Monday, June 19, 2017

New York Times: The Car Was Repossessed, but the Debt Remains

By Jessica Silver-Greenberg and Michael Corkery

More than a decade after Yvette Harris’s 1997 Mitsubishi was repossessed, she is still
paying off her car loan.

She has no choice. Her auto lender took her to court and won the right to seize a
portion of her income to cover her debt. The lender has so far been able to garnish
$4,133 from her paychecks — a drain that at one point forced Ms. Harris, a single
mother who lives in the Bronx, to go on public assistance to support her two sons.

“How am I still paying for a car I don’t have?” she asked.

For millions of Americans like Ms. Harris who have shaky credit and had to turn
to subprime auto loans with high interest rates and hefty fees to buy a car, there is no
getting out.

Many of these auto loans, it turns out, have a habit of haunting people long after
their cars have been repossessed.

The reason: Unable to recover the balance of the loans by repossessing and
reselling the cars, some subprime lenders are aggressively suing borrowers to collect
what remains — even 13 years later.

Ms. Harris’s predicament goes a long way toward explaining how lenders,
working hand in hand with auto dealers, have made billions of dollars extending
high-interest loans to Americans on the financial margins.

These are people desperate enough to take on thousands of dollars of debt at
interest rates as high as 24 percent for one simple reason: Without a car, they have
no way to get to work or to doctors.

With their low credit scores, buying or leasing a new car is not an option. And
when all the interest and fees of a subprime loan are added up, even a used car with
mechanical defects and many miles on the odometer can end up costing more than a
new car.

Subprime lenders are willing to take a chance on these risky borrowers because
when they default, the lenders can repossess their cars and persuade judges in 46
states to give them the power to seize borrowers’ paychecks to cover the balance of
the car loan.

Now, with defaults rising, federal banking regulators and economists are
worried how the strain of these loans will spill over into the broader economy.

For low-income Americans, the fallout could, in some ways, be worse than the
mortgage crisis.

With mortgages, people could turn in the keys to their house and walk away. But
with auto debt, there is increasingly no exit. Repossession, rather than being the end,
is just the beginning.

“Low-income earners are shackled to this debt,” said Shanna Tallarico, a
consumer lawyer with the New York Legal Assistance Group.

There are no national tallies of how many borrowers face the collection lawsuits,
known within the industry as deficiency cases. But state records show that the courts
are becoming flooded with such lawsuits.

For example, the large subprime lender Credit Acceptance has filed more than
17,000 lawsuits against borrowers in New York alone since 2010, court records
show. And debt buyers — companies that scoop up huge numbers of soured loans for
pennies on the dollar — bring their own cases, breathing new life into old bills.

Portfolio Recovery Associates, one of the nation’s largest debt buyers, purchased
about $30.2 million of auto deficiencies in the first quarter of this year, up from
$411,000 just a year earlier.

One of the people Credit Acceptance sued is Nagham Jawad, a refugee from
Iraq, who moved to Syracuse after her father was killed. Soon after settling into her
new home in 2009, Ms. Jawad took out a loan for $5,900 and bought a used car.

After only a few months on the road, the transmission on the 10-year-old Chevy
Tahoe gave out. The vehicle was in such bad shape that her lender didn’t bother to
repossess it when Ms. Jawad, 39, fell behind on payments.

“These are garbage cars sold at outrageous interest rates,” said her lawyer, Gary
J. Pieples, director of the consumer law clinic at the Syracuse University College of
Law.

The value of any car typically starts to decline the moment it leaves the dealer’s
lot. In the subprime market, however, the value of the cars is often beside the point.

A dealership in Queens refused to cancel Theresa Robinson’s loan of nearly
$8,000 and give her a refund for a car that broke down days after she drove it off the
lot.

Instead, Ms. Robinson, a Staten Island resident who is physically disabled and
was desperate for a car to get to her doctors’ appointments, was told to pick a
different car from the lot.

The second car she selected — a 2005 Chrysler Pacifica — eventually broke
down as well. Unable to afford the loan payments after sinking thousands of dollars
into repairs, Ms. Robinson defaulted.

Her subprime lender took her to court and won the right to garnish her income
from babysitting her grandson to cover her loan payments.

Ms. Robinson and her lawyer, Ms. Tallarico, are now fighting to get the
judgment overturned.

“Essentially, the dealers are not selling cars. They are selling bad loans,” said

Adam Taub, a lawyer in Detroit who has defended consumers in hundreds of these
cases.

Many lawyers assisting poor borrowers like Ms. Robinson say they learn about
the lawsuits only after a judge has issued a decision in favor of the lender.

Most borrowers can’t afford lawyers and don’t show up to court to challenge the
lawsuits. That means the collectors win many cases, transforming the debts into
judgments they can use to garnish wages.

The lenders argue that they are just recouping through the courts what they are
legally owed. They also argue that subprime auto lending meets an important need.

And collecting on the debt is a critical part of the business. The first item on the
quarterly earnings of Credit Acceptance, the large subprime auto lender, is not the
amount of loans it makes, but what it expects to collect on the debt.

The company, for example, expects a 72 percent collection rate on loans made in
2014 — the year that a used 2009 Volkswagen Tiguan was repossessed from Nina
Lysloff of Ypsilanti, Mich.

With all the interest and fees on her Credit Acceptance loan factored in, the car
ended up costing her $28,383. Ms. Lysloff could have bought a brand-new
Volkswagen Tiguan for $22,149, according to Kelley Blue Book.

When Ms. Lysloff fell behind, the trade-in value on the car was a fraction of
what she still owed. Last year, Credit Acceptance sued her for $15,755.

The strategy at Credit Acceptance, which has a market value of $4.4 billion, is
yielding big profits. The Michigan company said its return on equity, a measure of
profitability, was 31 percent last year — more than four times Bank of America’s
return.

Credit Acceptance did not respond to requests for comment.

Some of the people who got subprime loans lacked enough income to qualify for
any loan.

