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.
When the same thing keeps happening over and over again, I feel I should say something. Yesterday I met with a well-dressed, obviously educated and intelligent man. We talked about filing bankruptcy. He brought in and deposited on my desk a stack of documents that I usually request for such meetings. As I looked them over I said something that referred to him as having two mortgages. He seemed surprised and stated that he had only one mortgage.
At this point I had to take a breath and explain that a home equity line of credit is a mortgage, usually a second mortgage – but a mortgage. When you use a line of credit like that, it is like withdrawing money from a bank account – only it’s not money in a bank account, it’s the equity in your home. It always disturbs me to see people doing this because:
- Most don’t seem to realize that a home equity line of credit creates a lien on their home and therefore eats away at their home equity.
- Under Minnesota law the equity in our homes is one of the few things that most creditors cannot take away, except of course for a creditor holding a mortgage.
- Unlike a credit card debt or a medical bill, amounts owing on home equity lines must be paid, even in the event of a bankruptcy filing, unless the debtor is willing to let the home be foreclosed upon.
It seems to me that the loan officers do their best to make sure that consumers don’t understand the true nature of these credit lines. Not only don’t they explain it, but they can be downright deceptive about it. They talk as if it is free money, and encourage that kind of unhealthy thinking. Then they give the consumer an incomprehensible stack of papers that nobody understands, and say “sign here.”
I strongly suggest that if you need to go into debt for any reason, be sure you are doing it in a way that does not diminish the equity in your home. Beware of paperwork that puts a mortgage on your home in exchange for a favorable interest rate. That deal is not as good as it looks.
There seems to be a lot of confusion these days about how to put a value on the assets when we list them on a bankruptcy petition. Under the old law it was easier. The value was what you could get for an item if you put it out in the front yard and had to sell it within 24 hours – or at least that was my interpretation of what the law said.
Under the new bankruptcy law the value is what it would cost to replace an item with exactly the same thing, with the same wear and tear and in exactly the same condition. That’s pretty theoretical, since it seems to require that you establish a value by finding the price of an exact duplicate of what you have. When we don’t know what to say for a value, I tell my clients to start looking at Craig’s List or Ebay and see if they can find what they have and at least establish a price range.
One of the most contested areas is the value of cars. It seems that the bankruptcy trustees want to use NADA values, which tend to be aimed at what a dealer should be able to get for a car. If a trustee does use Kelly Blue Book, it’s usually the dealership value. There is nothing in the law, however, that says you have to buy a car from a dealer or use dealership prices. Recently, in the Ramirez case (359 B.R. 794), a bankruptcy judge in Colorado decided that the proper standard for valuing an automobile is the Kelly Blue Book private party value, a number which is always a lot lower than the price that a dealer could get for the same vehicle. I applaud that decision. It seems right to me.
As far as I know, no bankruptcy judge in Minnesota has issued a written decision on the issue. I recently received an email from another attorney, however, stating that two of our judges have stated verbally from the bench that Kelly Blue Book private party value is the one to use.