Wednesday, October 28, 2009

Obtaining Credit After Filing for Bankruptcy

Here at Shenwick & Associates, our clients often ask us how filing for bankruptcy will affect their financial future, and if they will ever be able to obtain credit again. It's important to note that your bankruptcy filing will remain on your credit report for seven to 10 years. This means that any credit company or potential lender looking to determine your creditworthiness during that period will be able to see that you filed for bankruptcy, which will affect your ability to obtain credit.

While filing for bankruptcy may make it more difficult to get some types of credit, such as a car or home equity loan, many clients tell us that within a few weeks of filing for bankruptcy, they received numerous credit card offers in the mail. At first, this seems counterintuitive; why would they solicit my business after I just filed to have my credit card debt discharged? But keep in mind that after a bankruptcy filing, you have a significantly lighter debt load to manage, and if all of your debts were dischargeable, you are essentially debt-free. Congratulations, and welcome to your fresh start! A word of caution is warranted, however, when deciding how to manage your personal finances post-bankruptcy.

Some credit card companies may be willing to take a risk on you with the hope that with fewer debts to pay, as well as your inability to file for Chapter 7 bankruptcy protection for another eight years, you will be able to pay them each month. But it is important to note that the cards offered may not be the kinds of cards you've been used to. Often, although credit card companies may be eager to sign you up, bear in mind that you may be considered more of a risk, and thus the cards offered to you may have a much higher interest rate and/or a much lower credit limit.

Nonetheless, for clients looking to rehabilitate or rebuild their credit after filing for bankruptcy, these cards may provide a way to do so. Bear in mind the importance of careful budgeting and financial management to ensure that any use of credit is in your long-term best interests. Being debt-free after bankruptcy can be a wonderful thing, but don't let the fresh start go to your head!

For more information about Chapter 7 personal bankruptcy and managing your financial future, please contact Jim Shenwick.

Monday, October 12, 2009

The Return of the Mortgage Cramdown?

Washington Revives the Mortgage Cramdown
As foreclosures continue to surge, congressional Democrats are pitching courtroom solutions to homeowners' woes. The Administration is wary

By Theo Francis

With foreclosures continuing to climb and midterm elections just a year away, Congress once again is preparing to tackle the mortgage crisis aggressively. High on many a wish list: a renewed push to allow so-called cramdown, which would let bankruptcy judges adjust the terms of home loans to give borrowers relief.

The banking industry hates cramdown (from the idea of cramming deals down lenders' throats), but Democrats argue that earlier efforts to fix the housing mess have not done as well as hoped. Moody's (MCO) estimates that 3.8 million homes will enter foreclosure this year, up 41% from 2008. No surprise, then, that lawmakers are getting an earful. "We have folks calling our office every day," says Senator Jeff Merkley (D-Ore.), who is pressing Treasury to streamline its program to restructure mortgages.


So Capitol Hill is poring over more ideas. One bill, introduced by Senator Jack Reed (D-R.I.) on Sept. 30 and co-sponsored by Merkley and two other senators, would force lenders to pause before they foreclose and to offer borrowers a break on their mortgage bill if they qualify for help under the Treasury program. Under the same proposed law, states could require mortgage servicers to enter mediation with borrowers before being allowed to foreclose. The bill also would give the states $6.4 billion to help homeowners stay put. "We're really trying to light a fire under the Administration," Merkley says.

Others in the Senate are considering the temporary suspension of home-loan payments or brief monthly mortgage subsidies for unemployed homeowners. House Financial Services Committee Chairman Barney Frank (D-Mass.) is drafting similar legislation.

The Administration is considering new options, too. One would support the broader housing market by extending a homebuyer's tax credit and making it easier for Fannie Mae (FNM) and Freddie Mac (FRE) to finance mortgages. Another would fund state housing agencies and independent mortgage banks. A Treasury spokeswoman noted that the Administration's programs have done more than previous efforts but said it "aggressively continues to build on our progress to date."

Many congressional Democrats think mortgage lenders need to feel the lash before they'll speed up mortgage workouts. Those critics, led by Senator Richard J. Durbin (D-Ill.), figure banks and mortgage servicers will do their best not to cut principal or interest rates on a mortgage. Lenders want to avoid, or at least delay, the loss they take from lowering what homeowners must pay, critics say. And despite an Administration plan that gives subsidies to mortgage servicers who agree to rework loans, many believe the service firms still gain too much from the fees they collect in foreclosure to bother working out a loan.

Durbin and other lawmakers are calling on Democrats to support what is seen as the party's nuclear option: cramdown. The proposal, which sailed through the House last spring, only to stall in the Senate on a 45-51 vote, authorizes bankruptcy courts to adjust mortgages. If Durbin's bill were to pass, a judge could reduce principal or interest rates on home loans and stretch out mortgage payments—something bankruptcy courts can do already with virtually every other kind of debt.

Supporters say cramdown would free homeowners from debt they can't afford while prodding lenders to cut deals before reaching the courthouse. A bankruptcy-court solution would also cost taxpayers little or nothing. Detractors argue cramdown would spook the mortgage market, driving up borrowing costs and making loans harder to get.

Undeterred, Durbin, the second-ranking Senate Democrat, is willing to attach a cramdown provision to any convenient bill if it won't get a hearing on its own. The proposal "will always be part of the conversation, if for nothing else than to scare the [daylights] out of everyone," says one senior Senate aide.

The financial industry, which used major muscle to kill the provision last spring, is arming for the fight, too. "The vote in the Senate was so overwhelmingly close, we're always worried," says one lobbyist. The big banks are leaning on community banks for help: These institutions were largely innocent of the worst excesses of the crisis and tend to be viewed much more favorably on Capitol Hill. "We are kind of the white hat," says a lobbyist for smaller financial institutions. "You'll see a lot of the industry try to hide behind us."

Given the industry's stance, supporters of cramdown say a forceful campaign by the White House would help. President Barack Obama supported it during the campaign and soon after his election, while his chief economics adviser Lawrence H. Summers wrote columns in favor of the proposal last year. But congressional sources say the Administration did little to push for passage of the bill last spring—possibly because Obama was reluctant to place further stress on already fragile banks. Now one Treasury official says the department has "no immediate plans" to revive the measure. Yet even without stronger White House support, Durbin might attract enough senators to embrace the bill if foreclosures continue to surge.

With Jane Sasseen in Washington

Francis is a correspondent in BusinessWeek's Washington bureau.

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