Here at Shenwick & Associates, we were pretty busy last month. And we're not the only ones in the bankruptcy field with more business. According to a New York Times article earlier this month (which we previously posted here on our blog), March was the busiest month for bankruptcy filings since the enactment of BAPCPA (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) in October 2005.
There were 158,000 bankruptcy filings in March, or 6,900 per day, up 35% from February and up 19% from March 2009. Despite BAPCPA's goal of reducing Chapter 7 liquidation cases, Chapter 7 filings as a percentage of all bankruptcies have increased to about 73 percent in 2009 from about 62 percent in 2006-07. Last month, 75% of bankruptcy filings were Chapter 7 cases.
There were 1,473,675 bankruptcy filings in 2009, up 32% over 2008. Business filings increased 40% in 2009 to 60,387–the highest level since 1993.
Whether you're a creditor looking for defense against a fraudulent conveyance or preferential transfer adversary proceeding or a debtor seeking a simple personal Chapter 7 liquidation or a complex Chapter 11 or 13 reorganization, for all of your bankruptcy and creditor and debtor questions, please contact Jim Shenwick.
Thursday, April 29, 2010
Tuesday, April 27, 2010
NYT: Learning How to Fight the Collector
By ANDREW MARTIN
Among debt collectors, Steven Katz is known as a “credit terrorist.” For years, he has run what he calls the Steven Katz School of Bill Collector Education, otherwise known as the “credit terrorist training camp.”
Mr. Katz, a 58-year-old accountant in suburban Tucson, spends his free time schooling debtors on the finer points of consumer protection law to help them turn the tables on debt collectors. On occasion, he thumbs his own nose at them too.
“How many times can I sue you? Let me count the ways,” he wrote under his pseudonym, Dr. Tax, in a March posting on Inside ARM, a debt collectors’ Web site.
A former bill collector himself, Mr. Katz rebelled after a debt buyer damaged his credit score with what he says was a bogus bill. Mr. Katz sued, and in 2003 he collected his first damage award, a $1,000 check that he now keeps framed behind his desk.
“The bill collectors, when they call, make you feel like the only option you have is to lay down and play dead. That’s not true,” said Mr. Katz said, who does not charge for his advice. “Nothing validates this more than getting a check.”
Call this movement revenge of the (alleged) deadbeats. Even as collectors try to recoup debts from millions of Americans struggling to pay their bills, a small but growing number of lawyers and consumers are fighting back against what they describe as harassment, unscrupulous practices — and, most important to their litigiousness, violations of the Fair Debt Collection Practices Act.
In fact, 8,287 federal lawsuits were filed citing violations of the act in 2009, a 60 percent rise over the previous year, according to WebRecon, a site that tracks collection-related litigation and the most litigious consumers and lawyers on behalf of debt collectors.
On Wednesday, the Supreme Court made it even easier for consumers to use the courts to fight debt collectors, ruling that collectors cannot be shielded from suits by claiming they made a mistake in interpreting the law.
When a consumer stops paying a bill, creditors often try to collect on their own for a few months. In many instances, the creditor hires another company to collect the debt. In other cases, they may dispose of the debt by selling it to a debt buyer for a steep discount.
Debt collectors and debt buyers are the targets of litigious consumers, since the debt collection law primarily applies to third-party collectors.
Peter Barry, a Minneapolis trial lawyer, is so bullish on the future of debt collection litigation that he holds several “boot camps” each year to share his secrets with other lawyers who want in on the action. If the debtor wins a court case under the act, the debt collector must pay the lawyer’s fees.
The next boot camp is being held in early May in San Francisco, at a cost of $2,495 a person for two and a half days of instruction.
“I can’t sue every illegal debt collector in America, although I’d like to try,” Mr. Barry said.
Mr. Katz can also claim some credit for the increase in lawsuits. For six years, he has run a free Web site called Debtorboards.com, where people share tips on topics like keeping a paper trail and recording calls from collectors.
He said the site received two million hits in 2009, a 60 percent increase over the previous year.
“Debtorboards is geared to help people use the laws as they are on the books as both a shield and a sword,” said Mr. Katz, who says he has won $36,000 from his own litigation against collection agencies. (Since many of the settlements are confidential, it is difficult to prove the claims of Mr. Katz and others).
Of course, debt collectors are hardly pleased with the litigation trend.
Rozanne M. Andersen, chief executive of ACA International, a trade association for the debt collection industry, said she was “extremely concerned” about the increase in lawsuits, which she said cost her industry hundreds of millions of dollars a year. She said much of the increase was the result of ambiguous language in the Fair Debt Collection Act.
Debt collectors are required, for example, to identify themselves on a voice message left for a consumer, she said. But they are also prohibited from telling a third party — including someone who might overhear a phone message — about a consumer’s debt.
“We are between a rock and a hard place,” Ms. Andersen said.
Ms. Andersen said she had little patience for Web sites that encouraged consumers to thwart debt collectors.
“We believe those types of Web sites are encouraging people to not take responsibility for just debt,” she said.
