At Shenwick & Associates, we are getting an increasing number of calls about asset protection. Asset protection involves the use of various legal techniques in conjunction with statutory and common law (i.e. debtor and creditor law, trusts and estates law) to protect the assets of individuals and business from civil money judgments. It is better to do asset protection planning sooner, rather then later and prior to lawsuits by creditors.
Asset protection is a complex and evolving area of law, with many potential pitfalls for the unwary. One of the biggest concerns in formulating an asset protection plan is avoiding claims of fraudulent conveyances. A fraudulent conveyance involves the intent to defraud or delay creditors. Factors that may be indicia of a fraudulent conveyance include: (1) lacking the financial means to pay off a debt after the transfer of assets; (2) concealing the ownership or location of assets from creditors; and (3) deliberately placing property in a location beyond the reach of creditors. Claims for fraudulent conveyance can be brought under the Bankruptcy Code or New York State law.
One option to protect assets is to create a Domestic Asset Protection Trust. Delaware law provides that, notwithstanding the fact that a Domestic Asset Protection Trust is self settled (funded by the client), it is still “spendthrift,” which means that under Delaware law, a creditor cannot reach those assets. A Domestic Asset Protection Trust will not protect a client from alimony, maintenance, child support or personal injury claims. Due to its prominence in corporate and business law, Delaware is an ideal jurisdiction for such an entity.
For more information about how to protect your assets from creditors, please contact Jim Shenwick.
Wednesday, December 02, 2009
Wednesday, November 25, 2009
From the Hospital to Bankruptcy Court
November 25, 2009
By KEVIN SACK
NASHVILLE — Some of the debtors sitting forlornly in this city’s old stone bankruptcy court have lost a job or gotten divorced. Others have been summoned to face their creditors because they spent mindlessly beyond their means. But all too often these days, they are there merely because they, or their children, got sick.
Wes and Katie Covington, from Smyrna, Tenn., were already in debt from a round of fertility treatments when complications with her pregnancy and surgery on his knee left them with unmanageable bills. For Christine L. Phillips of Nashville, it was a $10,000 trip to the emergency room after a car wreck, on the heels of costly operations to remove a cyst and repair a damaged nerve.
Jodie and Charlie Mullins of Dickson, Tenn., were making ends meet on his patrolman’s salary until she developed debilitating back pain that required spinal surgery and forced her to quit nursing school. As with many medical bankruptcies, they had health insurance but their policy had a $3,000 deductible and, to their surprise, covered only 80 percent of their costs.
“I always promised myself that if I ever got in trouble, I’d work two jobs to get out of it,” said Mr. Mullins, a 16-year veteran of the Dickson police force. “But it gets to the point where two or three or four jobs wouldn’t take care of it. The bills just were out of sight.”
Although statistics are elusive, there is a general sense among bankruptcy lawyers and court officials, in Nashville as elsewhere, that the share of personal bankruptcies caused by illness is growing.
In the campaign to broaden support for the overhaul of American health care, few arguments have packed as much rhetorical punch as the there-but-for-the-grace-of-God notion that average families, through no fault of their own, are going bankrupt because of medical debt.
President Obama, in addressing a joint session of Congress in September, called on lawmakers to protect those “who live every day just one accident or illness away from bankruptcy.” He added: “These are not primarily people on welfare. These are middle-class Americans.”
The Senate majority leader, Harry Reid of Nevada, made a similar case on Saturday in a floor speech calling for passage of a measure to open debate on his chamber’s health care bill.
The legislation moving through Congress would attack the problem in numerous ways.
Bills in both houses would expand eligibility for Medicaid and provide health insurance subsidies for those making up to four times the federal poverty level. Insurers would be prohibited from denying coverage to those with pre-existing health conditions. Out-of-pocket medical costs would be capped annually.
How many personal bankruptcies might be avoided is unpredictable, as it is not clear how often medical debt plays a back-breaking role. There were 1.1 million personal bankruptcy filings in 2008, including 12,500 in Nashville, and more are expected this year.
Last summer, Harvard researchers published a headline-grabbing paper that concluded that illness or medical bills contributed to 62 percent of bankruptcies in 2007, up from about half in 2001. More than three-fourths of those with medical debt had health insurance.
But the researchers’ methodology has been criticized as defining medical bankruptcy too broadly and for the ideological leanings of its authors, some of whom are outspoken advocates for nationalized health care.
At the bankruptcy court in Nashville, lawyers provided a spectrum of estimates for the share of cases in Middle Tennessee where medical debt was decisive, from 15 percent to 50 percent. But many said they felt the number had been growing, and might be higher than was obvious because medical bills are often disguised as credit card debt.
“This has really become the insurance system for the country,” said Susan R. Limor, a bankruptcy trustee who calculated that 13 of the 48 Chapter 7 liquidation cases on her docket one recent afternoon included medical debts of more than $1,000.
Under Chapter 7, a debtor’s assets are liquidated and the proceeds are used to pay creditors; any remaining debts are discharged, and filers are left with a 10-year stain on their credit ratings.
“You can’t believe how many people discharge medical debts,” Ms. Limor said. “It’s a kind of trailing indicator of who’s suffering in this economy.”
Kyle D. Craddock, a bankruptcy lawyer here, said his medical cases were heartbreaking because the financial devastation was so rapid and ill-timed. “They’re sick, they’re bankrupt, and if they stay sick for too long, they end up losing their jobs as well,” he said.
That was the case for Ms. Phillips, 45, who said she was fired in October from her job in a shipping department because she had missed so much work while recuperating from her car accident and operations. Her firing came only 11 days after she filed for bankruptcy, listing about $7,000 in unpaid medical bills among her $187,000 in liabilities.
“The medical bills put me over the edge,” said Ms. Phillips, who lost her health insurance along with her job. “I had no money for food at this point. How was I going to do it?”
It was the same for the Mullinses, who have two children. They had a mortgage and owed money on credit cards and student loans. “But the medical problem is what took us down,” said Ms. Mullins, who is packing to move from the two-bedroom house they will soon surrender to Wells Fargo. “Everything was due, they wanted their money now, now, now, and it just became overwhelming.”
For some, like Nathan W. Hale, 34, who had an attack of pancreatitis two months after losing his job with a Nashville cable company, it is the absence of insurance that pulls them under. Others, like Robin P. Herron, 35, of Eagleville, Tenn., have insurance, but it is not enough. Her Blue Cross Blue Shield policy covered only 80 percent of the cost when her daughter needed surgery to remove a cyst from a fallopian tube, leaving her $6,000 in debt.
After cortisone injections failed to cure his gimpy knee, Mr. Covington, 31, had surgery because the pain was forcing him to miss days of work as an emergency medical technician. His recovery kept him off the job for five months.
Simultaneously, his wife, a 911 dispatcher, developed sciatica while pregnant and had to take months off on reduced disability pay. Their insurance policy, with an $850 monthly premium, has a $4,000 annual deductible per family.
As the bills rolled in, the Covingtons compounded their troubles by placing medical charges on credit cards, simply to make the collection agencies stop calling. They fell months behind on their mortgage, and by August had lost their house and both cars.
Mr. Covington, who has taken a second job, said he found it ironic that it had not been the recession that forced them into bankruptcy. “I tell my wife that we beat the economy,” he said, “but health care beat us.”
Copyright 2009 The New York TImes Company. All rights reserved.
By KEVIN SACK
NASHVILLE — Some of the debtors sitting forlornly in this city’s old stone bankruptcy court have lost a job or gotten divorced. Others have been summoned to face their creditors because they spent mindlessly beyond their means. But all too often these days, they are there merely because they, or their children, got sick.
Wes and Katie Covington, from Smyrna, Tenn., were already in debt from a round of fertility treatments when complications with her pregnancy and surgery on his knee left them with unmanageable bills. For Christine L. Phillips of Nashville, it was a $10,000 trip to the emergency room after a car wreck, on the heels of costly operations to remove a cyst and repair a damaged nerve.
Jodie and Charlie Mullins of Dickson, Tenn., were making ends meet on his patrolman’s salary until she developed debilitating back pain that required spinal surgery and forced her to quit nursing school. As with many medical bankruptcies, they had health insurance but their policy had a $3,000 deductible and, to their surprise, covered only 80 percent of their costs.
“I always promised myself that if I ever got in trouble, I’d work two jobs to get out of it,” said Mr. Mullins, a 16-year veteran of the Dickson police force. “But it gets to the point where two or three or four jobs wouldn’t take care of it. The bills just were out of sight.”
Although statistics are elusive, there is a general sense among bankruptcy lawyers and court officials, in Nashville as elsewhere, that the share of personal bankruptcies caused by illness is growing.
In the campaign to broaden support for the overhaul of American health care, few arguments have packed as much rhetorical punch as the there-but-for-the-grace-of-God notion that average families, through no fault of their own, are going bankrupt because of medical debt.
President Obama, in addressing a joint session of Congress in September, called on lawmakers to protect those “who live every day just one accident or illness away from bankruptcy.” He added: “These are not primarily people on welfare. These are middle-class Americans.”
The Senate majority leader, Harry Reid of Nevada, made a similar case on Saturday in a floor speech calling for passage of a measure to open debate on his chamber’s health care bill.
The legislation moving through Congress would attack the problem in numerous ways.
Bills in both houses would expand eligibility for Medicaid and provide health insurance subsidies for those making up to four times the federal poverty level. Insurers would be prohibited from denying coverage to those with pre-existing health conditions. Out-of-pocket medical costs would be capped annually.
How many personal bankruptcies might be avoided is unpredictable, as it is not clear how often medical debt plays a back-breaking role. There were 1.1 million personal bankruptcy filings in 2008, including 12,500 in Nashville, and more are expected this year.
Last summer, Harvard researchers published a headline-grabbing paper that concluded that illness or medical bills contributed to 62 percent of bankruptcies in 2007, up from about half in 2001. More than three-fourths of those with medical debt had health insurance.
But the researchers’ methodology has been criticized as defining medical bankruptcy too broadly and for the ideological leanings of its authors, some of whom are outspoken advocates for nationalized health care.
At the bankruptcy court in Nashville, lawyers provided a spectrum of estimates for the share of cases in Middle Tennessee where medical debt was decisive, from 15 percent to 50 percent. But many said they felt the number had been growing, and might be higher than was obvious because medical bills are often disguised as credit card debt.
“This has really become the insurance system for the country,” said Susan R. Limor, a bankruptcy trustee who calculated that 13 of the 48 Chapter 7 liquidation cases on her docket one recent afternoon included medical debts of more than $1,000.
Under Chapter 7, a debtor’s assets are liquidated and the proceeds are used to pay creditors; any remaining debts are discharged, and filers are left with a 10-year stain on their credit ratings.
“You can’t believe how many people discharge medical debts,” Ms. Limor said. “It’s a kind of trailing indicator of who’s suffering in this economy.”
Kyle D. Craddock, a bankruptcy lawyer here, said his medical cases were heartbreaking because the financial devastation was so rapid and ill-timed. “They’re sick, they’re bankrupt, and if they stay sick for too long, they end up losing their jobs as well,” he said.
That was the case for Ms. Phillips, 45, who said she was fired in October from her job in a shipping department because she had missed so much work while recuperating from her car accident and operations. Her firing came only 11 days after she filed for bankruptcy, listing about $7,000 in unpaid medical bills among her $187,000 in liabilities.
“The medical bills put me over the edge,” said Ms. Phillips, who lost her health insurance along with her job. “I had no money for food at this point. How was I going to do it?”
It was the same for the Mullinses, who have two children. They had a mortgage and owed money on credit cards and student loans. “But the medical problem is what took us down,” said Ms. Mullins, who is packing to move from the two-bedroom house they will soon surrender to Wells Fargo. “Everything was due, they wanted their money now, now, now, and it just became overwhelming.”
For some, like Nathan W. Hale, 34, who had an attack of pancreatitis two months after losing his job with a Nashville cable company, it is the absence of insurance that pulls them under. Others, like Robin P. Herron, 35, of Eagleville, Tenn., have insurance, but it is not enough. Her Blue Cross Blue Shield policy covered only 80 percent of the cost when her daughter needed surgery to remove a cyst from a fallopian tube, leaving her $6,000 in debt.
After cortisone injections failed to cure his gimpy knee, Mr. Covington, 31, had surgery because the pain was forcing him to miss days of work as an emergency medical technician. His recovery kept him off the job for five months.
Simultaneously, his wife, a 911 dispatcher, developed sciatica while pregnant and had to take months off on reduced disability pay. Their insurance policy, with an $850 monthly premium, has a $4,000 annual deductible per family.
As the bills rolled in, the Covingtons compounded their troubles by placing medical charges on credit cards, simply to make the collection agencies stop calling. They fell months behind on their mortgage, and by August had lost their house and both cars.
Mr. Covington, who has taken a second job, said he found it ironic that it had not been the recession that forced them into bankruptcy. “I tell my wife that we beat the economy,” he said, “but health care beat us.”
Copyright 2009 The New York TImes Company. All rights reserved.
Tuesday, November 17, 2009
Developments in Personal Bankruptcy in These Tough Times
The following is the outline of a Continuing Legal Education course given by James H. Shenwick, Esq. at First American Title Insurance Company of New York on November 12, 2009.
I. Introduction
a. Why do people file for bankruptcy today?
1. Credit card debts
2. Business reversals and job loss
3. Falling real estate values
4. High housing costs
5. Student loans
6. Divorce
7. Medical bills and illness
b. Many of the problems that are causing individuals to file for personal bankruptcy are real estate related. Fortunately, the Bankruptcy Code and New York State Debtor and Creditor Law provide many remedies to real estate issues and other debtor/creditor problems facing individuals in 2009 in New York State.
• Chapter 7 bankruptcy constitutes the vast majority of individual filings, and can be very helpful in dealing with many debtor/creditor problems that individuals have these days.
c. 1 million Americans filed for bankruptcy from January 2009 to October 2009, and experts predict that bankruptcies could reach 1.5 million this year before leveling off at 1.6 million next year.
d. The goal of this outline is to explain contemporary issues facing debtors in New York State in 2009 and strategies for dealing with those issues.
II. Chapter 7 Personal Bankruptcy-“BAPCPA”
A. In 2005, Congress radically revised and amended Chapter 7 personal bankruptcy laws. 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.
B. 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, 2009, the median income of a single person in New York State is $46,523. For a family of two, the income threshold for the Median Income Test is $57,006, for a family of three it is $67,991 and for a family of four it is $83,036. Add $6,900 for each individual in excess of four. Median income figures are periodically revised by the Census Bureau.
C. 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.
D. However, with proper planning, most individuals or couples whose income exceeds the median income can still pass the Means Test and will be allowed to file for Chapter 7 bankruptcy, notwithstanding the legislative intent of the changes under BAPCPA, which was to try and minimize the number of individuals who could file for Chapter 7 bankruptcy and force them to either not file for bankruptcy or to file for Chapter 13 bankruptcy.
E. Means Test Planning Opportunities:
1. If an individual’s debts are primarily business debts, then the debtor is not required to take the Means Test.
2. The data that is used to calculate the Means Test is a six-month rolling look back at the debtor’s income and expenses. Accordingly, if a debtor is self-employed or is an independent contractor, they may be able to arrange their financial affairs so that they have less income for the months included in the Means Test, and therefore pass the Means Test. This is known as pre-bankruptcy planning.
3. Our experience is that 95% of all debtors pass the means test and qualify for Chapter 7 personal bankruptcy.
III. Why do the vast majority of Americans who file for bankruptcy file for Chapter 7 bankruptcy?
A. Chapter 7 bankruptcy provides individuals who qualify to file under this chapter with a “discharge,” which can wipe out a significant amount of an individual’s debt.
B. What debts are discharged in a Chapter 7 personal bankruptcy?
i. Credit card debt
ii. Personal, business, automobile and real estate loans
iii. Lines of credit
iv. Medical bills
v. Utility bills
vi. Personal and “good guy” guaranties-“good guy” guaranties are guaranties created for the leasing of commercial space
C. Certain “old income taxes” may be dischargeable if:
i. The tax return was filed more than two years prior to the bankruptcy filing;
ii. The taxes are more than three years old;
iii. The taxes were assessed more than 240 days before the filing of the petition;
iv. There was no attempt to avoid or evade the taxes.
If all of these conditions are met, the taxes are dischargeable in bankruptcy.
D. The IRS has heightened its scrutiny of the discharge of income taxes in bankruptcy, and their position (based on case law) is that if you spend too much money on luxury items and/or pay other creditors ahead of the IRS, then according to the IRS, those tax debts would not be dischargeable, and the IRS will commence an adversary proceeding (litigation in a bankruptcy case) to object to the discharge of these taxes. See Wright v. Internal Revenue Service, 191 B.R. 291 (S.D.N.Y. 1995); Haesloop v. U.S. (In re Haesloop), 2000 Bankr. LEXIS 1104, 2000 WL 1607316 (Bankr. E.D.N.Y. Aug. 30, 2000); Lynch v. United States, 299 B.R. 62 (Bankr. S.D.N.Y. 2003); Epstein v. United States, 303 B.R. 280 (Bankr. E.D.N.Y. 2004)
E. What is not dischargeable in a Chapter 7 bankruptcy filing?
i. Recent income taxes (2-3 years old)
ii. “Trust fund” taxes (i.e. sales or employment taxes)
iii. Student loans
iv. Domestic support obligations (i.e. alimony and child support payments)
v. Debts incurred within 90 days of a bankruptcy filing that aggregate at least $550 for luxury goods or services and cash advances aggregating more than $825 within 70 days.
Chapter 7 bankruptcy is a very effective tool for the right debtor!
F. New BAPCPA (2005) requirements in Chapter 7 bankruptcy
i. Under BAPCPA, in addition to the list of creditors, schedules of assets, liabilities, income and expenses debtors must now provide:
a. A certificate of credit counseling;
b. Payment advices from employers received 60 days before filing (if any);
c. A statement of monthly net income and any anticipated increase in income or expenses after filing;
d. Tax returns or transcripts filed in the most recent tax year;
f. Photo ID; and
g. Social Security card
ii. Failure to provide the documents within 45 days after the petition has been filed (with a possibility of a 45-day extension) results in automatic dismissal of the case.
iii. Also new under BAPCPA, a debtor must have received pre-petition credit briefing (in person, by phone or internet) from an approved non-profit entity that outlined opportunities for credit counseling and assisted the Debtor in performing a personal budget analysis in the 180 days before filing a petition. Greenpath, one of the approved credit counseling agencies, charges approximately $45.
vi. Additionally, within 45 days after the first Meeting of Creditors, the debtor must also take a post-petition financial management course and file a certificate of completion with the Bankruptcy Court. The cost of this course from Greenpath is also approximately $45.
iv. The Bankruptcy Court may grant a waiver based on the Debtor’s sworn statement that they were unable to obtain the counseling services within five days of making the request and had to file immediately, but the waiver expires 30 days after the petition is filed.
v. The briefing is not required if the Bankruptcy Court determines that the Debtor is mentally incapacitated, physically disabled, or is an active member of the military in a combat zone.
G. What are the negatives of filing for Chapter 7 bankruptcy?
i. The filing stays on a person’s credit report for seven to ten years
ii. A debtor may only file for Chapter 7 bankruptcy every eight years (however, if a debtor files for Chapter 7, receives a discharge, and then gets into further financial trouble, they can file under Chapter 11 or 13 of the Bankruptcy Code).
