Bankruptcy Legislation Hopes to Give Court Teeth to Fight Mortgage Fraud

In the midst of the distressed U.S. economy, many people are struggling financially. RealtyTrac statistics showed that the number of home foreclosures hit over one million in 2010 and shows no signs of abating. Foreclosures in Minnesota alone rose 11 percent from 2009 to 2010, according to the Minnesota Home Ownership Center.

In the midst of the swatch of foreclosures, the United States Trustee Program and Executive Office of the U.S. Bankruptcy Trustee (EOUST) - the division of the U.S. Department of Justice charged with ensuring the integrity of the administration of federal bankruptcy cases - conducted an audit of the paperwork filed by mortgage companies with the bankruptcy court to give foreclosures a closer look. Their review of the papers, known as "proofs of claim," uncovered a staggering error rate.

Previously, mortgage lenders had claimed that errors occurred in less than one percent of bankruptcy cases, but the Trustees found problems with over ten percent of the cases they reviewed.

Some of the common problems that Trustees encountered include:

  • Lenders overstating the amount that debtors owe
  • Lenders filing improper or deficient paperwork documenting the debt
  • Lenders charging unsubstantiated fees

As a result, the EOUST began requiring mortgage companies to provide proof to substantiate their claims. Mortgage companies challenged the authority of the EOUST to request this documentation. In response, members of Congress have proposed the Fighting Fraud in Bankruptcy Act in order to help U.S. Trustees combat this problem.

Goals of the Act

In response to lenders' legal challenges, members of Congress proposed the Fighting Fraud in Bankruptcy Act of 2011. The Act has four main goals:

  • Expressly state that U.S. Trustees have the power and duty to act when they detect fraud in the bankruptcy process
  • Give Trustees the authority to conduct audits to ensure the veracity of creditor claims and that creditors are complying with the law
  • When an audit reveals fraud, it gives the court power to amend errors and issue sanctions for fraud
  • Require that lenders state under penalty for perjury that foreclosures against active members of the military meet the standards of the Servicemembers Civil Relief Act

Supporters of the Act hope that the Act will make the bankruptcy process fairer for all parties involved and add a level accountability for those creditors who attempt to commit fraud. One of the Act's sponsors, Sen. Patrick Leahy, noted that the Act will help preserve the integrity of the justice system by preventing fraud on the court.

Being overwhelmed with debt is difficult enough without creditors lying about the amount of the debt. If you are struggling financially and face foreclosure, consult chapter 13 bankruptcy attorney who can advise you on options for reorganizing your finances.