Jack Gordon, who runs the fee-based WebRecon site, said it was no wonder lawsuits were increasing, because consumers were being bombarded with ads from lawyers when they searched online for information on debt collection. He said the proliferation of discussion sites like Mr. Katz’s had, to a lesser extent, also contributed to the trend.
On the boards, he said, “There’s a lot of hot air, a lot of people who overinflate their accomplishments.”
Regardless, Mr. Gordon’s database has become a badge of honor among the devotees of Debtorboards.com. As Brandon Scroggin, a 37-year-old from Little Rock, Ark., puts it, “That’s one list I’m a proud card-carrying member of.”
Mr. Scroggin, who provides price estimates at a body shop, said he was the type of person who refused to be taken advantage of, even for petty offenses. For instance, years ago, he said he joined in the class-action suit against the pop group Milli Vanilli, accused of lip synching, and collected a $1.25 check.
After a messy divorce, Mr. Scroggin was stuck with a $7,000 bill that he said belonged to his ex-wife. Instead of paying it, he began researching the law and stumbled on Debtorboards.com.
Armed with lessons he learned on the site, he demanded proof of the debt from the collection agency, and the calls stopped. But two and a half years later, they started up again so he sued the collection agency, National Loan Recoveries, for failing to provide proof of the debt, among other things.
The case was settled in 2008. The terms were confidential, but he says he never paid National Loan a dime. “Let’s just say I’m a very happy person,” he said. A lawyer for National Loan, Kathryn Bridges, did not return messages seeking comment.
Mr. Katz said his Web site was not intended to help people avoid paying legitimate debts. But if they do so, so be it — he feels no need to apologize.
He said Congress gave consumers certain rights, and he is simply making people aware of them, sometimes colorfully.
As Mr. Katz says at the bottom of each Dr. Tax posting, “A telephone in the hands of a collector is like a crowbar — it can be used to pry a mouth open wide enough to insert a foot.”
Barbara Thompson, 46, of Atlanta, said she challenged $11,000 in credit card debt using online research about collection laws. She does not dispute the debts but reasons that the credit card company wrote off her charges long ago. By her account, she owes the credit card company, not the debt collector.
“The credit card company, they sell it off, they charge it off, it’s just business as usual,” she said, adding, “I’m adamant about not paying a collection agency.”
Copyright 2010 The New York Times Company. All rights reserved.
Among debt collectors, Steven Katz is known as a “credit terrorist.” For years, he has run what he calls the Steven Katz School of Bill Collector Education, otherwise known as the “credit terrorist training camp.”
Mr. Katz, a 58-year-old accountant in suburban Tucson, spends his free time schooling debtors on the finer points of consumer protection law to help them turn the tables on debt collectors. On occasion, he thumbs his own nose at them too.
“How many times can I sue you? Let me count the ways,” he wrote under his pseudonym, Dr. Tax, in a March posting on Inside ARM, a debt collectors’ Web site.
A former bill collector himself, Mr. Katz rebelled after a debt buyer damaged his credit score with what he says was a bogus bill. Mr. Katz sued, and in 2003 he collected his first damage award, a $1,000 check that he now keeps framed behind his desk.
“The bill collectors, when they call, make you feel like the only option you have is to lay down and play dead. That’s not true,” said Mr. Katz said, who does not charge for his advice. “Nothing validates this more than getting a check.”
Call this movement revenge of the (alleged) deadbeats. Even as collectors try to recoup debts from millions of Americans struggling to pay their bills, a small but growing number of lawyers and consumers are fighting back against what they describe as harassment, unscrupulous practices — and, most important to their litigiousness, violations of the Fair Debt Collection Practices Act.
In fact, 8,287 federal lawsuits were filed citing violations of the act in 2009, a 60 percent rise over the previous year, according to WebRecon, a site that tracks collection-related litigation and the most litigious consumers and lawyers on behalf of debt collectors.
On Wednesday, the Supreme Court made it even easier for consumers to use the courts to fight debt collectors, ruling that collectors cannot be shielded from suits by claiming they made a mistake in interpreting the law.
When a consumer stops paying a bill, creditors often try to collect on their own for a few months. In many instances, the creditor hires another company to collect the debt. In other cases, they may dispose of the debt by selling it to a debt buyer for a steep discount.
Debt collectors and debt buyers are the targets of litigious consumers, since the debt collection law primarily applies to third-party collectors.
Peter Barry, a Minneapolis trial lawyer, is so bullish on the future of debt collection litigation that he holds several “boot camps” each year to share his secrets with other lawyers who want in on the action. If the debtor wins a court case under the act, the debt collector must pay the lawyer’s fees.
The next boot camp is being held in early May in San Francisco, at a cost of $2,495 a person for two and a half days of instruction.
“I can’t sue every illegal debt collector in America, although I’d like to try,” Mr. Barry said.
Mr. Katz can also claim some credit for the increase in lawsuits. For six years, he has run a free Web site called Debtorboards.com, where people share tips on topics like keeping a paper trail and recording calls from collectors.
He said the site received two million hits in 2009, a 60 percent increase over the previous year.
“Debtorboards is geared to help people use the laws as they are on the books as both a shield and a sword,” said Mr. Katz, who says he has won $36,000 from his own litigation against collection agencies. (Since many of the settlements are confidential, it is difficult to prove the claims of Mr. Katz and others).