U.S. Bank is pursuing Tara Pearson for the $9,339 left after her 2011 Hyundai
Accent was stolen and she could not pay the fee to get it from the impound lot. When
she purchased the car in 2015 at a dealership in Winchester, Ky., Ms. Pearson said,
she explained that her only income was about $722 from Social Security.

Her loan application listed things differently. Her employer was identified as
“S.S.I.,” and her income was put at $2,750, court records show.

Citing continuing litigation, U.S. Bank declined to comment about Ms. Pearson.

Auto lending was one of the few types of credit that did not dry up during the
financial crisis. It now stands at more than $1.1 trillion.

Despite many signs that the market is overheating, securities tied to the loans
are so profitable — yielding twice as much as certain Treasury securities — that they
remain a sought-after investment on Wall Street.

“The dog keeps eating until its stomach explodes,” said Daniel Zwirn, who runs
Arena, a hedge fund that has avoided subprime auto investments.

Some lenders are pulling back from making new loans. Subprime auto lending
reached a 10-year low in the first quarter. But for those borrowers already stuck with
debt, there is no end in sight.

Ms. Harris, the single mother from the Bronx, said that even after her wages had
been garnished and she paid an additional $2,743 on her own, her lender was still
seeking to collect about $6,500.

“It’s been a nightmare,” she said.

Copyright 2017 The New York Times Company.  All rights reserved.

Thursday, June 15, 2017

New York Times: Wells Fargo Is Accused of Making Improper Changes to Mortgages

By Gretchen Morgenson

Even as Wells Fargo was reeling from a major scandal in its consumer bank last year,
officials in the company’s mortgage business were putting through unauthorized
changes to home loans held by customers in bankruptcy, a new class action and
other lawsuits contend.

The changes, which surprised the customers, typically lowered their monthly
loan payments, which would seem to benefit borrowers, particularly those in
bankruptcy. But deep in the details was this fact: Wells Fargo’s changes would
extend the terms of borrowers’ loans by decades, meaning they would have monthly
payments for far longer and would ultimately owe the bank much more.

Any change to a payment plan for a person in bankruptcy is subject to approval
by the court and the other parties involved. But Wells Fargo put through big changes
to the home loans without such approval, according to the lawsuits.

The changes are part of a trial loan modification process from Wells Fargo. But
they put borrowers in bankruptcy at risk of defaulting on the commitments they
have made to the courts, and could make them vulnerable to foreclosure in the
future.

A spokesman for Wells Fargo, Tom Goyda, said the bank strongly denied the claims
made in the lawsuits and particularly disputed how the complaints characterized the
bank’s actions. Wells Fargo contends that the borrowers and the bankruptcy courts
were notified.

“Modifications help customers stay in their homes when they encounter
financial challenges,” Mr. Goyda said, “and we have used them to help more than
one million families since the beginning of 2009.”

According to court documents, Wells Fargo has been putting through
unrequested changes to borrowers’ loans since 2015. During this period, the bank
was under attack for its practice of opening unwanted bank and credit card accounts
for customers to meet sales quotas.

Outrage over that activity — which the bank admitted in September 2016, when
it was fined $185 million — cost John G. Stumpf, its former chief executive, his job
and damaged the bank’s reputation.

It is unclear how many unsolicited loan changes Wells Fargo has put through
nationwide, but seven cases describing the conduct have recently arisen in
Louisiana, New Jersey, North Carolina, Pennsylvania and Texas. In the North
Carolina court, Wells Fargo produced records showing it had submitted changes on
at least 25 borrowers’ loans since 2015.

Bankruptcy judges in North Carolina and Pennsylvania have admonished the
bank over the practice, according to the class-action lawsuit filed last week. One
judge called the practice “beyond the pale of due process.”

The lawsuits contend that Wells Fargo puts through changes on borrowers’
loans using a routine form that typically records new real estate taxes or
homeowners’ insurance costs that are folded into monthly mortgage payments.
Upon receiving these forms, bankruptcy court workers usually put the changes into
effect without questioning them.

It is unclear why the bank would put through such changes. On one hand, Wells
Fargo stood to profit from the new loan terms it set forth, and, under programs
designed to encourage loan modifications for troubled borrowers, the bank receives
as much as $1,600 from government programs for every such loan it adjusts, the
class-action lawsuit said. But submitting the changes without approval violates
bankruptcy rules and puts the bank at risk of court sanctions and federal scrutiny.

When a lawyer for a borrower has questioned the changes, Wells Fargo has reversed
them.

Abelardo Limon Jr., a lawyer in Brownsville, Tex., who represents some of the
plaintiffs, said he first thought Wells Fargo had made a clerical error. Then he saw
another case.

“When I realized it was a pattern of filing false documents with the federal court,
that was appalling to me,” Mr. Limon said in an interview. The unauthorized loan
modifications “really cause havoc to a debtor’s reorganization,” he said.

This is not the first time Wells Fargo has been accused of wrongdoing related to
payment change notices on mortgages it filed with the bankruptcy courts. Under a
settlement with the Justice Department in November 2015, the bank agreed to pay
$81.6 million to borrowers in bankruptcy whom it had failed to notify on time when
their monthly payments shifted to reflect different real estate taxes or insurance
costs.

That settlement — in which the bank also agreed to change its internal
procedures to prevent future violations — affected 68,000 homeowners.

Borrowers having financial difficulties often file for personal bankruptcy to save
their homes, working out payment plans with creditors and the courts to bring their
loans current in a set period. If the borrowers meet their obligations over that time,
they emerge from bankruptcy with clean slates and their homes intact.
Changing these payment plans without the approval of the judge and other
parties can imperil borrowers’ standing with the bankruptcy courts.

In the class-action lawsuit filed last week, the lead plaintiffs are a couple in
North Carolina who say that Wells Fargo submitted three changes to their payment
plan in 2016 without approval. The first time, Wells Fargo put through the changes
without alerting them, according to the couple, Christopher Dee Cotton and Allison
Hedrick Cotton.

The Cottons’ monthly payments declined with every change, dropping to $1,251
from $1,404.

