The bankruptcy system is often used as a tool by individuals engaged in a variety of real estate scams. For the perpetrators, the automatic stay becomes an integral part of their schemes. By filing serial bankruptcy cases, the perpetrators can stop the foreclosure actions and continue to control the properties. For the individuals recruited to purchase the properties, they will eventually need to file chapter 7 cases to discharge the mortgage deficiencies incurred as a result of the foreclosures. Victims of these types of schemes include lenders, the federal government and, in some instances, the debtor. John Dupuy (HUD, Office of the Inspector General) and Peter Ainsworth (Chief, U.S. Trustee Program’s Criminal Enforcement Unit) will discuss several of these schemes including equity skimming, property flipping, and fractional interest schemes and how they utilize the bankruptcy system on April 17 at the Commercial Fraud Task Force meeting during the Annual Spring Meeting in Washington, D.C.
One type of scam that utilizes the bankruptcy system targets individuals who are facing the loss of their homes. Many of these homeowners can’t make their current monthly payments, much less clean up past-due payments. The scam operators identify these homeowners through public foreclosure notices and various other methods. Generally, the homeowner is contacted by the perpetrator who claims to be a “mortgage broker,” “foreclosure consultant” or financial professional who can assist the homeowner in saving his or her home from foreclosure. The homeowner is persuaded to make mortgage payments to the perpetrators. The perpetrators will then file several bankruptcy cases in the victim’s name to stop the foreclosure. Generally, the victim is unaware that bankruptcy cases have been filed. The victim continues to pay the perpetrators, believing that the perpetrators have been successful in securing new financing or negotiating with the victim’s lender. Eventually, the foreclosure will go forward and the victim will not only have lost his or her home, but will have lost the cash paid to the perpetrators. In certain variations of this scheme, victims will also be persuaded to deed their properties to the perpetrators.
A related scam is the “eviction mill,” which offers “counseling” to help tenants avoid eviction. But instead of providing genuine eviction defense services, the scam operator files a bankruptcy case in the tenant's name. This invokes the automatic stay and delays eviction. Often the tenant doesn’t know that the bankruptcy case has been filed and that the tenant will be evicted after the stay is lifted or the bankruptcy case is dismissed. On the other side of the coin, the landlord holding a valid eviction notice due to the tenant’s non-payment can’t execute the eviction order until the stay is lifted or the bankruptcy case is dismissed.
Property flipping usually involves an organized ring that recruits individuals to serve as purchasers of real estate. The ring will identify properties that will be purchased from legitimate sellers. The ring will secure financing on behalf of the recruit to purchase several pieces of real estate. It will also submit to the lenders fraudulent appraisals that grossly inflate the value of the properties. The recruit signs the loan documents as the borrower. At closing, ring members will create two closing statements—a statement for the closing with the legitimate seller that reflects the actual price paid and the fraudulent closing statement that will be provided to the lender. Ring members will take the loan proceeds and pay the seller. The rest of the funds are used to pay the recruit a fee and the balance goes to ring. The properties may be “flipped” several times after the initial purchase with ring members now serving as both sellers and purchasers. In some cases, the ring will also rent the properties as an additional method of generating cash from the scheme. Throughout the entire scheme, few, if any mortgage payments are made. The inevitable foreclosure proceeding will be instituted. The ring will serial file incomplete bankruptcy cases or deed fractional property interest into existing bankruptcy cases to take advantage of the automatic stay. Eventually, the foreclosures will be completed. However, during the entire process the ring has continued to collect rent payments. Oftentimes, the loans involved are HUD or VA insured and the renters are also receiving federal rent support. The recruit will file chapter 7 to discharge the mortgage deficiencies.
Please join the Commercial Fraud Task Force on April 17 to learn more about real estate fraud schemes and how to detect them.