H. Property of the Bankruptcy Estate:
i. This includes tax refunds
ii. Lawsuits (usually personal injury cases) commenced by the debtor prior to the bankruptcy filing
iii. Inheritances received by the debtor within 180 days of the bankruptcy filing.
IV. Chapter 7 bankruptcy can be very effective for individuals with real estate in which they live that is “underwater” (where the fair market value of the property is less than the value of the mortgages to which the property is subject)
A. When we talk about real estate, we’re talking about houses, townhouses, co-ops and condos. In order to qualify for the homestead exemption, a debtor must reside in the property at the time the bankruptcy is filed.
In 2005, New York State increased the homestead exemption to $50,000 per Debtor, so a married couple under New York law can exempt $100,000 of equity in a residence. Let’s look at a few examples of how residential real estate issues play out in a Chapter 7 bankruptcy filing.
Real Estate Scenarios:
For example, let’s take a look at a married couple considering filing for bankruptcy and the value of their property and mortgage(s) on their property.
FMV $600,000
Mortgage ($500,000)
Equity $100,000
In this scenario, the couple could file for Chapter 7 bankruptcy, discharge their unsecured debts, and keep their house, provided that they continue to make mortgage payments.
FMV $700,000
Mortgage ($500,000)
Equity $200,000
NYS Homestead Exemption ($100,000)
Non-Exempt Equity $100,000
In this scenario in a Chapter 7 bankruptcy, the Chapter 7 Trustee would sell the house and receive $100,000 for the equity above the homestead exemption (less costs and expenses), and that money would be used to pay the couple’s creditors. The Trustee would pay $100,000 to the Debtors at the end of their case as a result of their homestead exemption. Alternatively, the debtors could repurchase the house from the Trustee by buying the equity from the Trustee (redemption).
FMV $400,000
Mortgage ($500,000)
Negative Equity ($100,000)
In this scenario, the house has a negative equity of $100,000 and is “underwater” and would not be sold by the Chapter 7 Trustee. However, in order to keep the house, the debtor must reaffirm the debt to the mortgagee before the case is discharged and continue to make the payments on the mortgage, notwithstanding the fact that the value of the house is less than the amount of the mortgage.
Reaffirmation is governed by section 524(c) of the Bankruptcy Code, and requires that the debtor file an agreement with the court stating that he or she agrees to be legally bound to repay the otherwise dischargeable debt. The reaffirmation agreement must be filed 60 days after the meeting of creditors. The debtor’s attorney must file an affidavit stating that such an agreement will not be a hardship for the debtor. In the case of a pro se debtor, the bankruptcy judge will interview the debtor to ensure the agreement is voluntary and that it does not present a hardship for the debtor. In any event, the debtor may rescind the agreement up to 60 days after the agreement is filed with the court, or the case is discharged, whichever is later.
Here’s a question for all of you-Under these circumstances why would the couple want to retain the house?
Wouldn’t they be better off economically to file for Chapter 7 bankruptcy and let the bank make a motion for relief from the automatic stay so they can foreclose and obtain title to the house? This a personal decision for the debtors would have to make, which may include non-economic considerations that would lead them to want to keep a house that is $100,000 “underwater.”
Scenario: One spouse files for bankruptcy, the other spouse does not and the house has equity.
In a Chapter 7 bankruptcy, the Trustee may be able to sell the house. However, under New York State law due to “tenancy-by-the-entirety” protection, the house cannot be sold. The creditor can docket a judgment against the property, which is good for 20 years, and the home cannot be sold or refinanced.
Under this scenario, NYS law may provide more protection to the non-filing spouse than bankruptcy law. See §§ 363(h), (i), and (j) of the Bankruptcy Code when dealing with a scenario where one spouse files for bankruptcy, the other spouse does not and the house has equity.
Note that if the home is transferred from one spouse to the other, this a fraudulent conveyance.
Planning opportunity: If the couple divorces, the house may be transferred from one spouse to the other for no consideration, pursuant to New York State equitable distribution law.
In Chapter 7 bankruptcy, the factors to be considered as to whether the Chapter 7 bankruptcy trustee can sell the house are: (i) the equity in the property; (ii) the respective ages of the debtor and the spouse; and (iii) the burden to the non-filing spouse of having to leave the house (i.e. the impact on minor children).
Section 363(h) of the Bankruptcy Code deals with the conditions which must be met for a Trustee to sell a co-owner’s interest in property (whether owned as tenants in common, joint tenants or tenants by the entirety), which include:
1. Partition of the property between the bankruptcy estate and the co-owners is impracticable;
2. Sale of the bankruptcy estate’s undivided interest in the property would realize significantly less for the estate than the sale of the property free of the interests of the co-owners;
3. The benefit to the bankruptcy estate of a sale of the property free of the interests of the co-owners outweighs the detriment, if any, to the co-owners.
In Community Natl. Bank and Trust Co. of New York v. Persky (In re Persky), 893 F.2d 15 (2d. Cir. 1989), the Second Circuit Court of Appeals reviewed a bankruptcy filing in which only one of the co-owners was indebted to the bank and filed for bankruptcy relief. The Court found that:
• The Bankruptcy Court had the power to review the Trustee’s discretion to sell the property.
• The benefit to the bankruptcy estate should be analyzed from the standpoint of the sale of the nondebtor spouse’s entire interest in the property, including their possessory and survivorship interests, in determining whether the property should be sold.
• Noneconomic factors should be considered when analyzing the detriment to the nondebtor spouse of a sale of the property.
Section 363(i) of the Bankruptcy Code provides that in a Chapter 7 bankruptcy, if the property is to be sold, the debtor’s spouse may purchase the estate’s share of the property.
Pursuant to §363(j) of the Bankruptcy Code, the Chapter 7 Trustee must distribute to the debtor’s spouse the proceeds of the sale (less costs and expenses), but not including any compensation of the Trustee, in accordance with the ownership interests of the non-filing spouse and the bankruptcy estate.
Pursuant to § 363(k) of the Bankruptcy Code, the mortgagee may also bid on the house and, if they’re successful, they may offset their secured claim against the purchase price of the house.
Mortgage Arrears and Chapter 7 Bankruptcy
The above scenarios assume that the debtors are current on their mortgage. If the debtors were not current, then the mortgage arrears would need to be cured in order to keep the house during Chapter 7 bankruptcy.
A. How does a debtor deal with mortgage arrears?
i. Negotiate with the lender prior to the bankruptcy filing.
ii. Negotiate with the lender after the bankruptcy filing for payment plan for the arrears. Pursuant to Bankruptcy Code § 524, a debtor must reaffirm within 60 days from the date of the first scheduled meeting of creditors. Once the reaffirmation is executed, unless the agreement is rescinded, the debtor is liable; if they default on the mortgage in the future after reaffirmation, the mortgage debt is not dischargeable.
iii. Loss mitigation in the Southern District of New York (see Section V below)
iv. Conversion of a Chapter 7 case to a Chapter 13 case, pursuant to Bankruptcy Code § 706.
v. Abandon the house to the mortgagee pursuant to the Chapter 7 filing, if you can’t work out a payment plan with the lender.
V. The Southern District of New York’s Loss-Mitigation Program
A. In response to a growing number of mortgage defaults and foreclosures, the U.S. Bankruptcy Court for the Southern District of New York (NYSB) adopted Loss Mitigation Program Procedures in January 2009. A full description of the program is available here.
B. “Loss mitigation” includes the full range of solutions that can prevent either the loss of a Debtor’s property to foreclosure, increased costs to the lender, or both. Loss mitigation commonly consists of the following general types of agreements, or a combination of them: loan modification, loan refinance, forbearance, short sale, or surrender of the property in full satisfaction of the mortgage.
C. Use of the NYSB Loss Mitigation Program Procedures requires that: (1) the individual must reside in the Southern District of New York (which includes the counties of New York, Bronx, Westchester, Rockland, Putnam, Orange, Dutchess, and Sullivan) and (2) loss mitigation can only be requested for an individual’s primary residence. Loss Mitigation is not available in the Eastern District of New York (which includes the counties of Kings, Queens, Richmond, Nassau and Suffolk). However, the Eastern District is contemplating setting up a similar program.
D. Parties are encouraged to request loss mitigation as early in the case as possible, but loss mitigation may be initiated at any time, by any of the following methods:
i. By the Debtor
a. A Debtor may request Loss Mitigation in a Chapter 7 or Chapter 13 Plan by filing and serving a Notice of Loss Mitigation Request (along with an affidavit of service) on a particular creditor. The creditor has 21 days to object. If no objection is filed, the debtor shall submit an order as soon as possible to the Judge assigned to the bankruptcy case. The order may be submitted: (1) after the expiration of the 21 days; or (2) with the Notice of Loss Mitigation Request on Notice of Presentment on the 22nd day.
b. A Debtor may also file and serve a Loss Mitigation Request-By the Debtor (along with an affidavit of service) for loss mitigation on a particular creditor separate from a Chapter 13 Plan. The creditor has 14 days to object. If no objection is filed, the debtor shall submit an order as soon as possible. The order may be submitted: (1) after the expiration of the 14 days; or (2) with the Loss Mitigation Request-By the Debtor on Notice of Presentment on the 15th day.
c. If a creditor has filed a motion requesting relief from the automatic stay pursuant to § 362 of the Bankruptcy Code (a Lift-Stay Motion), at any time prior
to the conclusion of the hearing on the Lift-Stay Motion, the Debtor may file a
Loss Mitigation Request-By the Debtor. The Debtor and creditor shall appear at the scheduled hearing on the Lift-Stay Motion, and the Bankruptcy Court will consider the Loss Mitigation Request-By the Debtor and any opposition by the Creditor.
ii. By a creditor.
A creditor may file a Loss Mitigation Request-By the Creditor. The Debtor shall have seven days to object. If no objection is filed, the creditor shall submit an order as soon as possible. The order may be submitted: (1) after the expiration of the seven days; or (2) with the request on Notice of Presentment on the 8th day.
iii. By the Bankruptcy Court.
The Bankruptcy Court may enter a Loss Mitigation Order at any time, provided
that the parties that will be bound by the Loss Mitigation Order have had notice and an opportunity to object.
D. Upon entry of a Loss-Mitigation Order:
i. Each creditor is authorized to contact the Debtor directly. It shall be presumed
that such communications do not violate the automatic stay.
ii. Except where necessary to prevent irreparable injury, loss or damage, a creditor shall not file a Lift-Stay Motion during the loss mitigation period. Any Lift-Stay
Motion filed by the creditor prior to the entry of the Loss Mitigation Order shall
be adjourned to a date after the last day of the loss mitigation period, and the stay
shall be extended pursuant to § 362(e) of the Bankruptcy Code.
iii. In a Chapter 13 case, the deadline by which a creditor must object to
confirmation of the Chapter 13 plan shall be extended to permit the creditor an
additional 14 days after the termination of loss mitigation, including any
extension of the loss mitigation period.
iv. All communications and information exchanged by the Loss Mitigation Parties
during loss mitigation will be inadmissible in any subsequent proceeding pursuant
to Federal Rule of Evidence 408.
E. The Loss Mitigation Parties shall provide either a written or verbal report to the bankruptcy court regarding the status of loss mitigation within the time set by the
bankruptcy court in the Loss Mitigation Order. The status report shall state whether one
or more loss mitigation sessions have been conducted, whether a resolution was reached,
and whether one or more of the Loss Mitigation Parties believe that additional loss
mitigation sessions would be likely to result in either a partial or complete resolution. A
status report may include a request for an extension of the loss mitigation period.
F. The Bankruptcy Court will consider any settlement reached during
loss mitigation. A settlement may be noticed and implemented in any manner
permitted by the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, including, but not limited to, a stipulation, sale, plan of reorganization or amended plan of reorganization.
G. Loss Mitigation may delay a motion to lift stay (filed by a mortgagee) to commence or continue a foreclosure action, and delay a foreclosure action as well.
VI. Exemptions in Chapter 7 Bankruptcy for a New York State Resident
A. IRA. The maximum amount of a qualified IRA that may be exempted is $1,000,000.
B. Under New York Debtor and Creditor Law §5205(a), an individual debtor may exempt up to $5,000 of personal property and a joint debtor may exempt up to $10,000 of personal property.
C. Homestead exemption-As discussed in Section IV above, in New York State, an individual debtor may exempt up $50,000 of equity in a residence, and a joint debtor may exempt up to $100,000 of equity in a residence.
D. An unlimited amount of rental or utility security deposits.
E. 60 days of food.
F. $7,500 (for an individual debtor) or $15,000 (for a joint debtor) of monies recovered for a personal injury.
VII. Remedies for Dealing with Judgments
A. Under New York Debtor and Creditor Law, a judgment is good for 20 years. A judgment docketed against a property would prevent the owner from selling or refinancing the property without satisfying the judgment.
B. If a married couple owns property as tenants by the entirety, a creditor can docket the judgment against the property, but can’t force a sale of the property. This is to prevent the innocent spouse from the consequences of the judgment debtor’s actions.
C. Creditors may file a motion to avoid a judicial lien under section 522(f) of the Bankruptcy Code. Section 522(f) of the Bankruptcy Code protects Debtors’ exemptions and discharge, and thus their fresh start, by allowing them to avoid certain liens on exempt property (but not consensual mortgages). A Debtor may avoid a judicial lien on any property to the extent that the property could have been exempted in the absence of the lien.
a. The formula for calculating avoidance of a lien is:
i. Add the lien being tested for avoidance, all other liens and the maximum exemption allowable in the absence of liens (in New York State, $50,000 for an individual Debtor, $100,000 for joint Debtors).
ii. From the above sum, subtract the value of the property in the absence of the lien to determine the extent of the impairment.
iii. If the extent of the impairment of the exemption exceeds the entire value of the Debtor’s lien, the entire lien is avoidable.
b. If the extent of impairment is less than the entire value of the Debtor’s lien, the lien can be avoided only to the extent of the impairment of the exemption and the rest remains as a lien.
c. If the property has increased in value, there may now be too much equity for § 522(f) to apply if the current date is used as the date of valuation. The Debtor will want to use the date the bankruptcy petition was originally filed as the date of valuation.
D. Judgments entered within 90 days of a bankruptcy filing are a voidable preference.
VIII. Cancellation of Record of Judgment Discharged in Bankruptcy under New York State Debtor and Creditor Law § 150
A. Under this section of New York State law, at any time after a year has elapsed since a Debtor is discharged from their debts in bankruptcy, a Debtor may apply, upon proof of their discharge of debts, to the court in which a judgment was rendered against the Debtor, or to the court in which the judgment was docketed, for an order directing that a discharge or a qualified discharge of record be marked upon the docket of the judgment.
B. If it appears after a hearing that the Debtor has been discharged from the payment of a judgment or the debt upon which it was recovered, the court must enter an order directing that a discharge or qualified discharge be marked on the docket of the judgment.
C. If it appears that any lien of the judgment upon real property owned by the Debtor prior to the commencement of the bankruptcy was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a discharge be marked on the docket of the judgment.
D. If (a) it does not appear whether the judgment was a lien on real property owned by the Debtor prior to the commencement of the bankruptcy, or (b) if it appears that the judgment was a lien on such real property, and it is not established to the satisfaction of the court that the lien was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a qualified discharge be marked on the docket of the judgment. If the court directs that a qualified discharge be marked on the docket of the judgment, it must specify in its order which of the two grounds stated above was the basis of its order.
VIII. Relief of Indebtedness Income
A. Under § 108 of the Internal Revenue Code, debt relief is considered income.
B. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
i. This provision applies to debt forgiven in calendar years 2007 through 2012.
ii. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).
iii. The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
iv. This provision does not apply to credit card debt or non-residential property. But a Chapter 7 bankruptcy filing eliminates relief of indebtedness debt.
IX. Chapter 13
A. What are the pros and cons?
i. Cons
a. The debtor is placed on an austerity budget and must pay their disposable income to the Chapter 13 Trustee on a monthly basis.
b. If the debtor is over the “median income,” then they must prepare a five year, 60 month plan. The shortest plans are generally three years.
c. The filing fee is $279 (which is $20 less then the filing fee for a Chapter 7 filing).
d. However, legal fees are greater than those for a Chapter 7 filing, since there are fees for preparing the plan, the hearing on plan confirmation, and the plan must be served on creditors and must be confirmable.
e. In the Southern District of New York, historically only 30% of Chapter 13 plans pay out over time.
f. Pursuant to §1322 of the Bankruptcy Code, first mortgages cannot be modified in Chapter 13. However, second mortgages can be modified and mortgages on investment properties and vacation homes can be modified.
g. The Chapter 13 Trustee receives a commission of 10% of the monies paid into a Chapter 13 plan.
h. Since 2005, when New York State increased the homestead exemption to $50,000, Chapter 7 can accomplish much of what can be accomplished with a Chapter 13 filing at a lesser cost to the Debtor.
ii. Pros
a. Chapter 13 allows the debtor to retain property that he or she would otherwise lose in a Chapter 7 liquidation (e.g. a car or a house with substantial equity)
b. A Chapter 13 debtor remains under bankruptcy court protection for the duration of the repayment plan (3-5 years)
X. Alternatives to Chapter 7 bankruptcy
A. Do nothing
B. File for Chapter 13 bankruptcy
C. File for Chapter 11 bankruptcy (which is an extremely expensive and time consuming process). A debtor would only file under this chapter if they didn’t fit within the confines of the Chapter 7 or Chapter 13 requirements, had a very unique problem or had an extremely high net worth.
D. Out of court workout with creditors
I. Introduction
a. Why do people file for bankruptcy today?
1. Credit card debts
2. Business reversals and job loss
3. Falling real estate values
4. High housing costs
5. Student loans
6. Divorce
7. Medical bills and illness
b. Many of the problems that are causing individuals to file for personal bankruptcy are real estate related. Fortunately, the Bankruptcy Code and New York State Debtor and Creditor Law provide many remedies to real estate issues and other debtor/creditor problems facing individuals in 2009 in New York State.
• Chapter 7 bankruptcy constitutes the vast majority of individual filings, and can be very helpful in dealing with many debtor/creditor problems that individuals have these days.
c. 1 million Americans filed for bankruptcy from January 2009 to October 2009, and experts predict that bankruptcies could reach 1.5 million this year before leveling off at 1.6 million next year.
d. The goal of this outline is to explain contemporary issues facing debtors in New York State in 2009 and strategies for dealing with those issues.
II. Chapter 7 Personal Bankruptcy-“BAPCPA”
A. In 2005, Congress radically revised and amended Chapter 7 personal bankruptcy laws. 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.
B. 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, 2009, the median income of a single person in New York State is $46,523. For a family of two, the income threshold for the Median Income Test is $57,006, for a family of three it is $67,991 and for a family of four it is $83,036. Add $6,900 for each individual in excess of four. Median income figures are periodically revised by the Census Bureau.
C. 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.
D. However, with proper planning, most individuals or couples whose income exceeds the median income can still pass the Means Test and will be allowed to file for Chapter 7 bankruptcy, notwithstanding the legislative intent of the changes under BAPCPA, which was to try and minimize the number of individuals who could file for Chapter 7 bankruptcy and force them to either not file for bankruptcy or to file for Chapter 13 bankruptcy.
