How it Works
The lawyer tells the distressed homeowner that for $ X, they can file bankruptcy and stop the foreclosure. The petition is filed, and the order for relief (the automatic stay) enters and the foreclosure proceeding is stopped in its tracks. However, the attorney files only a skeletal – or emergency petition. No other supporting schedules and documents are filed and ultimately, the case gets dismissed. The problem is that when the case gets dismissed, the foreclosure process can proceed.

While a homeowner may then decide that they should seek other counsel, the homeowner is now faced with a new problem: they have already filed bankruptcy and can be considered a “repeat filer.” Among the numerous changes to the bankruptcy laws in 2005 was the limitation on the automatic stay for debtors who have had a case pending in the 12 month period prior to filing.

If there was a case pending in the 12 month period prior to filing, the stay is effective for only 30 days. If there were two cases pending in the 12 month period prior to filing, there is no stay at all. The stay can be extended only if the debtor files a timely motion, and the court hears it in a timely manner, and the court finds that the later case is filed in good faith. If there were two cases pending, that motion might need an emergency determination and perhaps an evidentiary hearing.

While there might be good reasons for seeking bankruptcy protection more than once in a 12 month period, it should be avoided at all costs. Attorneys - and even pro se debtors who seek bankruptcy protection thinking it will buy them time to refinance their property or to negotiate with their mortgage company may find themselves only complicating their situation even more.

Why is it a Scam?
Bankruptcy does not stop foreclosure: it delays it. When the case is filed, the automatic stay will delay the bankruptcy proceeding. If a Chapter 7 is filed (which is assumes a debtor is going to surrender the home), a mortgage company will be able to seek relief from the stay in order to proceed with the foreclosure. If a Chapter 13 is filed, the stay will remain in effect however, the mortgage company will get relief from the stay if post-petition payments are not timely made. In addition, if all necessary documents, schedules and the Chapter 13 plan are not filed, the case may be dismissed, and in that case the foreclosure can proceed. Any good bankruptcy attorney knows this. An attorney who files a case knowing the debtor will not or cannot file the schedules and Chapter 13 plan is scamming the client, and filing the case in bad faith. Any suggestion that the mere filing of a bankruptcy petition (without full compliance with all filing requirements) will make everything better is simply false.

Why I am Warning Debtors
Today the Globe is reporting that the Massachusetts foreclosure crisis is apparently far from over. There were more than 2,200 foreclosures in January alone. Yesterday, I received a call from someone who needed to file a bankruptcy petition by this morning because the auction on their home was scheduled for this afternoon. A look at the docket in the case revealed that the person paid an attorney to file a petition a few months ago, but no schedules or Chapter 13 plan was ever filed. The person told me that the mortgage company was “refusing to work with them” and they needed to file bankruptcy again. Interestingly, their prior attorney was not returning their calls. This is no way to approach a debt crisis or the bankruptcy system. Any good bankruptcy attorney knows this, and should have advised the debtor accordingly.

So here are my recommendations: avoid being a repeat filer. If you are a homeowner that either is in foreclosure, or “sees the handwriting on the wall,” keep all of your options open – and this includes filing bankruptcy. No one wants to file bankruptcy; sometimes it is the only option available.

You can try and refinance, you can try and sell your home, or you can try and work with your mortgage company. But proceed with the assumption that those options may all fail. You might not have enough equity to refinance, or your credit score is law. There might not be any buyers interested in your property. Your mortgage company might not be interested in working with you. So, have a back-up plan, and let that back-up plan be a properly prepared and filed bankruptcy petition.

Or perhaps more simply stated: plan now or you may regret it later.