Buried deep in the documents Wells Fargo filed — but did not get approved by
the borrowers, their lawyers or the court — was the news that the bank would extend
the Cottons’ loan to 40 years, increasing the amount of interest they would have to
pay. Before the changes, the Cottons owed roughly $145,000 on their mortgage and
were on schedule to pay off the loan in 14 years. Over that period, their interest
would total $55,593.

Under the new loan terms, the Cottons would have incurred $85,000 in interest
costs over the additional 26 years, on top of the $55,593 they would have paid under
the existing loan, their court filing shows.

Theodore O. Bartholow III, a lawyer for the Cottons, said Wells Fargo’s actions
contravened the intent of the bankruptcy system. “When it goes the right way, the
debtor and mortgage company agree to do a modification, go to court and say, ‘Hey
judge, modify or change the disbursement on my mortgage.’”

Instead, Wells Fargo did “a total end run” around the process, said Mr.
Bartholow, of Kellett & Bartholow in Dallas. The Cottons declined to comment.

Mr. Goyda, the Wells Fargo spokesman, denied that the bank had not notified
borrowers. “The terms of these modification offers were clearly outlined in letters
sent to the customers and/or to their attorneys, and as part of the Payment Change
Notices sent to the bankruptcy courts,” he wrote by email.

Mr. Goyda said that “such notices are not part of the loan modification package,
or part of the documentation required for the customer to accept or decline
modification offers.” He added, “We do not finalize a modification without receiving
signed documents from the customer and, where required, approval from the
bankruptcy court.”

Mr. Limon and other lawyers say that while the bank may wait for approval to
complete a modification, it has nevertheless put through unapproved changes to
borrowers’ payment plans. According to a complaint he filed on behalf of clients in
Texas, instead of going through the proper channels to try to modify a loan, Wells
Fargo filed the routine payment change notification.

The clients also accuse the bank of making false claims by contending that the
borrowers had requested or approved the loan modifications. In many cases, the
trustees who handle payments on behalf of consumers in bankruptcy would accept
the changes Wells Fargo had submitted on the assumption they had been properly
approved.

Mr. Limon represents Ignacio and Gabriela Perez of Brownsville, who say Wells
Fargo put through an improper change to their payment plan last year.

After experiencing financial difficulties, Mr. and Mrs. Perez filed for Chapter 13
bankruptcy protection in August 2016. They owed about $54,000 on their home at
the time, and had fallen behind on the mortgage by $2,177. The value of their home
was $95,317, records show, so they had substantial equity.

In September, the Perezes filed a payment plan with the bankruptcy court in
Brownsville; the trustee overseeing the process ordered a confirmation hearing on
the plan for early November.

But in a letter to the Perezes dated Oct. 10, Wells Fargo said their loan was
“seriously delinquent” and offered them a trial loan modification. “Time is of the
essence,” the letter stated. “Act now to avoid foreclosure.”

Because they were going through bankruptcy, the Perezes were not under any
threat of foreclosure. Mr. Perez said in an interview that the letter worried him, so he
asked his lawyer to investigate.

Then, on Oct. 28, 2016, DeMarcus Jones, identified in court papers as “VP Loan
Documentation” at Wells Fargo, filed a notice of mortgage payment change with the
bankruptcy court. It said the Perezes’ new monthly payment would be $663.15, down
from $1,019.03. In the notice, the bank explained that the reduction was a “Payment
change resulting from an approved trial modification agreement.”

The changes had not been approved by the Perezes, their lawyer or the
bankruptcy court, their complaint said.

Although the monthly payment Wells Fargo had listed for the Perezes was
lower, there was a catch — the same one that showed up in the Cottons’ loan. The
Perezes had been scheduled to pay off their mortgage in nine years, but the loan
terms from Wells Fargo extended it to 40 years. The Perezes would owe the bank an
extra $40,000 in interest, the legal filing said.

“I thought that I was totally crazy, or they were totally crazy,” Mr. Perez said. “I
am 58, in what mind could they think I would agree to extend my mortgage 40 years
more? I don’t understand much maybe, but it doesn’t sound legal to me.”
Mr. Limon quickly fought the changes.

If he had not, Mr. and Mrs. Perez could have faced further complications. The
new Wells Fargo payments were so much less than the payments the Perezes had
submitted to the bankruptcy court that if the trustee had started making the new
payments with no court approval, the Perezes would have emerged at the end of
their bankruptcy plan owing the difference between the amounts. The Perezes would
be unwittingly in arrears, and the bank could begin foreclosure proceedings if they
were unable to make up the difference.

© 2017 The New York Times Company.  All rights reserved.

Wednesday, May 17, 2017

WSJ: U.S. Household Debts Hit Record High in First Quarter

By Ben Leubsdorf

The total debt held by American households reached a record high in early 2017, exceeding its 2008 peak after years of retrenchment in the face of financial crisis, recession and modest economic growth.

The milestone, announced Wednesday by the Federal Reserve Bank of New York, was a long time coming.

Americans reduced their debts during and after the 2007-09 recession to an unusual extent: a 12% decline from the peak in the third quarter of 2008 to the trough in the second quarter of 2013. New York Fed researchers, looking at data back to the end of World War II, described the drop as “an aberration from what had been a 63-year upward trend reflecting the depth, duration and aftermath of the Great Recession.”

In the first quarter, total debt was up 14.1% from that low point as steady job gains, falling unemployment and continued economic growth boosted households’ income and willingness to borrow. The New York Fed report said total household debt rose by $149 billion in the first three months of 2017 compared with the prior quarter, or 1.2%, to a total of $12.725 trillion.

“Almost nine years later, household debt has finally exceeded its 2008 peak, but the debt and its borrowers look quite different today,” New York Fed economist Donghoon Lee said. He added, “This record debt level is neither a reason to celebrate nor a cause for alarm.”