E. Means Test Planning Opportunities:
1. If an individual’s debts are primarily business debts, then the debtor is not required to take the Means Test.
2. The data that is used to calculate the Means Test is a six-month rolling look back at the debtor’s income and expenses. Accordingly, if a debtor is self-employed or is an independent contractor, they may be able to arrange their financial affairs so that they have less income for the months included in the Means Test, and therefore pass the Means Test. This is known as pre-bankruptcy planning.
3. Our experience is that 95% of all debtors pass the means test and qualify for Chapter 7 personal bankruptcy.
III. Why do the vast majority of Americans who file for bankruptcy file for Chapter 7 bankruptcy?
A. Chapter 7 bankruptcy provides individuals who qualify to file under this chapter with a “discharge,” which can wipe out a significant amount of an individual’s debt.
B. What debts are discharged in a Chapter 7 personal bankruptcy?
i. Credit card debt
ii. Personal, business, automobile and real estate loans
iii. Lines of credit
iv. Medical bills
v. Utility bills
vi. Personal and “good guy” guaranties-“good guy” guaranties are guaranties created for the leasing of commercial space
C. Certain “old income taxes” may be dischargeable if:
i. The tax return was filed more than two years prior to the bankruptcy filing;
ii. The taxes are more than three years old;
iii. The taxes were assessed more than 240 days before the filing of the petition;
iv. There was no attempt to avoid or evade the taxes.
If all of these conditions are met, the taxes are dischargeable in bankruptcy.
D. The IRS has heightened its scrutiny of the discharge of income taxes in bankruptcy, and their position (based on case law) is that if you spend too much money on luxury items and/or pay other creditors ahead of the IRS, then according to the IRS, those tax debts would not be dischargeable, and the IRS will commence an adversary proceeding (litigation in a bankruptcy case) to object to the discharge of these taxes. See Wright v. Internal Revenue Service, 191 B.R. 291 (S.D.N.Y. 1995); Haesloop v. U.S. (In re Haesloop), 2000 Bankr. LEXIS 1104, 2000 WL 1607316 (Bankr. E.D.N.Y. Aug. 30, 2000); Lynch v. United States, 299 B.R. 62 (Bankr. S.D.N.Y. 2003); Epstein v. United States, 303 B.R. 280 (Bankr. E.D.N.Y. 2004)
E. What is not dischargeable in a Chapter 7 bankruptcy filing?
i. Recent income taxes (2-3 years old)
ii. “Trust fund” taxes (i.e. sales or employment taxes)
iii. Student loans
iv. Domestic support obligations (i.e. alimony and child support payments)
v. Debts incurred within 90 days of a bankruptcy filing that aggregate at least $550 for luxury goods or services and cash advances aggregating more than $825 within 70 days.
Chapter 7 bankruptcy is a very effective tool for the right debtor!
F. New BAPCPA (2005) requirements in Chapter 7 bankruptcy
i. Under BAPCPA, in addition to the list of creditors, schedules of assets, liabilities, income and expenses debtors must now provide:
a. A certificate of credit counseling;
b. Payment advices from employers received 60 days before filing (if any);
c. A statement of monthly net income and any anticipated increase in income or expenses after filing;
d. Tax returns or transcripts filed in the most recent tax year;
f. Photo ID; and
g. Social Security card
ii. Failure to provide the documents within 45 days after the petition has been filed (with a possibility of a 45-day extension) results in automatic dismissal of the case.
iii. Also new under BAPCPA, a debtor must have received pre-petition credit briefing (in person, by phone or internet) from an approved non-profit entity that outlined opportunities for credit counseling and assisted the Debtor in performing a personal budget analysis in the 180 days before filing a petition. Greenpath, one of the approved credit counseling agencies, charges approximately $45.
vi. Additionally, within 45 days after the first Meeting of Creditors, the debtor must also take a post-petition financial management course and file a certificate of completion with the Bankruptcy Court. The cost of this course from Greenpath is also approximately $45.
iv. The Bankruptcy Court may grant a waiver based on the Debtor’s sworn statement that they were unable to obtain the counseling services within five days of making the request and had to file immediately, but the waiver expires 30 days after the petition is filed.
v. The briefing is not required if the Bankruptcy Court determines that the Debtor is mentally incapacitated, physically disabled, or is an active member of the military in a combat zone.
G. What are the negatives of filing for Chapter 7 bankruptcy?
i. The filing stays on a person’s credit report for seven to ten years
ii. A debtor may only file for Chapter 7 bankruptcy every eight years (however, if a debtor files for Chapter 7, receives a discharge, and then gets into further financial trouble, they can file under Chapter 11 or 13 of the Bankruptcy Code).
H. Property of the Bankruptcy Estate:
i. This includes tax refunds
ii. Lawsuits (usually personal injury cases) commenced by the debtor prior to the bankruptcy filing
iii. Inheritances received by the debtor within 180 days of the bankruptcy filing.
IV. Chapter 7 bankruptcy can be very effective for individuals with real estate in which they live that is “underwater” (where the fair market value of the property is less than the value of the mortgages to which the property is subject)
A. When we talk about real estate, we’re talking about houses, townhouses, co-ops and condos. In order to qualify for the homestead exemption, a debtor must reside in the property at the time the bankruptcy is filed.
In 2005, New York State increased the homestead exemption to $50,000 per Debtor, so a married couple under New York law can exempt $100,000 of equity in a residence. Let’s look at a few examples of how residential real estate issues play out in a Chapter 7 bankruptcy filing.
Real Estate Scenarios:
For example, let’s take a look at a married couple considering filing for bankruptcy and the value of their property and mortgage(s) on their property.
FMV $600,000
Mortgage ($500,000)
Equity $100,000
In this scenario, the couple could file for Chapter 7 bankruptcy, discharge their unsecured debts, and keep their house, provided that they continue to make mortgage payments.
FMV $700,000
Mortgage ($500,000)
Equity $200,000
NYS Homestead Exemption ($100,000)
Non-Exempt Equity $100,000
In this scenario in a Chapter 7 bankruptcy, the Chapter 7 Trustee would sell the house and receive $100,000 for the equity above the homestead exemption (less costs and expenses), and that money would be used to pay the couple’s creditors. The Trustee would pay $100,000 to the Debtors at the end of their case as a result of their homestead exemption. Alternatively, the debtors could repurchase the house from the Trustee by buying the equity from the Trustee (redemption).
FMV $400,000
Mortgage ($500,000)
Negative Equity ($100,000)
In this scenario, the house has a negative equity of $100,000 and is “underwater” and would not be sold by the Chapter 7 Trustee. However, in order to keep the house, the debtor must reaffirm the debt to the mortgagee before the case is discharged and continue to make the payments on the mortgage, notwithstanding the fact that the value of the house is less than the amount of the mortgage.
Reaffirmation is governed by section 524(c) of the Bankruptcy Code, and requires that the debtor file an agreement with the court stating that he or she agrees to be legally bound to repay the otherwise dischargeable debt. The reaffirmation agreement must be filed 60 days after the meeting of creditors. The debtor’s attorney must file an affidavit stating that such an agreement will not be a hardship for the debtor. In the case of a pro se debtor, the bankruptcy judge will interview the debtor to ensure the agreement is voluntary and that it does not present a hardship for the debtor. In any event, the debtor may rescind the agreement up to 60 days after the agreement is filed with the court, or the case is discharged, whichever is later.
Here’s a question for all of you-Under these circumstances why would the couple want to retain the house?
Wouldn’t they be better off economically to file for Chapter 7 bankruptcy and let the bank make a motion for relief from the automatic stay so they can foreclose and obtain title to the house? This a personal decision for the debtors would have to make, which may include non-economic considerations that would lead them to want to keep a house that is $100,000 “underwater.”
Scenario: One spouse files for bankruptcy, the other spouse does not and the house has equity.
In a Chapter 7 bankruptcy, the Trustee may be able to sell the house. However, under New York State law due to “tenancy-by-the-entirety” protection, the house cannot be sold. The creditor can docket a judgment against the property, which is good for 20 years, and the home cannot be sold or refinanced.
Under this scenario, NYS law may provide more protection to the non-filing spouse than bankruptcy law. See §§ 363(h), (i), and (j) of the Bankruptcy Code when dealing with a scenario where one spouse files for bankruptcy, the other spouse does not and the house has equity.
Note that if the home is transferred from one spouse to the other, this a fraudulent conveyance.
Planning opportunity: If the couple divorces, the house may be transferred from one spouse to the other for no consideration, pursuant to New York State equitable distribution law.
In Chapter 7 bankruptcy, the factors to be considered as to whether the Chapter 7 bankruptcy trustee can sell the house are: (i) the equity in the property; (ii) the respective ages of the debtor and the spouse; and (iii) the burden to the non-filing spouse of having to leave the house (i.e. the impact on minor children).
Section 363(h) of the Bankruptcy Code deals with the conditions which must be met for a Trustee to sell a co-owner’s interest in property (whether owned as tenants in common, joint tenants or tenants by the entirety), which include:
1. Partition of the property between the bankruptcy estate and the co-owners is impracticable;
2. Sale of the bankruptcy estate’s undivided interest in the property would realize significantly less for the estate than the sale of the property free of the interests of the co-owners;
3. The benefit to the bankruptcy estate of a sale of the property free of the interests of the co-owners outweighs the detriment, if any, to the co-owners.
In Community Natl. Bank and Trust Co. of New York v. Persky (In re Persky), 893 F.2d 15 (2d. Cir. 1989), the Second Circuit Court of Appeals reviewed a bankruptcy filing in which only one of the co-owners was indebted to the bank and filed for bankruptcy relief. The Court found that:
• The Bankruptcy Court had the power to review the Trustee’s discretion to sell the property.
• The benefit to the bankruptcy estate should be analyzed from the standpoint of the sale of the nondebtor spouse’s entire interest in the property, including their possessory and survivorship interests, in determining whether the property should be sold.
• Noneconomic factors should be considered when analyzing the detriment to the nondebtor spouse of a sale of the property.
Section 363(i) of the Bankruptcy Code provides that in a Chapter 7 bankruptcy, if the property is to be sold, the debtor’s spouse may purchase the estate’s share of the property.
Pursuant to §363(j) of the Bankruptcy Code, the Chapter 7 Trustee must distribute to the debtor’s spouse the proceeds of the sale (less costs and expenses), but not including any compensation of the Trustee, in accordance with the ownership interests of the non-filing spouse and the bankruptcy estate.
Pursuant to § 363(k) of the Bankruptcy Code, the mortgagee may also bid on the house and, if they’re successful, they may offset their secured claim against the purchase price of the house.
Mortgage Arrears and Chapter 7 Bankruptcy
The above scenarios assume that the debtors are current on their mortgage. If the debtors were not current, then the mortgage arrears would need to be cured in order to keep the house during Chapter 7 bankruptcy.
A. How does a debtor deal with mortgage arrears?
i. Negotiate with the lender prior to the bankruptcy filing.
ii. Negotiate with the lender after the bankruptcy filing for payment plan for the arrears. Pursuant to Bankruptcy Code § 524, a debtor must reaffirm within 60 days from the date of the first scheduled meeting of creditors. Once the reaffirmation is executed, unless the agreement is rescinded, the debtor is liable; if they default on the mortgage in the future after reaffirmation, the mortgage debt is not dischargeable.
iii. Loss mitigation in the Southern District of New York (see Section V below)
iv. Conversion of a Chapter 7 case to a Chapter 13 case, pursuant to Bankruptcy Code § 706.
v. Abandon the house to the mortgagee pursuant to the Chapter 7 filing, if you can’t work out a payment plan with the lender.
V. The Southern District of New York’s Loss-Mitigation Program
A. In response to a growing number of mortgage defaults and foreclosures, the U.S. Bankruptcy Court for the Southern District of New York (NYSB) adopted Loss Mitigation Program Procedures in January 2009. A full description of the program is available here.
B. “Loss mitigation” includes the full range of solutions that can prevent either the loss of a Debtor’s property to foreclosure, increased costs to the lender, or both. Loss mitigation commonly consists of the following general types of agreements, or a combination of them: loan modification, loan refinance, forbearance, short sale, or surrender of the property in full satisfaction of the mortgage.
C. Use of the NYSB Loss Mitigation Program Procedures requires that: (1) the individual must reside in the Southern District of New York (which includes the counties of New York, Bronx, Westchester, Rockland, Putnam, Orange, Dutchess, and Sullivan) and (2) loss mitigation can only be requested for an individual’s primary residence. Loss Mitigation is not available in the Eastern District of New York (which includes the counties of Kings, Queens, Richmond, Nassau and Suffolk). However, the Eastern District is contemplating setting up a similar program.
D. Parties are encouraged to request loss mitigation as early in the case as possible, but loss mitigation may be initiated at any time, by any of the following methods:
i. By the Debtor
a. A Debtor may request Loss Mitigation in a Chapter 7 or Chapter 13 Plan by filing and serving a Notice of Loss Mitigation Request (along with an affidavit of service) on a particular creditor. The creditor has 21 days to object. If no objection is filed, the debtor shall submit an order as soon as possible to the Judge assigned to the bankruptcy case. The order may be submitted: (1) after the expiration of the 21 days; or (2) with the Notice of Loss Mitigation Request on Notice of Presentment on the 22nd day.
b. A Debtor may also file and serve a Loss Mitigation Request-By the Debtor (along with an affidavit of service) for loss mitigation on a particular creditor separate from a Chapter 13 Plan. The creditor has 14 days to object. If no objection is filed, the debtor shall submit an order as soon as possible. The order may be submitted: (1) after the expiration of the 14 days; or (2) with the Loss Mitigation Request-By the Debtor on Notice of Presentment on the 15th day.
c. If a creditor has filed a motion requesting relief from the automatic stay pursuant to § 362 of the Bankruptcy Code (a Lift-Stay Motion), at any time prior
to the conclusion of the hearing on the Lift-Stay Motion, the Debtor may file a
Loss Mitigation Request-By the Debtor. The Debtor and creditor shall appear at the scheduled hearing on the Lift-Stay Motion, and the Bankruptcy Court will consider the Loss Mitigation Request-By the Debtor and any opposition by the Creditor.
ii. By a creditor.
A creditor may file a Loss Mitigation Request-By the Creditor. The Debtor shall have seven days to object. If no objection is filed, the creditor shall submit an order as soon as possible. The order may be submitted: (1) after the expiration of the seven days; or (2) with the request on Notice of Presentment on the 8th day.
iii. By the Bankruptcy Court.
The Bankruptcy Court may enter a Loss Mitigation Order at any time, provided
that the parties that will be bound by the Loss Mitigation Order have had notice and an opportunity to object.
D. Upon entry of a Loss-Mitigation Order:
i. Each creditor is authorized to contact the Debtor directly. It shall be presumed
that such communications do not violate the automatic stay.
ii. Except where necessary to prevent irreparable injury, loss or damage, a creditor shall not file a Lift-Stay Motion during the loss mitigation period. Any Lift-Stay
Motion filed by the creditor prior to the entry of the Loss Mitigation Order shall
be adjourned to a date after the last day of the loss mitigation period, and the stay
shall be extended pursuant to § 362(e) of the Bankruptcy Code.
iii. In a Chapter 13 case, the deadline by which a creditor must object to
confirmation of the Chapter 13 plan shall be extended to permit the creditor an
additional 14 days after the termination of loss mitigation, including any
extension of the loss mitigation period.
iv. All communications and information exchanged by the Loss Mitigation Parties
during loss mitigation will be inadmissible in any subsequent proceeding pursuant
to Federal Rule of Evidence 408.
E. The Loss Mitigation Parties shall provide either a written or verbal report to the bankruptcy court regarding the status of loss mitigation within the time set by the
bankruptcy court in the Loss Mitigation Order. The status report shall state whether one
or more loss mitigation sessions have been conducted, whether a resolution was reached,
and whether one or more of the Loss Mitigation Parties believe that additional loss
mitigation sessions would be likely to result in either a partial or complete resolution. A
status report may include a request for an extension of the loss mitigation period.
F. The Bankruptcy Court will consider any settlement reached during
loss mitigation. A settlement may be noticed and implemented in any manner
permitted by the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, including, but not limited to, a stipulation, sale, plan of reorganization or amended plan of reorganization.
G. Loss Mitigation may delay a motion to lift stay (filed by a mortgagee) to commence or continue a foreclosure action, and delay a foreclosure action as well.
VI. Exemptions in Chapter 7 Bankruptcy for a New York State Resident
A. IRA. The maximum amount of a qualified IRA that may be exempted is $1,000,000.
B. Under New York Debtor and Creditor Law §5205(a), an individual debtor may exempt up to $5,000 of personal property and a joint debtor may exempt up to $10,000 of personal property.
C. Homestead exemption-As discussed in Section IV above, in New York State, an individual debtor may exempt up $50,000 of equity in a residence, and a joint debtor may exempt up to $100,000 of equity in a residence.
D. An unlimited amount of rental or utility security deposits.
E. 60 days of food.
F. $7,500 (for an individual debtor) or $15,000 (for a joint debtor) of monies recovered for a personal injury.
VII. Remedies for Dealing with Judgments
A. Under New York Debtor and Creditor Law, a judgment is good for 20 years. A judgment docketed against a property would prevent the owner from selling or refinancing the property without satisfying the judgment.
B. If a married couple owns property as tenants by the entirety, a creditor can docket the judgment against the property, but can’t force a sale of the property. This is to prevent the innocent spouse from the consequences of the judgment debtor’s actions.
C. Creditors may file a motion to avoid a judicial lien under section 522(f) of the Bankruptcy Code. Section 522(f) of the Bankruptcy Code protects Debtors’ exemptions and discharge, and thus their fresh start, by allowing them to avoid certain liens on exempt property (but not consensual mortgages). A Debtor may avoid a judicial lien on any property to the extent that the property could have been exempted in the absence of the lien.
a. The formula for calculating avoidance of a lien is:
i. Add the lien being tested for avoidance, all other liens and the maximum exemption allowable in the absence of liens (in New York State, $50,000 for an individual Debtor, $100,000 for joint Debtors).
ii. From the above sum, subtract the value of the property in the absence of the lien to determine the extent of the impairment.
iii. If the extent of the impairment of the exemption exceeds the entire value of the Debtor’s lien, the entire lien is avoidable.
b. If the extent of impairment is less than the entire value of the Debtor’s lien, the lien can be avoided only to the extent of the impairment of the exemption and the rest remains as a lien.
c. If the property has increased in value, there may now be too much equity for § 522(f) to apply if the current date is used as the date of valuation. The Debtor will want to use the date the bankruptcy petition was originally filed as the date of valuation.
D. Judgments entered within 90 days of a bankruptcy filing are a voidable preference.
VIII. Cancellation of Record of Judgment Discharged in Bankruptcy under New York State Debtor and Creditor Law § 150
A. Under this section of New York State law, at any time after a year has elapsed since a Debtor is discharged from their debts in bankruptcy, a Debtor may apply, upon proof of their discharge of debts, to the court in which a judgment was rendered against the Debtor, or to the court in which the judgment was docketed, for an order directing that a discharge or a qualified discharge of record be marked upon the docket of the judgment.
B. If it appears after a hearing that the Debtor has been discharged from the payment of a judgment or the debt upon which it was recovered, the court must enter an order directing that a discharge or qualified discharge be marked on the docket of the judgment.
C. If it appears that any lien of the judgment upon real property owned by the Debtor prior to the commencement of the bankruptcy was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a discharge be marked on the docket of the judgment.
