Can Bankruptcy Rescue You from a Financial Scam?

Has anyone ever offered you $500, $1,000, $2,000 or more for you to sign your name – no strings attached?

Assuming you are not a celebrity working an autograph show, cash offers like this are not likely to happen.  Yet I hear stories about these “too good to be true” offers at least once or twice a year from my bankruptcy clients.  And when I see this type of situation, I know that my client likely has a real mess on his hands.

One of these cases from several years ago sticks out in my mind.  I’m going to change the facts to protect my client’s privacy but the principle will not change.  My client, Jack, worked in the billing department for a county government, and he lived in a quiet, residential neighborhood.  Jack had no pressing financial issues.

One day, the minister at Jack’s church called to ask Jack for a favor.  Another member of the church had offered to help raise money for the congregation.  The fundraiser had an opportunity to purchase several homes for below market value. He would then flip the properties within a matter of days and could generate a substantial profit.  If members of the church would help by co-signing on the mortgages – they would only be obligated for a week or two at the most – the fundraiser would donate 25% of his profits to the church.  Oh, and each church member who participated would get $1,500 for his trouble.

Jack trusted his minister and he readily agreed to sign up.  He met the minister and the fundraiser at the church a few days later, signed his name to several papers and walked out with $1,500.

Several months went by and Jack heard nothing.  He assumed that the deal was complete and that the fundraising effort was a success.  He had received several letters from different mortgage companies but the fundraiser had told him this might happen and not to worry.

Still, the letters kept coming.  The most recent one said that Jack owed $75,000 and it referenced a street address Jack did not know.  He called the mortgage company and was stunned to learn that he owed $75,000 on a home equity line of credit.

Jack then called his minister and discovered that his minister was also getting these payment demand letters as were several other members of the congregation.  The minister said that the fundraiser’s phone was disconnected and no one knew where he was.

Jack then called me and he scheduled an appointment.  I explained to Jack that the fundraiser was a scammer who was working in concert with a dishonest appraiser.  Jack and others had given the scammer their credit information and identify information which were use to take out hundreds of thousands of dollars in home equity loans.  The scammer took the money and was long gone.

Unfortunately, Jack’s acceptance of the $1,500 made him a participant in the mortgage fraud scheme and I explained to him that the mortgage lender would most likely object to the discharge of its debt.  I therefore advised Jack that bankruptcy was not his best option.  After numerous calls and extensive negotiation I was able to work out a deal whereby Jack agreed to pay around $35,000 back to the lender over the next 10 years.

While residential lending regulations have been changed to prevent this exact type of fraud now, there are always scammers out there looking to abuse the trust of regular people.

Here are some takeaways from cases like Jack’s:

• It is never a good idea to co-sign debt for anyone, even your child or sibling.
• No one is going to pay you hundreds or thousands of dollars for no good reason.
• It is never a good idea to invest or participate in a financial transaction that you do not fully understand.
• If something sounds too good to be true, it probably is.
• If you file bankruptcy on a debt that arises from fraud, you are going to be interrogated about everything you know.  If the judge concludes that you knew or should have known your conduct was wrongful, your bankruptcy relief will be denied.
• As soon as you realize that you may have been scammed, seek legal advice – you may be able to reduce the scope of your problem by reporting the fraud and cooperating with the lender and/or a state investigator.