Monday, November 24, 2008

New York Times: Downturn Drags More Consumers Into Bankruptcy

Published: November 15, 2008

The economy’s deep troubles are pushing a growing number of already struggling consumers into bankruptcy, often with far more debt than those who filed in previous downturns.

Plummeting home values, dwindling incomes and the near disappearance of credit have proved a potent mixture. While all the usual reasons that distressed borrowers seek bankruptcy — job loss, medical bills, divorce — play significant roles, new economic forces are changing the calculus of who can ride out the tough times and who cannot.

The number of personal bankruptcy filings jumped nearly 8 percent in October from September, after marching steadily upward for the last two years, said Mike Bickford, president of Automated Access to Court Electronic Records, a bankruptcy data and management company.

Filings totaled 108,595, surpassing 100,000 for the first time since a law that made it more difficult — and often twice as expensive — to file for bankruptcy took effect in 2005. That translated to an average of 4,936 bankruptcies filed each business day last month, up nearly 34 percent from October 2007.

Robert M. Lawless, a professor at the University of Illinois College of Law, pointed to the tightening of credit by banks as a significant factor in the increase in October. As banks have pulled back on lending, he said, consumers have been finding it more difficult, and in many cases impossible, to use credit cards, refinance their home mortgages or fall back on their home equity lines to get them through a rough period.

“A credit crunch can drive people into bankruptcy today rather than later as sources of lending dry up,” Professor Lawless said. “With the consumer credit tightening and the economy in a nosedive, this pop could just be the beginning of a long-term rise in the bankruptcy filing rate to levels that are even higher than we had before the 2005 bankruptcy law.”

Not only are filings up, but recent filers have had much more credit card debt, often run up in an attempt to keep current on a mortgage that now exceeds the value of their home, bankruptcy lawyers said in interviews.

A recent study found that the typical family who filed for bankruptcy in 2007 was carrying about 21 percent more in secured debts, like mortgages and car loans, and about 44 percent more in unsecured debts, like credit cards and medical and utility bills, than filers in 2001.

Their incomes, meanwhile, remained static over those six years, according to the study, which used data from the 2007 Consumer Bankruptcy Project, a joint effort of law professors, sociologists and physicians. Researchers surveyed 2,500 households nationwide that filed for bankruptcy in February and March 2007.

“Earlier downturns followed strong booms, so families went into recessions with higher incomes and lower debt loads,” said Elizabeth Warren, a professor at Harvard Law School and, along with Professor Lawless, part of the Bankruptcy Project team. “But the fundamentals are off for families even before we hit the recession this time, so bankruptcy filings are likely to rise faster.”

Not surprisingly, filings are increasing most rapidly in states where real estate values skyrocketed and then crashed, including Nevada, California and Florida. In Nevada, bankruptcy filings in October were up 70 percent compared with last year. In California, bankruptcies jumped 80 percent in the same period, while Florida’s filings rose 62 percent.

In those regions, some people are trying to rescue their homes through bankruptcy proceedings, but many are just as relieved to walk away, shedding layers of debt that otherwise would have taken decades to pay off.

Tony and Carrie Forsyth, both 30, chose not to walk away from their house in Florida. The couple said they thought their financial situation would improve in 2006, when Mr. Forsyth accepted a promotion from his employer, a Michigan food distributor, that required them to move to Florida. But they could not sell their home in Ypsilanti, Mich., so they decided to rent it out.

In June 2006, the couple headed south and bought a house for $220,000 in Tamarac, Fla., with no money down. Five months later, their tenants in Michigan stopped paying, and the family had to carry two mortgage payments, just as the adjustable-rate mortgage on their Michigan home reset to a higher interest rate. They lost the Michigan home to foreclosure in February 2007.

By that time, however, the couple, who have two young daughters, were using credit cards to pay for food, utilities and clothes. After accumulating about $20,000 in debt, they said, they realized that bankruptcy was the only way they could remain in their Florida home, whose value, meanwhile, had plunged 25 percent. They filed for Chapter 13 bankruptcy protection this year, which permitted them to keep the house, and they agreed to repay a portion of their debts over the next three years.