D. If (a) it does not appear whether the judgment was a lien on real property owned by the Debtor prior to the commencement of the bankruptcy, or (b) if it appears that the judgment was a lien on such real property, and it is not established to the satisfaction of the court that the lien was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a qualified discharge be marked on the docket of the judgment. If the court directs that a qualified discharge be marked on the docket of the judgment, it must specify in its order which of the two grounds stated above was the basis of its order.
VIII. Relief of Indebtedness Income
A. Under § 108 of the Internal Revenue Code, debt relief is considered income.
B. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
i. This provision applies to debt forgiven in calendar years 2007 through 2012.
ii. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).
iii. The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
iv. This provision does not apply to credit card debt or non-residential property. But a Chapter 7 bankruptcy filing eliminates relief of indebtedness debt.
IX. Chapter 13
A. What are the pros and cons?
i. Cons
a. The debtor is placed on an austerity budget and must pay their disposable income to the Chapter 13 Trustee on a monthly basis.
b. If the debtor is over the “median income,” then they must prepare a five year, 60 month plan. The shortest plans are generally three years.
c. The filing fee is $279 (which is $20 less then the filing fee for a Chapter 7 filing).
d. However, legal fees are greater than those for a Chapter 7 filing, since there are fees for preparing the plan, the hearing on plan confirmation, and the plan must be served on creditors and must be confirmable.
e. In the Southern District of New York, historically only 30% of Chapter 13 plans pay out over time.
f. Pursuant to §1322 of the Bankruptcy Code, first mortgages cannot be modified in Chapter 13. However, second mortgages can be modified and mortgages on investment properties and vacation homes can be modified.
g. The Chapter 13 Trustee receives a commission of 10% of the monies paid into a Chapter 13 plan.
h. Since 2005, when New York State increased the homestead exemption to $50,000, Chapter 7 can accomplish much of what can be accomplished with a Chapter 13 filing at a lesser cost to the Debtor.
ii. Pros
a. Chapter 13 allows the debtor to retain property that he or she would otherwise lose in a Chapter 7 liquidation (e.g. a car or a house with substantial equity)
b. A Chapter 13 debtor remains under bankruptcy court protection for the duration of the repayment plan (3-5 years)
X. Alternatives to Chapter 7 bankruptcy
A. Do nothing
B. File for Chapter 13 bankruptcy
C. File for Chapter 11 bankruptcy (which is an extremely expensive and time consuming process). A debtor would only file under this chapter if they didn’t fit within the confines of the Chapter 7 or Chapter 13 requirements, had a very unique problem or had an extremely high net worth.
D. Out of court workout with creditors
Wednesday, October 28, 2009
Obtaining Credit After Filing for Bankruptcy
Here at Shenwick & Associates, our clients often ask us how filing for bankruptcy will affect their financial future, and if they will ever be able to obtain credit again. It's important to note that your bankruptcy filing will remain on your credit report for seven to 10 years. This means that any credit company or potential lender looking to determine your creditworthiness during that period will be able to see that you filed for bankruptcy, which will affect your ability to obtain credit.
While filing for bankruptcy may make it more difficult to get some types of credit, such as a car or home equity loan, many clients tell us that within a few weeks of filing for bankruptcy, they received numerous credit card offers in the mail. At first, this seems counterintuitive; why would they solicit my business after I just filed to have my credit card debt discharged? But keep in mind that after a bankruptcy filing, you have a significantly lighter debt load to manage, and if all of your debts were dischargeable, you are essentially debt-free. Congratulations, and welcome to your fresh start! A word of caution is warranted, however, when deciding how to manage your personal finances post-bankruptcy.
Some credit card companies may be willing to take a risk on you with the hope that with fewer debts to pay, as well as your inability to file for Chapter 7 bankruptcy protection for another eight years, you will be able to pay them each month. But it is important to note that the cards offered may not be the kinds of cards you've been used to. Often, although credit card companies may be eager to sign you up, bear in mind that you may be considered more of a risk, and thus the cards offered to you may have a much higher interest rate and/or a much lower credit limit.
Nonetheless, for clients looking to rehabilitate or rebuild their credit after filing for bankruptcy, these cards may provide a way to do so. Bear in mind the importance of careful budgeting and financial management to ensure that any use of credit is in your long-term best interests. Being debt-free after bankruptcy can be a wonderful thing, but don't let the fresh start go to your head!
For more information about Chapter 7 personal bankruptcy and managing your financial future, please contact Jim Shenwick.
While filing for bankruptcy may make it more difficult to get some types of credit, such as a car or home equity loan, many clients tell us that within a few weeks of filing for bankruptcy, they received numerous credit card offers in the mail. At first, this seems counterintuitive; why would they solicit my business after I just filed to have my credit card debt discharged? But keep in mind that after a bankruptcy filing, you have a significantly lighter debt load to manage, and if all of your debts were dischargeable, you are essentially debt-free. Congratulations, and welcome to your fresh start! A word of caution is warranted, however, when deciding how to manage your personal finances post-bankruptcy.
Some credit card companies may be willing to take a risk on you with the hope that with fewer debts to pay, as well as your inability to file for Chapter 7 bankruptcy protection for another eight years, you will be able to pay them each month. But it is important to note that the cards offered may not be the kinds of cards you've been used to. Often, although credit card companies may be eager to sign you up, bear in mind that you may be considered more of a risk, and thus the cards offered to you may have a much higher interest rate and/or a much lower credit limit.
Nonetheless, for clients looking to rehabilitate or rebuild their credit after filing for bankruptcy, these cards may provide a way to do so. Bear in mind the importance of careful budgeting and financial management to ensure that any use of credit is in your long-term best interests. Being debt-free after bankruptcy can be a wonderful thing, but don't let the fresh start go to your head!
For more information about Chapter 7 personal bankruptcy and managing your financial future, please contact Jim Shenwick.
Monday, October 12, 2009
The Return of the Mortgage Cramdown?
Washington Revives the Mortgage Cramdown
As foreclosures continue to surge, congressional Democrats are pitching courtroom solutions to homeowners' woes. The Administration is wary
By Theo Francis
With foreclosures continuing to climb and midterm elections just a year away, Congress once again is preparing to tackle the mortgage crisis aggressively. High on many a wish list: a renewed push to allow so-called cramdown, which would let bankruptcy judges adjust the terms of home loans to give borrowers relief.
The banking industry hates cramdown (from the idea of cramming deals down lenders' throats), but Democrats argue that earlier efforts to fix the housing mess have not done as well as hoped. Moody's Economy.com (MCO) estimates that 3.8 million homes will enter foreclosure this year, up 41% from 2008. No surprise, then, that lawmakers are getting an earful. "We have folks calling our office every day," says Senator Jeff Merkley (D-Ore.), who is pressing Treasury to streamline its program to restructure mortgages.
"TRYING TO LIGHT A FIRE"
So Capitol Hill is poring over more ideas. One bill, introduced by Senator Jack Reed (D-R.I.) on Sept. 30 and co-sponsored by Merkley and two other senators, would force lenders to pause before they foreclose and to offer borrowers a break on their mortgage bill if they qualify for help under the Treasury program. Under the same proposed law, states could require mortgage servicers to enter mediation with borrowers before being allowed to foreclose. The bill also would give the states $6.4 billion to help homeowners stay put. "We're really trying to light a fire under the Administration," Merkley says.
Others in the Senate are considering the temporary suspension of home-loan payments or brief monthly mortgage subsidies for unemployed homeowners. House Financial Services Committee Chairman Barney Frank (D-Mass.) is drafting similar legislation.
The Administration is considering new options, too. One would support the broader housing market by extending a homebuyer's tax credit and making it easier for Fannie Mae (FNM) and Freddie Mac (FRE) to finance mortgages. Another would fund state housing agencies and independent mortgage banks. A Treasury spokeswoman noted that the Administration's programs have done more than previous efforts but said it "aggressively continues to build on our progress to date."
Many congressional Democrats think mortgage lenders need to feel the lash before they'll speed up mortgage workouts. Those critics, led by Senator Richard J. Durbin (D-Ill.), figure banks and mortgage servicers will do their best not to cut principal or interest rates on a mortgage. Lenders want to avoid, or at least delay, the loss they take from lowering what homeowners must pay, critics say. And despite an Administration plan that gives subsidies to mortgage servicers who agree to rework loans, many believe the service firms still gain too much from the fees they collect in foreclosure to bother working out a loan.
Durbin and other lawmakers are calling on Democrats to support what is seen as the party's nuclear option: cramdown. The proposal, which sailed through the House last spring, only to stall in the Senate on a 45-51 vote, authorizes bankruptcy courts to adjust mortgages. If Durbin's bill were to pass, a judge could reduce principal or interest rates on home loans and stretch out mortgage payments—something bankruptcy courts can do already with virtually every other kind of debt.
Supporters say cramdown would free homeowners from debt they can't afford while prodding lenders to cut deals before reaching the courthouse. A bankruptcy-court solution would also cost taxpayers little or nothing. Detractors argue cramdown would spook the mortgage market, driving up borrowing costs and making loans harder to get.
Undeterred, Durbin, the second-ranking Senate Democrat, is willing to attach a cramdown provision to any convenient bill if it won't get a hearing on its own. The proposal "will always be part of the conversation, if for nothing else than to scare the [daylights] out of everyone," says one senior Senate aide.
The financial industry, which used major muscle to kill the provision last spring, is arming for the fight, too. "The vote in the Senate was so overwhelmingly close, we're always worried," says one lobbyist. The big banks are leaning on community banks for help: These institutions were largely innocent of the worst excesses of the crisis and tend to be viewed much more favorably on Capitol Hill. "We are kind of the white hat," says a lobbyist for smaller financial institutions. "You'll see a lot of the industry try to hide behind us."
Given the industry's stance, supporters of cramdown say a forceful campaign by the White House would help. President Barack Obama supported it during the campaign and soon after his election, while his chief economics adviser Lawrence H. Summers wrote columns in favor of the proposal last year. But congressional sources say the Administration did little to push for passage of the bill last spring—possibly because Obama was reluctant to place further stress on already fragile banks. Now one Treasury official says the department has "no immediate plans" to revive the measure. Yet even without stronger White House support, Durbin might attract enough senators to embrace the bill if foreclosures continue to surge.
With Jane Sasseen in Washington
Francis is a correspondent in BusinessWeek's Washington bureau.
Copyright 2000-2009 by The McGraw-Hill Companies Inc. All rights reserved.
As foreclosures continue to surge, congressional Democrats are pitching courtroom solutions to homeowners' woes. The Administration is wary
By Theo Francis
With foreclosures continuing to climb and midterm elections just a year away, Congress once again is preparing to tackle the mortgage crisis aggressively. High on many a wish list: a renewed push to allow so-called cramdown, which would let bankruptcy judges adjust the terms of home loans to give borrowers relief.
The banking industry hates cramdown (from the idea of cramming deals down lenders' throats), but Democrats argue that earlier efforts to fix the housing mess have not done as well as hoped. Moody's Economy.com (MCO) estimates that 3.8 million homes will enter foreclosure this year, up 41% from 2008. No surprise, then, that lawmakers are getting an earful. "We have folks calling our office every day," says Senator Jeff Merkley (D-Ore.), who is pressing Treasury to streamline its program to restructure mortgages.
"TRYING TO LIGHT A FIRE"
So Capitol Hill is poring over more ideas. One bill, introduced by Senator Jack Reed (D-R.I.) on Sept. 30 and co-sponsored by Merkley and two other senators, would force lenders to pause before they foreclose and to offer borrowers a break on their mortgage bill if they qualify for help under the Treasury program. Under the same proposed law, states could require mortgage servicers to enter mediation with borrowers before being allowed to foreclose. The bill also would give the states $6.4 billion to help homeowners stay put. "We're really trying to light a fire under the Administration," Merkley says.
Others in the Senate are considering the temporary suspension of home-loan payments or brief monthly mortgage subsidies for unemployed homeowners. House Financial Services Committee Chairman Barney Frank (D-Mass.) is drafting similar legislation.
The Administration is considering new options, too. One would support the broader housing market by extending a homebuyer's tax credit and making it easier for Fannie Mae (FNM) and Freddie Mac (FRE) to finance mortgages. Another would fund state housing agencies and independent mortgage banks. A Treasury spokeswoman noted that the Administration's programs have done more than previous efforts but said it "aggressively continues to build on our progress to date."
Many congressional Democrats think mortgage lenders need to feel the lash before they'll speed up mortgage workouts. Those critics, led by Senator Richard J. Durbin (D-Ill.), figure banks and mortgage servicers will do their best not to cut principal or interest rates on a mortgage. Lenders want to avoid, or at least delay, the loss they take from lowering what homeowners must pay, critics say. And despite an Administration plan that gives subsidies to mortgage servicers who agree to rework loans, many believe the service firms still gain too much from the fees they collect in foreclosure to bother working out a loan.
Durbin and other lawmakers are calling on Democrats to support what is seen as the party's nuclear option: cramdown. The proposal, which sailed through the House last spring, only to stall in the Senate on a 45-51 vote, authorizes bankruptcy courts to adjust mortgages. If Durbin's bill were to pass, a judge could reduce principal or interest rates on home loans and stretch out mortgage payments—something bankruptcy courts can do already with virtually every other kind of debt.
Supporters say cramdown would free homeowners from debt they can't afford while prodding lenders to cut deals before reaching the courthouse. A bankruptcy-court solution would also cost taxpayers little or nothing. Detractors argue cramdown would spook the mortgage market, driving up borrowing costs and making loans harder to get.
Undeterred, Durbin, the second-ranking Senate Democrat, is willing to attach a cramdown provision to any convenient bill if it won't get a hearing on its own. The proposal "will always be part of the conversation, if for nothing else than to scare the [daylights] out of everyone," says one senior Senate aide.
The financial industry, which used major muscle to kill the provision last spring, is arming for the fight, too. "The vote in the Senate was so overwhelmingly close, we're always worried," says one lobbyist. The big banks are leaning on community banks for help: These institutions were largely innocent of the worst excesses of the crisis and tend to be viewed much more favorably on Capitol Hill. "We are kind of the white hat," says a lobbyist for smaller financial institutions. "You'll see a lot of the industry try to hide behind us."
Given the industry's stance, supporters of cramdown say a forceful campaign by the White House would help. President Barack Obama supported it during the campaign and soon after his election, while his chief economics adviser Lawrence H. Summers wrote columns in favor of the proposal last year. But congressional sources say the Administration did little to push for passage of the bill last spring—possibly because Obama was reluctant to place further stress on already fragile banks. Now one Treasury official says the department has "no immediate plans" to revive the measure. Yet even without stronger White House support, Durbin might attract enough senators to embrace the bill if foreclosures continue to surge.
With Jane Sasseen in Washington
Francis is a correspondent in BusinessWeek's Washington bureau.
Copyright 2000-2009 by The McGraw-Hill Companies Inc. All rights reserved.
Tuesday, August 25, 2009
Junior Mortgages in Bankruptcy
At Shenwick & Associates, we hear from many clients who have multiple mortgages on their property and want to stay in their home while reducing their debt burden. Chapter 13, which allows individual debtors to reorganize their debts and pay off secured creditors, is often a good choice for these clients. However, the treatment of unsecured junior mortgages has been a confusing one for both Debtors and Bankruptcy Courts alike.
In In re Pond, 252 F.3d 122 (2d Cir. 2001), the Second Circuit Court of Appeals held that a Debtor could void a wholly unsecured junior mortgage loan. The Debtors in In re Latimer, (Bk. No. 08-21242, Bank. W.D.N.Y., Ninfo, J., Oct. 27, 2008) wanted to bifurcate a second mortgage on their house into a secured claim and an unsecured claim, arguing that Pond didn’t address the plain language of 11 U.S.C. §§ 1322(c)(2) and 1325(a)(5)(B), which appears to specifically allow this type of bifurcation.
Relying on precedents from other Circuit Courts of Appeal, the Bankruptcy Court agreed and held that the Debtors could bifurcate the second mortgage on the real property into an allowed secured claim and an unsecured claim. Although the Second Circuit Court of Appeals (which has appellate jurisdiction over cases from New York) has not yet considered this issue, this case provides authority for debtors to bifurcate and strip down undersecured junior mortgages on their home in Chapter 13.
For more information about Chapter 13 bankruptcy and how to preserve the equity in your home in bankruptcy, please contact Jim Shenwick.
In In re Pond, 252 F.3d 122 (2d Cir. 2001), the Second Circuit Court of Appeals held that a Debtor could void a wholly unsecured junior mortgage loan. The Debtors in In re Latimer, (Bk. No. 08-21242, Bank. W.D.N.Y., Ninfo, J., Oct. 27, 2008) wanted to bifurcate a second mortgage on their house into a secured claim and an unsecured claim, arguing that Pond didn’t address the plain language of 11 U.S.C. §§ 1322(c)(2) and 1325(a)(5)(B), which appears to specifically allow this type of bifurcation.
Relying on precedents from other Circuit Courts of Appeal, the Bankruptcy Court agreed and held that the Debtors could bifurcate the second mortgage on the real property into an allowed secured claim and an unsecured claim. Although the Second Circuit Court of Appeals (which has appellate jurisdiction over cases from New York) has not yet considered this issue, this case provides authority for debtors to bifurcate and strip down undersecured junior mortgages on their home in Chapter 13.
For more information about Chapter 13 bankruptcy and how to preserve the equity in your home in bankruptcy, please contact Jim Shenwick.
Monday, August 10, 2009
Bloomberg News: Consumer, Celebrity Bankruptcies May Hit 1.4 Million
By Linda Sandler and Andrew M. Harris
Aug. 10 (Bloomberg) -- Consumer bankruptcies show no sign of abating after rising more than a third this year and may hit 1.4 million by Dec. 31 as jobs are lost and loans are harder to get, according to the American Bankruptcy Institute.
More than 126,000 consumers filed for bankruptcy in the U.S. last month, 34 percent more than in July 2008, the ABI said in its latest report on Aug. 4. The increase came after a 36.5 percent rise in personal bankruptcies nationwide in the first six months, to 675,351, according to the ABI research group, which interprets data collected by the National Bankruptcy Research Center.
“Rising unemployment on top of high pre-existing debt burdens is a formula for higher bankruptcies through the end of this year,” ABI Executive Director Samuel Gerdano said in a statement. The group, composed of lawyers, accountants, bankers and judges, is based in Alexandria, Virginia.
Debt problems don’t stop with sub-prime borrowers. Celebrities who filed for bankruptcy in July included movie actor Stephen Baldwin, who sought protection from creditors after lenders began foreclosure procedures against his home. Lenny Dykstra filed for Chapter 11 bankruptcy in a petition that says the former Major League Baseball All-Star owes between $10 million and $50 million.
Banks Hurt
Also last month, con man lawyer Marc Dreier’s luxury Manhattan condominium sold for $8.2 million, 21 percent less than what he paid two years ago, in an auction at U.S. Bankruptcy Court in Manhattan. Proceeds will be used to pay creditors in Dreier’s bankruptcy case and victims of Dreier’s fraud, said Salvatore LaMonica, trustee in the Chapter 7 bankruptcy case.
Steeply rising filings by consumers are hurting commercial banks. JPMorgan Chase & Co., the second-largest U.S. bank, predicted more losses on consumer loans last month even as it announced a rise in second-quarter profit on record investment banking fees. Chief Executive Officer Jamie Dimon said he doesn’t expect the credit card business to make a profit this year or in 2010, and the company increased its loss projections for prime and subprime mortgages.
