Fighting Fraud In Bankruptcy Act Introduced

On May 24, 2011, Senate Judiciary Committee Chairman Pat Leahy (D-Vermont) introduced the Fighting Fraud in Bankruptcy Act (S. 1054). Among other things, the Act is intended to bolster the ability of the Executive Office of the U. S. Trustee (EOUST) to fight creditor fraud and protect homeowners.

When you file a Chapter 13 bankruptcy case, your creditors must come forward and file a claim with the court in order to receive a port ion of the payment s that your will be making on your Chapter 13 Plan. The EOUST recently reviewed of proofs of claims filed by mortgage servicers, and found that the error rate was ten times higher than what representatives of the mortgage servicing industry had claimed. The EOUST has sought increased sanctions for defective and fraudulent claims, but the mortgage servicing industry has challenged the EOUST’s authority to do so.

The proposed Act clarifies that the U. S. Trustee has a duty to take act ion to remedy credit or abuse of the bankruptcy process. It also allows the court to correct or sanction credit or misconduct. It empowers the U. S. Trustee to establish procedures f or auditing claims, and it requires mortgage lenders to cert if y under penalty of perjury that foreclosure proceedings against active duty military members comply with the Servicemembers Civil Relief Act.

Introducing the bill, Senator Leahy said: “The Fighting Fraud in Bankrupt cy Act is another step forward in the Judiciary Committee’s important efforts to protect American citizens from fraud. As Congress looks at ways to mitigate the foreclosure crisis to reduce its impact on homeowners and the economy, I hope all Senators can agree that the foreclosure process for Americans should be a fair one and one in which there is account ability for fraud or other misconduct. And I hope we can all agree that the integrity of our judicial system is something worth protecting.”

Refiling After Dismissal? Make Sure You Extend the Automatic Stay

If your bankruptcy case is dismissed for any reason and you file a second case within a year, the “Automatic Stay” in the second case is different from the first. (The Automatic Stay is a protection created the moment you file.  It “stays” your creditors from trying to collect on your debts.  It stops lawsuits, foreclosures, garnishments, repossessions, and creditor phone calls and letters.) While the Automatic Stay usually last s indefinitely, in your second bankruptcy case filed within a year, it lasts only 30 days unless you ask the Court to “extend” it.

Generally, this rule exists to stop people from repeatedly filing and dismissing bad bankruptcy cases in order to thwart foreclosure indefinitely.

There’s an extra wrinkle to this rule:  The statute (11 U.S.C. § 362(c)(3)) is ambiguous as to whether the Automatic Stay’s protection terminates only as to you and your property, or if it also terminates as to the property of the “estate” that was created when you filed.  (The “property of the estate” includes all of your assets at the time of filing.  In a Chapter 13 case, it also includes your earnings during the course of your payment plan.)  As a result, a disagreement has arisen among the Circuit Courts, with a majority taking the former approach and a minority taking the latter approach.

The reasoning behind the majority approach is that it preserves the equal treatment of creditors: Let’s say you’re filing your second case within a year, following a dismissal, but fail to extend the Automatic Stay.  You have a house with equity that you want to surrender.  The house becomes property of the estate, and the Trustee takes possession, planning to sell it and distribute any proceeds to your creditors. Under the majority approach, your bank/mortgage holder can’t step in and take the house all for itself; it has to get its share from the Trustee, just like all the other creditors.  But under the minority approach, because there is no Automatic Stay as to the property of the estate, the bank can just step in and take the house all f or itself, leaving the other creditors out in the cold.

In its February 2011 decision In re Reswick (2011 WL 612728), the Bankruptcy Appellate Panel (BAP) for the Ninth Circuit (which includes California) came down on the side of the minority approach.  The facts of Reswick are atypical:  The debtor filed his second case within the year (the first having been dismissed for failure to make Chapter 13 Plan payments), but he did not obtain an extension of the Automatic Stay.  After 30 days elapsed, a creditor, based on a pre-pet it ion lawsuit, started garnishing the debtor’s wages (which, in Chapter 13 cases, are property of the estate). When the debtor sought damages f or violation of the Automatic Stay, the Court found that there was no Automatic St ay and therefore no violation. The BAP agreed.

Thus, the decision in Reswick gives preference to creditors who happen to have obtained pre-pet it ion judgments.  An appeal to the Ninth Circuit Court of Appeals is expected.  For Californians who’ve had one bankruptcy case dismissed and are contemplating a second filing within a year, the lesson of here is clear: Make sure your lawyer knows about your previous case, and make sure he or she seeks an extension of the Automatic Stay.