‘Petition Mills’ Dupe Many Into False Bankruptcies
On a Friday morning in early April, U.S. Bankruptcy Court trustee Steven E. Smith routinely called the roll of bankruptcy cases set that day for administrative hearings.
As he finished, a woman with a look of confusion on her face stepped to the front of the hearing room in the Federal Building in downtown Los Angeles. Holding a bankruptcy hearing notice in her hand, she told Smith that her name had just been called.
“I asked, ‘Do you know you have filed for bankruptcy?’ ” the trustee recalled. “She said, ‘I had no idea. This notice is the first I knew about it.’ ”
The woman may have been surprised, but not Smith. He immediately suspected that she had been victimized by what fraud investigators call a petition mill.
Federal authorities say that each year, a small army of Los Angeles area companies known as “petition mills” or “typing mills” land hundreds and possibly thousands of uncomprehending clients in bankruptcy court. In many cases, victims are not even aware that they have filed for bankruptcy.
Advertising themselves as financial counselors, eviction defense agencies and renters service agencies, the petition mills routinely use bankruptcy petitions as a method to delay their clients’ evictions and stave off other financial disasters.
But the result is often more disaster. Authorities say that the unwitting bankruptcy filings leave predominantly low-income victims with poor credit ratings that can linger for a decade, hindering their efforts to climb out of poverty. Their losses are measured in diminished purchasing power, access to loans during family crises and ability to move up to better homes, cars and apartments.
To stave off a threatened eviction in February, Henry Atkins Sr., a South-Central Los Angeles construction worker, unwittingly allowed an eviction counseling service to file bankruptcy papers on his behalf. Now as Atkins, 58, searches for a new apartment, he has been turned down repeatedly because of the resulting stain on his credit rating.
“I can’t find the kind of place I want right now,” he said. “It hurts me to have this problem. I’ve worked my whole life since I was 12, and never had problems. I paid my way. Now I am trying to get a place but the bankruptcy keeps coming up on my credit. How could this happen?”
A Growth Industry
Although petition and typing mills have operated in Southern California since the early 1980s, the rampant growth of the industry in recent years has prompted federal authorities to begin a widespread bankruptcy fraud investigation into their activities.
“The typing mills are preying on people who are in desperate situations,” said Davis Von Wittenburg, U.S. trustee for the bankruptcy court of the central district of California. “The people are given assurances: ‘Go on home. Leave it to us. We’ll take care of it.’ Some end up in bankruptcy and don’t even know it.”
The Trustee’s Bankruptcy Fraud Unit is investigating 40 Los Angeles-based mills. Special Investigator George Griffith said he believes there may be 40 more that bear further scrutiny.
“Every year it gets to be a bigger problem,” Griffith said. “There are more and more of these services around. The money is so good, they are branching out.”
The trustee’s office, a civil branch of the U.S. Justice Department, has already referred the investigation of several mills to the U.S. attorney’s office for possible criminal prosecution. Officials declined to name any of the companies because of the ongoing investigation.
The petition mill problem, authorities say, is unique to Southern California, where each year about 60,000 bankruptcies are filed in the federal court district that includes Los Angeles, Orange, Riverside, San Bernardino, Ventura and Santa Barbara counties.
“This is the bankruptcy capital of the United States,” Griffith said. “There are lines of people each day who want to file. The judges are jammed with work. Everybody is jammed up with monumental amounts of paper work.”
Authorities conservatively estimate that at least 5,000 bankruptcies filed in the district last year were done so with the aid of petition mills. And they estimate that as many as half of that number were filed on behalf of clients unaware that they were filing bankruptcy.
Federal officials are quick to caution that there are legitimate typing, secretarial and credit counseling services in Los Angeles. But investigators say they have been forced to target petition mills because they improperly dispense legal advice, overcharge clients and take advantage of their desperation and naivete in financial matters.
In response, operators of the mills portray themselves as providers of a legitimate service for downtrodden clients who come to the court system with no concept of its workings.
“It’s no scam,” said one owner of a Venice-based eviction counseling service. Like most owners interviewed, he declined to be identified. “What we do is help people stay off the street,” he said.
Petition mills range from store-front offices to operations run by a single person at home that use post office boxes and answering services. Almost all advertise their services in newspapers throughout the region.
The mills most often target renters facing eviction, finding potential clients by searching public records listing the names of defendants in civil actions. They then inundate their prey with flyers, postcards, even in-person visits offering help. One firm currently under investigation boldly guarantees a seven-month delay in evictions on its mail-out flyers, an investigator said.
“We can help,” reads another card mailed by the Alternative, a business whose principal operator was jailed earlier this year. “We can stop the Sheriff’s or Marshals and get you an extra 30 to 90 days in your home at a very low cost that is 100% guaranteed in writing.”
Federal authorities documented that the Alternative, which also operated under at least two other names at a Hollywood Boulevard address, charged its clients nearly double the amounts that it had listed on certified federal bankruptcy forms. The Alternative’s principal operator, William Ray Chapman III, 34, of Glendale, agreed in early 1988 to drop out of the business to avoid a federal charge of contempt, according to court records.
At the same time, the district attorney’s office consumer fraud unit was investigating Chapman. He was charged in late 1988 with perjury for making false claims on court documents filed on behalf of clients facing eviction. Chapman pleaded no contest and last February was sentenced to 90 days in County Jail.