The pace of new lending slowed from the strong fourth quarter. Mortgage balances rose 1.7% last quarter from the final three months of 2016, while home-equity lines of credit were down 3.6% in the first quarter. Automotive loans rose 0.9% and student loans climbed 2.6%. Credit-card debt fell 1.9%, and other types of debt were down 2.7% from the fourth quarter.

Americans' debt has returned to levels last seen before the recession in nominal terms, but the makeup of that debt has changed significantly. Change in total debt balance, by type, since its previous peak in 2008: The data weren’t adjusted for inflation, and household debt remains below past levels in relation to the size of the overall U.S. economy.

In the first quarter, total debt was 66.9% of nominal gross domestic product versus 85.4% of GDP in the third quarter of 2008. Balance sheets look different now, with less housing-related debt and more student and auto loans. As of the first quarter, 67.8% of total household debt was in the form of mortgages; in the third quarter of 2008, mortgages were 73.3% of total debt. Student loans rose from 4.8% to 10.6% of total indebtedness, and auto loans went from 6.4% to 9.2%.

Mortgages continue to account for the majority of overall U.S. household debt, though student and auto loans represent a growing share of the total.  Mortgage lending to subprime borrowers has dwindled since the housing crisis in favor of loans to consumers considered more likely to repay. In the first quarter, borrowers with credit scores under 620 accounted for 3.6% of mortgage originations, compared with 15.2% a decade earlier. Borrowers with credit scores of 760 or higher were 60.9% of originations last quarter, versus 23.9% in the first quarter of 2007. Auto loans have remained relatively available to subprime borrowers, helping fuel the record vehicle sales of recent years as interest rates have been low. Some 19.6% of auto-loan originations last quarter went to borrowers with credit scores below 620, down from 29.6% a decade earlier. The median credit score for auto-loan originations in the first quarter was 706, compared with 764 for mortgage originations.

The share of debt considered seriously delinquent — at least 90 days late — is down from recession-era levels, but varies widely by type of loan. Some 4.8% of outstanding debt was delinquent at the end of the first quarter, little changed from late 2016, with 3.4% at least 90 days late, known as seriously delinquent. Seriously delinquent rates have climbed recently for credit-card debt, 7.5% in the first quarter, and auto loans, 3.8% last quarter, and remained high—11% last quarter— for student loans, according to Wednesday’s report.

Copyright 2017 Dow Jones & Company, Inc.  All rights reserved.

Tuesday, May 09, 2017

Taxi medallion litigation updated

In our continuing posts about issues related to the decrease in the value of taxi medallions in New York City, this month we are covering two lawsuits regarding the dramatic drop in taxi medallion values. The first lawsuit involves two taxi medallion owners who have filed lawsuits against the New York City and the Taxi and Limousine Commission (“TLC”). This lawsuit was reported in the New York Daily News on May 3, 2017. The plaintiffs, driver Marcelino Hervias and medallion owner William Guerra argue that: (1) the apps for hailing cars and burdensome rules have made taxi medallions practically worthless and have created unfair competition; (2) New York City and the TLC are bound by a rule to create standards ensuring medallion owners remain financially stable; (3) New York City allows the apps to dominate the streets and provide rides similar to taxis, but with none of the financial and legal burdens that medallion owners and drivers face; and (4) the driver has to work harder and longer to cover his monthly medallion loan payments and expenses. Mr. Hervias estimates that his business is down 30% and that he must work extra shift hours each day to make up the difference. Mr. Hervias also states that there is no market for medallions because financial institutions will not lend money to buy a medallion. The attorney for the plaintiffs indicated that this is the first suit of its kind as it pertains to the taxi industry. The article states that Mayor de Blasio and the City’s Corporation Counsel (the entity that defends the City against lawsuits) did not return requests by the Daily News reporter for comments.

The second case involves New York City credit unions that manage more than 2 billion dollars in taxi medallion loans are appealing a court ruling that rejected their argument that the TLC treatment of medallions violates the equal protection clause under the United States Constitution. (information about this lawsuit can be found in a May 4, 2017 post on cutimes.com). The credit unions’ legal argument was that medallion owners are required to comply with state regulations, while Uber, Lyft, Gett and other ridesharing services operate without being required to comply with the same regulations. The credit unions argue that such disparate treatment violates the equal protection clause of the 14th Amendment of the U.S. Constitution. However, on March 30, 2017, United States District Court Judge Alison J. Nathan ruled that there was no disparate treatment because a mobile app is not the same as hailing a medallion on the street. The judge wrote that “[q]uite simply, medallion taxicabs are not similarly situated to hire vehicles because medallion taxicabs… have . . . a monopoly over one particular form of hailing.” The ruling also notes that several courts around the country considering similar Equal Protection claims also came to the same holding. The original lawsuit was filed in November 2015 by Melrose Credit Union (‘Melrose”), Progressive Credit Union, LOMTO Federal Credit Union (“LOMTO”) and taxicab industry organizations and individual investors. The credit unions filed a notice of appeal on April 27, 2017 with the Second Circuit Court of Appeals in New York City.

It is this author’s opinion that individual lawsuits like that described in the Daily News article are expensive, could take years to conclude and the outcome or result is uncertain. With respect to Judge Nathan’s ruling, many taxi medallion owners would argue that “this is a distinction without a difference”. But Judge Nathan’s ruling is the law, unless it is reversed on appeal.

The cutimes.com article noted that Melrose was placed into conservatorship in February by the New York State Department of Financial Services. The article also states that LOMTO is undercapitalized, with a net worth of 5.87% according to the National Credit Union Administration.  

These two lawsuits would seem to suggest that litigation will not assist medallion owners whose medallions have dramatically decreased in value.

Many taxi medallion owners who’ve consulted with Shenwick & Associates own medallions, which, to use a finance term, are “underwater.” Underwater means that the value of the asset is less than the loan collateralized by the asset. In simple terms, many medallion owners have loans against the medallions totaling $700,000-$900,000 (or more) and the medallions presently are worth approximately $240,000. As Mr. Hervias noted in the Daily News article, if banks are not providing loans to medallion purchasers, in the future it will become increasingly difficult for buyers to buy medallions because of the lack of financing (unless they are all cash buyers).

