Thursday, December 23, 2010

A Christmas present for debtors with homes in New York State

Today, New York State Governor David Paterson signed into law S.7034-A/A.8735-A, which will increase the amount of exemptions in bankruptcy proceedings and money judgments and provide a choice between State and Federal exemptions. The new law will be effective on January 22, 2011. Our previous coverage of these bills can be found here. Happy holidays indeed!

Tuesday, December 21, 2010

NYT: Homes at Risk, and No Help From Lawyers


In California, where foreclosures are more abundant than in any other state, homeowners trying to win a loan modification have always had a tough time.

Now they face yet another obstacle: hiring a lawyer.

Sharon Bell, a retiree who lives in Laguna Niguel, southeast of Los Angeles, needs a modification to keep her home. She says she is scared of her bank and its plentiful resources, so much so that she cannot even open its certified letters inquiring where her mortgage payments may be. Yet the half-dozen lawyers she has called have refused to represent her.

“They said they couldn’t help,” said Ms. Bell, 63. “But I’ve got to find help, because I’m dying every day.”

Lawyers throughout California say they have no choice but to reject clients like Ms. Bell because of a new state law that sharply restricts how they can be paid. Under the measure, passed overwhelmingly by the State Legislature and backed by the state bar association, lawyers who work on loan modifications cannot receive any money until the work is complete. The bar association says that under the law, clients cannot put retainers in trust accounts.

The law, which has few parallels in other states, was devised to eliminate swindles in which modification firms made promises about what their lawyers could do, charged hefty fees and then disappeared. But foreclosure specialists say there has been an unintended consequence: the honest lawyers can no longer afford to assist Ms. Bell and all the others who feel helpless before lenders that they see as elusive, unyielding and skilled at losing paperwork.

The revelations three months ago that large banks were sloppy and negligent in preparing foreclosure documents underscore just how important it is for distressed homeowners to have representation, lawyers and consumer advocates say. Homeowners whose cases were handled improperly have little way of knowing it. Even if they found out, they would be hard-pressed to challenge a lender without a lawyer.

“Consumers just don’t know what is going on,” said Walter Hackett, a former banker who is now a lawyer for a nonprofit service in Riverside. “They get a piece of paper saying they are going to lose their homes and they freak out.”

The problem for lawyers is that even a simple modification, in which the loan is restructured so the borrower can afford the monthly payments, is a marathon, putting off their payday for months if not years. If the bank refuses to come to terms, the client may file for bankruptcy. Then the lawyer will never be paid.

Alice M. Graham, a lawyer in Marina del Rey, said a homeowner in default recently tried to hire her. When Ms. Graham declined, the despairing owner begged her in vain to accept payments under the table.

“The banks have all the lawyers they want, and the consumers are helpless,” Ms. Graham said.

In some states, including New York and Florida, foreclosure proceedings are overseen by courts. In California, the process is more of a private matter between the bank and the homeowner. Through Sept. 30, lenders filed notices of default on 229,843 homes in California this year, according to the research firm MDA DataQuick.

The length of time California households spend in foreclosure, which was rising as owners pursued modifications, fell in the third quarter to 8.7 months, from 9.1 months in the second quarter. That could indicate that the absence of defense lawyers is beginning to accelerate the process.

While lawyers for nonprofits like Mr. Hackett continue to represent clients, they are too overwhelmed to help everyone. “A homeowner in California is going to have an extraordinarily difficult time finding an attorney,” he said.

That group includes Ms. Bell, who owned two properties free and clear and then gave in to a friend’s urging to “put your money to work.” That friend was an agent, and soon Ms. Bell owned two more properties and was making unsecured loans.

The loans went bad, the investments went bust, and Ms. Bell is trying to salvage her home. She wants an advocate but is reluctant to respond to any of the solicitations that fill her mailbox. “I know better,” she said.

Many people did not. Defaulting owners saw television commercials or heard radio ads where a lawyer promised relief. They handed over a few thousand dollars and heard no more.

Two years ago, the state bar association had seven complaints of misconduct in loan modifications. By March 2009, there were more than 100 complaints, and a task force was formed to deal with the problem. Soon, there were thousands of complaints.

It was a public relations disaster. The president of the bar association wrote in a column last year that “hundreds, and perhaps thousands, of California lawyers” were victimizing people “at the most vulnerable point in their lives.”

Politicians heard complaints, too. Ron Calderon, a state senator who represents several communities east of Los Angeles, sponsored a bill that prohibits advance payments for modifications and required lawyers to warn clients that they could do the job themselves without professional assistance. Lenders were supportive of the bill, Senator Calderon said.

It passed 36 to 4 in September 2009. The maximum punishment is a $10,000 fine and a year in jail.

The law is working well, Senator Calderon said. “You do not need a lawyer,” he said.

Mark Stone, a 56-year-old general contractor in Sierra Madre, feels differently. A few years ago, he got sick with hepatitis C. Unable to work full time, he began to miss mortgage payments. The drugs he was taking left him “a little confused,” he said.

Mr. Stone knew that his condition put him at a disadvantage in negotiations with his bank. So he hired Gregory Royston, a real estate lawyer in Redondo Beach. It took Mr. Royston nearly a year, but he restructured the loan.

Without the lawyer, Mr. Stone said, “I’d be living under a bridge.”

The legal bill, paid in advance, was $3,500. “Worth every penny,” said Mr. Stone, who is now back at work.

Mr. Royston said winning modifications was never easy and often impossible. “The banks stymie the borrower, and they really stymie any third party who works on behalf of the borrower,” he said.

A spokesman for the Mortgage Bankers Association said it simply wanted to protect homeowners from fraud. “Be very careful about anyone who wants you to pay them to help you get a loan modification,” said the spokesman, John Mechem.

That advice has never been more true. If any honest lawyers still do modifications, they are lost in a sea of swindles. “This law,” Mr. Royston said, “took the wrong people out of the game.”

Suzan Anderson, supervising trial counsel of the California bar’s special team on loan modification, defended the law, saying that in other types of cases, including personal injury and medical malpractice, the lawyers do not get paid until the end. She acknowledged, however, it was “a very problematical situation.”

As for the swindlers singled out by the law, they appear unfazed. The state bar is investigating 2,000 complaints of modification fraud.

“I wish the law had worked,” Ms. Anderson said.

Wells Fargo to Modify Mortgages

LOS ANGELES (AP) — Wells Fargo agreed to modify about 14,900 adjustable-rate loans made by banks it acquired, according to filings released on Monday.

The agreement with the state attorney general will result in more than $2 billion in principal write-downs, interest-rate reductions and other concessions through June 2013, said Franklin Codel, chief financial officer of Wells Fargo Home Mortgage.

The deal applies to mortgages marketed as “pick-a-payment” loans by Wachovia and World Savings Bank, a subsidiary of the Golden West Financial Corporation.

Wachovia bought World Savings in 2006, and Wells Fargo bought Wachovia in 2008.

The mortgages were so named because their terms allowed borrowers to make payments at various levels each month, including a payment option that increased the loan’s principal by covering less than the monthly interest owed.

Copyright 2010 The New York Times Company. All rights reserved.

Wednesday, November 24, 2010

Dischargeability of taxes in bankruptcy

In these troubled economic times, we're getting calls from many potential clients who owe money to the IRS and other taxing authorities. They're seeking our counsel about whether their taxes are dischargeable in bankruptcy or a strategy for dealing with their tax liabilities. Some advice and strategies for the discharge of taxes in bankruptcy are provided below.

1. Trust fund taxes (money withheld from an employee's wages (income tax, social security, and Medicare taxes) by an employer and held in trust until paid to the Treasury) and sales taxes are not dischargeable in bankruptcy.

2. So called "old income taxes" for which (i) the tax return was filed more than two years before the bankruptcy filing, (ii) the tax was due more than three years before the bankruptcy filing and (iii) the tax was assessed more than 240 days before the filing of the bankruptcy petition can be discharged in bankruptcy.

3. Taxpayers should file their income tax returns on a timely basis, whether or not they can pay the tax that is due.

4. Never file a fraudulent tax return-fraudulently filed tax returns aren't dischargeable in bankruptcy.

5. If a taxpayer didn't timely file income tax returns for several years and then did a "batch filing" of returns for multiple years, the IRS or other taxing authorities can argue that these batch filings were "an attempt to evade or defeat the tax" and taxes for those years may not be dischargeable, according to both the Bankruptcy Code and case law.

6. A determination of what taxes may be dischargeable in bankruptcy begins with a review of a taxpayer's tax transcript, the types of taxes that are due and the dates the taxes were assessed.

Please note that the interrelationship of taxes and bankruptcy law is quite complex and requires experienced counsel. The general guidelines listed above should not be construed as legal advice for your particular circumstances. Anyone who has questions concerning the dischargeability of taxes in bankruptcy should contact Jim Shenwick.

Thursday, November 18, 2010

NYT: Deal Over Foreclosures Statys Out of Reach


Changing the face of foreclosure in America will take some time, several state attorneys general said Wednesday, cautioning that an agreement with major lenders over revamped foreclosure practices was not imminent.

“We want to move as quickly as possibly but it has to be done right,” said Roy Cooper, the attorney general of North Carolina. “We have plowed this ground before.”

Ever since the law enforcement officials from all 50 states signed on last month to a highly publicized investigation of big mortgage lenders, there has been a public tug of war.

The banks, who have been subjected to bad publicity, have played down the investigation and want to see it end as quickly as possible. The state attorneys general, however, say that there is an opportunity to fundamentally change the way banks deal with defaulting borrowers so that more people can stay in their homes by modifying their mortgages, and that they will take the time needed.

“The large banks say they are doing everything they can to avoid foreclosure, but that is not the reality on the ground,” said Patrick Madigan, an assistant attorney general in Iowa who is a lead figure in the investigation. “The question is, Why?”

Mr. Madigan mentioned some theories, saying any or all could be true: “Is it the fact that the current servicing system was not designed to do large numbers of loan modifications, is it being understaffed, incompetence or the servicers having the wrong financial incentives?”

The major lenders are scheduled to appear on Capitol Hill on Thursday for the second hearing this week on their foreclosure procedures. The pressure to reach a settlement with the attorneys general will likely intensify after the hearing, which will be led by Representative Maxine Waters, a Democrat from California and outspoken critic of the mortgage lending industry.

But quick fixes are not likely, the attorneys general said. Richard Cordray, the Ohio attorney general who lost his bid for re-election this month, was hesitant to predict a significant outcome.

“Something will come of this, no question,” Mr. Cordray said of the inquiry. “The question is whether it will be a meaningful resolution that will make a real difference or a missed opportunity. It’s not entirely clear at this point.”

