The house at 6210 Indigo Place was the first that Cherlyn and Timothy Skinner had owned. It was surrounded by tall trees and small playmates for their four young daughters.
“We could have lived there for years,” Mrs. Skinner says.
But by late 1996, the young couple was fighting to stay for even a few more months. Cherlyn Skinner had lost her waitressing job and they were facing foreclosure.
“We were desperate,” she says.
The Skinners were so desperate that they gave 10 percent ownership in their home to a stranger who promised to keep the bank at bay. He charged the Skinners $350 a month and in return, signed the stake in their home to an associate who filed for bankruptcy. That automatically blocked the lender and other creditors from seizing the house, at least temporarily.
Law enforcement officials say it also involved the Skinners in a scheme that illegally subverts the federal bankruptcy system. The bankruptcy laws were designed to give people in financial trouble a little breathing space. But a small army of promoters has perverted that process for their own profit, investigators say.
In recent years, thousands of Southern California homeowners have made deals with promoters using such schemes, says Maureen Tighe, deputy chief of the major-fraud section of the U.S. Attorney’s office in Los Angeles.
The practice is costing home lenders hundreds of millions of dollars in lost interest and legal fees, says Catherine Bauer, a senior counsel for Bank of America.
Government investigators say the practice is illegal because the promoters are essentially setting up sham ownership transfers. What’s more, they often file for bankruptcy using false names.
Some even file for bankruptcy many times on the same piece of property. Each filing usually holds off foreclosure for only a few weeks or months before a lender obtains a court order removing the freeze. But then the promoter may file again under a different name, temporarily halting the foreclosure once again.
Bankruptcy officials hope to curb such abuses through a host of reform measures. A report issued in late October by the National Bankruptcy Review Commission recommended giving judges more discretion to remove the foreclosure protection automatically given to debtors in cases where a fraud is suspected. Like other commission recommendations, such a proposal would have to be enacted by Congress.
A task force at the Los Angeles bankruptcy court is looking at several new steps. One simple measure to curb false-name filings is to require filers to show identification, such as a driver’s license. Currently, “it’s easier to file bankruptcy than to get a library card,” says Tighe.
Law enforcement officials say Southern California is the capital of the foreclosure scams, as well as legitimate bankruptcy cases. Los Angeles is by far the busiest of the nation’s 91 bankruptcy courts, receiving over 9 percent of the more than 1 million new filings annually.
But suspect bankruptcy filings are cropping up increasingly in other parts of the country as well.
The schemes appear to be well-organized, officials say, with some people assigned to file the bankruptcies while others make sales pitches to homeowners. In California, a half-dozen individuals have already been indicted or convicted, and several others are under investigation, according to court filings.
Law enforcement officials say they generally don’t bring charges against the homeowners because they don’t make the actual false filings and are usually only vaguely aware of what is being done. Moreover, officials add, people who are losing their homes are more likely to produce sympathy than anger from a jury.
Nonetheless, while many homeowners say they would never knowingly associate with a fraud, some concede that legality isn’t always their first concern.
Cherlyn Skinner says her family’s financial problems started early in 1996 when she lost her waitress job at a San Bernadino coffee shop, 60 miles east of Los Angeles. With only her husband’s paycheck from a diesel engine-repair shop, the family soon fell far behind on their $1,100 monthly mortgage bill.
Notice of the pending foreclosure action was publicly filed in fall, 1996 and soon after, the couple received roughly a dozen fliers from firms promising help. On the day before Thanksgiving, Skinner called one of them.
According to an FBI affidavit filed earlier this year in Los Angeles federal court, Skinner talked to a salesman at Werner Kluge & Assocs. of Westlake Village, Calif., who told her they could stay in their home for as much as 18 months by transferring part ownership in the house to somebody in bankruptcy. The FBI affidavit said two individuals connected with the Kluge firm are under criminal investigation in connection with bankruptcy filings on some 250 properties.
No phone listing could be found for the firm.
The Skinners quickly signed and sent back papers transferring a 10 percent ownership in their home. Skinner says the space for the new owner’s name was blank.
“We just signed it and they filled it out,” she says. She adds that they signed several such transfers. The FBI affidavit mentions two bankruptcy filings by different individuals involving the house. According to the affidavit, when FBI agents traced the Social Security number listed by one of them, they found that it belonged to a 7-year old in Oregon.
In April, the Skinners were contacted by an FBI agent. They quickly moved out and the house went into foreclosure. Cherlyn Skinner says it just went back onto the market with an asking price $45,000 less than the $115,000 they paid for it two years ago.
The Skinners themselves are unlikely to face charges, but their financial future remains unsettled. Cherlyn Skinner has a part-time municipal job and is looking for another waitress position. They are renting a house, but dreaming of buying within two years.
“I want a home for my kids,” she says. “So they can come back and say `This is where I grew up.”‘
