Rambling in front of the video camera the other day, it was not long before I got on the subject of how unethical, illegal, fraudulent and criminal it is to attempt charging attorney fees for a bankruptcy on a credit card – with the intent of getting rid of the credit card debt in that bankruptcy. If you run up a debt intending to list it in a bankruptcy, that is fraud. It can be grounds to have a particular debt not discharged in your case; or it could be grounds to have the entire bankruptcy thrown out. Worse yet, it’s fraud and could be prosecuted as a felony. Here’s what I said about it on Youtube:
Here’s another clip in the series that I have been working on. In this one I talk about how the Senate has eliminated a section of the pending mortgage relief legislation which would have allowed a bankruptcy judge to reduce the balance owing on a mortgage. The idea was that in those situations where the mortgage is more than the value of the property, the bankruptcy judge could reduce the balance of the mortgage to be equal to the value of the house. The rest of the balance of the mortgage would be discharged in the bankruptcy. Sounds like a wonderful idea to me. But the Senate committee didn’t think so. Too much lobbying by the banking industry.
So for the time being there is no provision in the bankruptcy law for an option to discharge the part of the mortgage that exceeds the value of the house, while allowing the balance of the mortgage to be a lien on the house. I feel as if I may be doing a bad job at explaining this. It’s the kind of thing that many non-lawyers might not understand. As a result, the Senate gets away with not passing a really beneficial piece of legislation, because nobody quite understands what it is they didn’t pass.
Here’s the second in the series of videos where I update my earlier comments about the current state of bankruptcy law and practice. In this video I talk about how Congress has withdrawn funding from the U. S Trustee’s office for the hiring of outside accounting firms to conduct audits of debtor’s records.
Update December 4, 2014: I’ve removed the video referred to here from my Youtube channel because the info is so outdated. The sad fact is that those audits of Chapter 7 cases are in full swing again, and any body who files a Chapter 7 bankruptcy has to think in terms of being ready to respond to an audit. These audits are conducted by a New York accounting firm – you’d think they were tallying the votes for American Idol. They’re very picky.
I’m sitting here looking at an email I have received from the National Association of Consumer Bankruptcy Lawyers, of which I am a member. The Association has been pushing for legislation which would allow a bankruptcy court to order modifications in mortgage loans, something which would currently be entirely off limits. The bill is S. 2636, and the section of the bill with the mortgage modification provisions is Title IV. There is fear that before the bill is passed that this section will be removed. Now would be a good time to call or write your US Senator if you would like to see them do something about the current mortgage foreclosure crisis.
You can find the text of the bill here. I’m not sure I fully understand all the language, but it looks as if it would give the bankruptcy court authority to lower interest rates and extend the term of the loan to 30 years. I just met today with a gentleman whose mortgage balloons in less than two years. At that time he may have to just walk away from the house. If the term could be extended under the terms of this bill, the effect would be to save this guy’s house. Links to both of Minnesota’s senators can be found here, including info on how to contact them.
About a week ago BankruptcyLawNetwork.com reported that the Executive Office of the U.S. Trustee has suspended auditing of debtors filing for bankruptcy because Congress did not fund the audits in the 2008 appropiration. This is good news. Under the 2005 changes to the bankruptcy law, the U.S. Trustee could engage the services of outside accounting firms to audit the records of bankrupt debtors. At least until they find some funding somewhere, and they are looking for alternative sources, this auditing activity will come to a stop.
This does not mean that the Trustees themselves cannot continue requesting detailed information, documents and records from bankrupt debtors; and going over it with a fine tooth comb. It just means that they can’t hire outside accounting help to do it. When these audits were in progress, they only involved a very small percentage of the bankruptcy cases being filed. A much higher percentage of cases were investigated directly by U. S. Trustee personnel without outside help.
It is my hope that the failure to appropriate funds represents the beginning of a backlash against the so-called Bankruptcy Reform Act.