Some experts were willing to go even further, saying the lenders were impervious to change. For 18 months, the Obama administration has promoted modifications that would keep families in their homes over foreclosures that would kick them out. The programs have had some success but ultimately have done little to stem the tide.

“The banks’ act was to put their tail between their legs, act contrite before Congress and change nothing,” said Adam Levitin, an associate profesor of law at Georgetown University who testified before Congress on Tuesday and will testify again on Thursday.

The banks hope to buy off the attorneys general with money, perhaps to establish a compensation fund for victims, Mr. Levitin said. That, he said, would prevent attorneys general from “digging deeper and uncovering more rot in the mortgage system. My fear is that the banks’ calculus is correct.”

There were fresh reports on Wednesday that the foreclosure situation was deteriorating. Another 35,000 households entered foreclosure in October, the data company Lender Processing Service said, despite freezes instituted by lenders as they reviewed their practices. About 4.3 million households are either in serious default or in foreclosure.

The housing market also showed fresh signs of trouble. CoreLogic, a data company, said Wednesday that home prices fell 2.8 percent in the last year. Earlier this week, another information company, DataQuick, said sales in the Southern California market had dropped 24 percent in October from last year.

“We agree with the attorneys general that a housing market recovery is vital to restoring economic growth, and the sooner we resolve the outstanding issues, the better,” said Lawrence Di Rita, a Bank of America spokesman.

For the banks, the immediate cost of halting foreclosure is not significant. Brian Moynihan, the chief executive of Bank of America, said it totaled $10 million to $20 million a month. Bank of America has frozen foreclosures in 27 states.

A far greater threat to the broader financial system is the possibility that investors will force financial institutions to buy back hundreds of billions of dollars in soured mortgages, according to a Congressional Research Service report prepared for Thursday’s hearing and obtained by The New York Times.

Loan buybacks could shift $425 billion in losses on mortgage-backed securities from the investors that owned them to the banks that helped originate or assemble the securities, according to the report, far more than most estimates floated on Wall Street.

“Loan buybacks have the potential to cause the banking system to become undercapitalized once again or to cause individual large banks to fail,” the report says, “even if that outcome is unlikely.”

While bank officials agree that a settlement with the attorneys general is not in the making anytime soon, they remain eager to put the controversy behind them. Bank of America’s reputation, in particular, was hammered last month as the uproar grew over claims that the industry had pursued foreclosures in cases where documents were lost, missing or barely reviewed before they were signed by bank officials, a practice known as robo-signing.

What is more, as the nation’s largest mortgage servicer — it handles roughly 14 million home loans, or one in five American mortgages — it has more to lose as the investigation drags on. The majority of its troubled portfolio was picked up in 2008 when it bought Countrywide, whose aggressive subprime lending practices made it a symbol of industry excess.

“What makes it a little more pressing for Bank of America is their level of exposure,” said Guy Cecala, publisher of Inside Mortgage Finance. “Whatever the issue is, Bank of America seems to have a target on its back from people looking to be compensated for losses.”

As the beneficiary of two government bailouts, both repaid, it has been eager to maintain good relations with regulators.

Representatives from Bank of America and the other main players in the mortgage servicing industry — Ally Financial, JPMorgan Chase, Wells Fargo and Citigroup — will testify at Thursday’s hearing. A top mortgage executive at Citi plans to testify that the company identified 14,000 foreclosure cases where errors may have been made, including 4,000 where a notary may have been absent when they were signed. The bank, which until now has defended its processes, still insists that in each case the original decision to foreclose was correct and that the paperwork will be refiled.

Mr. Levitin, the Georgetown professor, will argue in Thursday’s testimony that the business model at servicing giants like Bank of America and Wells Fargo “encourages them to cut cut costs wherever possible, even if this involves cutting corners on legal requirements, and to lard on junk fees and in-sourced expenses at inflated prices.” That results in foreclosure, rather than modification, being a better bet for servicers.

In removing such incentives, the attorneys general have the task of encouraging a new system that changes behavior. “We are trying to create a paradigm shift in the way foreclosures are handled,” said Mr. Madigan, the assistant Iowa attorney general.

Copyright 2010 The New York Times Company. All rights reserved.

Friday, November 12, 2010

Personal Bankruptcy in The Year 2010

The following is a talk on this topic given by James H. Shenwick, Esq. at the Douglaston Club on November 10, 2010.

I. Three types of personal bankruptcy

a. Chapter 11-This is the same kind of bankruptcy used by major corporations to reorganize. The primary reason that individuals file for Chapter 11 is that they have too much income and assets or they have debts that fall outside the statutory limits for filing a Chapter 13 bankruptcy.

b. Chapter 13-This is usually the type of bankruptcy individuals file when they want to reorganize their debts, if (for example), they have too much equity in their house. However, this means that the debtor will have to repay a portion of their debts, and their are limits on the amount of debt you can have to qualify for this type of bankruptcy (more on that later).

c. Chapter 7-the most common type of personal bankruptcy, this allows debtors to liquidate or discharge most (but not all) of their debts (again, more on what debts are dischargeable in Chapter 7 bankruptcy later).

II. Today’s market

a. The nominal unemployment rate is close to 10% [9.6% in September], while the real unemployment rate is closer to 18-19%.

b. The unemployment rate for recent college graduate is 20-21%.

c. We are seeing a record number of foreclosures–most of our personal bankruptcy clients who have purchased a home in the last three to four years are “underwater” (the owner owes more on the mortgages(s) then the home is worth).

d. 41.8 million Americans are on food stamps, and the White House estimates that number will soon rise to 43 million.

e. Are we in a “W” shaped economic pattern? If so, are we on a upward leg or a downward leg of the “W?”

III. How can personal bankruptcy be of use?

a. 98% to 99% of our personal bankruptcy clients wind up filing for Chapter 7 bankruptcy for the “fresh start” of liquidating most of their debts.

b. In 2005, the New York State legislature increased the homestead exemption from the bankruptcy estate (the assets available to pay their creditors) to $50,000 per spouse. Most of our Chapter 7 clients can reaffirm their mortgages and keep their houses. And the homestead exemption may be increasing soon (more on that later in my talk).

c. Debtors can also reject unfavorable leases and guarantees through a Chapter 7 filing.

d. Congress radically revised and amended Chapter 7 personal bankruptcy laws by enacting the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). These changes include median income and means testing, where if an individual (single, married or with children) has income that exceeds a certain dollar amount, then the bankruptcy filing is considered an abuse of the system and facially they are not permitted to file Chapter 7 bankruptcy.

e. The first test under the revised code is whether a debtor exceeds the median income for their family size based on their state of residence. Pursuant to the 2005 amendments, a case where the debtor makes less than the median is presumed to be a non-abusive filing, and a below-median debtor may file for Chapter 7 bankruptcy. Effective March 15, 2010, the median income of a single person in New York State is $46,320. For a family of two, the income threshold for the Median Income Test is $57,902, for a family of three it is $69,174 and for a family of four it is $82,164. Add $7,500 for each individual in excess of four. Median income figures are periodically revised by the Census Bureau.

f. However, all is not lost for a debtor who exceeds his or her state median income threshold. If an individual’s income exceeds the median income for their respective state and family size, they may still be allowed to file for Chapter 7 bankruptcy if they pass the so-called “Means Test,” i.e. the results show that the bankruptcy filing is not a presumption of abuse under § 707(b)(7) of the Bankruptcy Code. The Means Test (officially known as Form 22A, “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation”) is one of the most complicated calculations in the law. It consists of eight pages, and is similar to doing a 1040 tax return for an individual. The Means Test incorporates the debts that an individual has (both unsecured and secured (i.e. mortgages and car loans), taxes that they owe, and expenses specified by the IRS in its financial analysis standards–food, clothing, household supplies, personal care, out-of-pocket health care and miscellaneous (National Standards); housing and utilities (non-mortgage expenses), housing and utilities (mortgage/rental expense), with adjustments, transportation (vehicle operation/public transportation/transportation ownership or lease expenses)(you are entitled to an expense allowance in this category regardless of whether you pay the expenses of operating a vehicle and regardless of whether you use public transportation)–as well as many other factors.

g. Another requirement to file for Chapter 7 bankruptcy is that the Debtor’s monthly net income (their average monthly income less their average monthly expenses) must be zero or a negative amount.

h. Chapter 13 bankruptcy can useful for debtors who have unincorporated businesses that they want to keep. Like Chapter 7 debtors, Chapter 13 debtors can also exempt up to $2,400 in equity in a motor vehicle and $50,000 in equity in a principal residence from their bankruptcy estate.

i. However, § 109(e) of the Bankruptcy Code places limits who can qualify to be a debtor under Chapter 13. To qualify, a debtor must have regular income and noncontingent, liquidated, unsecured debts of less than $360,475 and noncontingent, liquidated, secured debts of less than $1,081,400.

IV. New developments.

a. New York bankruptcy exemptions may be about to undergo their biggest transformation in years. New York State Senate bill S.7034A and Assembly bill A. 8735A have been passed by the Legislature and are expected to be signed into law by Governor Paterson in the very near future.

The scope of the bill is very broad, but a few of the major changes are:

• The homestead exemption would increase from $50,000 to: $150,000 for the counties of Kings, New York, Queens, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam; $125,000 for the counties of Dutchess, Albany, Columbia, Orange, Saratoga, and Ulster; $75,000 for the remaining counties in the state.
• The motor vehicle exemption would increase from $2,400 to $4,000. If the vehicle was equipped for a disabled person, the limit would be $10,000.
• The aggregate individual bankruptcy exemption for cash, household goods and clothing would increase from $5,000 to $10,000.
• The New York Banking Department will publish cost of living adjustments to exemption amounts every three years commencing April 1, 2012.
• Debtors will now be able to choose whether to use the New York exemptions or the federal exemptions. This will be especially useful for Debtors who do not own a home, since the “wildcard” exemption in § 522(d)(5) of the Bankruptcy Code allows Debtors to exempt a significant amount of cash.

A married couple filing jointly for bankruptcy can double the amount of the exemptions listed above.

b. Student loans are not usually dischargeable in bankruptcy, but the House of Representatives is currently considering H.R. 5043, the “Private Student Loan Bankruptcy Fairness Act of 2010,” which would allow debt from private loans issued by for-profit lenders to be dischargeable in bankruptcy. H.R. 5043 is currently in the House Judiciary Committee. A similar bill, S. 3219, the “Fairness for Struggling Students Act of 2010,” is currently under consideration in the Senate’s Judiciary Committee.