What options are available for medallion owners? One possible solution may be for medallion owners and their organizations to lobby the City of New York and Mayor de Blasio to create a fund to compensate medallion owners due to the disparate treatment faced by medallion owners and the ridesharing services. Another solution is for the city or state to create an entity or mechanism to provide funding or financing for future medallion purchases. The city or state could also look to the ridesharing services to contribute to those funds, though the ridesharing services would argue that their technology is merely “disruptive” and that competition has decreased the value of medallions, not inappropriate actions on their part. Recent articles about the Uber culture would seem to suggest that Uber would not voluntarily contribute to such funds.

The issue for medallion owners is: (1) whether they should continue to make loan payments on their medallions, if the value of the loans exceeds the value of the medallions; (2) competition from the ridesharing services has reduced their earnings; and (3) banks are not lending money to finance medallion purchases. If a medallion owner stops making loan payments, he or she will be in default under their loan(s) and the banks can commence litigation to foreclose on the medallions and/or seek repayment of their loans.

As we discussed in a prior article dated February 2nd, medallion owners who stop paying their loans have four options: (1) arrange their financial affairs so that they are “judgment proof”; (2). negotiate an out-of-court settlement with the banks that financed their medallion purchases; (3) file for bankruptcy protection or (4) litigate with the banks that loaned them money to purchase their medallions (an expensive and often times losing proposition). The option that is best for an individual medallion owner depends on his or her facts and circumstances.

Medallion owners who need such counseling are urged to contact Jim Shenwick.

Monday, May 01, 2017

Men's Fitness: 5 reasons filing for bankruptcy could save you from life-crushing debt

By Damon Trent

Whether you’re drowning in debt because of unemployment, medical bills, or just good old-fashioned spending—in 2016, almost 772,000 Americans found themselves in one of those situations—you’ve probably considered declaring personal bankruptcy, an option designed to allow people in financial distress to hit the reset button. But does it work? And should you consider it? Here’s what you need to know.

When should I consider bankruptcy?

Anytime you find yourself with more debt than you can handle, bankruptcy is an option worth exploring. Bruce Weiner, a New York bankruptcy attorney, says that in nearly 40 years of practice he’s found “a good thumbnail is when the amount you owe starts to approach what you make in a year.” (Note: Some debts—like taxes, child support, and mortgages—aren’t usually eligible for bankruptcy relief, so if you owe those, you’ll have to pay them even if you file for bankruptcy.)
The U.S. offers a half-dozen forms of bankruptcy to choose from, each named for the chapter of the law that established it. The most popular for individuals are Chapters 7 and 13.

Chapter 7

Also known as “liquidation” bankruptcy, Chapter 7 is by far the most common form of personal bankruptcy in the United States (versus Chapter 11 for businesses).
After you file your paperwork, the judge appoints a “trustee,” whose job it is to sell (“liquidate”) any assets you have and distribute the proceeds among the people to whom you owe money.
Luckily, this won’t leave you naked and homeless. Part of the trustee’s job is to ensure that you’re left with the resources you need to live and work. Plus, any money you earn from that day forward is yours to keep.

Chapter 13

If you have a steady income, Chapter 13 offers a somewhat gentler solution. Instead of selling your assets, a Chapter 13 trustee works out a legally binding plan for paying back your debts, or a percentage of them, over a fixed time period, usually three to five years.
Along with letting you keep your stuff, in some cases Chapter 13 can apply to common types of debt that Chapter 7 doesn’t cover.

What happens when I file?

Different kinds of personal bankruptcy all share one glorious feature: the “automatic stay.”
The day you file your paperwork, your creditors are legally barred from trying to collect their debts. That means no more lawsuits. No more “Final Demand” on red-trimmed envelopes. No more voicemails demanding you call the sinister “Mr. Peterson” back “immediately.” Instantly, those headaches are gone for good. And soon your debts are also gone—or “discharged,” in legal terms.

What’s the catch?

There’s one great reason not to file for bankruptcy: Your credit score takes a hit. Of course, if you haven’t paid a bill for a year or two, your score may already be in the basement. If not, you can expect a drop of several hundred points. And that black mark stays on your record for eons—a decade for Chapter 7, eight years for Chapter 13.
In many cases, though, declaring bankruptcy will actually leave you with a higher credit score than if you simply allowed your debts to fester. Weiner says that many of his clients are shocked to start receiving offers for credit cards and mortgages only months after filing for bankruptcy.

So, going bankrupt is good?

No. Bankruptcy is unpleasant, and intrusive, and creates an indelible record of a low point in your life.
“Nobody wants to end up here,” says Weiner. But it beats the constant, crushing stress of unpayable debt.
Not only that, but, well, bankruptcy is also fundamentally American. That’s why it’s in the Constitution. The Founding Fathers knew that if this land was going to be a place where citizens could dream big and take risks, they also had to have what Weiner calls “the freedom to fail.”
That freedom is yours to enjoy— if you’re ever unlucky enough to need it.


Thursday, April 27, 2017

New York City taxi medallions continued

Our February post on taxi medallions and their significant loss in value generated much reader interest. In this month’s email, we’ll update readers on taxi medallions and related issues.

The New York Post reported earlier this month that a taxi medallion recently sold for $241,000-a new low. As recently as three years ago, taxi medallions were selling for $1,300,000-a drop in value of over 80%.  And there are approximately 50,000 Uber drivers in NYC vs. approximately 13,587 yellow cab drivers.

With just 13,587 yellow cabs on New York City’s streets compared to about 50,000 cars from black cab and app services, New Yorkers now have more transportation options than ever before. In New York City, people took fewer trips and spent less on taxis during the first half of last year compared with 2015, according to a November securities filing from lender Medallion Financial Corp.

