepared a report on the findings.

The report states that, in recent years, "some people in the Central District of California 'have apparently created whole businesses out of the delay possibilities provided by the automatic stay.' These entities often advertise as 'foreclosure services' or 'mortgage consultants.' "

The report identifies the following five different kinds of bankruptcy foreclosure scams, which have been taken from the Fact Sheet on Final Report of Bankruptcy Foreclosure Scam Task Force:

• The fractional interest transfer scam. A bankruptcy debtor receives a 5 percent or 10 percent interest in property that is held by another borrower who faces foreclosure. Because the interest is then held by a bankruptcy debtor, the original borrower's creditors cannot foreclose until the bankruptcy judge lifts the automatic stay.

One San Bernardino, Calif., homeowner facing imminent foreclosure was approached by a scam perpetrator, and agreed to sign deeds of trust and grant deeds transferring fractional interests in her property, according to the report. The homeowner paid the foreclosure consultant a few hundred dollars per month. The recipients of the fractional interests included homeless individuals and apparently fictitious people. Eight of them filed for bankruptcy one after the other. Each filing stayed foreclosure on the homeowner's home, causing a 10-month delay between the first filing and the completed foreclosure.

• Serial filings by related debtors. The same individual or related individuals file several bankruptcy cases in a row to delay foreclosure.
• Voluntary dismissals of serial Chapter 13 cases. The debtor asks the court to dismiss the case. When a bankruptcy trustee obtains dismissal of a case for failure to appear or make required mortgage payments, the dismissal order usually prohibits the debtor from refiling for bankruptcy within 180 days. A voluntary dismissal avoids this prohibition. The debtor can immediately refile, renewing the automatic stay.
• Involuntary petition scams. Under certain circumstances, the Bankruptcy Code permits creditors to file "involuntary petitions" against borrowers. In this scam, an entity will file--for a fee--a bankruptcy petition against an individual facing foreclosure, causing the automatic stay to take effect on the individual's behalf.
• Phony alias amendments to petitions. The bankruptcy petition is amended to add an alias name of the debtor. The alias is actually the name of an unrelated person. The amended petition is recorded or otherwise used to stop eviction or foreclosure proceedings against the unrelated person.

To view the full report, see Final Report Of The Bankruptcy Foreclosure Scam Task Force, United States Bankruptcy Court - Central District Of California; May 1998.