Cost of Service
The mills generally charge $200 to $400 for the services they provide, taking in as much as $3,000 a week from clients, authorities said. Griffith noted that one petition mill has filed hundreds of bankruptcies without its clients’ knowledge, often taking more than $1,000 in payments from each client over several weeks by falsely claiming that more money was needed to delay their evictions.
Authorities said the victims of petition-mill scams are typically people of lower- and lower-middle income levels who are uncertain of the consequences of bankruptcy. Those drawn in are often immigrants with little knowledge of English and those unfamiliar with legal language--clients with a poor understanding of the documents they sign.
Henry Atkins Sr. said he sought the help of a legal service in February after his landlord served him with an eviction notice ordering him to vacate his apartment within five days. The agency Atkins turned to was one of a half dozen that had mailed flyers to his home.
Atkins said he was evicted because of a dispute with the new owners of the apartment building where he had lived for several years. He was not having financial difficulties, Atkins said, but he wanted to delay the eviction so he would have more time to find a new apartment.
After he paid $240 in cash and spoke with a counselor at the agency, Atkins signed several legal papers. Atkins said he had no reason to believe any of them pertained to bankruptcy and the subject was never discussed.
His eviction was delayed a month and he was pleased with the service--until his applications to rent apartments began to be turned down. The cause, he was told repeatedly, was a bankruptcy on his record--which had been filed without Atkins’ knowledge.
‘I Always Have Money’
“I think it’s a dirty deal,” he said. “Nobody said anything about bankruptcy. Why would I file bankruptcy? It’s crazy. I have too good of a job to do that. I always have money in my pocket. All I did was sign some papers that they told me would get me more time.”
Atkins complained to the bankruptcy fraud unit. His claim is now being investigated. Meanwhile, he has been staying with friends and in motels while searching for an apartment that is safe and suitable--but does not check credit records.
Bankruptcy petitions filed through the mills are routinely dismissed when forms are not completed or the clients fail to show up for hearings. But because of the heavy caseload in the bankruptcy system, the dismissal process can take from three weeks to six months, successfully stalling eviction and fulfilling the petition mill’s promise to its client. Often, petition mills will refile a bankruptcy after it has been dismissed, guaranteeing further delay.
Smith, the federal trustee who is one of 14 in Los Angeles who conduct hearings on bankruptcies before cases are taken before federal judges, said that most victims named in petitions do not show up for hearings. The reasons, he said, are that most do not know they have filed bankruptcy, were instructed to ignore legal notices or were knowingly part of the scam. The cases are then dismissed.
“People are being duped,” Smith said. “They are being vastly overcharged and, secondly, don’t know they are in bankruptcy. They just sign where they are supposed to sign and the next thing they know they are in bankruptcy court.”
Officials said that a dismissed bankruptcy remains on a person’s credit record for 10 years. “A bankruptcy could be updated as being dismissed, but it would stay on the report,” said Jennifer Nu, a spokeswoman for TRW Credit Data, the nation’s largest credit bureau service.
Petition-mill clients may not know about the credit damage for months or even years.
“They might eventually climb up the ladder (to a higher income level) and want to buy a house or a car,” Griffith said. “They will try to get a loan. There will be a credit check and they will find out about the bankruptcy. They’ll say, ‘I never filed bankruptcy,’ but it was filed.
“Is it stupid? Maybe if you are viewing it from an upper-income level. But these people have no idea what is happening. They are going on faith. The people that go to these services are in dire straits. This is the hand they have been waiting to grasp.”
There is little that victims can do once they have discovered that they mistakenly filed for bankruptcy. Authorities said that in many cases, victims signed bankruptcy petitions, making it difficult to prove they were not aware of the process. Also, the mills frequently change names and locations, making it difficult to track those responsible.
“If you sue these fly-by-night places, they’ll move and go somewhere else,” said Margaret Norman, an attorney who last year represented a client who found he had two bankruptcies on his record after going to a financial counseling service in Inglewood.
What authorities call a scam, operators of the services call a legitimate business that offers hope to desperate people.
‘No Place to Go’
“These people that come to me have no place to go,” said an operator of a San Fernando Valley typing service who spoke on the condition he and his company not be named. He said he operates “on the up and up” and does not file bankruptcies in clients’ names without their knowledge.
“It’s prolonging the coming of the bullet,” he said. “They want a little more time to get on their feet. It lets them walk out with dignity without all the neighbors looking. I get people that call me up four months later and say thank you.”
He said his clients willingly trade possible long-term damage to their credit record for the short-term help. He said that he tells them there is no long-term damage to their credit if the bankruptcy is dismissed.
The typing service owner acknowledged routinely telling clients to disregard legal notices that come in the mail after the filing of a petition. But he bristled at the suggestion that his use of bankruptcy laws is an abuse of the system.
“Big corporations use bankruptcy as a tool for their gain all the time,” he said. “So what’s good for them is not good for the average guy who has a problem? That isn’t right. They (federal authorities) complain about more paper work. Which is worse, more paper work or more homeless?”
Petition mill operators could face fines and up to five years in prison if charged with making a fraudulent bankruptcy claim, Von Wittenburg said.
But because the mills change names, move often, and use legitimate legal tactics and the often-unknowing cooperation of clients to stall evictions, it is a difficult and time-consuming process to investigate them for fraud.
“If you investigate Joe’s,” Griffith said, “then he goes down the street and opens Fred’s and keeps going.”