Wednesday, November 10, 2010

Preference Actions

Here at Shenwick and Associates, we have noticed an uptick in preference actions. For those of you who are not familiar with bankruptcy jargon, a preference action is an adversary proceeding (litigation) commenced by a Chapter 7 bankruptcy trustee or a Chapter 11 debtor seeking the return of monies that were paid by the company to a creditor, generally within 90 days of the bankruptcy filing. If the creditor is an "insider" (i.e. a relative, or, in the case of a company, a director or officer), the look back period (also known as the "preference period") for a preference action is one year.

Many clients ask what strategies are available to avoid preference actions. Some potential strategies are as follows:

1. If a customer or client owes money, and those monies are past due, attempt to have the bill paid by a third party.

2.Attempt to have a third-party guarantee payment of the debt.

3. The ordinary course of business defense -- the more ordinary the payment, the less likely the payment will be considered a preferential transfer. Additionally, if the terms of an invoice are net 30 days, and the invoices are 90 or 120 days past due, have the customer or client pay more recent invoices and avoid payment of the 90 or 120 day invoice.

4. The small payments exception-Under §§ 547(c)(8) and (c)(9) of the Bankruptcy Code, which were added as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Trustees may not avoid a transfer: (1) in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600; or (2) in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $5,850 (as of April 1, 2010).

5. Attempt to shed your insider status prior to receiving payment if you will be deemed an "insider" under § 101(31) of the Bankruptcy Code.

6. Remember that if you ship goods to a debtor during the preference period and are not paid for those goods, those goods are deemed new value and decrease the amount of the preferential payments.

If you have questions regarding preference or fraudulent conveyance actions, please do not hesitate to contact Jim Shenwick.

Monday, November 08, 2010

NYT: Robo-Signing at Companies That Buy Consumer Debts

By David Segal

When Michael Gazzarato took a job that required him to sign hundreds of affidavits in a single day, he had one demand for his employer: a much better pen.

“They tried to get me to do it with a Bic, and I wasn’t going — I wasn’t having it,” he said. “It was bad when I had to use the plastic Papermate-type pen. It was a nightmare.”

The complaint could have come from any of the autograph marathoners in the recent mortgage foreclosure mess. But Mr. Gazzarato was speaking at a deposition in a 2007 lawsuit against Asset Acceptance, a company that buys consumer debts and then tries to collect.

His job was to sign affidavits, swearing that he had personally reviewed and verified the records of debtors — a time-consuming task when done correctly.

Sound familiar?

Banks have been under siege in recent weeks for widespread corner-cutting in the rush to process delinquent mortgages. The accusations have stirred outrage and set off investigations by attorneys general across the country, prompting several leading banks to temporarily cease foreclosures.

But lawyers who defend consumers in debt-collection cases say the banks did not invent the headless, assembly-line approach to financial paperwork. Debt buyers, they say, have been doing it for years.

“The difference is that in the case of debt buyers, the abuses are much worse,” says Richard Rubin, a consumer lawyer in Santa Fe, N.M.

“At least when it comes to mortgages, the banks have the right address, everyone agrees about the interest rate. But with debt buyers, the debt has been passed through so many hands, often over so many years, that a lot of time, these companies are pursuing the wrong person, or the charges have no lawful basis.”

The debt in these cases — typically from credit cards, auto loans, utility bills and so on — is sold by finance companies and banks in a vast secondary market, bundled in huge portfolios, for pennies on the dollar. Debt buyers often hire collectors to commence a campaign of insistent letters and regular phone calls. Or, in a tactic that is becoming increasingly popular, they sue.

Nobody knows how many debt-collection affidavits are filed each year, but a report by the nonprofit Legal Aid Society found that in New York City alone more than 450,000 were filed by debt buyers, from January 2006 to July 2008, yielding more than $1.1 billion in judgments and settlements.

Problems with this torrent of litigation are legion, according to the Federal Trade Commission, led by Jon Leibowitz. The agency issued a report on the subject, “Repairing a Broken System,” in July. In some instances, banks are selling account information that is riddled with errors.

More often, essential background information simply is not acquired by debt buyers, in large part because that data adds to the price of each account. But court rules state that anyone submitting an affidavit to a court against a debtor must have proof of that claim — proper documentation of a debt’s origins, history and amount.

Without that information it is hard to imagine how any company could meet the legal standard of due diligence, particularly while churning out thousands and thousands of affidavits a week.

Analysts say that affidavit-signers at debt-buying companies appear to have little choice but to take at face value the few facts typically provided to them — often little more than basic account information on a computer screen.

That was made vividly clear during the deposition last year of Jay Mills, an employee of a subsidiary of SquareTwo Financial (then known as Collect America), a debt-buying company in Denver.

“So,” asked Dale Irwin, the plaintiff’s lawyer, using shorthand for Collect America, “if you see on the screen that the moon is made of green cheese, you trust that CACH has investigated that and has determined that in fact, the moon is made of green cheese?”

“Yes,” Mr. Mills replied.

Given the volume of affidavits, even perfunctory research seems impossible. Cherie Thomas, who works for Asta Funding, a debt buyer in Englewood Cliffs, N.J., said in a 2007 deposition that she had signed 2,000 affidavits a day. With a half-hour for lunch and two brief breaks, that’s roughly one affidavit every 13 seconds.

Executives at debt-buying firms say they have systems to ensure the accuracy of their affidavits. Robert Michel, chief financial officer at Asta Funding, says his company hires outside lawyers to read over affidavits, then has staff employees check their work.

“The people who work in this area are well trained, and they know that when they sign a statement they have to follow certain procedures,” he said. “They know what they are doing.”

He added that the pace of affidavits filed by Asta had dwindled since 2007 and was now closer to “several hundred” a day, rather than 2,000.

Even if debt buyers purchase the requisite information directly from a bank, it may be flawed. Linda Almonte oversaw a team of advisers, analysts and managers at JPMorgan Chase last year, when the company was preparing the sale of 23,000 delinquent accounts, with a face value of $200 million. With the debt sold at roughly 13 cents on the dollar, the sale was supposed to net $26 million.

As the date of the sale approached, Ms. Almonte and her employees started to notice mistakes and inconsistencies in the accounts.

“We found that with about 5,000 accounts there were incorrect balances, incorrect addresses,” she said. “There were even cases where a consumer had won a judgment against Chase, but it was still part of the package being sold.”

Ms. Almonte flagged the defects with her manager, but he shrugged them off, she says, and he urged her and her colleagues to complete the deal in time for the company’s coming earnings report. Instead, she contacted senior legal counsel at the company. Within days, she was fired. She has since filed a wrongful termination suit against Chase.

A Chase spokesman declined to comment, citing the pending litigation.

The majority of lawsuits filed in debt collection cases go unanswered, which is why most end with default judgments — victories for creditors that allow them to use court officers or sheriffs to garnish wages or freeze bank accounts, among other remedies.

There is a persistent argument about why so few consumers respond in these cases. Consumers often know they owe the debt and conclude that fighting about it is pointless, said Barbara Sinsley, general counsel at DBA International, a trade group of debt buyers.

Lawyers for consumers, on the other hand, contend that few debtors ever learn about the legal action until it is too late, often because the process server charged with alerting them never actually delivered a notification. In those instances when a consumer hires a lawyer, the consumer often prevails.

“I’ve lost four and I’ve taken about 5,000 cases,” said Jerry Jarzombek, a consumer lawyer in Fort Worth. “If the case goes to trial, I say to the judge, ‘Your honor, imagine if someone came in here to give eyewitness testimony in a traffic accident case and they didn’t actually see the crash. They just read about it somewhere. Well, this is the same thing.’ The debt buyers don’t know anything about the debt. They just read about it.”

Every plaintiff’s lawyer and consumer advocate in this field has a theory about why there has been so much fury over mortgage paperwork abuses but so little about debt collections. The stakes in collections cases are smaller, and of course, debt buyers were never given a taxpayer bailout.

“But what people don’t realize,” said Daniel Edelman, a plaintiff’s lawyer in Chicago, “is that the mortgage issue and debt collections are intimately connected. The millions of default judgments out there — you better believe that’s one reason that homeowners can’t afford their homes.”

Andrew Martin contributed reporting.

Copyright 2010 The New York Times Company. All rights reserved.

Tuesday, October 26, 2010

NYT: Owners Seek to Sell at a Loss, But Bankers Push Foreclosure


PHOENIX — Bank of America and GMAC are firing up their formidable foreclosure machines again today, after a brief pause.

But hard-pressed homeowners like Lydia Sweetland are asking why lenders often balk at a less disruptive solution: short sales, which allow owners to sell deeply devalued homes for less than what remains on their mortgage.

Ms. Sweetland, 47, tried such a sale this summer out of desperation. She had lost her high-paying job and drained her once-flush retirement savings, and her bank, GMAC, wouldn’t modify her mortgage. After seven months of being unable to pay her mortgage, she decided that a short sale would give her more time to move out of her Phoenix home and damage her credit rating less than a foreclosure.

She owes $206,000 and found a buyer who would pay $200,000. Last Friday, GMAC rejected that offer and said it would foreclose in seven days, even though, according to Ms. Sweetland’s broker, the bank estimates it will make $19,000 less on a foreclosure than on a short sale.

“I guess I could salute and say, ‘O.K., I’m walking, here’s the keys,’ ” says Ms. Sweetland, as she sits in a plastic Adirondack chair on her patio. “But I need a little time, and I don’t want to just leave the house vacant. I loved this neighborhood.”

GMAC declined to be interviewed about Ms. Sweetland’s case.

The halt in most foreclosures the last few weeks gave a hint of hope to homeowners like Ms. Sweetland, who found breathing room to pursue alternatives. Consumer advocates took the view that this might pressure banks to offer mortgage modifications on better terms and perhaps drive interest in short sales, which are rising sharply in many corners of the nation.

But some major lenders took a quick inventory of their foreclosure practices and insisted their processes were sound. They now seem intent on resuming foreclosures. And that could have a profound effect on many homeowners.

In Arizona, thousands of homeowners have turned to short sales to avoid foreclosures, and many end up running a daunting procedural gantlet. Several of the largest lenders have set up complicated and balky application systems.

Concerns about fraud are one of the reasons lenders are so careful about short sales. Sometimes well-off homeowners want to portray their finances as dire and cut their losses on a property. In other instances, distressed homeowners try to make a short sale to a relative, who would then sell it back to them (a practice that is illegal). A recent industry report estimates that short sale fraud occurs in at least 2 percent of sales and costs banks about $300 million annually.

Short sales are also hindered when homeowners fail to forward the proper papers, have tax liens or cannot find a buyer.

Because of such concerns, homeowners often are instructed that they must be delinquent and they must apply for a modification first, even if chances of approval are slim. The aversion to short sales also leads banks to take many months to process applications, and some lenders set unrealistically high sales prices — known as broker price opinions — and hire workers who say they are poorly trained.