I am now receiving calls from people who have done what is called a “short sale” of their home to avoid a foreclosure. The typical situation is one where the value of the house has fallen below what is owed on the mortgage or mortgages, since often there is more than one. Meanwhile, the homeowners are falling behind in their payments. There are many possible reasons why they are behind in paying, but the most common is that one or more of the mortgages is an ARM, and the payments have jumped sky high The assumption may have been at the time of taking out the ARM that by the time the payments went up, they would be able to refinance again with a new and more reasonable mortgage. Now in this market that plan is pretty much out the window.
All the homeowners can think of it that they must avoid foreclosure. So they list the home for sale with a realtor. By and by the realtor finds a buyer, but it’s for a price that’s below the balance owing on the mortgages. This of course is no big surprise and is exactly what the homeowners figured was their best hope. The realtor contacts the mortgage lender or lenders, and the lenders agree to the sale. Specifically they will release their mortgage on the property in exchange for less than full payment. This can be a wise move from the point of view of the lender, because they were going to lose time and money in the event of a foreclosure anyway. The homeowners are relieved, go through with the sale, and move into a rented apartment.
The story does not have a happy ending. They do not live happily ever after. They neglected one thing. That release from the mortgage company just released the property, not them. There is an unpaid balance on the mortgage or mortgages, and the bill collectors start calling and threatening.
The amount they owe is way beyond any ability to pay they might have had; and so they call me about a bankruptcy. In my opinion, they would have been WAY better off to have just let the lenders foreclose. Ordinarily, foreclosure is done in such a way that the mortgage holder only gets the house and doesn’t get a right to go after the former homeowner personally. There may very well have been a possibility of living in the house rent free for a year or so and then walking away with no further debt.
Another possibility may have been that the first mortgage would foreclose and take the house. the second mortgage holder would not foreclose, let the house go, and then go after the former homeowners personally. That’s not such a good result, but it still includes the rent-free year or so.
Yet another possibility is that the release from the lender in the short sale DOES include a personal release. The former homeowners think all is well as they enjoy their new apartment. Then a 1099 arrives from the lender. The debt that was forgiven is reported as income to the IRS, and they may owe a tax on it.
My suggestion is that it is almost always best in the foregoing circumstances to just stay in the house and ride out the foreclosure. Don’t move out until the foreclosure is done, the redemption period has run out, and the lender starts an eviction action. If there is only one mortgage, you may come out of the process rather debt free and not need me. If there is more than one mortgage, you may have debt but at least no 1099. There may be circumstances where a short sale could be a good idea, but it is hard for me to think of one.
The idea that a short sale is the best thing for one’s credit seems to me to be an illusion. By the time the whole scenario is run, the credit report won’t look so good no matter what you do.
I am looking this afternoon at an October 15th article in the Duluth News Tribune. A bankruptcy lawyer I know has posted it on a local bankruptcy list serve to which I subscribe. The headline, “Bankruptcy filings are on the rise” is not really news to me. But one of the sub-headings in the article really caught my eye: “ABUSE WASN’T THERE”
The article rehashes how the credit and banking industry had lobbied for passage of the 2005 new legislation on the theory that a large number of people had been “abusing” the bankruptcy system. But then it takes a closer look at the filings under the new law, especially the ratio between Chapter 7s – which is where most of the abuse was supposed to have been happening – and Chapter 13s – which are preferred by the banking industry. They note that the ratio between 7s and 13s is the same now as it was in 1999. That ratio together with quotes from a credit counselor at Lutheran Social Services seems to support the proposition that the perceived “abuse” never actually existed.
In fact, judging by the whipping that some of the banks and credit card companies seem to be taking in the stock market today, it seems clear to me that a great deal of irresponsible behavior – abuse if you want to call it that – was engaged in by the bankers and lenders themselves. At the time of this writing, the Dow is down 192 points; and it’s been dropping for several days in a row. It is my hope that our economy can absorb the shock that is being expressed in today’s market, but I’m not at all sure that we won’t wind up in a recession. If it happens, I don’t think it will be the consumers who will be to blame.