Beware Of Bankruptcy Scams

Recently, I learned of a bankruptcy scam in Southwest Florida.  On BLN, we have written about scams in the past, but many of the scams out there focus on other areas of the debt industry, like debt collectors.  This scam deals directly with the filing of bankruptcy petitions in the bankruptcy court to obtain an automatic stay.  There is an individual who is either helping people file for bankruptcy or filing petitions on their behalf, without their knowledge to stop foreclosures.  I’m not part of the investigation, and I’m sure the investigation is ongoing, so I will limit my comments to generalities.  Either way it appears to be at a minimum, the unlicensed practice of law.

A bankruptcy scam is something that you want no part of.  Bankruptcy Judges take the filing of a bankruptcy very seriously, and they also work very hard to preserve the integrity of the bankruptcy system.  There are two ways that this bankruptcy scam could be working.  Either the person who files the petition either knows about the bankruptcy filing or they do not.  You may be asking yourself: How could someone not know that they filed for bankruptcy protection?  Actually, it is quite easy. 

In order to file for bankruptcy protection and receive an automatic stay, an individual only has to provide a minimal amount of information.  Let’s say that you went to a debt settlement company and hired them to help you.  In a matter of minutes, they could obtain enough information about you to file a bankruptcy petition on your behalf.  Sure, someone has to sign the petition under penalty of perjury, Right?

That’s correct, Somebody does?  Why would someone file a bankruptcy petition on someone else’s behalf?  The only reason I could think of would be to obtain the automatic stay or some other tactical advantage in litigation.  Oh yea, and to stop a foreclosure sale.  In Southwest Florida, we still have our fair share of foreclosures in the pipeline.

What if the bankruptcy filer knew the petitions were being prepared, signed the bankruptcy petition, filed it, but filed in bad faith.  Is this a problem, I would think so.

The problem is that it is relatively easy to file a fraudulent bankruptcy petition.  It is very difficult to file the petition and schedules correctly, as it takes quite a bit of time, attention to detail and literally voluminous documentation.  But, both the fraudulently filed petition and the correctly filed bankruptcy documents immediately receive the same protections afforded by the United States Bankruptcy Code.

Here is my selfish problem with this mess.  My firm handles bankruptcy and foreclosure defense cases.  We also appear in the same courtrooms before the same Judges that are dealing with this problem or will soon be dealing with this problem.  Sometimes, one of our foreclosure defense clients file for bankruptcy.  Accordingly, we prepare a Suggestion of Bankruptcy and file it in the State Court to provide notice to the Court and all parties involved that the individual is now under the protection of the United States Bankruptcy Court and the fundamental protections afforded by the bankruptcy laws and rules.  My concern is that we are all going to be heavily scrutinized when a person files for bankruptcy protection.

Quite frankly, I wouldn’t blame the Court and Creditor’s Attorneys for being a bit gun shy after this fiasco plays out.  A scam like this will definitely call the integrity of the system into question.