Credit Card Losses
JPMorgan said losses in its Chase credit-card portfolio may be 10 percent next quarter and will be “highly dependent” on unemployment after that. Losses for cards issued by Washington Mutual, which the bank acquired in September, may reach 24 percent by the end of the year, the company said.
JPMorgan’s credit cards lost $672 million, compared with income of $250 million in the second quarter last year. Home- equity charge-offs climbed to $1.3 billion, or 4.61 percent. Prime mortgage defaults rose to $481 million, or 3.07 percent, from $104 million, or 1.08 percent a year earlier.
Dimon, 53, said the company supported “proper consumer protection” and that pending legislation setting up an agency to monitor consumer lending practices would hurt short-term profits in credit cards.
Congress, in October 2005, enacted the Bankruptcy Abuse Prevention and Consumer Protection Act, a legislative reform package intended to make it harder for consumers to get court orders wiping out their uncollateralized debt.
The act required debt counseling and a means test for would-be filers.
Copyright 2009 Bloomberg L.P. All rights reserved.
Aug. 10 (Bloomberg) -- Consumer bankruptcies show no sign of abating after rising more than a third this year and may hit 1.4 million by Dec. 31 as jobs are lost and loans are harder to get, according to the American Bankruptcy Institute.
More than 126,000 consumers filed for bankruptcy in the U.S. last month, 34 percent more than in July 2008, the ABI said in its latest report on Aug. 4. The increase came after a 36.5 percent rise in personal bankruptcies nationwide in the first six months, to 675,351, according to the ABI research group, which interprets data collected by the National Bankruptcy Research Center.
“Rising unemployment on top of high pre-existing debt burdens is a formula for higher bankruptcies through the end of this year,” ABI Executive Director Samuel Gerdano said in a statement. The group, composed of lawyers, accountants, bankers and judges, is based in Alexandria, Virginia.
Debt problems don’t stop with sub-prime borrowers. Celebrities who filed for bankruptcy in July included movie actor Stephen Baldwin, who sought protection from creditors after lenders began foreclosure procedures against his home. Lenny Dykstra filed for Chapter 11 bankruptcy in a petition that says the former Major League Baseball All-Star owes between $10 million and $50 million.
Banks Hurt
Also last month, con man lawyer Marc Dreier’s luxury Manhattan condominium sold for $8.2 million, 21 percent less than what he paid two years ago, in an auction at U.S. Bankruptcy Court in Manhattan. Proceeds will be used to pay creditors in Dreier’s bankruptcy case and victims of Dreier’s fraud, said Salvatore LaMonica, trustee in the Chapter 7 bankruptcy case.
Steeply rising filings by consumers are hurting commercial banks. JPMorgan Chase & Co., the second-largest U.S. bank, predicted more losses on consumer loans last month even as it announced a rise in second-quarter profit on record investment banking fees. Chief Executive Officer Jamie Dimon said he doesn’t expect the credit card business to make a profit this year or in 2010, and the company increased its loss projections for prime and subprime mortgages.
Credit Card Losses
JPMorgan said losses in its Chase credit-card portfolio may be 10 percent next quarter and will be “highly dependent” on unemployment after that. Losses for cards issued by Washington Mutual, which the bank acquired in September, may reach 24 percent by the end of the year, the company said.
JPMorgan’s credit cards lost $672 million, compared with income of $250 million in the second quarter last year. Home- equity charge-offs climbed to $1.3 billion, or 4.61 percent. Prime mortgage defaults rose to $481 million, or 3.07 percent, from $104 million, or 1.08 percent a year earlier.
Dimon, 53, said the company supported “proper consumer protection” and that pending legislation setting up an agency to monitor consumer lending practices would hurt short-term profits in credit cards.
Congress, in October 2005, enacted the Bankruptcy Abuse Prevention and Consumer Protection Act, a legislative reform package intended to make it harder for consumers to get court orders wiping out their uncollateralized debt.
The act required debt counseling and a means test for would-be filers.
Copyright 2009 Bloomberg L.P. All rights reserved.
Monday, August 03, 2009
Short Sales of Real Estate
At Shenwick & Associates, with the continuing fall in the value of real estate, we have received many inquiries regarding short sales of real estate (where the balance on the loan exceeds the value of the real estate in residential or commercial properties). Section 363 of the Bankruptcy Code concerns the use, sale or lease of property, and has been in the news of late with the GM and Chrysler bankruptcies. There are two ways to sell real estate or other assets in bankruptcy. One is pursuant to Section 363 of the Bankruptcy Code, and the other is pursuant to a confirmed bankruptcy plan.
While Section 363 is the quicker way to sell assets, there is a benefit to selling real estate through a confirmed bankruptcy plan, due to the fact that the seller (the bankrupt entity or individual) will not have to pay city or state real estate transfer taxes, based on the U.S. Supreme Court case Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. __ (2008). Accordingly, it may be beneficial to all parties for the debtor to file a simple, boilerplate Plan and Disclosure Statement and then sell the real estate pursuant to that Plan.
Recently, Shenwick & Associates represented a lender who was foreclosing on a property in which the borrower's principal had guaranteed the debt. The borrower filed for Chapter 11 bankruptcy to stay the foreclosure. A deal was reached in which the property would be conveyed to the secured lender pursuant to a confirmed Chapter 11 Plan. The transaction was a win-win situation for all parties. The debtor was able to transfer property that was "underwater," the debtor's principal was relieved of liability under his personal guaranty and the secured creditor obtained title to property, without paying city and state transfer taxes.
Any parties having questions regarding this or other transactions involving real estate in bankruptcy should contact Shenwick & Associates.
While Section 363 is the quicker way to sell assets, there is a benefit to selling real estate through a confirmed bankruptcy plan, due to the fact that the seller (the bankrupt entity or individual) will not have to pay city or state real estate transfer taxes, based on the U.S. Supreme Court case Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. __ (2008). Accordingly, it may be beneficial to all parties for the debtor to file a simple, boilerplate Plan and Disclosure Statement and then sell the real estate pursuant to that Plan.
Recently, Shenwick & Associates represented a lender who was foreclosing on a property in which the borrower's principal had guaranteed the debt. The borrower filed for Chapter 11 bankruptcy to stay the foreclosure. A deal was reached in which the property would be conveyed to the secured lender pursuant to a confirmed Chapter 11 Plan. The transaction was a win-win situation for all parties. The debtor was able to transfer property that was "underwater," the debtor's principal was relieved of liability under his personal guaranty and the secured creditor obtained title to property, without paying city and state transfer taxes.
Any parties having questions regarding this or other transactions involving real estate in bankruptcy should contact Shenwick & Associates.
Thursday, July 23, 2009
NYT: Stores Go Dark Where Buyers Once Roamed
By CHRISTINE HAUGHNEY
Among the marks of Manhattan’s prosperity in recent years were the thousands of restaurants and shops that opened to meet an ever-growing demand. Confident in the appetite for spending — on expensive shampoo at 24-hour drugstores, cheese plates at sleek wine bars and clothes at minimalist boutiques — store owners signed high-rent leases with little haggling.
But as New Yorkers have drastically cut back, the shops that line the streets, from chain outlets to family-run shops, have started to disappear.
The storefront vacancy rate in Manhattan is now at its highest point since the early 1990s — an estimated 6.5 percent — and is expected to exceed 10 percent by the middle of next year, according to data gathered by Marcus & Millichap Research Services, a national real estate investment brokerage based in Encino, Calif.
And those numbers do not capture the full story. Some of the more desirable shopping districts are littered with empty storefronts. For example, Fifth Avenue between 42nd Street and 49th Street, the stretch just south of Saks Fifth Avenue, has a vacancy rate of 15.3 percent, according to the brokerage Cushman & Wakefield.
In SoHo, from West Houston Street to Grand Street and Broadway to West Broadway, among the high-end boutiques, art galleries and restaurants, 1 in 10 retail spaces are now empty or about to be.
“I’ve never seen such an across-the-board problem,” said Lorraine Nadel, a lawyer who has represented tenants and landlords for 18 years. “Store owners can’t pay their rent, and they can’t keep their businesses going.”
It has long been difficult to run a small business in Manhattan, but a number of struggling store owners cite high rents and their landlords’ unwillingness to negotiate as the leading obstacles to their survival.
“It’s a crisis,” said Stephen Null, director of the Coalition for Fair Business Rents, which has been promoting legislation to protect small businesses in lease negotiations since 1984. “Lease renewals are the single biggest killer of small businesses in New York City.”
Manhattan, with its high density, high incomes and near-constant foot traffic, has maintained a strong storefront culture while other urban areas have seen their downtowns empty out and lose customers to suburban malls.
Stores and restaurants in New York are open longer hours, increasing the potential for revenue, and residents tend to shop near where they live, if just by necessity.
But because stores are such a part of their neighborhoods, the closings can have more of an emotional impact on residents.
“New York is different than the rest of America because it is the last bastion of storefronts,” said Kenneth T. Jackson, a historian at Columbia University. “You don’t live in a city of eight and a half million people. You live in a city of neighborhoods.”
“We feel a loss when the store is gone,” he added.
In one block alone, on the west side of Lexington Avenue between 74th and 75th Streets, three stores have closed in the past few months: a women’s clothing shop called Cantaloup, a luggage shop and a design store — places that the locals say had thrived for years. Those closings followed that of a sandwich shop across the street.
“The fabric of the neighborhood is up for grabs right now,” said Elaine Abelson, a professor of history at the New School who has lived in the neighborhood for 35 years.
The outlook is even worse in other boroughs. Hessam Nadji, managing director of research services at Marcus & Millichap, estimates that vacancy rates in Brooklyn and Queens, currently at 7 to 10 percent, will rise to 12 to 15 percent by year’s end. He said some neighborhoods have been ravaged by vacancy rates of 25 to 40 percent.
The problem is so bad that the city has become involved. It has offered grants for worker training, and it held a session last Wednesday on how to negotiate leases. Scott M. Stringer, the Manhattan borough president, held a conference called “Rescue and Recovery for Small Businesses” on July 13 that drew 320 people, among them owners of an organic grocery store, a wine bar, and a coffeehouse and bookstore who swapped advice on how to keep their businesses afloat.
High rents in the recession are the “last straw for small business in New York City,” Mr. Stringer said, “and I hear it everywhere I go.”
Without these storefronts, he said, the city loses “our special sauce that gives us our panache.”
The City Council is weighing in, too, considering a Small Business Survival Act that would require businesses to have the option of 10-year leases, renewals and the right to mediation if they cannot reach an agreement.
The legislation does not have the support of the Bloomberg administration, which argues that tracking lease negotiations would be too costly because of expenses like hiring staff, and that the need for such a law has “greatly dissipated” because rents have declined.
But as jobs disappear and neighborhoods suffer, the tide of opinion is growing that the government may need to step in. While data on the challenges of small business owners is limited, a survey of 937 Hispanic small business owners conducted by the U.S.A. Latin Chamber of Commerce between November 2008 and January 2009 found that most of them said they would not stay in the city because their rents had become so high.
The closing of stores has started to chip away at the city’s tax collections. Sales tax revenues have declined by 3 percent through May, to $4.15 billion from $4.3 billion the year before, according to the city’s Office of Management and Budget.
Some neighborhoods seem better positioned to hold on to their storefronts. Times Square has had relatively fewer closings because more people have been staying in town for vacations and attending Broadway shows, said Tim Tompkins, president of the Times Square Alliance. Doug Griebel, president of the Columbus Avenue Business Improvement District and an owner of the Rosa Mexicano restaurants, said there were only two vacant storefronts on Columbus between 67th and 82nd Streets.
Gary Schwartzman, broker with Grubb & Ellis, a commercial real estate firm, said many landlords were trying to find ways to keep retail businesses open.
“The risk of losing a good tenant is something that landlords don’t want,” Mr. Schwartzman said. “Right now, it’s all about tenant retention.”
Ms. Nadel, the lawyer, says that if a landlord tells her that he or she will not negotiate with tenants, she points to a stack of eviction files and says the chances of finding a new tenant are slim.
“You can’t maintain the rents,” she says she tells them. “People have run through their savings. They’ve run through everything.”
Copyright 2009 The New York Times Company. All rights reserved.
Among the marks of Manhattan’s prosperity in recent years were the thousands of restaurants and shops that opened to meet an ever-growing demand. Confident in the appetite for spending — on expensive shampoo at 24-hour drugstores, cheese plates at sleek wine bars and clothes at minimalist boutiques — store owners signed high-rent leases with little haggling.
But as New Yorkers have drastically cut back, the shops that line the streets, from chain outlets to family-run shops, have started to disappear.
The storefront vacancy rate in Manhattan is now at its highest point since the early 1990s — an estimated 6.5 percent — and is expected to exceed 10 percent by the middle of next year, according to data gathered by Marcus & Millichap Research Services, a national real estate investment brokerage based in Encino, Calif.
And those numbers do not capture the full story. Some of the more desirable shopping districts are littered with empty storefronts. For example, Fifth Avenue between 42nd Street and 49th Street, the stretch just south of Saks Fifth Avenue, has a vacancy rate of 15.3 percent, according to the brokerage Cushman & Wakefield.
In SoHo, from West Houston Street to Grand Street and Broadway to West Broadway, among the high-end boutiques, art galleries and restaurants, 1 in 10 retail spaces are now empty or about to be.
“I’ve never seen such an across-the-board problem,” said Lorraine Nadel, a lawyer who has represented tenants and landlords for 18 years. “Store owners can’t pay their rent, and they can’t keep their businesses going.”
It has long been difficult to run a small business in Manhattan, but a number of struggling store owners cite high rents and their landlords’ unwillingness to negotiate as the leading obstacles to their survival.
“It’s a crisis,” said Stephen Null, director of the Coalition for Fair Business Rents, which has been promoting legislation to protect small businesses in lease negotiations since 1984. “Lease renewals are the single biggest killer of small businesses in New York City.”
Manhattan, with its high density, high incomes and near-constant foot traffic, has maintained a strong storefront culture while other urban areas have seen their downtowns empty out and lose customers to suburban malls.
Stores and restaurants in New York are open longer hours, increasing the potential for revenue, and residents tend to shop near where they live, if just by necessity.
But because stores are such a part of their neighborhoods, the closings can have more of an emotional impact on residents.
“New York is different than the rest of America because it is the last bastion of storefronts,” said Kenneth T. Jackson, a historian at Columbia University. “You don’t live in a city of eight and a half million people. You live in a city of neighborhoods.”
“We feel a loss when the store is gone,” he added.
In one block alone, on the west side of Lexington Avenue between 74th and 75th Streets, three stores have closed in the past few months: a women’s clothing shop called Cantaloup, a luggage shop and a design store — places that the locals say had thrived for years. Those closings followed that of a sandwich shop across the street.
“The fabric of the neighborhood is up for grabs right now,” said Elaine Abelson, a professor of history at the New School who has lived in the neighborhood for 35 years.
The outlook is even worse in other boroughs. Hessam Nadji, managing director of research services at Marcus & Millichap, estimates that vacancy rates in Brooklyn and Queens, currently at 7 to 10 percent, will rise to 12 to 15 percent by year’s end. He said some neighborhoods have been ravaged by vacancy rates of 25 to 40 percent.
The problem is so bad that the city has become involved. It has offered grants for worker training, and it held a session last Wednesday on how to negotiate leases. Scott M. Stringer, the Manhattan borough president, held a conference called “Rescue and Recovery for Small Businesses” on July 13 that drew 320 people, among them owners of an organic grocery store, a wine bar, and a coffeehouse and bookstore who swapped advice on how to keep their businesses afloat.
High rents in the recession are the “last straw for small business in New York City,” Mr. Stringer said, “and I hear it everywhere I go.”
Without these storefronts, he said, the city loses “our special sauce that gives us our panache.”
The City Council is weighing in, too, considering a Small Business Survival Act that would require businesses to have the option of 10-year leases, renewals and the right to mediation if they cannot reach an agreement.
The legislation does not have the support of the Bloomberg administration, which argues that tracking lease negotiations would be too costly because of expenses like hiring staff, and that the need for such a law has “greatly dissipated” because rents have declined.
But as jobs disappear and neighborhoods suffer, the tide of opinion is growing that the government may need to step in. While data on the challenges of small business owners is limited, a survey of 937 Hispanic small business owners conducted by the U.S.A. Latin Chamber of Commerce between November 2008 and January 2009 found that most of them said they would not stay in the city because their rents had become so high.
The closing of stores has started to chip away at the city’s tax collections. Sales tax revenues have declined by 3 percent through May, to $4.15 billion from $4.3 billion the year before, according to the city’s Office of Management and Budget.
Some neighborhoods seem better positioned to hold on to their storefronts. Times Square has had relatively fewer closings because more people have been staying in town for vacations and attending Broadway shows, said Tim Tompkins, president of the Times Square Alliance. Doug Griebel, president of the Columbus Avenue Business Improvement District and an owner of the Rosa Mexicano restaurants, said there were only two vacant storefronts on Columbus between 67th and 82nd Streets.
Gary Schwartzman, broker with Grubb & Ellis, a commercial real estate firm, said many landlords were trying to find ways to keep retail businesses open.
“The risk of losing a good tenant is something that landlords don’t want,” Mr. Schwartzman said. “Right now, it’s all about tenant retention.”
Ms. Nadel, the lawyer, says that if a landlord tells her that he or she will not negotiate with tenants, she points to a stack of eviction files and says the chances of finding a new tenant are slim.
“You can’t maintain the rents,” she says she tells them. “People have run through their savings. They’ve run through everything.”
Copyright 2009 The New York Times Company. All rights reserved.
Thursday, June 25, 2009
Closing Down a Business
In these trying economic times, many clients have contacted us about closing down their business. One of the questions we’re often asked is, “Is it better to file a business Chapter 7 bankruptcy or just close down the business (also known as "going dark")?”
In general, if a company has assets that can be sold, or is concerned about an orderly liquidation of assets, or if they want or need an independent third party (i.e. a bankruptcy trustee) to close a business to protect their reputation in their industry, then they should consider a chapter 7 bankruptcy filing. However, for many businesses, going dark may be more beneficial and less costly. If a company wants to wind down its business in an orderly manner, the following actions should be taken by the company’s management:
1. The Board of Directors should adopt a resolution closing the business;
2. All members (in an LLC) or directors should resign from the Board of Directors;
3. The company should terminate and pay all of its employees;
4. Secured creditors (such as equipment vendors) should be notified and asked to remove their property from the company’s premises;
5. A shutdown letter should be sent to all unsecured creditors, employees and shareholders notifying them that the business is closing;
6. If shareholders or principals have guaranteed a lease, or if a good guy guaranty is in effect, the company should negotiate a settlement with their landlord; and
7. The company’s accountant should finalize and file all tax returns, which should be indicated as final returns, and all taxes should be paid.
The decision as to whether a company should file for bankruptcy or close down is a complicated one that requires assessing many variables and should be made in consultation with an experienced bankruptcy attorney. Anyone having questions regarding corporate bankruptcy or the closing down of businesses should contact Jim Shenwick.