As a result, quite a few homeowners seeking short sales — banks will not provide precise numbers — topple into foreclosure, sometimes, critics say, for reasons that are hard to understand. Ms. Sweetland and her broker say they are confounded by her foreclosure, because in Arizona’s depressed real estate market, foreclosed homes often sit vacant for many months before banks are able to resell them.

“Banks are historically reluctant to do short sales, fearing that somehow the homeowner is getting an advantage on them,” said Diane E. Thompson, of counsel to the National Consumer Law Center. “There’s this irrational belief that if you foreclose and hold on to the property for six months, somehow prices will rebound.”

Homeowners, advocates and realty agents offer particularly pointed criticism of Bank of America, the nation’s largest servicer of mortgages, and a recipient of billions of dollars in federal bailout aid. Its holdings account for 31 percent of the pending foreclosures in Maricopa County, which includes Phoenix and Scottsdale, according to an analysis for The Arizona Republic.

The bank instructs real estate agents to use its computer program to evaluate short sales. But in three cases observed by The New York Times in collaboration with two real estate agents, the bank’s system repeatedly asked for and lost the same information and generated inaccurate responses.

In half a dozen more cases examined by The New York Times, Bank of America rejected short sale offers, foreclosed and auctioned off houses at lower prices.

“When I hear that a client’s mortgage is held by Bank of America, I just sigh. Our chances of getting an approval for them just went from 90 percent to 50-50,” said Benjamin Toma, who has a family-run real estate agency in Phoenix.

Bank of America officials also declined interview requests. A Bank of America spokeswoman said in an e-mail that the bank had processed 61,000 short sales nationwide this year; she declined to provide numbers for Arizona or to discuss criticisms of the company’s processing.

Fannie Mae, the mortgage finance company with federal backing, gives cash incentives to encourage servicers, who are affiliated with banks and who oversee great bundles of delinquent mortgages, to approve short sales.

But less obvious financial incentives can push toward a foreclosure rather than a short sale. Servicers can reap high fees from foreclosures. And lenders can try to collect on private mortgage insurance.

Some advocates and real estate agents also point to an April 2009 regulatory change in an obscure federal accounting law. The change, in effect, allowed banks to foreclose on a home without having to write down a loss until that home was sold. By contrast, if a bank agrees to a short sale, it must mark the loss immediately.

Short sales, to be sure, are no free ride for homeowners. They take a hit to their credit ratings, although for three to five years rather than seven after a foreclosure. An owner seeking a short sale must satisfy a laundry list of conditions, including making a detailed disclosure of income, tax and credit liens. And owners must prove that they have no connection to the buyer.

Still, bank decision-making, at least from a homeowner’s perspective, often appears arbitrary. That is certainly the view of Nicholas Yannuzzi, who after 30 years in Arizona still talks with a Philadelphia rasp. Mr. Yannuzzi has owned five houses over time, without any financial problems. When his wife was diagnosed with bone cancer, he put 20 percent down and bought a ranch house in North Scottsdale so that she would not have to climb stairs.

In the last few years, his wife died, he lost his job and he used his retirement fund to pay his mortgage for five months. His bank, Wells Fargo, denied his mortgage modification request and then his request for a short sale.

The bank officer told him that Fannie Mae, which held the mortgage, would not take a discount. At the end of last week, he was waiting to be locked out of his home.

“I’m a proud man. I’ve worked since I was 20 years old,” he said. “But I’ve run out of my 79 weeks of unemployment, so that’s it.”

He shrugged. “I try to keep in the frame of mind that a lot of people have it worse than me.”

Back in Phoenix, Ms. Sweetland’s real estate agent, Sherry Rampy, appeared to receive good news last week. GMAC re-examined her client’s application and suggested it might be approved.

But the bank attached a condition: Ms. Sweetland must come up with $2,000 in closing costs or pay $100 a month for 50 months to the bank. Ms. Sweetland, however, is flat broke.

A late afternoon desert sun angles across her Pasadena neighborhood.

“After this, I’ll never buy again,” Ms. Sweetland says. “This is not the American dream. This is not my American dream.”

Copyright 2010 The New York Times Company. All rights reserved.

Thursday, October 07, 2010

New York Times: F.T.C. Accuses American Tax Relief of Fraud


WASHINGTON — Who wouldn’t like to settle with the Internal Revenue Service for pennies on the dollar?

In recent years, some 20,000 people have turned to American Tax Relief of Beverly Hills, Calif., to do just that after seeing the company’s advertisements on television, the Internet or in print, where actors portraying clients say the company reduced their back taxes to say, $2,000 from $24,000 or $40,000 from $200,000.

But the Federal Trade Commission said Wednesday that despite collecting $60 million to $100 million in upfront fees from often-desperate clients in recent years, American Tax Relief rarely, if ever, delivered on its promises.

It did, however, according to the F.T.C., deliver $30 million in customers’ funds to the accounts of the company’s owners or their relatives — money that was spent on a $3.4 million house in Beverly Hills; a garage full of cars, including a Ferrari, a Rolls Royce, a Bentley, two Porsches and two Mercedes-Benzes; and other luxuries.

At the F.T.C.’s request, a federal district court judge in Chicago froze the assets of American Tax Relief and its owners on Sept. 24 and appointed a receiver to manage the company. The judge also approved a temporary restraining order prohibiting the company and its owners — Alexander Seung Hahn, who is on probation for an earlier marketing fraud case, and his wife, Joo Hyun Park, from making deceptive claims. The F.T.C. does not have criminal jurisdiction or the ability to assess fines.

“Everyone has seen these commercials and wondered, ‘Can I really get away with paying the I.R.S. only a fraction of what I owe?,’ ” C. Steven Baker, the director of the F.T.C.’s Midwest Regional office, said in an interview. “The short answer is no.”

Of the 20,000 clients that the F.T.C. says it believes that American Tax Relief signed up, “we have not been able to find a single one” that the company helped to reduce a tax burden, said David Vladek, the chief of the commission’s division of consumer protection.

Mr. Hahn and Ms. Park could not be reached for comment. Charles L. Kreindler, a Los Angeles lawyer who represents the company, said in a statement that it intended to fight the F.T.C. action, which “focused on a small handful of complaints and ignored the thousands of consumers who have been helped.”

In the last five months, Mr. Kreindler said, more than 60 tax abatement offers from American Tax Relief had been accepted by tax authorities, saving clients more than $2 million and reducing their taxes by 90 percent. “During that same time period, American Tax Relief has successfully eliminated debilitating penalties for dozens of other taxpayers and placed them on payment plans that they can live with,” he added.

Mr. Hahn has previously been in trouble with the law for marketing scams. In October 2006, he was sentenced to five years’ probation for a conviction of mail fraud related to a telemarketing scheme at a company he ran in Garden Grove, Calif.

According to an affidavit filed in United States District Court in Santa Ana, Calif., Mr. Hahn started American Tax Relief in 1999 after paying a secretary at the tax-relief firm where he worked to steal a copy of its client list.

From 2002 through 2008, 410 different consumers filed 497 complaints against American Tax Relief with the Better Business bureau, the F.T.C., or various law enforcement agencies. The complaints accused the company of failing to negotiate settlements with the I.R.S., resulting in penalties and additional interest charges for the customers, or making unauthorized charges to credit cards or withdrawals from bank accounts.

When customers complained to American Tax Relief that a debt was not settled, the company often blamed the clients for providing incorrect paperwork, missing deadlines or failing to pay all of the required fees, according to court papers.

Some of the $30 million that the F.T.C. says went to pay the personal expenses of Mr. Hahn and his wife were laundered through the accounts of his wife’s parents, Young Soon Park and Il Kon Park, according to the agency.

Mr. Baker of the F.T.C.’s Chicago office said that companies like American Tax Relief had created a widespread misimpression that anyone with an outstanding tax debt could settle with the I.R.S. for less than they owed.

While the I.R.S. does have programs of the type pitched by American Tax Relief — an “offer in compromise” settlement and a “penalty abatement” — the government is likely to accept less than it is owed only if the taxpayer makes an offer that is equal to or greater than the taxpayer’s ability to pay, including the value of all of the taxpayer’s property, cars, bank accounts and other assets.

An I.R.S. Web site specifically cautions: “Taxpayers should beware of promoters’ claims that tax debts can be settled through the offer in compromise program for ‘pennies on the dollar.’ ”

Most of the clients who received any service from American Tax Relief were eligible for no I.R.S. program other than an installment agreement, which usually requires the full amount of the debt to be paid over time. Installment agreements are easily arranged by individual taxpayers and rarely require expert assistance.

Mr. Vladek said that while the F.T.C. and other agencies determined that American Tax Relief took in about $60 million between January 2004 and October 2008, its continued business since then has probably pushed the total to more than $100 million.

Copyright 2010 The New York Times Company. All rights reserved.

Monday, October 04, 2010

New York Times: Flawed Paperwork Aggravates a Foreclosure Crisis


As some of the nation’s largest lenders have conceded that their foreclosure procedures might have been improperly handled, lawsuits have revealed myriad missteps in crucial documents.

The flawed practices that GMAC Mortgage, JPMorgan Chase and Bank of America have recently begun investigating are so prevalent, lawyers and legal experts say, that additional lenders and loan servicers are likely to halt foreclosure proceedings and may have to reconsider past evictions.

Problems emerging in courts across the nation are varied but all involve documents that must be submitted before foreclosures can proceed legally. Homeowners, lawyers and analysts have been citing such problems for the last few years, but it appears to have reached such intensity recently that banks are beginning to re-examine whether all of the foreclosure papers were prepared properly.

In some cases, documents have been signed by employees who say they have not verified crucial information like amounts owed by borrowers. Other problems involve questionable legal notarization of documents, in which, for example, the notarizations predate the actual preparation of documents — suggesting that signatures were never actually reviewed by a notary.

Other problems occurred when notarizations took place so far from where the documents were signed that it was highly unlikely that the notaries witnessed the signings, as the law requires.

On still other important documents, a single official’s name is signed in such radically different ways that some appear to be forgeries. Additional problems have emerged when multiple banks have all argued that they have the right to foreclose on the same property, a result of a murky trail of documentation and ownership.

There is no doubt that the enormous increase in foreclosures in recent years has strained the resources of lenders and their legal representatives, creating challenges that any institution might find overwhelming. According to the Mortgage Bankers Association, the percentage of loans that were delinquent by 90 days or more stood at 9.5 percent in the first quarter of 2010, up from 4 percent in the same period of 2008.

But analysts say that the wave of defaults still does not excuse lenders’ failures to meet their legal obligations before trying to remove defaulting borrowers from their homes.