According to an article in Skift, 81 percent of Capital One's $690 million in loans for taxi medallions are at risk of default. The share of taxi medallion loans Capital One thinks its borrowers won’t be able to repay in full has nearly tripled over the past year, to 51.5 percent. Another 29 percent of Capital One’s loans are to stressed borrowers who could be at risk of default. And  BankUnited told its investors in November that nearly 59 percent of its loans secured by taxi medallions were under water. Close to 95 percent of BankUnited’s loans were to New York City borrowers.
Many readers have asked us what the banks that loaned money to medallion owners can or are doing. Their options are as follows: 1. Close and go out of business; 2. File for chapter 7 or 11 bankruptcy and liquidate or attempt to reorganize; 3. Sell their non–performing loans to third parties such as hedge funds; 4. Restructure their loans from third parties; 5. Seek capital from third parties; or 6. Work to restructure their loans to medallion owners. Which strategy is optimal? The optimal strategy depends on the facts of each case.

For medallion owners whose loans exceed the value of the medallions, the question remains as to what their strategy should be. The key issue for a medallion owner is whether to continue to own and make payments on a medallion loan, where the value of the medallion is far below the loan balance. For those medallion owners seeking specific advice, please see our post here. Any course of action chosen by a medallion owner involves NYS debtor/creditor law, bankruptcy law and tax law. Medallion owners are advised to seek legal counsel and to proceed with caution.

Many readers have also asked about timing. Assuming the bank or fund that made them the loan is in financial trouble, are they better off negotiating a settlement now or waiting to see what the future holds? This author has negotiated with buyers of distressed debt (defaulted or written off credit card debt) and often those creditors can be more difficult to deal with than banks.

However, in this author’s opinion, taxi medallion prices will continue to decrease in value or remain at these low levels, and taxi medallion owners need to develop a strategy to address these issues based on their own facts and circumstances. To discuss your situation regarding tax medallion ownership, please contact Jim Shenwick.

Monday, April 17, 2017

NY Times: Workers Find Winning a Wage Judgment Can Be an Empty Victory

The sign above Soft Touch Car Wash on Broadway in the Inwood neighborhood of Manhattan declares, “Open 24 hours,” but last month the bustling carwash suddenly closed. It was the same at the four other carwashes owned by the same family in New York City and the surrounding area: the phone lines disconnected, the hoses and wash mops idle and dry.

The operators of the small chain, José and Andrés Vázquez, agreed to pay $1.65 million to 18 employees to settle a federal lawsuit over stolen wages, a significant victory in the battles against wage theft in the city’s low-paying industries.

But the suddenly shuttered carwashes illustrate a persistent problem confronting many low-wage workers not just in New York but across the country: Winning in court is no guarantee that they will ever see much, if any, compensation.

The workers who toiled at the Vázquez carwashes battled for nearly six years before receiving the money they were due, their efforts hampered by the owners having filed for bankruptcy — a well-worn tactic used to avoid paying exploited workers, according to labor advocates. The owners could not be reached for comment.

Now, some New York State lawmakers are renewing a push for legislation that would put in place a type of insurance against this tactic, which crops up in industries from nail salons to restaurants. The measure would essentially enable employees who accuse an employer of wage theft to have a lien placed on the employer’s assets while the outcome is being determined.

“We are improving the lot of low-paid service workers; however, we haven’t attacked this fundamental problem of them giving their work, giving their time, and not getting compensated for it,” said Assemblywoman Linda B. Rosenthal, a Democrat who represents parts of Manhattan. “And it’s just not something we can tolerate anymore.”

In a setback for workers and their advocates, the measure was dropped from the budget agreement that state lawmakers reached. But a bill with the same measure, introduced this year by Ms. Rosenthal, is poised for a vote this spring in the Assembly.

Selling off houses and businesses — sometimes for a nominal sum, and frequently to a relative — and declaring bankruptcy is a move that experts say business owners often use to avoid paying back wages, overtime or damages, usually as a result of a court order. Under Ms. Rosenthal’s proposal, businesses would not be permitted to sell their assets while a wage dispute was underway.

“We know their tricks,” she said, referring to unscrupulous business owners. “This is an attempt to jump in front of their tricks.”

A 2015 report written by several worker advocacy organizations calculated that between 2003 and 2013, the New York State Department of Labor was unable to collect over $101 million that employers owed workers.

“It’s not surprising that people who are willing to cheat their workers are willing to transfer their assets to prevent their workers from getting what they are rightfully owed,” said Richard Blum, a staff attorney with the Legal Aid Society who works in the employment law division.

Small-business groups have opposed Ms. Rosenthal’s measure, saying it is an unnecessary and unfair burden on employers.

“It’s based on an accusation, not on proof,” said Denise M. Richardson, the executive director of the General Contractors Association. “An employee who feels aggrieved should not be able to tie up a business’s finances absent any proof that in fact they have been subject to wage theft.”

But workers say they need more powerful tools to battle employers who mistreat them.
“Right now, it is very easy for these sweatshop bosses to steal workers’ wages,” said Jin Ming Cao, who has yet to see any of the over $100,000 a judge ordered his former employer, a restaurant in Manhattan, to pay him in 2010, part of $1.5 million settlement involving a group of workers. “Even when they’re found out by a court, they just change names, it’s so easy.”

Laws allowing liens against business owners involved in wage disputes exist in half a dozen states — Alaska, Idaho, New Hampshire, Texas, Washington and Wisconsin — but only Wisconsin permits liens solely based on an allegation of wage theft, according to the National Employment Law Project. In the other states, a lien is allowed only after wage theft has been proved as a result of a lawsuit or an agency investigation, for example.

In New York, rules are already in place to protect workers in a few select industries where wage theft has been a widespread problem. In 2015, Gov. Andrew M. Cuomo imposed a requirement that nail salons carry wage bonds, a type of liability insurance designed to prevent the nonpayment of workers.

Nail salon owners have campaigned against the requirement, arguing that the price of carrying such insurance is too burdensome for small businesses like theirs. The cost varies depending on the coverage; carrying a $25,000 bond, for example, would cost an employer between $550 and $700 a year, according to providers.

