Someone who contemplates pulling out all the stops to avoid foreclosure should consider the following: Filing serial bankruptcy petitions to avoid foreclosure can result in a conviction for bankruptcy fraud, as shown by a Seventh Circuit opinion upholding a debtor’s four-year prison sentence for filing five chapter 13 petitions.
Here’s another warning: The lender isn’t the only victim when it comes to sentencing. The debtor’s sentence was enhanced to reflect the claims of the debtor’s other creditors.
The debtor owned a condominium. She filed five chapter 13 petitions to stop the condominium association from evicting her. The filings followed the same pattern, according to the June 6 opinion by Circuit Judge Joel M. Flaum.
Similar to many individuals who use bankruptcy to forestall foreclosure, the debtor would file a chapter 13 petition, but the bankruptcy court would dismiss when she failed to make plan payments.
There was more to the scheme, though. On one occasion, she temporarily transferred title of the unit to a friend for no consideration. The friend then filed his own chapter 13 petition, which was dismissed for nonpayment.
The government indicted both the debtor and her friend for bankruptcy fraud. The friend took a plea to a misdemeanor and cooperated with the government. After a week-long trial, the jury convicted the debtor on all five counts.
Agreeing with the government, the district court imposed a 10-level enhancement because the victims’ losses totaled more than $150,000. The district court imposed an additional two-level enhancement because there were more than 10 victims. Although the guidelines would have meant 51 to 63 months in prison, the district judge was lenient and imposed a 47-month sentence.
The debtor appealed her 47-month prison sentence, although it was below the sentencing guidelines. Judge Flaum upheld the sentence.
The loss calculation was erroneous, the debtor argued, because the condominium association was the only victim and its losses were only $46,000. Judge Flaum disagreed, employing the clear error standard for reviewing the sentence.
Between her first and fifth bankruptcy filings, the claims of the debtor’s creditors increased by $193,000, thus justifying the finding that losses exceeded $150,000.
The debtor contended that the district court should have included only the losses incurred by the condominium association because her other debts were not the result of criminal or unlawful conduct. Again, Judge Flaum disagreed.
The debtor’s crime was filing “multiple chapter 13 bankruptcy petitions in bad faith.” Counting other creditors’ claims was not error, Judge Flaum said, because the fraudulent bankruptcy filings automatically precluded the other creditors from collecting their debts.
Judge Flaum also rejected the idea that the condominium association was the only victim. According to the sentencing guidelines, a “victim” is someone who sustains an “actual loss.”
Again, the enhancement was not erroneous, Judge Flaum said, because the automatic stay applied to all creditors, not just the condominium association.