In general, if a company has assets that can be sold, or is concerned about an orderly liquidation of assets, or if they want or need an independent third party (i.e. a bankruptcy trustee) to close a business to protect their reputation in their industry, then they should consider a chapter 7 bankruptcy filing. However, for many businesses, going dark may be more beneficial and less costly. If a company wants to wind down its business in an orderly manner, the following actions should be taken by the company’s management:
1. The Board of Directors should adopt a resolution closing the business;
2. All members (in an LLC) or directors should resign from the Board of Directors;
3. The company should terminate and pay all of its employees;
4. Secured creditors (such as equipment vendors) should be notified and asked to remove their property from the company’s premises;
5. A shutdown letter should be sent to all unsecured creditors, employees and shareholders notifying them that the business is closing;
6. If shareholders or principals have guaranteed a lease, or if a good guy guaranty is in effect, the company should negotiate a settlement with their landlord; and
7. The company’s accountant should finalize and file all tax returns, which should be indicated as final returns, and all taxes should be paid.
The decision as to whether a company should file for bankruptcy or close down is a complicated one that requires assessing many variables and should be made in consultation with an experienced bankruptcy attorney. Anyone having questions regarding corporate bankruptcy or the closing down of businesses should contact Jim Shenwick.
Monday, June 15, 2009
Village Voice: An Unlikely Rescuer from the Jaws of Debt
By Elizabeth Dwoskin
By 9:30 a.m., the 11th-floor hallway of a courthouse in downtown Brooklyn is filled with tight huddles made up of people in debt and the lawyers who are after them to pay.
The goal of the conferences is almost always the same: to cut a deal in the hallway before going into the packed courtroom to appear before the judge.
The people who owe money are anxious. They ask legal advice from just about anyone wearing a suit. The attorneys, for their part, talk to them sweetly about how to settle their cases.
Some of the people are angry, and some are confused—they had no idea they were in debt until letters came in the mail announcing they were being sued.
But if there's a dispute, the lawyers are quick to blame the collection agencies—their employers—for not giving them the correct paperwork or enough information. They reassure the debtors that everything will be taken care of quickly. And the people seem to believe them—better to settle things with these nice people in the hall who give them the impression that it's the proper procedure.
Beverly Smith, an African-American woman in her late forties, has already come to court three separate times. She works in the bridal section at Bloomingdale's and found out the hard way that someone believed she owed money—she received a letter stating her wages would be garnished.
Believing she was a victim of identity theft, she went to the police to file a report. But they handed her some forms to fill out and told her there was nothing they could do.
The first time that Smith came to the courthouse, an attorney from a firm called Pressler and Pressler, working for an agency called Palisades Collections, told her that in order to prove she didn't owe the money, she needed to fax them proof of her residency and a copy of her Social Security card. The second time, a different attorney from the same firm told her in another hallway conference that he had never received her fax and didn't have enough information to verify her identity. The third time, in April, the lawyer still didn't have the paperwork he required, so Smith agreed to a fourth court date.
She's tired of taking days off to come back to court. "I told the lawyer: Enough is enough," she says. She's determined to make her fourth court date, in June, her last. It has never occurred to her to ask to see a judge.
Time and again, people in the hallway insist that they've provided the correct documentation, that the debts aren't theirs, and that there's been a mistake. The attorneys, however, explain in reassuring tones that it's best just to settle matters with a payment to make it all go away, or to schedule yet another court date later on. It's better not to get the judge involved.
After the hallway conferences, the people file into the packed and noisy courtroom.
And then, something unusual happens.
A man and an older woman are called up to appear before the bench. They ask for a Russian interpreter. Through the interpreter, the man explains that the woman is being falsely accused of a debt, and that the lawyer suing her can't prove that it was hers. After some questioning, the collection agency's attorney concedes that, in fact, he doesn't have the documents he needs to prove that she owes the money. He asks for more time.
The judge, a small man with a tight beard and a yarmulke, refuses. With a wave of his hand, he dismisses the case.
"Dasvedanya," he says to the couple in Russian, and tells them they can be on their way.
But the couple doesn't budge. Stunned, they can't believe that the ordeal is so suddenly over.
"God bless you, sir," the man says to the judge.
"Have a nice day," he answers.
On the way out of the courtroom, the judge sees the Russian man stopping to say something to the lawyer who sued him and lost.
"Don't talk to him," the judge orders.
The couple shuffles out the door.
It's a scene that will be repeated over and over again in the courtroom of Judge Noach Dear, as he repeatedly dismisses lawsuits, denies attorneys seeking payment, and sends people on their way, amazed that they are free from further harassment by collection agencies.
Twice on a recent morning, his rulings are met with standing ovations.
The straightforward, clear-eyed justice being meted out in Dear's debt court sessions is not what many were expecting from a man who, they assumed, would be a disastrous addition to the local judicial system.
In fact, Noach Dear's reputation was so lousy from his years as one of the City Council's most reprehensible members, some predicted calamity once Dear—who had never practiced law—donned judge's robes.
The New York City Bar Association found Dear "unqualified," and the Brooklyn Bar Association refused to endorse his candidacy, but his political connections and name recognition in the district made his election in 2007 all but foreordained.
An Orthodox Jew from Borough Park, Dear was a City Councilman for 18 years, serving for a decade on the Transportation Committee, until, in 2001, term limits forced him to seek a new job. He then served for six years on the city's Taxi & Limousine Commission.
In Borough Park, Dear was known as a fixer with the juice to make things happen, but he's also been ridiculed for his ham-fisted manner. In 1996, for example, Dear was a top fundraiser for Bill Clinton and Al Gore—at a fundraising dinner, Dear walked a New York Times reporter over to Clinton and said to him, "Tell her what you think of me."
Time and again, Dear has been criticized for dubious schemes: In the late 1980s, he started a foundation called Save Soviet Jewry, assigned himself a salary, and then proceeded to spend the organization's money flying himself and his family first-class on fact-finding missions to Russia and Israel. In 1993, Attorney General Robert Abrams made him repay the foundation $37,000. He was prohibited from ever starting a charity again.
And talk about tone-deaf: As chairman of the City Council's Human Rights Commission, Dear organized a trip to South Africa—but the Council's black members pulled out when they found the trip was sponsored by the white pro-apartheid government. Dear also got involved advocating for a group of ethnic Tamils that had fled the violence of their native Sri Lanka. In 1983, he went to Congress to chastise the government for turning a blind eye to the problems there. But he also got the Tamils to send him to Europe and to put $170,000 into a kosher restaurant he owned in Borough Park. According to the Tamils, he never repaid it: "If I was permitted to hit him, I'd break his head," one Tamil leader told the Times.
Taking money and not repaying it also got Dear in trouble with the Federal Election Commission. In 2000, when running for Congress for the second time, Dear's campaign treasurer took out ads in The Jewish Press costing $52,800, but never paid for them. The newspaper told the FEC that they didn't press the matter because of the close-knit religious community, where powerful ties mean a great deal. The Commission cited Dear for not paying for the ads, as well as for receiving illegal contributions from 325 individuals. Dear was never charged, but the money had to be refunded to the donors.
"It's like they rewarded him for being a crook," says Sandy Aboulafia, a longtime Midwood activist and political opponent to Dear.
After so many scandals, two failed runs for Congress, and a futile bid for the State Senate, Dear finally turned to a more attainable goal: municipal judge.
Many court observers predicted disaster.
On a recent morning, a woman and a collection agency attorney approach Judge Dear. The lawyer announces that after working out a deal together in the outside hallway, the woman is prepared to pay her years-old debt. The woman—whose records show a history of mental illness—earns only $300
a month from disability payments, but the lawyer announces she has agreed to pay a $100 monthly settlement to the collection agency. The woman, however, begins to have what looks like a panic attack. She starts shaking her head in an erratic way and sobbing uncontrollably. She manages to tell Dear that she never meant to make such an agreement.
"Look what you have done to this woman!" Dear says to the lawyer in a voice so loud that it fills the noisy courtroom. The lawyer begins to make excuses. He claims that the woman didn't seem out of sorts when they had cut the deal in the hallway and says he assumed she had other sources of income when she agreed to the payment.
Shaking his head, Dear stops the lawyer in mid-sentence and dismisses the lawsuit. He asks the court officer for an escort for the disoriented woman.
"You mean I can leave now?" the woman ekes out between sobs. "Yes," says Dear, and motions for the next case.
Around the courtroom, the people sitting on benches loosen their grips on their ragged file folders stuffed with credit card statements and Con Ed bills, stand up, and, one by one, break into applause.
"Money-grubbing!" one woman mutters.
"He ain't smiling‚ now!" another whoops. "Fair is fair!"
The Voice was told by numerous people at the courthouse that Judge Dear's sessions in debt court are out of the ordinary.
"He takes the issue seriously," says Sidney Cherubin, who runs a volunteer legal clinic the city created in 2006 to help the growing number of New Yorkers contesting false claims of debt. Dear is one of about a dozen judges who take turns on the debt court rotation.
Collection lawyers dread getting placed with Dear.
"He just rules from his biases, from his heart," lamented a frustrated attorney who preferred not to give his name for fear that it would impact him negatively in court. "He doesn't know the law," the attorney added.
Dear says that he prefers to be assigned to this tiny court, full of small claims with big effects on the lives of people of modest means. He refuses to allow the court to become an arm of the collection agency—which, according to statistics, is what has effectively happened in recent years.
Of the nearly $1 billion in claims that collectors filed in 2007 against New Yorkers, about $800 million was won by debt collectors in judgments. That's not surprising when about 80 percent of the people who are accused in such claims don't bother to show up to court. But complaints against collectors are rising so fast that, last year, they outpaced gripes against housing contractors to become New Yorkers' number-one complaint.
Of the fraction of people who do show up in court, nearly all of them represent themselves, which, Dear says, is another part of the problem.
"When you're a referee and someone else doesn't know the rules of the court, it's very hard," he says. In order to illustrate what he sees on the bench, Dear gave the Voice unusual access: He allowed a reporter not only to observe his sessions and talk with him about them, but to sit behind the bench with him to see the court operate from his vantage point.
Dear starts most days with a speech: He welcomes people, introduces himself, and then launches into a series of warnings. He tells the people being sued to be careful about asking for legal advice from the attorneys who are suing them.
"Just remember: They are your adversaries," he announces. He explains that when they sign a contract in the hallway, they are admitting to owing their debt. "Come see me," he offers as an alternative.
A typical day has about 80 to 100 cases, all handled before lunchtime. One morning, with the noon meal approaching, Dear deals with another collection agency lawyer who has come to court without the proper documents to prove that the man he is suing actually owes a debt.
"You're telling me that you had one year to do discovery on this case, and you still haven't been able to get documents?" he asks. "Do you think it's fair for you to ask this court to do your job for you?"
The lawyer sheepishly reminds the judge that it is within his power to dismiss the case.
"I will," Dear says, leaning over the bench to see the man more closely. "Dismissed."
Dear tells the Voice that he did not know much about the growing problem of debt lawsuits when he first began working on the court. But he learned quickly—taking cues from deputy chief administrative court judge Fern Fisher—and soon wanted to "make a mark."
"I like to shake things up," he says.
Throughout the day, Dear is presented with one tale of financial misery after another.
A middle-aged African-American woman approaches the bench and tells Dear she has come to pay her debt. "Don't you want to know the amount?" he asks. "I just want to pay it," the woman answers. "What was it for?" the judge asks. "Anesthesiology," she replies. "What happened?" he asks. The woman says she lost her job and, with it, her health insurance. (Dear agreed to let her pay the debt.)
Another middle-aged African-American woman approaches the bench. She is so visibly upset that it is hard to make out her words, but it is clear she is angry because money was taken from her empty bank account. The judge asks her to calm down. "I can't calm down," she replies. "I'm a black female—little people. I'm not a lawyer. I'm a regular citizen. They can do what they want," she says, and pauses. "I wish I could do whatever I wanted." The judge then tries to get her to work out a payment plan with the collection lawyer. The woman says it doesn't matter what plan they come up with—she's broke. (Dear often tries to bargain with the lawyers to get them to lower their demands, sometimes sounding like a haggler in an open-air market.)
One recent college graduate comes to the bench and tells the judge that she was served papers at a wrong address—a frequent complaint. She says that although she has lived in New York for years, the collection agency served her papers at an old address in Wisconsin. She also says that the collection lawyer had threatened her the night before on the phone: He told her that if she didn't settle, "the gloves would come off." When the lawyer doesn't deny that he threatened the woman, Dear becomes enraged. "Telling a defendant, pro se, that now the gloves are off?" he says. "To me, that's a threat."
"It's a euphemism," says the anxious lawyer, and makes another attempt to excuse himself. "It was born out of frustration," he balks. Once again, Dear dismisses the case.
Dear knows that the collection lawyers aren't thrilled with how he runs debt court. "I'm just calling it like it is," he says.
Over the past 10 years, the subprime credit card industry—like the subprime mortgage industry, aimed at lower-income people and larded with hidden fees and variable rates—has exploded and, with it, the number of people in debt. In a place like New York, the problem of credit card debt is particularly acute. New York is a city of people who are highly mobile—their addresses change, and it is harder to track them down, as required by law. It's also a city of renters, and, unlike in other parts of the country, people here often don't have home equity to fall back on when they get into economic trouble. An economic downturn has forced more people than ever into debt court and has turned the Brooklyn Civil Courthouse into one of the busiest in the nation.
That has led to a new kind of gold rush: debt buying. In the past, when a company was owed money by a customer, it would hire a collection agency to get the money back, paying the agency a percentage. But today, the vast majority of collection agencies in debt courts have purchased those debts as a business plan.
Called "third-party debt buyers," companies like Palisades Collections buy consumer debts from major companies—Chase, Citibank, Fingerhut, Sears—long after those companies have given up trying to get their money back. Buying the debts in multi-billion-dollar bundles for pennies on the dollar, debt buyers are then free to go after the creditors for the full amounts, and, with fees and service charges tacked on, they can collect about twice what the customer originally owed.
Debts can be purchased and repurchased—sometimes, it's even difficult for the attorneys to say how the debts were originally created.
There's plenty of evidence that these debt buyers are using the courts to go after people who don't actually owe the money they're being sued for. In a sample study of 600 cases that the Urban Justice Center conducted for cases brought in 2006, 99 percent didn't hold up to basic legal standards of evidence. Debt collectors frequently neglect to do the simple legwork it would take to verify a person's Social Security number, address, or bank account. Last month, Attorney General Andrew Cuomo sued a debt buyer named Lamont Cooper and shut down two of Cooper's companies. Cuomo alleged that Cooper's firms had routinely failed to serve people court papers where they actually lived and wasn't properly verifying the identities of the people they sued. Last week, Cuomo announced that he was fining three additional collection agencies on similar charges, and was pursuing a dozen more.
Many of the people who come to Dear's courtroom say they never received a summons. They make their way to court on their own after they go to an ATM machine and find that their bank accounts have been frozen, or when they receive a notice that their credit has been ruined. For many, it's the first time they've heard anything about a debt at all.
The Urban Justice Center's 2006 study found that 40 percent of the 600 lawsuits examined were filed by one company, Palisades Collections, and its law firm, Pressler and Pressler—a ratio that suggests Palisades is filing about 125,000 lawsuits each year. In 2004, the city found that two-thirds of defaulted credit card debts had been purchased by only 10 companies.
Palisades has no website of its own. But do a search on its name, and you'll find page after page of horror stories by people claiming they were wrongly sued for debt. (Multiple attempts to speak with someone at Palisades resulted in a manager answering that the volume of calls they receive prevented anyone there from answering questions.)
When Palisades purchases debts, it usually gets little more than a spreadsheet with names, account numbers, and debt amounts. Sometimes, there are addresses and Social Security numbers; sometimes, there aren't. The information is often years old by the time the company gets it.
Yet instead of spending the resources to track down and confirm that information, collection agencies seem to have adopted a different strategy: sue. Assume the defendants won't show up. Then, go after bank assets.
The debt buying industry "is crying out for regulation," says the city's commissioner of consumer affairs, Jonathan Mintz. He describes debt collection agencies as bottom-feeders, an industry that is "far down the food chain."
Recently, there have been some signs that things are shifting. On the national level, President Obama has called for sweeping changes: He recently called credit card executives to Washington and denounced the billing practices that have led Americans ever deeper into debt. (Dear's reaction: "I would say to the President, 'If you want to know how to resolve this issue, come down to 141 Livingston Street.' ")
Besides Cuomo's settlement, Dan Garodnick, the City Councilman who represents Stuyvesant Town, recently pushed through a bill that closed a loophole that allowed third-party agencies to purchase debts without a license. (They do have to be licensed to bring a lawsuit, but the collection agencies were able to exploit a loophole in the law and get around that, says Harvey Epstein of the Urban Justice Center.) The City Council and the city's Consumer Affairs Department have each held hearings about cleaning up the industry. Judge Fern Fisher—whom Dear considers a mentor—created the Thursday-afternoon clinic at the courthouse, one of the first of its kind in the nation. She has commissioned research into why people don't show up to court. As of April 2008, she has been making debt collection agencies send summonses through the court—if the notices comes back "return to sender," the collection agencies are no longer able to bring the suit. Fisher says that that measure alone has eliminated about 10,000 mistaken lawsuits and has brought more people into court.
"I do not believe it's because people are callous and irresponsible," Fisher says, speaking of the many New Yorkers who don't show up. "Some people are afraid. Some people just don't understand the significance. Some people are hopeless."
But the industry is still rife with problems—for one, the firms hire people to drop off the summonses at people's addresses, and they often leave the forms with someone who has no connection to the person actually being sued for debt. This was at the heart of Cuomo's recent lawsuit.
Additionally, in each of these cases, a debt collector has to sign and swear that they have "direct knowledge of the facts of the case." Usually, the companies hire lawyers to do that, too. For instance, in the case of one law firm, Mel S. Harris & Associates, a man named Todd Fabacher has personally signed off that he has "direct knowledge of the facts" of hundreds (and perhaps thousands) of cases. "I don't know how that's humanly possible," says Nasoan Sheftel-Gomes, a lawyer for the Urban Justice Center who works with people being sued by debt collectors. (Calls to Fabacher have not been returned.)
By the late 1990s, subprime was the fastest growing sector of the credit card industry. Today, 400,000 of the city's poorest households pay about 40 percent of their monthly income to credit card and installment plans. Most of the rest goes to rent.
While Dear gave the Voice unusual access to his courtroom, he was reticent about his troubled political record. He didn't want to "dredge up what happened 30 years ago," and, he says, "There are people who would like to see me fail."
He recalls, one afternoon, that his life seems to have come full-circle: The first bill he sponsored as a councilman was a bill to license debt collectors. He says he has taken a special liking to pro se court, where defendants represent themselves, and often requests to be placed there on the rotation of judges. "I feel like I'm contributing something," he says.
"I like to fight for the underdog."
Copyright © 2009 Village Voice LLC. All rights reserved.
By 9:30 a.m., the 11th-floor hallway of a courthouse in downtown Brooklyn is filled with tight huddles made up of people in debt and the lawyers who are after them to pay.
The goal of the conferences is almost always the same: to cut a deal in the hallway before going into the packed courtroom to appear before the judge.
The people who owe money are anxious. They ask legal advice from just about anyone wearing a suit. The attorneys, for their part, talk to them sweetly about how to settle their cases.
Some of the people are angry, and some are confused—they had no idea they were in debt until letters came in the mail announcing they were being sued.
But if there's a dispute, the lawyers are quick to blame the collection agencies—their employers—for not giving them the correct paperwork or enough information. They reassure the debtors that everything will be taken care of quickly. And the people seem to believe them—better to settle things with these nice people in the hall who give them the impression that it's the proper procedure.