Last week, lawmakers in West Virginia voted to remove, on similar grounds, a wage bond requirement that had long been in place for construction and mining industries.
On a sidewalk outside Manhattan Valley, an Indian restaurant on the Upper West Side, about 100 workers gathered recently to pass out fliers and chant that the proposed state measure, commonly known as Sweat — securing wages earned against theft — needed to become law.

When the restaurant was known as Indus Valley, a group of 10 workers sued and were awarded $700,000 in back wages by a federal judge in 2014. They still have not been paid. The owners have told the court that they sold the restaurant and that Manhattan Valley is a new restaurant with different owners. Workers and advocates claim that is a ruse to avoid payment and that the same owners still run the restaurant.

One of the workers is Efren Caballero De Jesus, 43. He delivered curries, bottled raita sauce and cleaned the kitchen at Indus Valley, often seven days a week, 10 or more hours a day, earning as little as $400 per week, for four years. “I felt degraded,” Mr. De Jesus said.

He was elated when a judge apportioned him over $180,000 of the award in 2015, but three years later, he wonders if he will ever receive anything from the two brothers who owned the restaurant, Phuman and Lakhvir Singh.

“I thought if we got the decision, we were going to collect the money,” Mr. De Jesus said. “I feel very angry.’’

Ahmed Hussain, a server answering the phone at Manhattan Valley on Thursday, said the Singh brothers no longer owned the restaurant. The Singhs could not be reached.
Copyright 2017 The New York Times Company.  All rights reserved.

Tuesday, March 14, 2017

We've moved!



We are pleased to announce that we've moved to a new location near Grand Central Terminal.  Our new address is: Shenwick & Associates, 122 East 42nd Street, Suite 620, New York, NY 10168.  Please update your records accordingly.

Our phones and e-mail addresses remain the same.  We look forward to continuing to serve you from our new location!

Tuesday, February 21, 2017

UPI: U.S. household debt near record levels, Federal Reserve report says

By Ed Adamczyk 

Feb. 17 (UPI) -- Total U.S. household debt climbed to a near-record $12.58 trillion by the end of 2016, a Federal Reserve Bank of New York report says.

February's 33-page "Quarterly Report of Household Debt and Credit" shows that every category of debt measured -- including mortgages, credit cards, student loans and auto loans -- saw an increase.

The total increase of $460 billion in 2016 was the largest in a decade. Mortgage balances, now at $8.48 trillion, made up 67 percent of the household debt.

At the current rate of growth, household debt is expected to break the 2008 record high, of $12.68 trillion, sometime in 2017. The year was marked by the start of a recession.

The report indicates mortgages still make up the bulk of household debt, but student loans are now 10 percent of the total, auto loans are 9 percent of the total and credit card debt is 6 percent. Dollar amounts rose in each category in 2016's fourth quarter. The rising debt indicates that banks are extending more credit to households.

A major difference between the 2008 and 2016 debt levels, the report said, is that fewer delinquencies were reported at the end of 2016. In last year's fourth quarter, 4.8 percent of debts were regarded as delinquent or late in payment, compared to 8.5 percent of total household debt in 2008's third quarter.
There were also 200,000 fewer consumer bankruptcies reported in 2016's fourth quarter, a four percent decline, compared to the fourth quarter of 2015.

Copyright © 2017 United Press International, Inc. All Rights Reserved. 

Thursday, February 02, 2017

Strategies for Addressing the Decrease in Value of New York City Taxi Medallions as a Result of Competition from Uber and Lyft Under New York State Debtor and Creditor Law and the Federal Bankruptcy Code



February 2, 2017

As a result of Uber’s and Lyft’s technological disruption of the transportation services market, the value of New York City taxi medallions has significantly decreased. In 2014 taxi medallions were being sold for approximately $1.3 million dollars,  Current Taxi & Limousine Commission sales reports from December 2016 and data from taxi medallion brokers indicate that the current value of taxi medallions is approximately $400,000-$600,000.  And according to a recent piece in Bloomberg News, over 80 percent of Capital One Financial Corp.’s loans for taxi medallions are at risk of default.

Many entrepreneurial immigrants and other individuals pursuing the American Dream and financial security purchased taxi medallions by borrowing money from banks or finance companies. Many of these loans were at an 80% loan to value ratio, and as a result of the decline in taxi medallion value, the debt securing the taxi medallions exceeds the value of the taxi medallions, giving the medallions a negative value. To use a term from real estate financing, these taxi medallions are “underwater.
Banks and the taxi medallion financing companies require that the borrower sign a Promissory Note, a Security Agreement and a UCC–1 financing statement so that the banks or the financing companies would be a secured creditor. Additionally, the borrower would be personally liable to repay the loan to the bank or financing company, and in some instances the medallion owner may have pledged other assets that they own as collateral for the loan, such as their house.

As a result of the decrease in value of taxi medallions, many medallion owners owe substantially more to the bank or financing company than the medallion is worth: a typical example would be an individual who owns a medallion subject to a loan of $1,000,000 and the medallion presently has a fair market value of $500,000 -$600,000, resulting in a deficiency or shortfall of $400,000-$500,000, which the medallion owner would have to repay to the bank or finance company if the medallion were sold. Most medallion owners don’t have sufficient assets to cover this deficiency, creating a financial catastrophe for the medallion owner.

There are over 13,000 New York City taxi medallions.  The New York City Taxi & Limousine Commission sales reports indicate that six medallions were sold in December 2016. Two were estate sales (meaning that the medallion owner died and their estates sold the medallion) and four were foreclosures (meaning that the medallion owner could not repay the loan and the bank or financing company foreclosed pursuant to New York State Uniform Commercial Code law to obtain possession of the financed taxi medallion). If we assume that in an average year 5% of taxi medallions are sold or transferred, that would mean that there should be about 700 medallion sales a year or 58 per month.  But if December 2016 was a representative month, medallion sales have nearly ground to a halt!

