With 1-2 million foreclosures on the horizon, we are probably going to see a lot of shady characters advertise on lamp posts, classified ads, pay-per-click advertising and spam e-mails with questionable promises to rescue people in a difficult situation.

Apparently, the mortgage crisis is now so bad some are saying it’s likely to cause a recession.

Foreclosure scams have been around for a long time, predating the current mortgage crisis.

Scams rarely change very much, they tend to disappear and then resurface when there is an event that makes them viable again.

For instance, the infamous Nigerian 419 scam which is frequently in the news can be traced to what was known as the Spanish Prisoner letter, which dates back to the early 1900s.

Advance fee is one of the more popular variations of a foreclosure scam, people are asked to pay a large fee up front and then get nothing for their money.

I had a reader send me an e-mail, where this was occurring and the intended victim was being asked to wire the money. Being asked to wire the money is common in all the advance fee type scams, because once it’s wired the sender has very little recourse, if any at all!

I found an interesting article on the DOJ (Department of Justice) website published in 1998 by the American Bankruptcy Institute.

The report details the following types of foreclosure scams:

For the cost of a bankruptcy filing fee, a debtor can immediately obtain one of the most powerful injunctions available under American law: the automatic stay,” the foreclosure scam task force pointed out. The task force report described bankruptcy foreclosure fraud as the practice of filing for bankruptcy to delay or defraud creditors, without intending to comply with the requirements for obtaining a bankruptcy discharge or completing a repayment plan.

The foreclosure scam most commonly associated with the West Coast is the fractional interest transfer. Typically, a partial interest–perhaps 5 percent or 10 percent–in property held by a homeowner facing foreclosure is transferred to a real or fictional entity already in bankruptcy. Because the property interest is then held by a bankruptcy debtor, the original owner’s creditor cannot foreclose until the bankruptcy court lifts the automatic stay.

Some scams involve fractional interests transferred with the knowledge of the original property owner. Often, however, the original owner first transfers the property to the perpetrator of a foreclosure scam, who then transfers the fractional interest without the original owner’s knowledge. Sometimes a property is moved from case to case as the stay is lifted; one residential property was linked to 24 different bankruptcy cases.

The task force report explained how one homeowner facing foreclosure was persuaded by a scam perpetrator to sign deeds of trust and grant deeds transferring fractional interests in her property. The homeowner paid the foreclosure consultant several hundred dollars per month so she could stay in her home. The fractional interest recipients included apparently fictitious individuals as well as homeless persons recruited for a fee to participate; eight recipients filed for bankruptcy one after the other. Each filing stayed foreclosure on the property, causing a 10-month delay between the first filing and the completed foreclosure.

Many more variations of bankruptcy foreclosure fraud are surfacing around the country. Probably the most widespread involves the use of foreclosure notices to identify individuals facing the loss of their homes. The scam perpetrator contacts the home owner, advertising “mortgage assistance” or “foreclosure counseling” and promising to work out the home owner’s problems with the mortgagee or to obtain refinancing for an up-front fee typically ranging from $250 to $850. The perpetrator may direct the home owner to “fill out some forms,” including a blank bankruptcy petition, or may collect the information needed to complete a petition later. The perpetrator subsequently files a bankruptcy petition in the home owner’s name, after filling in the bankruptcy papers signed by the home owner or forging the home owner’s signature. The bankruptcy petition invokes the automatic stay, the imminent foreclosure is postponed, and the home owner stops receiving collection calls and letters.

In most cases, the perpetrator does not tell the home owner about the bankruptcy petition, instead convincing the home owner that foreclosure activity has ceased because mortgage problems have been worked out. The perpetrator may tell the home owner that he or she might receive a notice from the court, which should be ignored. The home owner may even be told that the perpetrator has gone to court on the home owner’s behalf. No one appears at the Section 341 meeting, the case is dismissed, the foreclosure goes forward, and the home is lost.

Permutations of this scam include the perpetrator’s collecting monthly mortgage payments from the homeowner, falsely stating that they will be forwarded to the mortgagee. In these cases, each defrauded homeowner pays not only the up-front fee for “services,” but also hundreds or thousands of dollars in mortgage payments.

In another increasingly common alternative, the scam perpetrator convinces the home owner to quit-claim the residence to the perpetrator or to sell the residence for a nominal fee such as $1. The home owner agrees to transfer title because he or she has little or no equity in the property. The perpetrator charges the home owner “rent” or a “consultant’s fee” or “management fee” to stay in the residence while the mortgage problems are worked out, after which the home owner will be able to “apply for repurchase” of the property or share the profits if the perpetrator sells the property.

But it costs money for the perpetrators to file all of these bankruptcy cases. To avoid bankruptcy filing fees, some perpetrators transfer an interest of the home owner’s quit-claimed property into the name of an existing bankruptcy debtor–perhaps a Chapter 11 business debtor across the country–in a variation of the fractional interest scam. Typically, the debtor learns that a property interest has been transferred into its bankruptcy estate when it is contacted by counsel for the property owner’s secured creditor, who has learned it cannot foreclose because the property is owned by a bankruptcy debtor.

Full report from the American Bankruptcy Institute, here.

Reuters video (courtesy of YouTube) did an interesting piece that is more recent. In it they offer some pretty good advice to be EXTREMELY CAREFUL before signing any documents related to your home in any of these come-ons.

The end result could be losing your home to the person, who is claiming to help you!

You can view the video below, here.

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