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Published in Texas Lawyer June, 2002
Debtor Beware, It’s not Business as Usual
By Jim McMillen
If you are one of those attorneys who believes that debtors do not have anything to worry about until six months after the
proposed Bankruptcy
Reform Act take effect, we have news for you. In October 2001, the Office of the United States Trustee initiated a greater focus on civil enforcement nationwide using the tenants available under the tenants’ available current laws. To implement the new initiatives to create a debtor identification program and initiatives to combat system abuse in the form of serial filings, petition preparers, attorney misconduct, abusive use of discharges under § 707(b), dismissal under § 707(a) and the denial of discharge under § 727.
Identity fraud has been on the increase for several years now. In efforts to protect innocent victims and to prevent the
use of false identification in bankruptcy proceeds, the trustees are requiring debtors to produce their social security cards at the 341 meeting of creditors. Although for the great part
incorrect social security numbers on bankruptcy petitions are through typographical error there are a number of individuals that have used false identification to obtain the benefit of the
automatic stay in foreclosure and eviction proceedings.
Once the petition is filed, the individuals have disappeared without showing up for the meeting of creditors. The bankruptcy often stays on the victims credit records for years. Provisions have been made for alternative methods of proving identification by producing driver’s licenses, government issued picture identification, passports, and resident alien cards. The primary goal is to protect innocent victims and intentional violations will be referred to the United States Attorney for prosecution.
Serial filing has become a major problem for the system. Debtors are often motivated by foreclosure, seizure of an asset, wage
garnishments,
evictions, lawsuits and to perpetuate a credit card bust out. These schemes are perpetrated by one or more individuals, but are used for one purpose in mind such as equity skimming. In these type of cases the trustees are filing motions to dismiss with prejudice, motions to convert to chapter 7, modifications of the automatic stay in remfor
certain property and objections to discharge under § 727 and sanctions under Rule 11 against the debtors’ attorneys.
Th dismissals are being sought for bad faith under § 707(b) and § 349 of the Bankruptcy Code. The primary concerns of the Trustees are to protect the victims.
Many of these schemes have been aided by petitioner preparers and in some cases by attorney. In the Central District of
California it is
permissible for paralegals to perform more direct services for a client. In the Los Angeles area about 50% of the petition preparers and about 14% of these petitions were filed by debtors who were petition preparers. Many of these cases were filed to protect the debtor from foreclosures and evictions. Often the debtors did not even know that they had filed for bankruptcy. A cottage industry developed in the form of foreclosure prevention companies. These companies would charge large fees to prevent foreclosure or the debtors’ property and promise to restructure the debtors’ mortgages with additional funds and lower payments. They used petition preparers and in some cases attorneys to file foreclosure while they would take funds from the debtors and would eventually tell the debtor they were unable to find the additional financing. In 1994, congress passed § 110 of the bankruptcy code to address the problems of these petition preparers. It was not the intent of the new section to allow unlicenced to engage in the unauthorized practice of law, but to regulate the petition preparers. The Trustees in many districts are requiring pro se debtors to complete forms which inquire into the assistance they received before filing. It is the intent of the trustee to seek sanctions and in proper cases to make referrals to the United States Attorneys of petition preparers who have engaged in illegal activity in the form of bankruptcy fraud. In the case of the bankruptcy petition preparers the courts may disgorge all fees paid and levy a fine of $500 for each violation.
The Trustees are checking the schedules of debtors for excessive payroll tax deductions, repayment of retirement funds, they are
reviewing the expenses
of the debtors for reasonableness considering the needs of debtors households. The trustees are also reviewing the debts that the debtors are paying to determine if large payments are for luxury goods such as boats, recreation, privates schools, high mortgage and car payments, and for payment of unsecured debts to insiders of the debtor. Recent purchases of luxury goods are looked at with a jaundice eye by trustees. Multiple recent purchases of luxury goods will be acted on. The Trustees are seeking dismissal under § 707(b) for bad faith filing in cases in which creditors would receive a significant payment of a portion of their debts under chapter 13 of the bankruptcy code. In many cases the trustees are requesting additional support documentation from debtors on ten day deadlines and when the debtors fail to comply they seek dismissals under § 707(a) of the Bankruptcy Code. In the past the trustees have been very liberal in allowing the debtors to amend their schedules, trustees are currently filing objections to discharge under § 727. You can expect that the United State Trustees will be filing more objections to discharge than they have in the past on all grounds provided.
The trustees are not looking to persecute honest debtors. They will be looking at each individual situation and seeking relief only
in cases where it is justified. They will seek relief only to the extent that it is necessary to correct a violation in a particular case, but it is not business as usual.
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