“It reflects the hubris that as long as the money was going through the pipeline, these companies didn’t really have to make sure the documents were in order,” said Kathleen C. Engel, dean for intellectual life at Suffolk University Law School and an expert in mortgage law. “Suddenly they have a lot at stake, and playing fast and loose is going to be more costly than it was in the past.”

Attorneys general in at least six states, including Massachusetts, Iowa, Florida and Illinois, are investigating improper foreclosure practices. Last week, Jennifer Brunner, the secretary of state of Ohio, referred examples of what her office considers possible notary abuse by Chase Home Mortgage to federal prosecutors for investigation.

The implications are not yet clear for borrowers who have been evicted from their homes as a result of improper filings. But legal experts say that courts may impose sanctions on lenders or their representatives or may force banks to pay borrowers’ legal costs in these cases.

Judges may dismiss the foreclosures altogether, barring lenders from refiling and awarding the home to the borrower. That would create a loss for the lender or investor holding the note underlying the property. Almost certainly, lawyers say, lawsuits on behalf of borrowers will multiply.

In Florida, problems with foreclosure cases are especially acute. A recent sample of foreclosure cases in the 12th Judicial Circuit of Florida showed that 20 percent of those set for summary judgment involved deficient documents, according to chief judge Lee E. Haworth.

“We have sent repeated notices to law firms saying, ‘You are not following the rules, and if you don’t clean up your act, we are going to impose sanctions on you,’ ” Mr. Haworth said in an interview. “They say, ‘We’ll fix it, we’ll fix it, we’ll fix it.’ But they don’t.”

As a result, Mr. Haworth said, on Sept. 17, Harry Rapkin, a judge overseeing foreclosures in the district, dismissed 61 foreclosure cases. The plaintiffs can refile but they need to pay new filing fees, Mr. Haworth said.

The byzantine mortgage securitization process that helped inflate the housing bubble allowed home loans to change hands so many times before they were eventually pooled and sold to investors that it is now extremely difficult to track exactly which lenders have claims to a home.

Many lenders or loan servicers that begin the foreclosure process after a borrower defaults do not produce documentation proving that they have the legal right to foreclosure, known as standing.

As a substitute, the banks usually present affidavits attesting to ownership of the note signed by an employee of a legal services firm acting as an agent for the lender or loan servicer. Such affidavits allow foreclosures to proceed, but because they are often dubiously prepared, many questions have arisen about their validity.

Although lawyers for troubled borrowers have contended for years that banks in many cases have not properly documented their rights to foreclose, the issue erupted in mid-September when GMAC said it was halting foreclosure proceedings in 23 states because of problems with its legal practices. The move by GMAC followed testimony by an employee who signed affidavits for the lender; he said that he executed 400 of them each day without reading them or verifying that the information in them was correct.

JPMorgan Chase and Bank of America followed with similar announcements.

But these three large lenders are not the only companies employing people who have failed to verify crucial aspects of a foreclosure case, court documents show.

Last May, Herman John Kennerty, a loan administration manager in the default document group of Wells Fargo Mortgage, testified to lawyers representing a troubled borrower that he typically signed 50 to 150 foreclosure documents a day. In that case, in King County Superior Court in Seattle, he also stated that he did not independently verify the information to which he was attesting.

Wells Fargo did not respond to requests for comment.

In other cases, judges are finding that banks’ claims of standing in a foreclosure case can conflict with other evidence.

Last Thursday, Paul F. Isaacs, a judge in Bourbon County Circuit Court in Kentucky, reversed a ruling he had made in August giving Bank of New York Mellon the right to foreclose on a couple’s home. According to court filings, Mr. Isaacs had relied on the bank’s documentation that it said showed it held the note underlying the property in a trust. But after the borrowers supplied evidence indicating that the note may in fact reside in a different trust, the judge reversed himself. The court will revisit the matter soon.

Bank of New York said it was reviewing the ruling and could not comment.

Another problematic case involves a foreclosure action taken by Deutsche Bank against a borrower in the Bronx in New York. The bank says it has the right to foreclose because the mortgage was assigned to it on Oct. 15, 2009.

But according to court filings made by David B. Shaev, a lawyer at Shaev & Fleischman who represents the borrower, the assignment to Deutsche Bank is riddled with problems. First, the company that Deutsche said had assigned it the mortgage, the Sand Canyon Corporation, no longer had any rights to the underlying property when the transfer was supposed to have occurred.

Additional questions have arisen over the signature verifying an assignment of the mortgage. Court documents show that Tywanna Thomas, assistant vice president of American Home Mortgage Servicing, assigned the mortgage from Sand Canyon to Deutsche Bank in October 2009. On assignments of mortgages in other cases, Ms. Thomas’s signatures differ so wildly that it appears that three people signed the documents using Ms. Thomas’s name.

Given the differences in the signatures, Mr. Shaev filed court papers last July contending that the assignment is a sham, “prepared to create an appearance of a creditor as a real party in interest/standing, when in fact it is likely that the chain of title required in these matters was not performed, lost or both.”

Mr. Shaev also asked the judge overseeing the case, Shelley C. Chapman, to order Ms. Thomas to appear to answer questions the lawyer has raised.

John Gallagher, a spokesman for Deutsche Bank, which is trustee for the securitization that holds the note in this case, said companies servicing mortgage loans engaged the law firms that oversee foreclosure proceedings. “Loan servicers are obligated to adhere to all legal requirements,” he said, “and Deutsche Bank, as trustee, has consistently informed servicers that they are required to execute these actions in a proper and timely manner.”

Reached by phone on Saturday, Ms. Thomas declined to comment.

The United States Trustee, a unit of the Justice Department, is also weighing in on dubious court documents filed by lenders. Last January, it supported a request by Silvia Nuer, a borrower in foreclosure in the Bronx, for sanctions against JPMorgan Chase.

In testimony, a lawyer for Chase conceded that a law firm that had previously represented the bank, the Steven J. Baum firm of Buffalo, had filed inaccurate documents as it sought to take over the property from Ms. Nuer.

The Chase lawyer told a judge last January that his predecessors had combed through the chain of title on the property and could not find a proper assignment. The firm found “something didn’t happen that needed to be fixed,” he explained, and then, according to court documents, it prepared inaccurate documents to fill in the gaps.

The Baum firm did not return calls to comment.

A lawyer for the United States Trustee said that the Nuer case “does not represent an isolated example of misconduct by Chase in the Southern District of New York.”

Chase declined to comment.

“The servicers have it in their control to get the right documents and do this properly, but it is so much cheaper to run it through a foreclosure mill,” said Linda M. Tirelli, a lawyer in White Plains who represents Ms. Nuer in the case against Chase. “This is not about getting a free house for my client. It’s about a level playing field. If I submitted false documents like this to the court, I’d have my license handed to me.”

Copyright 2010 The New York Times Company. All rights reserved.

Friday, August 27, 2010

New New York bankruptcy exemptions

Here at Shenwick & Associates, one of the questions we're most frequently asked is "what will I be able to keep after for filing for Chapter 7 or Chapter 13 bankruptcy?" When a bankruptcy petition is filed, a bankruptcy estate is created for the benefit of the debtor's creditors, which consists of all of the Debtor's property except for what state or federal law allows to be exempted. Often, there are no assets left over for distribution to creditors after property is exempted, and the case becomes a "no asset" case.

What property a Debtor may keep in bankruptcy depends on which state the Debtor is filing for bankruptcy from. Every state has their own laws about what can be exempted from the bankruptcy estate, and some states allow a Debtor to choose whether to exempt property under state laws or the federal exemptions contained in § 522(d) of the Bankruptcy Code.

Under current New York law, Debtors may only use the New York State exemptions, which aside from increasing certain exemptions (such as the homestead exemption), have not been substantively revised and updated in many years.

However, New York bankruptcy exemptions are about to undergo their biggest transformation in years. New York State Senate bill S. 7034A and Assembly bill A. 8735A have been passed by the Legislature and are expected to be signed into law by Governor Paterson in the very near future.

The scope of the bill is very broad, but a few of the major changes are:

• The homestead exemption would increase from $50,000 to: $150,000 for the counties of Kings, New York, Queens, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam; $125,000 for the counties of Dutchess, Albany, Columbia, Orange, Saratoga, and Ulster; $75,000 for the remaining counties in the state.

• The motor vehicle exemption would increase from $2,400 to $4,000. If the vehicle was equipped for a disabled person, the limit would be $10,000.

• The aggregate individual bankruptcy exemption for cash, household goods and clothing would increase from $5,000 to $10,000.

• The New York Banking Department will publish cost of living adjustments to exemption amounts every three years commencing April 1, 2012.

Debtors will now be able to choose whether to use the New York exemptions or the federal exemptions. This will be especially useful for Debtors who do not own a home, since the "wildcard" exemption in § 522(d)(5) of the Bankruptcy Code allows Debtors to exempt a significant amount of cash.

A married couple filing jointly for bankruptcy can double the amount of the exemptions listed above.

To find how to make the best choices to protect your precious property in bankruptcy, please contact Jim Shenwick.

Thursday, August 12, 2010

NYT: Borrowers Refuse to Pay Billions in Home Equity Loans


PHOENIX — During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.

The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.

Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.

The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.

“When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” said Christopher A. Combs, a real estate lawyer here, where the problem is especially pronounced. “Their chances are pretty good of walking away and not having the bank collect.”

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”

Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.

“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”

But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.

“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.”

Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next. “I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”

Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”

Desert Schools, the largest credit union in Arizona, increased its allowance for loan losses of all types by 926 percent in the last two years. It declined to comment.

The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.

“No one had ever seen a national real estate bubble,” said Keith Leggett, a senior economist with the American Bankers Association. “We would love to change history so more conservative underwriting practices were put in place.”

The delinquency rate on home equity loans was 4.12 percent in the first quarter, down slightly from the fourth quarter of 2009, when it was the highest in 26 years of such record keeping. Borrowers who default can expect damage to their creditworthiness and in some cases tax consequences.

Nevertheless, Mr. Leggett said, “more than a sliver” of the debt will never be repaid.

Eric Hairston plans to be among this group. During the boom, he bought as an investment a three-apartment property in Hoboken, N.J. At the peak, when the building was worth as much as $1.5 million, he took out a $190,000 home equity loan.

Mr. Hairston, who worked in the technology department of the investment bank Lehman Brothers, invested in a Northern California pizza catering company. When real estate cratered, Mr. Hairston went into default.

The building was sold this spring for $750,000. Only a small slice went to the home equity lender, which reserved the right to come after Mr. Hairston for the rest of what it was owed.

Mr. Hairston, who now works for the pizza company, has not heard again from his lender.