Beverly Smith, an African-American woman in her late forties, has already come to court three separate times. She works in the bridal section at Bloomingdale's and found out the hard way that someone believed she owed money—she received a letter stating her wages would be garnished.
Believing she was a victim of identity theft, she went to the police to file a report. But they handed her some forms to fill out and told her there was nothing they could do.
The first time that Smith came to the courthouse, an attorney from a firm called Pressler and Pressler, working for an agency called Palisades Collections, told her that in order to prove she didn't owe the money, she needed to fax them proof of her residency and a copy of her Social Security card. The second time, a different attorney from the same firm told her in another hallway conference that he had never received her fax and didn't have enough information to verify her identity. The third time, in April, the lawyer still didn't have the paperwork he required, so Smith agreed to a fourth court date.
She's tired of taking days off to come back to court. "I told the lawyer: Enough is enough," she says. She's determined to make her fourth court date, in June, her last. It has never occurred to her to ask to see a judge.
Time and again, people in the hallway insist that they've provided the correct documentation, that the debts aren't theirs, and that there's been a mistake. The attorneys, however, explain in reassuring tones that it's best just to settle matters with a payment to make it all go away, or to schedule yet another court date later on. It's better not to get the judge involved.
After the hallway conferences, the people file into the packed and noisy courtroom.
And then, something unusual happens.
A man and an older woman are called up to appear before the bench. They ask for a Russian interpreter. Through the interpreter, the man explains that the woman is being falsely accused of a debt, and that the lawyer suing her can't prove that it was hers. After some questioning, the collection agency's attorney concedes that, in fact, he doesn't have the documents he needs to prove that she owes the money. He asks for more time.
The judge, a small man with a tight beard and a yarmulke, refuses. With a wave of his hand, he dismisses the case.
"Dasvedanya," he says to the couple in Russian, and tells them they can be on their way.
But the couple doesn't budge. Stunned, they can't believe that the ordeal is so suddenly over.
"God bless you, sir," the man says to the judge.
"Have a nice day," he answers.
On the way out of the courtroom, the judge sees the Russian man stopping to say something to the lawyer who sued him and lost.
"Don't talk to him," the judge orders.
The couple shuffles out the door.
It's a scene that will be repeated over and over again in the courtroom of Judge Noach Dear, as he repeatedly dismisses lawsuits, denies attorneys seeking payment, and sends people on their way, amazed that they are free from further harassment by collection agencies.
Twice on a recent morning, his rulings are met with standing ovations.
The straightforward, clear-eyed justice being meted out in Dear's debt court sessions is not what many were expecting from a man who, they assumed, would be a disastrous addition to the local judicial system.
In fact, Noach Dear's reputation was so lousy from his years as one of the City Council's most reprehensible members, some predicted calamity once Dear—who had never practiced law—donned judge's robes.
The New York City Bar Association found Dear "unqualified," and the Brooklyn Bar Association refused to endorse his candidacy, but his political connections and name recognition in the district made his election in 2007 all but foreordained.
An Orthodox Jew from Borough Park, Dear was a City Councilman for 18 years, serving for a decade on the Transportation Committee, until, in 2001, term limits forced him to seek a new job. He then served for six years on the city's Taxi & Limousine Commission.
In Borough Park, Dear was known as a fixer with the juice to make things happen, but he's also been ridiculed for his ham-fisted manner. In 1996, for example, Dear was a top fundraiser for Bill Clinton and Al Gore—at a fundraising dinner, Dear walked a New York Times reporter over to Clinton and said to him, "Tell her what you think of me."
Time and again, Dear has been criticized for dubious schemes: In the late 1980s, he started a foundation called Save Soviet Jewry, assigned himself a salary, and then proceeded to spend the organization's money flying himself and his family first-class on fact-finding missions to Russia and Israel. In 1993, Attorney General Robert Abrams made him repay the foundation $37,000. He was prohibited from ever starting a charity again.
And talk about tone-deaf: As chairman of the City Council's Human Rights Commission, Dear organized a trip to South Africa—but the Council's black members pulled out when they found the trip was sponsored by the white pro-apartheid government. Dear also got involved advocating for a group of ethnic Tamils that had fled the violence of their native Sri Lanka. In 1983, he went to Congress to chastise the government for turning a blind eye to the problems there. But he also got the Tamils to send him to Europe and to put $170,000 into a kosher restaurant he owned in Borough Park. According to the Tamils, he never repaid it: "If I was permitted to hit him, I'd break his head," one Tamil leader told the Times.
Taking money and not repaying it also got Dear in trouble with the Federal Election Commission. In 2000, when running for Congress for the second time, Dear's campaign treasurer took out ads in The Jewish Press costing $52,800, but never paid for them. The newspaper told the FEC that they didn't press the matter because of the close-knit religious community, where powerful ties mean a great deal. The Commission cited Dear for not paying for the ads, as well as for receiving illegal contributions from 325 individuals. Dear was never charged, but the money had to be refunded to the donors.
"It's like they rewarded him for being a crook," says Sandy Aboulafia, a longtime Midwood activist and political opponent to Dear.
After so many scandals, two failed runs for Congress, and a futile bid for the State Senate, Dear finally turned to a more attainable goal: municipal judge.
Many court observers predicted disaster.
On a recent morning, a woman and a collection agency attorney approach Judge Dear. The lawyer announces that after working out a deal together in the outside hallway, the woman is prepared to pay her years-old debt. The woman—whose records show a history of mental illness—earns only $300
a month from disability payments, but the lawyer announces she has agreed to pay a $100 monthly settlement to the collection agency. The woman, however, begins to have what looks like a panic attack. She starts shaking her head in an erratic way and sobbing uncontrollably. She manages to tell Dear that she never meant to make such an agreement.
"Look what you have done to this woman!" Dear says to the lawyer in a voice so loud that it fills the noisy courtroom. The lawyer begins to make excuses. He claims that the woman didn't seem out of sorts when they had cut the deal in the hallway and says he assumed she had other sources of income when she agreed to the payment.
Shaking his head, Dear stops the lawyer in mid-sentence and dismisses the lawsuit. He asks the court officer for an escort for the disoriented woman.
"You mean I can leave now?" the woman ekes out between sobs. "Yes," says Dear, and motions for the next case.
Around the courtroom, the people sitting on benches loosen their grips on their ragged file folders stuffed with credit card statements and Con Ed bills, stand up, and, one by one, break into applause.
"Money-grubbing!" one woman mutters.
"He ain't smiling‚ now!" another whoops. "Fair is fair!"
The Voice was told by numerous people at the courthouse that Judge Dear's sessions in debt court are out of the ordinary.
"He takes the issue seriously," says Sidney Cherubin, who runs a volunteer legal clinic the city created in 2006 to help the growing number of New Yorkers contesting false claims of debt. Dear is one of about a dozen judges who take turns on the debt court rotation.
Collection lawyers dread getting placed with Dear.
"He just rules from his biases, from his heart," lamented a frustrated attorney who preferred not to give his name for fear that it would impact him negatively in court. "He doesn't know the law," the attorney added.
Dear says that he prefers to be assigned to this tiny court, full of small claims with big effects on the lives of people of modest means. He refuses to allow the court to become an arm of the collection agency—which, according to statistics, is what has effectively happened in recent years.
Of the nearly $1 billion in claims that collectors filed in 2007 against New Yorkers, about $800 million was won by debt collectors in judgments. That's not surprising when about 80 percent of the people who are accused in such claims don't bother to show up to court. But complaints against collectors are rising so fast that, last year, they outpaced gripes against housing contractors to become New Yorkers' number-one complaint.
Of the fraction of people who do show up in court, nearly all of them represent themselves, which, Dear says, is another part of the problem.
"When you're a referee and someone else doesn't know the rules of the court, it's very hard," he says. In order to illustrate what he sees on the bench, Dear gave the Voice unusual access: He allowed a reporter not only to observe his sessions and talk with him about them, but to sit behind the bench with him to see the court operate from his vantage point.
Dear starts most days with a speech: He welcomes people, introduces himself, and then launches into a series of warnings. He tells the people being sued to be careful about asking for legal advice from the attorneys who are suing them.
"Just remember: They are your adversaries," he announces. He explains that when they sign a contract in the hallway, they are admitting to owing their debt. "Come see me," he offers as an alternative.
A typical day has about 80 to 100 cases, all handled before lunchtime. One morning, with the noon meal approaching, Dear deals with another collection agency lawyer who has come to court without the proper documents to prove that the man he is suing actually owes a debt.
"You're telling me that you had one year to do discovery on this case, and you still haven't been able to get documents?" he asks. "Do you think it's fair for you to ask this court to do your job for you?"
The lawyer sheepishly reminds the judge that it is within his power to dismiss the case.
"I will," Dear says, leaning over the bench to see the man more closely. "Dismissed."
Dear tells the Voice that he did not know much about the growing problem of debt lawsuits when he first began working on the court. But he learned quickly—taking cues from deputy chief administrative court judge Fern Fisher—and soon wanted to "make a mark."
"I like to shake things up," he says.
Throughout the day, Dear is presented with one tale of financial misery after another.
A middle-aged African-American woman approaches the bench and tells Dear she has come to pay her debt. "Don't you want to know the amount?" he asks. "I just want to pay it," the woman answers. "What was it for?" the judge asks. "Anesthesiology," she replies. "What happened?" he asks. The woman says she lost her job and, with it, her health insurance. (Dear agreed to let her pay the debt.)
Another middle-aged African-American woman approaches the bench. She is so visibly upset that it is hard to make out her words, but it is clear she is angry because money was taken from her empty bank account. The judge asks her to calm down. "I can't calm down," she replies. "I'm a black female—little people. I'm not a lawyer. I'm a regular citizen. They can do what they want," she says, and pauses. "I wish I could do whatever I wanted." The judge then tries to get her to work out a payment plan with the collection lawyer. The woman says it doesn't matter what plan they come up with—she's broke. (Dear often tries to bargain with the lawyers to get them to lower their demands, sometimes sounding like a haggler in an open-air market.)
One recent college graduate comes to the bench and tells the judge that she was served papers at a wrong address—a frequent complaint. She says that although she has lived in New York for years, the collection agency served her papers at an old address in Wisconsin. She also says that the collection lawyer had threatened her the night before on the phone: He told her that if she didn't settle, "the gloves would come off." When the lawyer doesn't deny that he threatened the woman, Dear becomes enraged. "Telling a defendant, pro se, that now the gloves are off?" he says. "To me, that's a threat."
"It's a euphemism," says the anxious lawyer, and makes another attempt to excuse himself. "It was born out of frustration," he balks. Once again, Dear dismisses the case.
Dear knows that the collection lawyers aren't thrilled with how he runs debt court. "I'm just calling it like it is," he says.
Over the past 10 years, the subprime credit card industry—like the subprime mortgage industry, aimed at lower-income people and larded with hidden fees and variable rates—has exploded and, with it, the number of people in debt. In a place like New York, the problem of credit card debt is particularly acute. New York is a city of people who are highly mobile—their addresses change, and it is harder to track them down, as required by law. It's also a city of renters, and, unlike in other parts of the country, people here often don't have home equity to fall back on when they get into economic trouble. An economic downturn has forced more people than ever into debt court and has turned the Brooklyn Civil Courthouse into one of the busiest in the nation.
That has led to a new kind of gold rush: debt buying. In the past, when a company was owed money by a customer, it would hire a collection agency to get the money back, paying the agency a percentage. But today, the vast majority of collection agencies in debt courts have purchased those debts as a business plan.
Called "third-party debt buyers," companies like Palisades Collections buy consumer debts from major companies—Chase, Citibank, Fingerhut, Sears—long after those companies have given up trying to get their money back. Buying the debts in multi-billion-dollar bundles for pennies on the dollar, debt buyers are then free to go after the creditors for the full amounts, and, with fees and service charges tacked on, they can collect about twice what the customer originally owed.
Debts can be purchased and repurchased—sometimes, it's even difficult for the attorneys to say how the debts were originally created.
There's plenty of evidence that these debt buyers are using the courts to go after people who don't actually owe the money they're being sued for. In a sample study of 600 cases that the Urban Justice Center conducted for cases brought in 2006, 99 percent didn't hold up to basic legal standards of evidence. Debt collectors frequently neglect to do the simple legwork it would take to verify a person's Social Security number, address, or bank account. Last month, Attorney General Andrew Cuomo sued a debt buyer named Lamont Cooper and shut down two of Cooper's companies. Cuomo alleged that Cooper's firms had routinely failed to serve people court papers where they actually lived and wasn't properly verifying the identities of the people they sued. Last week, Cuomo announced that he was fining three additional collection agencies on similar charges, and was pursuing a dozen more.
Many of the people who come to Dear's courtroom say they never received a summons. They make their way to court on their own after they go to an ATM machine and find that their bank accounts have been frozen, or when they receive a notice that their credit has been ruined. For many, it's the first time they've heard anything about a debt at all.
The Urban Justice Center's 2006 study found that 40 percent of the 600 lawsuits examined were filed by one company, Palisades Collections, and its law firm, Pressler and Pressler—a ratio that suggests Palisades is filing about 125,000 lawsuits each year. In 2004, the city found that two-thirds of defaulted credit card debts had been purchased by only 10 companies.
Palisades has no website of its own. But do a search on its name, and you'll find page after page of horror stories by people claiming they were wrongly sued for debt. (Multiple attempts to speak with someone at Palisades resulted in a manager answering that the volume of calls they receive prevented anyone there from answering questions.)
When Palisades purchases debts, it usually gets little more than a spreadsheet with names, account numbers, and debt amounts. Sometimes, there are addresses and Social Security numbers; sometimes, there aren't. The information is often years old by the time the company gets it.
Yet instead of spending the resources to track down and confirm that information, collection agencies seem to have adopted a different strategy: sue. Assume the defendants won't show up. Then, go after bank assets.
The debt buying industry "is crying out for regulation," says the city's commissioner of consumer affairs, Jonathan Mintz. He describes debt collection agencies as bottom-feeders, an industry that is "far down the food chain."
Recently, there have been some signs that things are shifting. On the national level, President Obama has called for sweeping changes: He recently called credit card executives to Washington and denounced the billing practices that have led Americans ever deeper into debt. (Dear's reaction: "I would say to the President, 'If you want to know how to resolve this issue, come down to 141 Livingston Street.' ")
Besides Cuomo's settlement, Dan Garodnick, the City Councilman who represents Stuyvesant Town, recently pushed through a bill that closed a loophole that allowed third-party agencies to purchase debts without a license. (They do have to be licensed to bring a lawsuit, but the collection agencies were able to exploit a loophole in the law and get around that, says Harvey Epstein of the Urban Justice Center.) The City Council and the city's Consumer Affairs Department have each held hearings about cleaning up the industry. Judge Fern Fisher—whom Dear considers a mentor—created the Thursday-afternoon clinic at the courthouse, one of the first of its kind in the nation. She has commissioned research into why people don't show up to court. As of April 2008, she has been making debt collection agencies send summonses through the court—if the notices comes back "return to sender," the collection agencies are no longer able to bring the suit. Fisher says that that measure alone has eliminated about 10,000 mistaken lawsuits and has brought more people into court.
"I do not believe it's because people are callous and irresponsible," Fisher says, speaking of the many New Yorkers who don't show up. "Some people are afraid. Some people just don't understand the significance. Some people are hopeless."
But the industry is still rife with problems—for one, the firms hire people to drop off the summonses at people's addresses, and they often leave the forms with someone who has no connection to the person actually being sued for debt. This was at the heart of Cuomo's recent lawsuit.
Additionally, in each of these cases, a debt collector has to sign and swear that they have "direct knowledge of the facts of the case." Usually, the companies hire lawyers to do that, too. For instance, in the case of one law firm, Mel S. Harris & Associates, a man named Todd Fabacher has personally signed off that he has "direct knowledge of the facts" of hundreds (and perhaps thousands) of cases. "I don't know how that's humanly possible," says Nasoan Sheftel-Gomes, a lawyer for the Urban Justice Center who works with people being sued by debt collectors. (Calls to Fabacher have not been returned.)
By the late 1990s, subprime was the fastest growing sector of the credit card industry. Today, 400,000 of the city's poorest households pay about 40 percent of their monthly income to credit card and installment plans. Most of the rest goes to rent.
While Dear gave the Voice unusual access to his courtroom, he was reticent about his troubled political record. He didn't want to "dredge up what happened 30 years ago," and, he says, "There are people who would like to see me fail."
He recalls, one afternoon, that his life seems to have come full-circle: The first bill he sponsored as a councilman was a bill to license debt collectors. He says he has taken a special liking to pro se court, where defendants represent themselves, and often requests to be placed there on the rotation of judges. "I feel like I'm contributing something," he says.
"I like to fight for the underdog."
Copyright © 2009 Village Voice LLC. All rights reserved.
Wednesday, June 10, 2009
NYT: The Debt Settlement Industry Is Busy, but It's a Bit Nervous, Too
By DAVID STREITFELD
CHICAGO — This should be a triumphant time for the debt settlement industry. If ever there was a moment when masses of people needed help so they were not smothered by the weight of their credit card bills, it is now.
But at a conclave of settlement professionals here this week, the mood was more of crisis than celebration. One sober question hung in the air: Would the industry exist in anything like its present form in a few years?
A formidable array of forces is concerned about the way the settlement companies solicit consumers and negotiate lower payments on their debts. The industry is in the cross hairs of the Federal Trade Commission, state regulators, members of Congress and state legislatures. Credit card companies are not fond of it, and many consumer advocates practically loathe it.
The common complaint among all these groups is that too many debt settlement companies are more interested in helping themselves earn fees than aiding their beleaguered clients. Their ads promise the clients will get out of debt but, critics say, the reality is that they often become even more enmeshed.
Noting “the legal firestorm that has subsumed the debt settlement industry” in recent years, Jeffrey Tenenbaum, a lawyer representing dozens of settlement firms, warned that many companies could be “legislated, regulated or litigated out of business.” Like the other speakers, he stood on a conference stage outfitted as a boxing ring.
Some attendees confronted the prospect of new laws with foreboding. “I think regulation is going to be a killer,” said David Fishman of Arbitronix, based in Las Vegas.
But others saw it as good news. “There’s a lot of bad apples in this industry,” said David Jenkins of First American Debt Relief in Newport Beach, Calif. “Let’s clean it up.”
A third group said it was all a problem of miscommunication.
Regulators and attorneys general “don’t understand what we do and how we do it, and the benefits we provide for consumers,” said Peter McLaughlin of Preferred Financial Services in Andover, Mass.
Understanding might be on the upswing, although whether it will lead to appreciation is a separate issue. Preferred Financial was one of numerous settlement companies that received a subpoena from the New York attorney general, Andrew M. Cuomo, last month as part of a wide-ranging investigation.
The settlement companies, which number about 2,000, have varying business models but generally develop programs for strapped individuals to pay off a percentage of their credit card debt and avoid bankruptcy.
Only a handful of the companies came to this convention, which was run by a trade group called the United States Organizations for Bankruptcy Alternatives. Participants stressed that that it was the people who were not there who were the problem.
“The bottom feeders are ruining our reputation,” said John Ansbach, the general counsel for EFA Processing in Frisco, Tex. “The good stories are not being told.”
Part of the problem with industry, Mr. Ansbach said, is that there are few barriers to entry. Many of the smaller firms are virtual outfits, contracting with outsourcing companies to do all the back-end work of talking to the debtors, enrolling them and negotiating settlements.
