After the recession of 2008 and the worst housing crisis in our nation’s history, bankruptcy filings went through the roof. Although many were legitimate, some homeowners found it as their last resort to stop a foreclosure proceeding from moving forward.
Often, the homeowner would file a bankruptcy to stay the foreclosure, and then go through the process again and again in an attempt to delay the foreclosure as long as possible. These actions tied up the federal bankruptcy courts and negatively affected creditors who may have been caught up in the bankruptcy.
A 20-year study performed by the American Bankruptcy Institute investigated bankruptcy filings in Utah, finding that 10.7 percent of debtors studied had filed multiple Chapter 7 bankruptcies and 20.3 percent of those serial filers had their case dismissed by the court rather than receiving a discharge.
With over 800,000 bankruptcy filings in 2017 alone, serial filings are causing a severe court backlog and creating a massive problem for attorneys and creditors alike.
Now it appears the courts are beginning to take action to try to stem the tide of serial debtors who file multiple petitions for bankruptcy protection. Recently, the U.S. Court of Appeals for the Seventh Circuit issued an opinion that serves as both a warning to serial filers and a potential remedy for lenders.
In United States v. Williams, the debtor fell behind on her payments to creditors, including her condominium association. She filed the first of five Chapter 13 bankruptcies in 2003, failing each time to comply with the Chapter 13 Plan. The failure to make her payments ultimately resulted in each of the bankruptcy cases getting dismissed without a discharge.
Following the dismissal of each case, the condo association would reinstate collections against the debtor causing her to file another bankruptcy. Between her second and third filing, the debtor also transferred title of her condo to a friend in an attempt to thwart the condominium association’s attempt to evict her.
No consideration was given for the transfer, and to make matters worse, the friend took out two mortgages against the property during the short time she held title. The title was eventually transferred back to the debtor, where she then filed another Chapter 13 bankruptcy.
After the debtor’s fifth bankruptcy filing was dismissed, the condominium association continued to attempt to evict her from the property. She again tried to stop the eviction by transferring title to her friend, who then filed her own Chapter 13 bankruptcy petition.
Immediately following the bankruptcy filing, the friend transferred title back to the debtor, and subsequently had her bankruptcy case dismissed for failure to comply with her Chapter 13 Plan and providing false testimony about the property.
The debtor and her friend were eventually charged in district court with bankruptcy fraud in a five-count indictment. The debtor was found guilty on all counts and sentenced to 46 months in prison. In determining guilt, the court calculated the total loss to creditors from the time of the first bankruptcy until the final bankruptcy filing, with an enhancement for defrauding 10 or more creditors. The friend cooperated with authorities and ended up taking a plea deal.
The debtor appealed the district court’s decision to the Seventh Circuit, arguing that the court erred in their calculation of the debts and that there was no evidence that the debts increased due to any specific unlawful activity.
The Seventh Circuit disagreed, holding that the debtor’s multiple filings represented bad faith filings that “fraudulently invoked” an automatic stay on her creditors in an attempt to prevent them from collecting on the debts.
The debtor also argued that the court erred in calculating the number of defrauded creditors, stating that the government failed to prove any other creditor, besides the condominium association, that had suffered harm. However, the Seventh Circuit found that with each bankruptcy filing, all creditors listed in the bankruptcy schedules were affected by the automatic stay.
The Seventh Circuit’s ruling is important because it emphasizes the seriousness that accompanies a bankruptcy petition. It also demonstrates that serial filers will be dealt with severely, and in some instances, may see jail time for their actions.
The decision also provides a remedy for creditors who must contend with debtors filing serial bankruptcy petitions in an attempt to delay and dissuade debt collection. The opinion offers creditors precedent to seek a denial of a debtor’s discharge, even when their specific debt was not the primary reason for the bankruptcy filing.