A Chapter 7 bankruptcy, by contrast, provides filers with what is known as a “fresh start” because debts are forgiven. In this case, assets are liquidated, though the states allow for various exemptions. To qualify for a Chapter 7, filers need to pass a means test to determine whether they are unable to repay their debts.

Filers who are deemed able to repay a portion of their debts must file for Chapter 13 bankruptcy. Some debtors choose Chapter 13 because it permits them to save their primary homes from foreclosure, though they are required to catch up on their mortgage payments.

Mr. Forsyth said declaring bankruptcy was a difficult step. “Because of our Christian background, it didn’t feel right,” he said. “But there was no other way for us to live and support our family unless we went that route.”

Mrs. Forsyth added: “We are just rolling with life. You have to eat. You have to have diapers.”

The Forsyths are emblematic of the new forces that have led to the sharp rise in bankruptcy filings. “Historically, a person would get behind in his mortgage because of a temporarily catastrophic financial event, such as job loss, divorce, illness,” said Chip Parker, a bankruptcy lawyer in Jacksonville, Fla. “However, when these adjustable-rate mortgages started resetting from their teaser rate and clients couldn’t refinance their way out of trouble, they were getting behind even though there was no catastrophic event.”

Bankruptcy lawyers report that they have been having more consultations with middle-class families with six-figure incomes — including many who either bought a home during the boom or pulled out most or all of their available home equity just keep to up with the cost of living. Also caught up in the bankruptcies are real estate investors, who hoped to flip properties they had bought near the height of the market.

“There are a lot of foreclosures that haven’t taken place yet because people still have available credit,” said Jeffrey H. Tromberg, a bankruptcy lawyer in Fort Lauderdale, Fla. “We don’t see them until they’ve maxed out their credit cards.”

A similar pattern has emerged in Las Vegas, where more people are filing for Chapter 7 bankruptcy protection because it makes more financial sense to walk away from their homes. Real estate values have plummeted, and now the local economy is also suffering. Car salesmen and casino dealers are being laid off. Valet parking attendants and masseuses are collecting less in tips.

“My clients are basically good people that got into a home the best way they could and can no longer meet their obligations because their income has gone down,” said Roger P. Croteau, a lawyer in Las Vegas who concentrates on bankruptcy. “There is no equity to pay off their credit cards, and they are maxed out. They haven’t saved enough because of housing costs.”

Ellen Stoebling, a bankruptcy lawyer in Las Vegas, added: “People are using their cards to try and hold onto their property for as long as possible in hopes they can somehow talk some sense into their lender and stay in the property.”

The problems are not limited to people with adjustable-rate mortgages and homes that are now worth less than they owe. Job losses are also playing a role. Bankruptcies are also up sharply in Delaware, Rhode Island and Indiana, where the unemployment rates have been climbing.

And, of course, some people continue to seek bankruptcy for the usual reasons.

Lisa Marquis, a 35-year-old mother of five in Indiana, has no medical insurance but has undergone 21 operations in the last nine years, some related to emphysema and other respiratory diseases, and others related to accidents and several miscarriages.

Mrs. Marquis cannot work, but her husband earns $13.50 an hour as a truck driver — a salary that makes them ineligible for Medicaid but unable to pay their medical bills. Earlier this year, the family had to leave the mobile home they owned because the mold there was making it hard for her to breathe; they moved into a house where they paid more than $600 a month in rent. Mr. Marquis was spending three days a week in court fending off angry creditors, cutting down on the number of hours he could work.

In April, facing more than $114,000 in medical bills and less available overtime work, the Marquises filed for Chapter 13 bankruptcy — the third time in less than 10 years that Mrs. Marquis had to file for protection because of medical bills. Because the latest filing is a Chapter 13, they have agreed to pay some of their debts.