EFA itself is one of these outsourcers, handling settlement programs for dozens of corporate clients. Mr. Ansbach says EFA rejects more new clients than it takes on.
There are even companies to help secure the customers. Max Bruck is the vice president of sales for Find Your Customers Inc., which develops print, radio and television spots. The most successful ads, he said, emphasize words like “stress” and “anxiety” and showcase notions like the inability to sleep or frequent fights with a spouse..
Mr. Bruck has just finished a radio ad that begins with an employer calling a job applicant, ominously wondering why the job-seeker went bankrupt. “Bankruptcy stays with you forever,” the announcer warns.
Listeners’ calls are funneled to clients of Mr. Bruck who pay $80 each. The average ad generates 500 to 1,000 calls, he said.
Copyright 2009 The New York Times Company. All rights reserved.
CHICAGO — This should be a triumphant time for the debt settlement industry. If ever there was a moment when masses of people needed help so they were not smothered by the weight of their credit card bills, it is now.
But at a conclave of settlement professionals here this week, the mood was more of crisis than celebration. One sober question hung in the air: Would the industry exist in anything like its present form in a few years?
A formidable array of forces is concerned about the way the settlement companies solicit consumers and negotiate lower payments on their debts. The industry is in the cross hairs of the Federal Trade Commission, state regulators, members of Congress and state legislatures. Credit card companies are not fond of it, and many consumer advocates practically loathe it.
The common complaint among all these groups is that too many debt settlement companies are more interested in helping themselves earn fees than aiding their beleaguered clients. Their ads promise the clients will get out of debt but, critics say, the reality is that they often become even more enmeshed.
Noting “the legal firestorm that has subsumed the debt settlement industry” in recent years, Jeffrey Tenenbaum, a lawyer representing dozens of settlement firms, warned that many companies could be “legislated, regulated or litigated out of business.” Like the other speakers, he stood on a conference stage outfitted as a boxing ring.
Some attendees confronted the prospect of new laws with foreboding. “I think regulation is going to be a killer,” said David Fishman of Arbitronix, based in Las Vegas.
But others saw it as good news. “There’s a lot of bad apples in this industry,” said David Jenkins of First American Debt Relief in Newport Beach, Calif. “Let’s clean it up.”
A third group said it was all a problem of miscommunication.
Regulators and attorneys general “don’t understand what we do and how we do it, and the benefits we provide for consumers,” said Peter McLaughlin of Preferred Financial Services in Andover, Mass.
Understanding might be on the upswing, although whether it will lead to appreciation is a separate issue. Preferred Financial was one of numerous settlement companies that received a subpoena from the New York attorney general, Andrew M. Cuomo, last month as part of a wide-ranging investigation.
The settlement companies, which number about 2,000, have varying business models but generally develop programs for strapped individuals to pay off a percentage of their credit card debt and avoid bankruptcy.
Only a handful of the companies came to this convention, which was run by a trade group called the United States Organizations for Bankruptcy Alternatives. Participants stressed that that it was the people who were not there who were the problem.
“The bottom feeders are ruining our reputation,” said John Ansbach, the general counsel for EFA Processing in Frisco, Tex. “The good stories are not being told.”
Part of the problem with industry, Mr. Ansbach said, is that there are few barriers to entry. Many of the smaller firms are virtual outfits, contracting with outsourcing companies to do all the back-end work of talking to the debtors, enrolling them and negotiating settlements.
EFA itself is one of these outsourcers, handling settlement programs for dozens of corporate clients. Mr. Ansbach says EFA rejects more new clients than it takes on.
There are even companies to help secure the customers. Max Bruck is the vice president of sales for Find Your Customers Inc., which develops print, radio and television spots. The most successful ads, he said, emphasize words like “stress” and “anxiety” and showcase notions like the inability to sleep or frequent fights with a spouse..
Mr. Bruck has just finished a radio ad that begins with an employer calling a job applicant, ominously wondering why the job-seeker went bankrupt. “Bankruptcy stays with you forever,” the announcer warns.
Listeners’ calls are funneled to clients of Mr. Bruck who pay $80 each. The average ad generates 500 to 1,000 calls, he said.
Copyright 2009 The New York Times Company. All rights reserved.
Thursday, May 28, 2009
Modification of Mortgages in the Southern District of New York
As many of you may know, a bill to modify the bankruptcy laws to allow Bankruptcy Judges to modify mortgages on debtors' primary residences passed the House of Representatives in March, but unfortunately, due to intense opposition by mortgage bankers and a lack of support from President Obama, that bill failed to pass the Senate last month. Notwithstanding that, due to the current recession, the United States is experiencing a record number of personal bankruptcy filings. 1.2 million Americans filed for bankruptcy from April 2008 to last month, and experts predict that bankruptcies could reach 1.5 million this year before leveling off at 1.6 million next year.
Despite the failure of the new bankruptcy bill, the U.S. Bankruptcy Court for the Southern District of New York (NYSB) adopted Loss Mitigation Program Procedures in January 2009. It has been our experience to date that filing for bankruptcy (either Chapter 7 or Chapter 13) in conjunction with requesting loss mitigation is one of the most effective ways to modify a first mortgage (the purpose of the proposed bill).
Last week we were negotiating with outside counsel for Chase Home Finance regarding a modification of a first mortgage for a debtor's primary residence, and they indicated that the quickest way to modify a first mortgage would be to move for loss mitigation through the NYSB procedures. Use of the NYSB Loss Mitigation Program Procedures requires that: (1) the individual must reside in the Southern District of New York (which includes the counties of New York, Bronx, Westchester, Rockland, Putnam, Orange, Dutchess, and Sullivan) and (2) loss mitigation can only be requested for an individual's primary residence.
Additionally, for individuals that file for bankruptcy, there is a $50,000 homestead exemption per spouse under the New York State Debtor & Creditor Law, so an individual can file for Chapter 7 bankruptcy, and if they're married, they can keep their house by reaffirming the debt (which means that the debtor(s) agree to that the debt will not be discharged in bankruptcy and will be continue to be paid) on a primary residence that has no more than $100,000 in equity.
Due to the sharp decrease in residential real estate values that has left many homeowners with no equity (or "underwater"), many individuals can file for Chapter 7 bankruptcy, wipe out credit card, business debt or guaranties and other debts, retain their house, request Loss Mitigation to modify the terms of the mortgage, reaffirm the mortgage and then emerge from bankruptcy with their homeownership intact.
Anyone with questions regarding personal bankruptcy or the Loss Mitigation Program in the Southern District of New York should contact Jim Shenwick.
Despite the failure of the new bankruptcy bill, the U.S. Bankruptcy Court for the Southern District of New York (NYSB) adopted Loss Mitigation Program Procedures in January 2009. It has been our experience to date that filing for bankruptcy (either Chapter 7 or Chapter 13) in conjunction with requesting loss mitigation is one of the most effective ways to modify a first mortgage (the purpose of the proposed bill).
Last week we were negotiating with outside counsel for Chase Home Finance regarding a modification of a first mortgage for a debtor's primary residence, and they indicated that the quickest way to modify a first mortgage would be to move for loss mitigation through the NYSB procedures. Use of the NYSB Loss Mitigation Program Procedures requires that: (1) the individual must reside in the Southern District of New York (which includes the counties of New York, Bronx, Westchester, Rockland, Putnam, Orange, Dutchess, and Sullivan) and (2) loss mitigation can only be requested for an individual's primary residence.
Additionally, for individuals that file for bankruptcy, there is a $50,000 homestead exemption per spouse under the New York State Debtor & Creditor Law, so an individual can file for Chapter 7 bankruptcy, and if they're married, they can keep their house by reaffirming the debt (which means that the debtor(s) agree to that the debt will not be discharged in bankruptcy and will be continue to be paid) on a primary residence that has no more than $100,000 in equity.
Due to the sharp decrease in residential real estate values that has left many homeowners with no equity (or "underwater"), many individuals can file for Chapter 7 bankruptcy, wipe out credit card, business debt or guaranties and other debts, retain their house, request Loss Mitigation to modify the terms of the mortgage, reaffirm the mortgage and then emerge from bankruptcy with their homeownership intact.
Anyone with questions regarding personal bankruptcy or the Loss Mitigation Program in the Southern District of New York should contact Jim Shenwick.
Monday, May 18, 2009
QuickJump
This law firm recently started using a new product from Tech Hit called “QuickJump.” QuickJump lets users navigate to the right Windows folders by using a few keystrokes-a valuable shortcut for attorneys and other users who need to save documents such as e-mail messages and Word files. We have been using QuickJump in conjunction with MessageSave, another Tech Hit product that allows users to quickly save e-mail messages on their C: drive. We have found both programs to be invaluable products that save us much time and effort in saving and filing documents, and we highly recommend them.
Jim Shenwick
Jim Shenwick
NYT: Weighing the Options With Credit Card Debt
By TARA SIEGEL BERNARD
Many consumers are buckling under the weight of mounting credit card debt.
So it should come as no surprise that some have been lured in by often-hollow promises from debt settlement companies, claiming they can reduce debts to a small fraction of what is owed by negotiating with creditors.
But as their customers have learned, debt settlement companies are not debt genies — they do not have special powers to make your debt disappear. Andrew M. Cuomo, New York State’s attorney general, recently announced an investigation into more than a dozen debt settlement companies. Many companies require hefty upfront fees — often 15 percent of your total debt — but often don’t deliver on their promises, experts say.
Of course, figuring out a reasonable way to shed debt may seem an insurmountable task, especially if you have lost your job or you are simply not earning enough. The numbers are not pretty: if you carry $10,000 on a credit card with an 18 percent rate and make only the minimum payment (say, 1 percent of the balance plus interest), it will take 32 years to pay it off — for a grand total of $24,834. That does not count late fees or over-the-limit charges.
So it is important to assess your options before you fall too far behind. This is probably best accomplished with a reputable credit counselor. But before you pick up the phone, familiarize yourself with the pros and cons of the various options.
DO IT YOURSELF If you have only a few thousand dollars in debt on one or two cards, you may try calling your card issuer and asking it about any repayment plan for people facing financial hardship. The company may be willing to work with you. But keep in mind that it is likely to reduce your credit limits to your current balance, experts said.
“Most people are very hesitant to call their creditors,” said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. “But they are the first ones they should consult. They have programs for short-term financial hiccups.”
FIND A COUNSELOR If you are knee-deep in debt, or your debt is spread across multiple cards, consult with a financial counselor. A credit counselor can assess your entire financial picture and help determine the best course of action. It may be as simple as setting up a payment plan that you can handle on your own.
But you need to be careful when choosing a counselor. Stick with someone who is affiliated with one of the legitimate, nonprofit umbrella organizations like the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Their fees should be reasonable (about $30 to $50 to set up, say, a debt management plan) and they should not turn you away if you cannot afford the nominal fee. They should also be willing to spend an hour with you, at the least.
DEBT MANAGEMENT PLAN A credit counseling agency should be able to determine whether this type of plan will work for you. Here is how they operate: the agency negotiates a lower interest rate and payment with the card companies, to a level you can afford. All late fees and over-the-limit fees stop. You then make a single payment to your counseling agency, which disburses the payment to all your creditors. The agency usually charges a fee of about $25 a month. Most plans last three to five years, at which point your existing debt will be paid off.
“A debt management plan doesn’t reduce the balance, but one of the big advantages is that the interest rates go down, usually significantly,” said Rick Phillips, vice president of debt management plan services at Consumer Credit Counseling Service of Greater Atlanta. He said most people who came to them were paying rates from 25 to 29 percent, which usually drop to 6 to 12 percent, or lower.
But these days, fewer people can afford traditional debt management plans. As a result, two credit counseling groups struck a deal with the top 10 credit card issuers this month to make the debt management plans more affordable. That may include lowering the minimum payment and the interest rate even further.
Participating in these plans will not necessarily hurt your credit score, but it is a gray area. It depends on how your creditor reports it to the credit rating agencies. Still, digging out of debt should be the priority; your credit score will eventually improve. Missing payments remain on your record for seven years.
DEBT SETTLEMENT So should debt settlement companies be avoided at all costs? They certainly should not be your first call.
“Sometimes, there are no good solutions, but of the solutions, debt settlement ends up being their best bet,” Gerri Detweiler, a credit adviser at Credit.com, said. “There is a segment of people who cannot afford to pay the full amount through a debt management, but they either don’t want to file for bankruptcy or they can’t file for bankruptcy.” (Credit.com refers prescreened consumers to debt settlement companies through its Web site; the settlement company pays Credit.com a fee each time a consumer fills out an application. Credit.com vets the companies to be sure they disclose all costs.)
But consumer advocates said that many people ended up dropping out of these plans because of the high fees. When you sign up, many firms require you to pay a sizable fee upfront. Or they may levy initial set-up and monthly fees, and charge a percentage of the amount they saved you. They typically advise you to stop paying your debts and tell you to put aside money each month in a separate account over a period of two or three years. That sum will eventually be used to negotiate a settlement, usually about 60 percent of what you owe. In the meantime, though, credit card companies continue to charge interest and late fees. The creditor may sue. And the phone will probably continue to ring incessantly. The companies can offer no guarantees — except that your credit score will drop.
“I wouldn’t rule out the possibility that there is a good company out there, but the basic business model is not a good one for consumers,” said Deanne Loonin, a lawyer at the National Consumer Law Center who has researched the companies. “A lot of creditors won’t even work with debt settlement companies.”
And here is another little-known fact: Any debt forgiven exceeding $600 is considered taxable income unless you can prove you are insolvent (your liabilities exceed your assets).
BANKRUPTCY For some people, at least, it pays to visit a bankruptcy lawyer, where the initial consultations should be free. A lawyer can advise you of your rights and walk you through the many implications of bankruptcy. “It’s not a bad idea if you’re under a lot of financial stress or you are afraid of losing your assets,” Ms. Detweiler said. It also pays to meet with a bankruptcy lawyer and a credit counselor before you consider debt settlement. “If you do it the other way around, you are very vulnerable to being led down the wrong path,” she said. “And what I find is that people hear what they want to hear.”
Copyright 2009 The New York Times Company. All rights reserved.
Many consumers are buckling under the weight of mounting credit card debt.
So it should come as no surprise that some have been lured in by often-hollow promises from debt settlement companies, claiming they can reduce debts to a small fraction of what is owed by negotiating with creditors.
But as their customers have learned, debt settlement companies are not debt genies — they do not have special powers to make your debt disappear. Andrew M. Cuomo, New York State’s attorney general, recently announced an investigation into more than a dozen debt settlement companies. Many companies require hefty upfront fees — often 15 percent of your total debt — but often don’t deliver on their promises, experts say.
Of course, figuring out a reasonable way to shed debt may seem an insurmountable task, especially if you have lost your job or you are simply not earning enough. The numbers are not pretty: if you carry $10,000 on a credit card with an 18 percent rate and make only the minimum payment (say, 1 percent of the balance plus interest), it will take 32 years to pay it off — for a grand total of $24,834. That does not count late fees or over-the-limit charges.
So it is important to assess your options before you fall too far behind. This is probably best accomplished with a reputable credit counselor. But before you pick up the phone, familiarize yourself with the pros and cons of the various options.
DO IT YOURSELF If you have only a few thousand dollars in debt on one or two cards, you may try calling your card issuer and asking it about any repayment plan for people facing financial hardship. The company may be willing to work with you. But keep in mind that it is likely to reduce your credit limits to your current balance, experts said.
“Most people are very hesitant to call their creditors,” said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. “But they are the first ones they should consult. They have programs for short-term financial hiccups.”
FIND A COUNSELOR If you are knee-deep in debt, or your debt is spread across multiple cards, consult with a financial counselor. A credit counselor can assess your entire financial picture and help determine the best course of action. It may be as simple as setting up a payment plan that you can handle on your own.
But you need to be careful when choosing a counselor. Stick with someone who is affiliated with one of the legitimate, nonprofit umbrella organizations like the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Their fees should be reasonable (about $30 to $50 to set up, say, a debt management plan) and they should not turn you away if you cannot afford the nominal fee. They should also be willing to spend an hour with you, at the least.
DEBT MANAGEMENT PLAN A credit counseling agency should be able to determine whether this type of plan will work for you. Here is how they operate: the agency negotiates a lower interest rate and payment with the card companies, to a level you can afford. All late fees and over-the-limit fees stop. You then make a single payment to your counseling agency, which disburses the payment to all your creditors. The agency usually charges a fee of about $25 a month. Most plans last three to five years, at which point your existing debt will be paid off.
“A debt management plan doesn’t reduce the balance, but one of the big advantages is that the interest rates go down, usually significantly,” said Rick Phillips, vice president of debt management plan services at Consumer Credit Counseling Service of Greater Atlanta. He said most people who came to them were paying rates from 25 to 29 percent, which usually drop to 6 to 12 percent, or lower.
But these days, fewer people can afford traditional debt management plans. As a result, two credit counseling groups struck a deal with the top 10 credit card issuers this month to make the debt management plans more affordable. That may include lowering the minimum payment and the interest rate even further.
Participating in these plans will not necessarily hurt your credit score, but it is a gray area. It depends on how your creditor reports it to the credit rating agencies. Still, digging out of debt should be the priority; your credit score will eventually improve. Missing payments remain on your record for seven years.
DEBT SETTLEMENT So should debt settlement companies be avoided at all costs? They certainly should not be your first call.
“Sometimes, there are no good solutions, but of the solutions, debt settlement ends up being their best bet,” Gerri Detweiler, a credit adviser at Credit.com, said. “There is a segment of people who cannot afford to pay the full amount through a debt management, but they either don’t want to file for bankruptcy or they can’t file for bankruptcy.” (Credit.com refers prescreened consumers to debt settlement companies through its Web site; the settlement company pays Credit.com a fee each time a consumer fills out an application. Credit.com vets the companies to be sure they disclose all costs.)
But consumer advocates said that many people ended up dropping out of these plans because of the high fees. When you sign up, many firms require you to pay a sizable fee upfront. Or they may levy initial set-up and monthly fees, and charge a percentage of the amount they saved you. They typically advise you to stop paying your debts and tell you to put aside money each month in a separate account over a period of two or three years. That sum will eventually be used to negotiate a settlement, usually about 60 percent of what you owe. In the meantime, though, credit card companies continue to charge interest and late fees. The creditor may sue. And the phone will probably continue to ring incessantly. The companies can offer no guarantees — except that your credit score will drop.
“I wouldn’t rule out the possibility that there is a good company out there, but the basic business model is not a good one for consumers,” said Deanne Loonin, a lawyer at the National Consumer Law Center who has researched the companies. “A lot of creditors won’t even work with debt settlement companies.”
And here is another little-known fact: Any debt forgiven exceeding $600 is considered taxable income unless you can prove you are insolvent (your liabilities exceed your assets).
BANKRUPTCY For some people, at least, it pays to visit a bankruptcy lawyer, where the initial consultations should be free. A lawyer can advise you of your rights and walk you through the many implications of bankruptcy. “It’s not a bad idea if you’re under a lot of financial stress or you are afraid of losing your assets,” Ms. Detweiler said. It also pays to meet with a bankruptcy lawyer and a credit counselor before you consider debt settlement. “If you do it the other way around, you are very vulnerable to being led down the wrong path,” she said. “And what I find is that people hear what they want to hear.”
Copyright 2009 The New York Times Company. All rights reserved.
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