Consumer Bankruptcy Up 48% in July

A few weeks ago I bookmarked an article posted on Twin Cities Daily Planet which indicated that bankrupty filings in Minnesota are up almost 30% for May and June of 2008 as compared to May and June of 2007. I thought it has seemed to be pretty busy around here, but I still thought the percentage was surprisingly high. Had someone told me in January of 2006, right after the “reform” legislation had gone into effect that this was going to happen, I don’t think I would have believed it. The standard wisdom at that time was that bankruptcy lawyers might be about out of business. In fact, many lawyers quit practicing bankruptcy law at that time. The new law was called BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act). In my opinion, the only abuse that was going on was that perpetrated by the credit industry, and the only protection provided was for them and not consumers.

Earlier this week I received a copy of Consumer Bankruptcy News, one of those old fashioned publications that is still printed on paper. In the lower right corner of page 7 was an item stating that nation-wide bankruptcy filings were up 48% in July 2008 as compared to July 2007. There were 94,124 consumer filings in July and 82,770 in June this year. That would be as if everybody in Bloomington, Minnesota and in Duluth Minnesota combined had filed for bankruptcy in June or July. If that keeps up, I would assume that for August it would be as if everybody in Rochester, Minnesota had filed for bankruptcy.

If you should feel a need to come see me to talk bankruptcy, there’s sure no reason to feel alone.

Creeping Debt and Chapter 13 Bankruptcy Debt Limits

Not long ago it seemed that $20,000 of credit card debt was a lot. I would file a bankruptcy for a person who had that without giving it a second thought. Now, however, as things go in my world, that’s not a lot of debt for most people. Unless the debtor is sick, disabled or hopelessly low income, I would be reluctant to file for someone with such a small debt.

What’s happening is that I rarely see anyone who’s not more than $50,000 in debt, and over $100,000 of consumer credit card debt is common. Once the total of the debt tops $100,000 I tend to ignore how much higher it goes, as my software keeps a running tally of the total. The fact is that for me, and I’m afraid for the whole country, the amount of credit card debt that seems normal is creeping steadily upward.

So the other day when I was reading my mail on a bankruptcy lawyer listserve, I had a bit of a start. One of the emails reminded me that for a Chapter 13 bankruptcy, there is a limit as to how much debt one is allowed to have. I quickly pulled out the most recent Chapter 13 I had filed and checked the balances of the debts, to make sure we had not exceeded the legal limit. Up until that moment it never occurred to me that one day someone will probably walk into my office with consumer debts in excess of the Chapter 13 limits. All of a sudden, those limits don’t seem as high to me as they used to. A lawyer who files a case where the limits are exceeded is subject to sanctions. If I did that it could cost me thousands of dollars. I must start paying more attention to those limits.

In order to qualify for a Chapter 13 bankruptcy, the person’s secured debt must not exceed $1,010,650 and the unsecured debt must not exceed $336,900. The way things are going right now, I would not be surprised to meet someone within the next week whose debts are over those limits. From my perspective the current economic downturn has been frightening and unbelievable.

I don’t mean to imply that I have never met a person with debts that high. Back in the early 1980s, during a serious recession we had in those years, I did a Chapter 7 bankruptcy for a real estate developer who had gone out of business and who had millions of dollars in debt. There’s no limit to the amount of debt you can run through a Chapter 7. I have also done Chapter 7 work for small business owners who’s debts would have exeeded the Chapter 13 limits.

But now people I see with consumer debt are actually starting to push those Chapter 13 limits, and that is something I have never seen before.

Debtor Audits in Bankruptcy Cases Resume Today

My email today brought me a notice that the U.S. Trustee’s office is resuming debtor audits as of today. They stopped in January because Congress didn’t fund it.

An audit in this context involves the U.S. Trustee’s office hiring an outside accounting firm to go over the debtor’s records. Previously the policy was that one in 250 cases would randomly be audited. Now the policy is one in a thousand will be audited. That’s a 400% improvement, but I’m still sad to see this stuff starting again.

Minnesota Bankruptcy: The Income Limits

Since the passage of the “new law” in October of 2005, there have been rules based on level of income about who can file a Chapter 7 Bankruptcy. Unless you are at or below the median income for the State of Minnesota based upon your family size, you can only file a Chapter 7 if you pass the so-called means test. The means test is a whole other topic, which I will have to deal with some other time. For now, however, here’s a video I posted recently on Youtube where I discuss the median income levels for Minnesota by household size.

The numbers are subject to change every few months, but I have them posted on my site on my Chapter 7 page under the subheading of “Qualifying for Chapter 7 in Minnesota.”

David J. Kelly, Attorney
Kelly Law Office
1013 Ford Rd.
Minnetonka, MN 55305
952-544-6356
http://www.mn-bankruptcy.com/
http://www.mn-dwi.com/
http://www.kelly-law.com/

Youtube Video Bankruptcy Update Part IV

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:

Bankruptcy Update Part III – Spring 2008

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.

Youtube video Bankruptcy Update Part II

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.

Senate to Vote Next Week on New Mortgage Relief Bill

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.

Executive Office of U.S. Trustee Suspends Debtor Audits

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.

Don’t Sell Yourself Short

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.