“We could have waited to do a 7,” Mrs. Marquis said. “I want to pay my debts. I didn’t want to cheat people who helped to save my life.”

Despite the rise in bankruptcies, academics and lawyers say they believe that many others have been discouraged from filing because of the 2005 bankruptcy law.

Ms. Warren, the Harvard law professor, said many borrowers had been left with the mistaken impression that they could no longer file. And, she argued, “the widespread perception that bankruptcy is not available to help families makes this economic crisis worse.”

Wednesday, November 12, 2008

Negotiating Better Terms for Mortgage


You don’t need to be behind on your mortgage payments to ask for a better deal from your bank.

Surprised? It’s easy to see why. The government’s announcement on Tuesday that Fannie Mae and Freddie Mac would modify terms for borrowers who are at least 90 days late with their payments makes it seem as if only the delinquent are eligible for a personal bailout.

But 90 percent or so of homeowners are still current with their payments, and for them, it has often seemed as if the banks were playing a game of chicken. Sorry, but until you blow off the payments for a few months running and wreck your credit in the process, the lender won’t even consider renegotiating the terms.

On Monday, however, Citigroup announced a pre-emptive campaign to talk to people before they fall behind on their payments. It plans to reach out to borrowers in distressed areas, including Arizona, California, Florida, Indiana, Michigan, Nevada and Ohio, and offer new terms to those who anticipate trouble making their payments.

And it turns out that other banks may also be willing to negotiate with borrowers who are current with their payments, even if they aren’t promoting it as aggressively as Citi.

JPMorgan Chase, HSBC and Bank of America, which took over Countrywide and its soured mortgage portfolio, have modified terms for such borrowers. And some of these adjustments are patterned after plans that the Federal Deposit Insurance Corporation put into place after it took over IndyMac.

There are several prerequisites to consider if you’re a borrower who is paying on time and wants some kind of a break. The home in question must be your primary residence. And the banks generally need to have your mortgage on their books and not have sold it off to Fannie Mae or Freddie Mac or someone else.

Then, the big question will be how financially strained you are. Perhaps your loan is about to adjust to a higher rate that is barely affordable — or already has. Or maybe you live in a two-income household where one income has disappeared or fallen drastically because of reduced sales commissions. Or, possibly, you lied about how much money you were making when you applied for a mortgage back in 2006 when nobody bothered checking.

Whatever the reason, the bank wants to know your current debt to (pretax) income ratio. If your monthly household income is $10,000, the bank may consider you overburdened if you’re paying more than $4,000 or so toward your housing costs, or 40 percent of your income. So don’t bother trying to get a better deal if your percentage is down near 25 percent.

If you think you may qualify, then you need to figure out whom to talk to. You should expect that every major mortgage lender or servicer is utterly overwhelmed right now. Calling the 800 number on your bank statement may lead to long hold times or representatives confused about changing internal guidelines.

Try asking immediately to speak to a loss mitigation or workout specialist. Chase has helpfully set up a separate number, (866) 550-5705, to take customers of Chase, EMC Mortgage and Washington Mutual straight to a loan modification specialist. Whomever you’re dealing with, write down everything they say and get the phone extension for people who are particularly helpful so you can talk to them again when things go wrong.

Then, expect a grilling. Chase will want a hardship letter, explaining what has gone wrong and why you need a break on your loan terms. A bank may ask for your last few pay stubs, a few years of tax returns and other financial information. “Expect to have your numbers crunched pretty hard,” said a Chase spokesman, Tom Kelly.

A bank may turn you down because you’re not struggling enough. Or, if you’re out of work, the bank may decide that foreclosure will be cleaner than lowering your payments to a level that you still won’t be able to afford.

If you do get a better deal — and it’s possible that very few people current on a 30-year fixed-rate mortgage will — don’t expect much of a gift. As far as the banks are concerned, they want to extract as much as possible, as long as it doesn’t break you.

In reducing the size of your monthly payments, they can play with the interest rate or the principal owed, either temporarily or permanently. If at all possible, the banks want any adjustment to be temporary and would prefer not to reduce the principal owed by a single penny.