Since the lender made a bad loan, Mr. Hairston argues, a 10 percent settlement would be reasonable. “It’s not the homeowner’s fault that the value of the collateral drops,” he said.

Marc McCain, a Phoenix lawyer, has been retained by about 300 new clients in the last year, many of whom were planning to walk away from properties they could afford but wanted to be rid of — strategic defaulters. On top of their unpaid mortgage obligations, they had home equity loans of $50,000 to $150,000.

Fewer than 5 percent of these clients said they would continue paying their home equity loan no matter what. Ten percent intend to negotiate a short sale on their house, where the holders of the primary mortgage and the home equity loan agree to accept less than what they are owed. In such deals primary mortgage holders get paid first.

The other 85 percent said they would default and worry about the debt only if and when they were forced to, Mr. McCain said.

“People want to have some green pastures in front of them,” said Mr. McCain, who recently negotiated a couple’s $75,000 home equity debt into a $3,500 settlement. “It’s come to the point where morality is no longer an issue.”

Darin Bolton, a software engineer, defaulted on the loans for his house in a Chicago suburb last year because “we felt we were just tossing our money into a hole.” This spring, he moved into a rental a few blocks away.

“I’m kind of banking on there being too many of us for the lenders to pursue,” he said. “There is strength in numbers.”

John Collins Rudolf contributed reporting.

Copyright 2010 The New York Times Company. All rights reserved.

Monday, August 02, 2010

NYT: Old Debts That Won't Die


Timothy McCollough freely admits that he stopped making payments on his Chase Manhattan credit card in 1999. He says he did not have the means to pay after he was disabled by a head injury that cost him his job as a school security guard.

But more than a decade later, Mr. McCollough, who is 52 and lives in Laurel, Mont., is still haunted by the unpaid balance, which was originally about $3,000.

In 2007, he was sued a second time over the debt, and this time the suit contended that he owed significantly more: $3,816 in credit card debt, plus $5,536 in interest and $481 in legal fees. As he did the first time, Mr. McCollough sent a handwritten note to the court explaining that the statute of limitations on the debt had passed.

“I have had no dealing with any credit card in 8 1/2 years,” he wrote to the court. “The pain they caused is worth more than the money they want.”

Mr. McCollough is not the only borrower being pursued for a balance that has expired. Such claims are routinely sold on debt collection Web sites, where out-of-statute debt is for sale for a penny or less on the dollar.

In most states, it is legal for collectors to pursue out-of-statute debt, as long as they do not file a lawsuit or threaten to do so.

But some lawsuits are filed anyway, and consumer groups and even some industry consultants argue that collectors routinely harass debtors for unpaid balances that have exceeded the statute of limitations. In some cases, collectors have unlawfully added fees and interest.

“It’s so cheap, if you can work it smart, you don’t need to collect that much,” said John Pratt, a consultant to the debt-buying industry and an author of “Debt Purchasing: An Investor’s Guide to Buying Debt” (Morris Publishing, 2005). He said investors in old debt generally hoped to recoup two and half times what they paid for a group of claims.

Because collectors cannot sue on old debt, he said, they are more likely to resort to abusive tactics. “Time-barred debt is where the worst abuse has occurred towards the debtor,” he said.

In a report issued July 12, the Federal Trade Commission called for “significant reforms” in the debt collection industry and recommended that states change the murky laws that govern out-of-statute debt.

The statute of limitations for debt varies by state, generally from three to 10 years. In many states, collectors can restart the clock if they can persuade the consumer to make even a tiny payment toward the old debt. Debt collectors generally do not tell consumers that making a payment will revive the debt so it can be legally pursued.

“The point of the payments is not so much to get the money” as it is to restart the clock, said Daniel Schlanger, a New York lawyer who represents consumers in cases against debt collectors.

The F.T.C., in its report, recommends that states make sure the statute of limitations for outstanding debt is clear and that collectors filing a lawsuit be required to prove that the debt is not out of statute.

In addition, the agency recommends that states require collectors to tell consumers that they are not entitled to sue on out-of-statute debt and that making a partial payment revives the entire liability.

Rozanne Andersen, chief executive of ACA International, an association of debt collection companies, said she did not believe that old consumer debt should expire at all. The money is owed whether the debt is a month old or 10 years old, she said.

Ms. Andersen says her association opposes filing lawsuits against out-of-statute debt or using trickery to get consumers to pay. But she says she sees nothing wrong with debt collectors pursuing legitimate debts, even if that might spur the borrower to restart the statute of limitations.

In addition, she said it was ridiculous to expect debt collectors to warn consumers that their debts had expired.

“It suggests that if a consumer can avoid paying for a certain period of time, they will enjoy a windfall,” she said, adding later, “People are obligated to pay their debts, whether the statute of limitations period has run or not.”

The debt collection industry has undergone a transformation in the last decade. Credit card issuers, health care providers and cellphone companies now routinely sell debt that they deem uncollectible to debt buyers, who then either try to collect it themselves, turn it over to a collections law firm or sell it again.

The price of secondhand debt depends on factors like the age of the debt, average balance, how much documentation is available to prove the debt and where the debtors are located.

Out-of-statute debt is readily available on various Web sites that cater to the collections industry. For instance, a Chaska, Minn., company called Credit Card Reseller is offering an $8 million portfolio of Bank of America credit card accounts, which on average have a balance of $4,981 and were written off by the bank in 2003.

The expected asking price is $16,000, or two-tenths of a cent for every dollar owed.

While collectors are not supposed to file lawsuits to pursue out-of-statute debt, some consumer lawyers say it happens routinely. In California, for instance, Victoria Byers of Los Angeles was sued last year for $1,708 over an old AT&T cellphone bill that she disputed. Her last payment was made in 2005.

Last month, Ms. Byers, who is 50, filed her own suit contending that the debt collector, Professional Collection Consultants, and its lawyer, Scott Wu, violated the Fair Debt Collection Practices Act. Her suit asserts that the collection firm and Mr. Wu routinely file lawsuits on stale debt in the hopes of obtaining default judgments.

Ms. Byers’s lawyer, Michael Stone, said he based the accusation on the high volume of lawsuits filed by Mr. Wu and on the “reckless” manner in which they treated Ms. Byers.

Clark Garen, a lawyer for Professional Collection Consultants, denied that his firm purposely set out to collect expired debt. As a result of the accusations in the Byers lawsuit, he said the firm reviewed its record of filing lawsuits and found a small number of instances in which lawsuits were filed against debt in which the statute of limitations had expired.

Of the 11,946 lawsuits that it filed over the last four years in California, 73 involved debt in which the statute of limitation had expired, Mr. Garen said. Professional Collection Consultants is dropping the lawsuits in which a judgment has not been entered and refunding $44,710.82 to consumers in 29 of the cases in which some money was collected, he said.

Mr. McCollough, the man who was pursued for his old Chase credit card debt, also ended up countersuing the collection law firm that sued him, Johnson Rodenburg & Lauinger of Bismarck, N.D. Last year, a Montana jury awarded him $311,000 in damages, primarily for emotional distress. The decision is being appealed.

Fred Simpson, a Missoula, Mont., lawyer representing Johnson Rodenburg, declined to comment and pointed instead to his appellate brief, in which cites an “accumulation of errors” by the district court.

In his closing arguments at the trial, Mr. Simpson pointed out that Mr. McCollough still owed the balance on his Chase card.

“The money was green and he spent it,” Mr. Simpson said. “If Mr. McCollough paid his credit card bill to Chase Manhattan, we wouldn’t be here this morning.”

Copyright 2010 The New York Times Company. All rights reserved.

Monday, July 26, 2010

NYT: The Roller-Coaster Ride Called a Short Sale


With property values down by as much as 30 percent in New York City, some homeowners who bought at the height of the market are finding themselves underwater and are being forced to sell their homes in short sales.

In the months after the Lehman Brothers crash, most of the short-sale action was in the boroughs outside of Manhattan and in the suburbs. This year, however, short sales appear to be picking up in Manhattan, real estate and mortgage brokers say.

A recent search of sales listings found almost 20 advertised short sales, and that did not include short sales disguised with euphemistic terms like “owner must sell.” The advertised short sales range from a $250,000 two-bedroom on the Upper East Side to a $2 million three-bedroom designed by Philippe Starck in the financial district. They include town houses, co-ops, condops and condos.

And the number of short sales, in which a home sells for less than the amount owed on the mortgage, will most likely continue to grow. The number of lis pendens filings — a first step in the foreclosure process for houses and condos — doubled in 2009 in Manhattan, to 724 from 334 in 2008; this year, 382 had been filed by the end of June, according to the Furman Center for Real Estate and Urban Policy of New York University.

“Short sales are happening and they’re all over the map,” said Melissa Cohn, the president of the Manhattan Mortgage Company. “We’re seeing multimillion-dollar foreclosures and short sales that no one ever anticipated in New York City.”

Jonathan J. Miller, the president of the appraisal firm Miller Samuel and a market analyst, said that 2010 might well be dubbed the Year of the Short Sale nationally. “A short sale is going to be the only way for many people who bought at the peak and who are now underwater to move on with their lives if they have to relocate or downsize,” he said.

Short sales are a gentler alternative to foreclosure for both sellers and lenders. “Compared to a foreclosure, a short sale generally allows an easier transition for the borrower, less impact on their credit history, and larger net proceeds to the loan’s owner,” said Tom Kelly, a spokesman for JPMorgan Chase, adding that Chase encourages borrowers who are unable to keep their homes to consider short sales.

Some advertised short sales seem like bargains, but most are priced just a little under market — low enough to generate interest from buyers, but not too low to raise objections from lenders.

Short sales, however, are not for the faint-hearted. While there is a possibility for a good price, there is also a good chance that the deal will not go through. Many cooks are involved in this stew. The buyer must negotiate the price with both the seller and the seller’s lender. At the same time, the seller must negotiate with the lender on the terms for forgiving the amount still owed on the mortgage. Meanwhile the bank is negotiating fees for lawyers and brokers. The process can take six to nine months.

For Sharay Hayes, who owns a four-story town house on Strivers Row in Harlem, a short sale may be the only way to avoid bankruptcy. Mr. Hayes inherited a share of the house, where he has lived since he was 3, from his grandfather in 2001. Over the years, he took out several mortgages to buy out six relatives and to restore the house’s 19th-century grandeur while renovating it with 21st-century finishes and luxuries like a steam room and a whirlpool tub.

Until late last year, he kept up with payments on the $1.8 million he owes on the house. But his “entire portfolio of income earning was in real estate,” he said, namely rental properties in Ohio. Those investments went south when the auto plant that employed most of his tenants was shuttered about a year ago; he also is on the verge of losing these properties.

“That’s another nightmare I’m trying to wake up from,” Mr. Hayes said.

