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Fighting Fraud in Bankruptcy Act of 2011

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On May 25, 2011, Senator Patrick Leahy (D-VT) introduced a bill (S.1054, full text available here) titled the “Fighting Fraud in Bankruptcy Act of 2011” (hereinafter “FFBA”). The FFBA is aimed at providing additional tools to the U.S. Trustees to protect homeowners from lenders who file fraudulent claims. These additional tools consist primarily of remedies against those who assert or assist in the assertion of fraudulent claims in the bankruptcy court. The available remedies are broad and left to the Judge’s discretion but can include civil penalties (i.e. money damages).

The also FFBA makes it clear that the U.S. Trustees have a duty to take action to remedy any abuses by creditors. The FFBA attempts to provide Trustees with the tools needed to take legal action–specifically, the power to bring motions to remedy fraudulent claims. The U.S. Trustee is also directed to establish claims auditing procedures to ensure creditors are complying with the law.

Whether the FFBA will be effective is still in debate. Over the last several years, many of us in the Bankruptcy world have encountered abuses by creditors. Often times the abuses do not rise to the level of fraud but are simply the result of poor record keeping and sloppy handling of client files. The FFBA is aimed at ensuring those people who file bankruptcy do not end up worse off than when they went into the case because of bad faith filings by creditors that are seldom policed.

The FFBA is a good start but more needs to be done. In my practice I sometimes encounter creditors who file improper proofs of claim, which can disrupt confirmation of Chapter 13 plans. Many large lenders also lodge objections in the bankruptcy court as a matter of course without even reviewing the Chapter 13 plans. These types of actions can derail an otherwise straightforward case and create a lot of work for the debtors’ attorney and/or the trustee. Hopefully, the threat of civil penalties will prompt lenders to conduct more due diligence before entering the bankruptcy court.

The full text of the Bill is available for download here.


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Hamid Jabbar

Hamid Jabbar

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