At IndyMac, many mortgage customers whose payments were about to adjust upward to unaffordable levels were switched into loans with much lower interest rates for five years. The alterations are aimed at keeping the debt-to-income ratio at 38 percent or below. Then, the rate adjusts upward by no more than 1 percentage point each year until it hits the prevailing average at that point.

Other banks are doing something called principal forbearance. There, the bank carves off a chunk of the money you owe and puts it aside. You continue making payments, now lowered, on the rest of the loan. When you sell or refinance later, however, the bank adds that chunk back onto the total amount you must repay. By then, it is hoped, the value of the home has rebounded or you’ve built up enough equity to make the bank whole.

Alas, this is not exactly a handout. We’re not at the point yet where widespread offers of no-strings reductions in principal are available (or mandated by the government). But banks do seem to hope that if they continue to offer a bit more flexibility in dribs and drabs every few months, borrowers will forget that they owe $100,000 more than their home is worth and remember that they like their neighborhood and don’t want to turn the keys over to the bank.

So if you’re devoting a big chunk of your income to dutifully sending the mortgage lender a check, it may be worth calling to see if you can figure out a way to make the payment smaller.

Report your loan modification to

Copyright 2008 The New York Times Company. All rights reserved.

Wednesday, November 05, 2008

Letter to Senators Schumer and Clinton regarding allowing Bankruptcy Judges to modify mortgages in Chapter 13 bankruptcy

Dear Senators Schumer and Clinton:

I wanted to congratulate you on a spectacular election for Senate Democrats. Both of you deserve a great deal of credit for your roles in last night’s gain of seats for your caucus in the Senate.

I am a bankruptcy and real estate attorney with over 15 years of experience representing individuals and businesses in personal and business bankruptcy (my firm has filed hundreds of bankruptcy petitions) and have represented both debtors and creditors. As you are both aware, housing values have decreased substantially, the value of many houses is less than the amount of their mortgage(s) and foreclosure rates are rising geometrically throughout the country.

The solution to this housing crisis is to allow bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases. I believe that this change in law would be beneficial to both homeowners and to banks. Rather than people losing their houses in a foreclosure proceeding, Chapter 13 would provide a mechanism whereby a debtor (borrower) prepares a plan to pay the bank the arrears due under a mortgage over a three to five year period and retain their house. It would seem to me, that banks would rather be paid monies due them secured by their mortgages, than own devalued residential real estate.

Several law and finance professors have done studies which have shown that allowing homeowners to modify their mortgages in Chapter 13 would not negatively impact banks. The proof is actually simple, since under the present law, judges in Chapter 13 cases are allowed to modify mortgages on investment properties and vacation homes There has been no significant impact or effect on mortgages on those properties. Common sense would dictate that the law should be changed to allow bankruptcy judges to modify mortgages on individual’s primary residences as well.

Additionally, in 2005 Congress passed BAPCPA (the Bankruptcy Abuse and Consumer Protection Act), which greatly changed personal and business bankruptcy. One of the requirements of the new law is mandatory credit counseling, both prior to a bankruptcy filing and after the bankruptcy filing. These classes take approximately three hours and they cost a debtor $90-150. Studies have shown that mandatory credit counseling has little impact on an individual’s subsequent bankruptcy filing. I believe that the statistics show that 97% of all people who take the initial credit counseling course file a Chapter 7 bankruptcy petition, notwithstanding the credit counseling. The requirement of mandatory credit counseling increases the cost of bankruptcy and prevents the filing of emergency bankruptcy petitions to save individual’s houses from foreclosure, and should be repealed by Congress.

Now that Democrats have increased their control of the Senate and President-elect Obama has expressed his support for allowing bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases, we would hope that either of you would propose legislation to remedy these issues. If you or your staff have any further questions, please do not hesitate to contact the undersigned. Your attention to this matter is appreciated.

James Shenwick