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Cosponsors of bankruptcy fraud bill question mortgage service industry

US Trustee announced settlement with Capitol One in January


Today's post is about bankruptcy fraud, but the first case may seem an extension of the Mortgage Foreclosure Scandal I've been addressing the past few days. I think it's worthwhile to revisit bankruptcy fraud ever so often. For one thing, the power of bankruptcy protection is so strong that it's bad ju-ju to abuse it.

Penalty for bankruptcy fraud can include jail time

For another, anyone tempted to game the system needs to stop and remember that even though different states have some of their own rules and difference the bankruptcy court is federal, so gaming the system can result in severe costs--as well as jail time.

The National Association of Consumer Bankruptcy Attorneys (NACBA) was in our lead on Aug. 25 because of its position on an idea for Fannie Mae, Freddie Mac and FHA financially distressed houses to be sold as rental properties.

NACBA plugs senators' probe of servicers' practices with foreclosures in bankruptcy

On Aug. 4, NACBA re-posted a Bridgeport News piece about a pair of U.S. Senators who are looking possible abuse of the bankruptcy system by big lenders:
Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) and Committee Member Richard Blumenthal (D-Conn.) last week sent letters to several of the nation’s leading mortgage servicers, requesting information about policies and practices related to foreclosures in the bankruptcy courts.

Leahy and Blumenthal, in letters to 11 leading mortgage services, inquired about steps the companies are taking to ensure that homeowners are treated fairly, consistently and honestly in foreclosure proceedings.

A review of servicer filings from several districts conducted by the Executive Office for the United States Trustee (EOUST) revealed that the rate of obvious, facial errors in proofs of claim in the bankruptcy courts may be far greater than previously disclosed. The review was recently discussed publicly by Clifford J. White, III, the director of the EOUST.

Fighting Fraud in Bankruptcy Act

The senators in May cosponsored The Fighting Fraud in Bankruptcy Act, designed to " bolster the Trustee and bankruptcy courts’ ability to fight creditor fraud and protect homeowners in the bankruptcy process."

Senator concerned about 'serious misconduct by mortgage servicers'

In his PR announcing the letters, Blumenthal quotes Leahy before making a statement of his own:
“The foreclosure crisis is profoundly affecting millions of hardworking Americans in this time of economic uncertainty,” said Leahy.  “I am very concerned that homeowners who are compelled to turn to the bankruptcy process far too often face serious misconduct by mortgage servicers. We need a full understanding of the mortgage servicing policies and practices at the heart of these problems.   We have a responsibility to ensure that Americans are protected from fraud and other misconduct when they seek relief in our federal bankruptcy courts. ”

“Ongoing abuses and fraudulent practices by mortgage servicers are needlessly forcing foreclosures on families struggling to stay in their homes – slowing our economic recovery,” said Blumenthal. “This investigation will ask the tough questions to bring about real changes to this broken system so that people can no longer be given the run-around when trying to stay in their homes.”

In order to provide the mortgage lending institutions with an opportunity to respond to the inquiry, the Senators have not publicly disclosed the recipients of the letters.  The Senators’ letter is a first step toward understanding and addressing widely reported problems in the bankruptcy courts related to home foreclosures.

'Fraudulent and faulty documents' . . .  'have triggered several investigations'

However, the Blumenthal's Web page includes both the PR and a copy of the letter they sent to the loan servicers. Following is an excerpt:
Evidence has been mounting for some time that loan servicing institutions are unprepared to deal adequately with the complexity of the crisis in a fair and equitable manner that is consistent for all homeowners. Fraudulent and faulty documents filed in state and bankruptcy courts to facilitate foreclosures have triggered several investigations, including inquiries by Federal regulators and state attorneys general, but the problem remains widespread. Clifford J. White, III, director of the Executive Office for the United States Trustee (EOUST), recently stated publicly that an investigation by his office has revealed that the rate of obvious, facial errors in proofs of claim in the bankruptcy courts may be 10 times higher than previously disclosed.[2] This is a shocking and disappointing statistic, but consistent with what bankruptcy judges, attorneys, and homeowners have been experiencing for some time.

Capitol One settled for nearly $2.5 million over abuses

The EOUST knows that a problem exists; the senators simply want to quantify--and qualify--the size and scope. For example, on its Web site, EOUST has a PR from January 2011, announcing a settlement of more than $2 million with Capital One for making bad claims against homeowners who had filed bankruptcy:
The U.S. Trustee Program (USTP) announced today that Capital One Bank (USA) N.A. will refund approximately $2.35 million to consumers in bankruptcy (or their bankruptcy estates) for amounts received by Capital One as a result of erroneous claims it filed in bankruptcy cases for debts that previously had been discharged. Capital One also will reimburse attorneys' fees and costs to consumers and bankruptcy trustees who filed legal objections to Capital One's erroneous claims.

In October 2008, the USTP entered a settlement agreement with Capital One to resolve allegations that the company attempted to collect on debts that previously had been discharged in bankruptcy. At that time, the USTP alleged that Capital One had filed approximately 5,600 erroneous claims in bankruptcy cases, and the company acknowledged that it had received approximately $340,000 to which it was not entitled.

As part of the settlement with the USTP, Capital One agreed to an audit process overseen by an independent auditor chosen by the court to examine Capital One customer accounts to ensure that all monies improperly received by Capital One as a result of erroneously filed claims were returned to consumers who had filed bankruptcy or to their bankruptcy estates. The auditor would also approve reimbursement to consumers and bankruptcy trustees for out-of-pocket costs and expenses, including attorneys' fees, incurred to contest erroneous claims.

Next time: more examples of bankruptcy fraud, from around the country.

Consumer bankruptcy for yourself

If you're considering filing for consumer-level bankruptcy protection, be aware that legally you can file the petition yourself. You can also hire "advocates" who can point you toward the correct forms and provide a minimal amount of information--although they can not offer legal advice. That being said, bankruptcy experts and legal authorities recommend hiring a trained, experienced attorney who keeps up with changes to the code and is familiar with all the principals in your area's bankruptcy court.

Consider free case evaluation

If you're interested in learning more about the power of bankruptcy protection, please, browse our site for more information; if you need help filing for bankruptcy protection for yourself, consider signing up for a free case evaluation.

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