He has had his Harlem home on and off the market since 2006 for as much as $2.9 million, but with the recession, houses in the immediate area now are selling for closer to $1 million. His current broker, Gordon Sokich, the president of Luxor Homes and Investment Realty, an agency that specializes in distressed property sales, advised him to put it on the market for $850,000.

The low price prompted a bidding war and the house is now in contract for $975,000. Mr. Sokich said he expected the bank to counter with a higher price. “We don’t know what the bank’s bottom line is,” he said. He added that because Mr. Hayes has several liens on the house, the first lien is probably the only one that will be repaid in full.

“Once I conceded that I was going to lose my home,” Mr. Hayes said, “I felt like every day I was in the bedroom with my shades drawn, hoping it would go away.” But the prospect of a short sale “buys me some time.”

Because lenders can always sue after a short sale for what is still owed on a mortgage, sellers are advised to ask their lenders to waive the right to sue. But even with a waiver, lenders will often try to make up some of what is owed, either by seeking a cash payment at the closing or a promissory note. Any amount that is forgiven can be considered income by the Internal Revenue Service.

“The seller generally walks away with nothing,” said John Bradbury, a Manhattan lawyer who has taught seminars on short sales to real estate agents. “but they get out from under a mortgage they can no longer afford.”

Short sales often take months because many mortgages are owned by multiple investors, each of whom must agree to the process. Banks, too, are overwhelmed by foreclosure filings and applications for loan modifications. In addition, banks are not about to broadcast how much of a loss they’re willing to take in a short sale.

“There’s no 1-800 number that you can call to find out what a bank will take,” Mr. Bradbury said. “It’s all done on a case-by-case basis, which is what lends itself to the painfully long process.”

Phil Tesoriero, the owner of Exceptional Homes Real Estate in Farmingdale, N.Y., and the teacher of a certification course on short sales, said he had seen short sales take anywhere from 45 days to 18 months. He has handled scores of short sales in Queens and Long Island, where he estimated there are a few thousand short sale listings.

Finding the right person at a bank to approve a short sale is often the biggest problem. “That person hasn’t been born yet,” Mr. Tesoriero deadpanned. “If I get the same person on the phone twice, it’s a miracle.” The best way to deal with that, he said, “is to present a proposal that doesn’t require much conversation.” And, he added, “that means sending a proposal that makes sense for the bank.”

He urged starting with a list price not too far off the market value, providing good comparables to support the price, and not wasting the bank’s time by presenting hopelessly lowball offers.

Carol Kaplan, a spokeswoman for the American Bankers Association, said that short sales, like foreclosures and mortgage modifications, had been long processes in recent years, “because of the number of them in the pipeline and the amount of paperwork involved.” She said that although banks preferred short sales to foreclosures, “they also want to make sure that there is no other option that would allow the homeowner to repay the loan in full.”

Banks generally will not entertain a short sale until a seller has a signed contract and 10 percent down from a prospective buyer. The Obama administration started a program this spring to encourage more short sales by allowing lenders to preapprove a listing price and setting time limits for the approval process. But many people in Manhattan do not qualify for the program, because it excludes anyone who owes more than $729,750 and whose monthly payment exceeds 31 percent of gross income.

It is only when the offer is in hand that the seller submits an application to the bank. This includes a hardship letter documenting why he or she can no longer pay the mortgage — kind of like a co-op board package in reverse, this time to prove lack of resources.

For buyers, uncertainty is the main thing that sets a short sale apart from a regular sale. Because short sales can take months, a buyer seeking a mortgage may need to seek several extensions on a locked-in rate. Lawyers advise buyers to include a contract clause that allows them to pull out of the deal after a specified time period if the bank drags its heels on a decision.

Bill Dakak exercised that option earlier this year on the potential short sale of a studio in an Upper East Side co-op. He had a signed contract for $210,000 on a renovated apartment that had sold in 2005 for $399,000. His broker, Mark Baum, an agent with Prudential Douglas Elliman, said that the bank obtained and then somehow lost an appraisal and questioned the comparables provided by the seller’s broker. Weeks turned into months.

Mr. Dakak’s contract allowed him to back out after three months, and he did. “You’re asking for a response and you get nothing,” he said. “I needed to move on, and honestly I walked away from it feeling like the bank wasn’t interested in selling.”

Mr. Dakak, who works in finance in Miami and was looking for a pied-Ă -terre, wound up spending $160,000 in the same building, on a studio in need of updating.

Short sales tend to attract “somewhat sophisticated buyers,” said Mary Vetri, a senior vice president of Brown Harris Stevens who helped complete a short sale on a one-bedroom condo in a Midtown high-rise in December. She represented the seller, who had bought the place in 2007 for about $850,000, but then lost his job and tried selling it at $899,000. After a year at that price, it was dropped to $739,000.

It sold for $690,000, when similar apartments in the building were listed for about $20,000 more. The buyer, Ms. Vetri said, “didn’t need to move right away and he was educated on short sales and involved enough so that we were all focused on getting it accomplished.” The sale closed six months after going to contract.

Even when all the paperwork is submitted and various parties work hard to keep a short sale moving, a deal can still unwind after months of waiting.

When former clients came to Robin Lyon-Gardiner, a vice president of Brown Harris Stevens, saying they could no longer afford their two-bedroom condo with an office and a garden on the Upper West Side, she knew it would have to be a short sale. The couple owed close to $1.2 million on the place, but a similar apartment in the building had sold in a short sale for $940,000.

Ms. Lyon-Gardiner priced it at $975,000 last August, setting off two bidding wars. The first ended in a contract for $999,000, but that buyer “got cold feet and walked away,” she said. The second contract with different buyers was for $1.1 million.

The broker for the buyers, Carla de Leon, an agent at Halstead Property, had taken a class on short sales. She warned her clients that the process could drag on for months. “I also told them they had to be realistic,” she said, “because I had learned that there was only a 60 to 70 percent chance that the deal would even get done.” But her clients were game.

For months, the two brokers were in constant contact with each other, the owner’s lawyer and the bank. “I never got through to anyone who could tell me anything,” Ms. de Leon said, “but I felt it was important to keep trying. Because maybe I might get the one person who would feel sorry for me and try to move it along.”

At one point, the bank lost the file and the seller had to resubmit the application. Then, about six months after the contract was signed, the bank finally made a decision.

“After all that — it was so much heartache and so much time — they declined it,” Ms. Lyon-Gardiner said. “I never had a listing that so many people wanted and nobody ended up getting.”

Ms. de Leon said her buyers, whose deposit was returned, were stunned. “They didn’t understand how the bank could sit on it for so long or why the bank wouldn’t want the most they could get for the property,” she said.

At last word, the owners planned to declare bankruptcy.

Copyright 2010 The New York Times Company. All rights reserved.

Monday, July 19, 2010

Chapter 13 Plan contributions

In our continuing series of posts regarding Chapter 13 bankruptcy, this month's topic discusses how much money a debtor must contribute to their Chapter 13 bankruptcy Plan. More specifically, what Plan contribution is required for a debtor whose income is over the median income (in New York State, the median income is currently $46,320 for a family of one, $57,902 for a family of two, $69,174 for a family of three, and $82,164 for a family of four (add $7,500 for each additional individual in excess of four)?

Prior to 2005, a Chapter 13 debtor was required to contribute their disposable income to fund a Chapter 13 plan. The disposable income number was based on the debtor's actual expenses on Schedules I (income) and J (expenses). However, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress added complexity by modifying and further detailing the definition of "disposable income" (in Section 1325(b)(2) of the Bankruptcy Code) and by requiring that debtors who exceed the median household income for their state contribute their "projected disposable income" to fund a Chapter 13 Plan.

Although "disposable income" is a defined term, both Bankruptcy Courts and bankruptcy attorneys have struggled with the definition of "projected disposable income." Recently, both the Supreme Court (in Hamilton v. Lanning, 560 U.S. ___, 130 S. Ct. 487 (2010)) and the Bankruptcy Court for the Eastern District of New York (in In re Almonte, 397 B.R. 659 (2008) and In re Mendelson, 412 B.R. 75 (2009), both decided by Bankruptcy Judge Grossman) have addressed this issue.

A common element in all three cases is that in the six months prior to the debtor's bankruptcy filing (which is the lookback period for "current monthly income," the starting point for determining "disposable income") they had non-recurring extraordinary incomesuch as severance pay for being terminated from a job and gifts or loans from friends or family. In these cases, the Chapter 13 Trustees said that based on their interpretation of the meaning of "projected disposable income," the debtor would have to fund a chapter 13 plan strictly based on their Chapter 13 Form 22C "means test" results. Counsel for the Chapter 13 debtors uniformly argued that the means test (in these cases) included sources of income that were extraordinary and not recurring, and this form should not be the sole basis for calculating Plan payments for the Chapter 13 debtor (which could be 36-60 months of future payments).

Judge Grossman in In re Almonte and In re Mendelson and the Supreme Court in Hamilton v. Lanning ruled for the Chapter 13 debtors, and indicated that the chapter 13 monthly payments should not include these extraordinary and non-recurring sources of income. Rather, they should use a "crystal ball" approach and look at the expected future monthly income of the debtor over the applicable commitment period of the proposed Plan.

Any individuals with questions about Chapter 13 bankruptcy should contact Jim Shenwick.

Monday, June 21, 2010

NYT: Peddling Relief, Firms Put Debtors in Deeper Hole


PALM BEACH, Fla. — For the companies that promise relief to Americans confronting swelling credit card balances, these are days of lucrative opportunity.

So lucrative, that an industry trade association, the United States Organizations for Bankruptcy Alternatives, recently convened here, in the oceanfront confines of the Four Seasons Resort, to forge deals and plot strategy.

At a well-lubricated evening reception, a steel drum band played Bob Marley songs as hostesses in skimpy dresses draped leis around the necks of arriving entrepreneurs, some with deep tans.

The debt settlement industry can afford some extravagance. The long recession has delivered an abundance of customers — debt-saturated Americans, suffering lost jobs and income, sliding toward bankruptcy. The settlement companies typically harvest fees reaching 15 to 20 percent of the credit card balances carried by their customers, and they tend to collect upfront, regardless of whether a customer’s debt is actually reduced.

State attorneys general from New York to California and consumer watchdogs like the Better Business Bureau say the industry’s proceeds come at the direct expense of financially troubled Americans who are being fleeced of their last dollars with dubious promises.

Consumers rarely emerge from debt settlement programs with their credit card balances eliminated, these critics say, and many wind up worse off, with severely damaged credit, ceaseless threats from collection agents and lawsuits from creditors.