Why so few taxi medallion sales? One answer to this question may be that with the new technology of Uber and Lyft, few individuals see a viable financial future as a taxi medallion owner and driver. Another potential factor is that medallion owners may be hoping that the market will correct itself in the future and their medallions may increase in value over time, hopefully equal to or greater than the amount of the loan associated with the medallion. As we all know, “hope springs eternal” and this strategy may be the equivalent of “kicking the can down the street” – delaying or pushing off a problem that will not go away.

The purpose of this article is to present medallion owners with strategies to deal with the reduced or diminished value of the taxi medallion that they own under New York State Debtor and Creditor Law and the federal Bankruptcy Code. There are five possible strategies:
1.    

  1. The medallion owner can continue to make loan payments and hope that the value of the medallion increases over time and the increased value will allow for a sale of the medallion in the future, which will generate enough money to pay off the medallion loan. As discussed above, as a result of Uber, Lyft and other transportation service technologies, it is doubtful that the value of taxi medallions will ever return to its previous high valuations.
  2. The medallion owner can stop making loan payments and surrender the medallion to the bank or finance company or allow the bank or finance company to foreclose or repossess the medallion under New York State law. There are several problems with this strategy.  First, the bank or finance company will commence an action against the medallion owner to collect their debt. Second, after the foreclosure or repossession, the bank or finance company is allowed to seek a deficiency judgment (the difference between the amount due on the medallion loan and the value of the medallion at auction or its value at the time of repossession including legal fees and court costs) against the medallion owner. Under New York State law a judgment is enforceable for 20 years (statute of limitations) and the bank or finance company will be able to: (a) garnish the medallion owner’s wages; (b) place a lien and levy on any financial accounts owned by the medallion owner; and (c) docket the judgment against any real estate owned by the medallion owner. Third, the bank or finance company will report “relief of indebtedness income” to the Internal Revenue Service pursuant to section 108 of the Internal Revenue Code, and practically speaking the amount of the deficiency judgment (calculated above) would be deemed to be income to the medallion owner (unless an exclusion pursuant to this provision can be found).  Fourth, the judgment will be reported to credit reporting agencies, the medallion owner’s credit report score will decrease and the medallion owner will be unable to obtain a loan from another bank or finance company while the judgment is outstanding.
  3. The medallion owner can stop making loan payments to the bank or finance company and attempt an “out-of-court workout” with the bank or finance company. Under this scenario, the medallion owner would hire an attorney to negotiate a consensual return of the medallion to the bank or the finance company and any other consideration or money negotiated between the parties. The benefits of this approach are as follows: First, this arrangement is consensual and there will be no litigation between the medallion owner or the bank and finance company.  Second, a judgment will not be entered against the medallion owner. Third, the amount of relief of indebtedness income that would be reported to the Internal Revenue Service pursuant to section 108 of the Internal Revenue Code would be minimized. Under this scenario, the bank or the finance company would ask for an Affidavit of Net Worth (a statement of assets and liabilities made under oath) from the medallion owner to determine what assets the medallion owner could use pay the deficiency to the bank or the finance company if the value of the medallion is substantially less than the value of the outstanding balance of the loan.
  4. The medallion owner can file a chapter 7 personal bankruptcy. Chapter 7 personal bankruptcy is known as a “Liquidation and Fresh Start”. The medallion owner would hire a bankruptcy attorney, provide financial information to the attorney, who would then prepare a bankruptcy petition for the medallion owner and file the bankruptcy petition with the bankruptcy court. The medallion owner would go to court for a meeting of creditors with the bankruptcy attorney and then obtain a Discharge from the bankruptcy court, discharging or eliminating the loan or monies due to the bank or financing company. Under this scenario, the chapter 7 bankruptcy trustee could attempt to sell the taxi medallion or it would be surrendered to the bank or the financing company. The good news for the medallion owner is that if a debtor files under chapter 7, there is no relief of indebtedness income to the medallion owner. Additionally, with guidance from an experienced attorney, the medallion owner will be able to repair their credit in approximately a year to 18 months. However, if the medallion owner owns other valuable property or assets (such as a house, co-op, condominium or vacation property), the bankruptcy trustee has the right to sell or liquidate those assets to repay creditors. With respect to the family house, co-op or condominium unit, the medallion owner would be able to claim a homestead exemption (in the New York metropolitan area) of $165,550 for himself or herself and $165,550 for their spouse (if they are married and both parties reside in the house, co-op or condominium). Additionally, the chapter 7 bankruptcy filing would negatively impact the debtor’s credit report score. A medallion owner should consult with an experienced bankruptcy attorney before going down the path of a chapter 7 personal bankruptcy filing.
  5. Finally, the medallion owner can file a chapter 13 personal bankruptcy. Chapter 13 bankruptcy is a form of personal bankruptcy for individuals who own valuable property that they want to keep at the conclusion of the bankruptcy case, and requires that the debtor to make three to five years of payments out of their disposable income (future income minus necessary living expenses) to the bankruptcy trustee, who then makes distributions to the creditors in the case. The chapter 13 bankruptcy filing could be used by a medallion owner who wants to keep the medallion and continue to make payments to the bank or financing company, or it could be used to return the medallion to the bank or financing company and allow the debtor/medallion owner to keep the other assets or property that they own, provided that they make all of the payments scheduled in their chapter 13 plan. A chapter 13 bankruptcy filing is more favorable for credit reporting purposes then chapter 7 bankruptcy.

As you can see, there are many strategies under New York State law and federal bankruptcy law that can be utilized by a medallion owner who owns a medallion that’s underwater. Just as there is no such thing as “a one sized shoe that fits all,” each potential strategy discussed above must be reviewed and evaluated by an experienced bankruptcy and workout attorney who has reviewed the medallion owner’s financial situation and understands the medallion owner’s desired outcome. At Shenwick & Associates, we have represented medallion owners and other debtors, and are extremely experienced at doing workouts and bankruptcy filings for both individuals and companies. Those interested in setting up a meeting with Jim Shenwick can call him at (212) 541-6224 or email him at jshenwick at gmail dot com.

© 2017 James Shenwick.  All rights reserved.