In the Kansas City area, Linda Robertson, 58, rues the day she bought the pitch from a debt settlement company advertising on the radio, promising to spare her from bankruptcy and eliminate her debts. She wound up sending nearly $4,000 into a special account established under the company’s guidance before a credit card company sued her, prompting her to drop out of the program.

By then, her account had only $1,470 remaining: The debt settlement company had collected the rest in fees. She is now filing for bankruptcy.

“They take advantage of vulnerable people,” she said. “When you’re desperate and you’re trying to get out of debt, they take advantage of you.” Debt settlement has swollen to some 2,000 firms, from a niche of perhaps a dozen companies a decade ago, according to trade associations and the Federal Trade Commission, which is completing new rules aimed at curbing abuses within the industry.

Last year, within the industry’s two leading trade associations — the United States Organizations for Bankruptcy Alternatives and the Association of Settlement Companies — some 250 companies collectively had more than 425,000 customers, who had enrolled roughly $11.7 billion in credit card balances in their programs.

As the industry has grown, so have allegations of unfair practices. Since 2004, at least 21 states have brought at least 128 enforcement actions against debt relief companies, according to the National Association of Attorneys General. Consumer complaints received by states more than doubled between 2007 and 2009, according to comments filed with the Federal Trade Commission.

“The industry’s not legitimate,” said Norman Googel, assistant attorney general in West Virginia, which has prosecuted debt settlement companies. “They’re targeting a group of people who are already drowning in debt. We’re talking about middle-class and lower middle-class people who had incomes, but they were using credit cards to survive.”

The industry counters that a few rogue operators have unfairly tarnished the reputations of well-intentioned debt settlement companies that provide a crucial service: liberating Americans from impossible credit card burdens.

With the unemployment rate near double digits and 6.7 million people out of work for six months or longer, many have relied on credit cards. By the middle of last year, 6.5 percent of all accounts were at least 30 days past due, up from less than 4 percent in 2005, according to Moody’s

Yet a 2005 alteration spurred by the financial industry made it harder for Americans to discharge credit card debts through bankruptcy, generating demand for alternatives like debt settlement.

The Arrangement

The industry casts itself as a victim of a smear campaign orchestrated by the giant banks that dominate the credit card trade and aim to hang on to the spoils: interest rates of 20 percent or more and exorbitant late fees.

“We’re the little guys in this,” said John Ansbach, the chief lobbyist for the United States Organizations for Bankruptcy Alternatives, better known as Usoba (pronounced you-SO-buh). “We exist to advocate for consumers. Two and a half billion dollars of unsecured debt has been settled by this industry, so how can you take the position that it has no value?”

But consumer watchdogs and state authorities argue that debt settlement companies generally fail to deliver.

In the typical arrangement, the companies direct consumers to set up special accounts and stock them with monthly deposits while skipping their credit card payments. Once balances reach sufficient size, negotiators strike lump-sum settlements with credit card companies that can cut debts in half. The programs generally last two to three years.

“What they don’t tell their customers is when you stop sending the money, creditors get angry,” said Andrew G. Pizor, a staff lawyer at the National Consumer Law Center. “Collection agents call. Sometimes they sue. People think they’re settling their problems and getting some relief, and lo and behold they get slammed with a lawsuit.”

In the case of two debt settlement companies sued last year by New York State, the attorney general alleged that no more than 1 percent of customers gained the services promised by marketers. A Colorado investigation came to a similar conclusion.

The industry’s own figures show that clients typically fail to secure relief. In a survey of its members, the Association of Settlement Companies found that three years after enrolling, only 34 percent of customers had either completed programs or were still saving for settlements.

“The industry is designed almost as a Ponzi scheme,” said Scott Johnson, chief executive of US Debt Resolve, a debt settlement company based in Dallas, which he portrays as a rare island of integrity in a sea of shady competitors. “Consumers come into these programs and pay thousands of dollars and then nothing happens. What they constantly have to have is more consumers coming into the program to come up with the money for more marketing.”

The Pitch

Linda Robertson knew nothing about the industry she was about to encounter when she picked up the phone at her Missouri home in February 2009 in response to a radio ad.

What she knew was that she could no longer manage even the monthly payments on her roughly $23,000 in credit card debt.

So much had come apart so quickly.

Before the recession, Ms. Robertson had been living in Phoenix, earning as much as $8,000 a month as a real estate appraiser. In 2005, she paid $185,000 for a three-bedroom house with a swimming pool and a yard dotted with hibiscus.

When the real estate business collapsed, she gave up her house to foreclosure and moved in with her son. She got a job as a waitress, earning enough to hang on to her car. She tapped credit cards to pay for gasoline and groceries.

By late 2007, she and her son could no longer afford his apartment. She moved home to Kansas City, where an aunt offered a room. She took a job on the night shift at a factory that makes plastic lids for packaged potato chips, earning $11.15 an hour.

Still, her credit card balances swelled.

The radio ad offered the services of a company based in Dallas with a soothing name: Financial Freedom of America. It cast itself as an antidote to the breakdown of middle-class life.

“We negotiate the past while you navigate the future,” read a caption on its Web site, next to a photo of a young woman nose-kissing an adorable boy. “The American Dream. It was never about bailouts or foreclosures. It was always about American values like hard work, ingenuity and looking out for your neighbor.”

When Ms. Robertson called, a customer service representative laid out a plan. Every month, Ms. Robertson would send $427.93 into a new account. Three years later, she would be debt-free. The representative told her the company would take $100 a month as an administrative fee, she recalled. His tone was take-charge.

“You talk about a rush-through,” Ms. Robertson said. “I didn’t even get to read the contract. It was all done. I had to sign it on the computer while he was on the phone. Then he called me back in 10 minutes to say it was done. He made me feel like this was the answer to my problems and I wasn’t going to have to face bankruptcy.”

Ms. Robertson made nine payments, according to Financial Freedom. Late last year, a sheriff’s deputy arrived at her door with court papers: One of her creditors, Capital One, had filed suit to collect roughly $5,000.

Panicked, she called Financial Freedom to seek guidance. “They said, ‘Oh, we don’t have any control over that, and you don’t have enough money in your account for us to settle with them,’ ” she recalled.

Her account held only $1,470, the representative explained, though she had by then deposited more than $3,700. Financial Freedom had taken the rest for its administrative fees, the company confirmed.

Financial Freedom later negotiated for her to make $100 monthly payments toward satisfying her debt to the creditor, but Ms. Robertson rejected that arrangement, no longer trusting the company. She demanded her money back.

She also filed a report with the Better Business Bureau in Dallas, adding to a stack of more than 100 consumer complaints lodged against the company. The bureau gives the company a failing grade of F.

Ms. Robertson received $1,470 back through the closure of her account, and then $1,120 — half the fees that Financial Freedom collected. Her pending bankruptcy has cost her $1,500 in legal fees.

“I trusted them,” she said. “They sounded like they were going to help me out. It’s a rip-off.”

Financial Freedom’s chief executive, Corey Butcher, rejected that characterization.

“We talked to her multiple times and verified the full details,” he said, adding that his company puts every client through a verification process to validate that they understand the risks — from lawsuits to garnished wages.

Intense and brooding, Mr. Butcher speaks of a personal mission to extricate consumers from credit card debt. But roughly half his customers fail to complete the program, he complained, with most of the cancellations coming within the first six months. He pinned the low completion rate on the same lack of discipline that has fostered many American ailments, from obesity to the foreclosure crisis.

“It comes from a lack of commitment,” Mr. Butcher said. “It’s like going and hiring a personal trainer at a health club. Some people act like they have lost the weight already, when actually they have to go to the gym three days a week, use the treadmill, cut back on their eating. They have to stick with it. At some point, the client has to take responsibility for their circumstance.”

Consumer watchdogs point to another reason customers wind up confused and upset: bogus marketing promises.

In April, the United States Government Accountability Office released a report drawing on undercover agents who posed as prospective customers at 20 debt settlement companies. According to the report, 17 of the 20 firms advised clients to stop paying their credit card bills. Some companies marketed their programs as if they had the imprimatur of the federal government, with one advertising itself as a “national debt relief stimulus plan.” Several claimed that 85 to 100 percent of their customers completed their programs.

“The vast majority of companies provided fraudulent and deceptive information,” said Gregory D. Kutz, managing director of forensic audits and special investigations at the G.A.O. in testimony before the Senate Commerce Committee during an April hearing.

At the same hearing, Senator Claire McCaskill, a Missouri Democrat, pressed Mr. Ansbach, the Usoba lobbyist, to explain why his organization refused to disclose its membership.

“The leadership in our trade group candidly was concerned that publishing a list of members ended up being a subpoena list,” Mr. Ansbach said.

“Probably a genuine concern,” Senator McCaskill replied.

The Coming Crackdown

On multiple fronts, state and federal authorities are now taking aim at the industry.

The Federal Trade Commission has proposed banning upfront fees, bringing vociferous lobbying from industry groups. The commission is expected to issue new rules this summer. Senator McCaskill has joined with fellow Democrat Charles E. Schumer of New York to sponsor a bill that would cap fees charged by debt settlement companies at 5 percent of the savings recouped by their customers. Legislation in several states, including New York, California and Illinois, would also cap fees. A new consumer protection agency created as part of the financial regulatory reform bill in Congress could further constrain the industry.

The prospect of regulation hung palpably over the trade show at this Atlantic-side resort, tempering the orchid-adorned buffet tables and poolside cocktails with a note of foreboding.

“The current debt settlement business model is going to die,” declared Jeffrey S. Tenenbaum, a lawyer in the Washington firm Venable, addressing a packed ballroom. “The only question is who the executioner is going to be.”

That warning did not dislodge the spirit of expansion. Exhibitors paid as much as $4,500 for display space to showcase their wares — software to manage accounts, marketing expertise, call centers — to attendees who came for two days of strategy sessions and networking.

Cody Krebs, a senior account executive from Southern California, manned a booth for, whose Internet ads link customers to debt settlement companies. Like many who have entered the industry, he previously sold subprime mortgages. When that business collapsed, he found refuge selling new products to the same set of customers — people with poor credit.

“It’s been tremendous,” he said. “Business has tripled in the last year and a half.”

The threat of regulations makes securing new customers imperative now, before new rules can take effect, said Matthew G. Hearn, whose firm, Mstars of Minneapolis, trains debt settlement sales staffs. “Do what you have to do to get the deals on the board,” he said, pacing excitedly in front of a podium.

And if some debt settlement companies have gained an unsavory reputation, he added, make that a marketing opportunity.

“We aren’t like them,” Mr. Hearn said. “You need to constantly pitch that. ‘We aren’t bad actors. It’s the ones out there that are.’ ”

Copyright 2010 The New York Times Company. All rights reserved.