Of course, debt collectors are hardly pleased with the litigation trend.
Rozanne M. Andersen, chief executive of ACA International, a trade association for the debt collection industry, said she was “extremely concerned” about the increase in lawsuits, which she said cost her industry hundreds of millions of dollars a year. She said much of the increase was the result of ambiguous language in the Fair Debt Collection Act.
Debt collectors are required, for example, to identify themselves on a voice message left for a consumer, she said. But they are also prohibited from telling a third party — including someone who might overhear a phone message — about a consumer’s debt.
“We are between a rock and a hard place,” Ms. Andersen said.
Ms. Andersen said she had little patience for Web sites that encouraged consumers to thwart debt collectors.
“We believe those types of Web sites are encouraging people to not take responsibility for just debt,” she said.
Jack Gordon, who runs the fee-based WebRecon site, said it was no wonder lawsuits were increasing, because consumers were being bombarded with ads from lawyers when they searched online for information on debt collection. He said the proliferation of discussion sites like Mr. Katz’s had, to a lesser extent, also contributed to the trend.
On the boards, he said, “There’s a lot of hot air, a lot of people who overinflate their accomplishments.”
Regardless, Mr. Gordon’s database has become a badge of honor among the devotees of Debtorboards.com. As Brandon Scroggin, a 37-year-old from Little Rock, Ark., puts it, “That’s one list I’m a proud card-carrying member of.”
Mr. Scroggin, who provides price estimates at a body shop, said he was the type of person who refused to be taken advantage of, even for petty offenses. For instance, years ago, he said he joined in the class-action suit against the pop group Milli Vanilli, accused of lip synching, and collected a $1.25 check.
After a messy divorce, Mr. Scroggin was stuck with a $7,000 bill that he said belonged to his ex-wife. Instead of paying it, he began researching the law and stumbled on Debtorboards.com.
Armed with lessons he learned on the site, he demanded proof of the debt from the collection agency, and the calls stopped. But two and a half years later, they started up again so he sued the collection agency, National Loan Recoveries, for failing to provide proof of the debt, among other things.
The case was settled in 2008. The terms were confidential, but he says he never paid National Loan a dime. “Let’s just say I’m a very happy person,” he said. A lawyer for National Loan, Kathryn Bridges, did not return messages seeking comment.
Mr. Katz said his Web site was not intended to help people avoid paying legitimate debts. But if they do so, so be it — he feels no need to apologize.
He said Congress gave consumers certain rights, and he is simply making people aware of them, sometimes colorfully.
As Mr. Katz says at the bottom of each Dr. Tax posting, “A telephone in the hands of a collector is like a crowbar — it can be used to pry a mouth open wide enough to insert a foot.”
Barbara Thompson, 46, of Atlanta, said she challenged $11,000 in credit card debt using online research about collection laws. She does not dispute the debts but reasons that the credit card company wrote off her charges long ago. By her account, she owes the credit card company, not the debt collector.
“The credit card company, they sell it off, they charge it off, it’s just business as usual,” she said, adding, “I’m adamant about not paying a collection agency.”
Copyright 2010 The New York Times Company. All rights reserved.
Friday, April 16, 2010
NYT: Defaults Rise in Federal Loan Modification Program
By DAVID STREITFELD
The number of homeowners who defaulted on their mortgages even after securing cheaper terms through the government’s modification program nearly doubled in March, continuing a trend that could undermine the entire program.
Data released Wednesday by the Treasury Department and the Housing and Urban Development Department showed that 2,879 modified loans had been ended since the program’s inception in the fall, up from 1,499 in February and 1,005 in January.
The Treasury Department said it could not explain the growing number of what it called cancellations, almost all of which were apparently prompted by the borrower’s being unable to make the new payment. A scant number — 37 — were because the loan had been paid off, presumably because the borrower sold the house.
About seven million households are behind on their mortgage payments.
The Obama administration’s modification program has been widely criticized for doing little to help them. The program received another bad review on Wednesday with the release of a report from the Congressional Oversight Panel.
The Treasury’s stated goal is for the modification program to help as many as four million households, the oversight report said, “but only some of these offers will result in temporary modifications, and only some of those modifications will convert to final, five-year status.”
The report continued: “Even among borrowers who receive five-year modifications, some will eventually fall behind on their payments and once again face foreclosure. In the final reckoning, the goal itself seems small in comparison to the magnitude of the problem.”
The Treasury took issue with the report and said the pace of modifications was picking up. The number of active permanent modifications in March was 227,922, an increase of 35 percent from those in February. An additional 108,212 permanent modifications are awaiting borrower approval.
Shaun Donovan, secretary of Housing and Urban Development, said in an interview that those were the important numbers to focus on.
“One percent of these loans defaulting is a tiny fraction,” Mr. Donovan said. “Given how stressed these borrowers are, even in the best situation, there will be redefaults. But I don’t think there is any evidence that would cause us to worry at this point.”
Julia R. Gordon, senior policy counsel for the Center for Responsible Lending in Washington, said she expected the number of post-modification defaults to continue to rise.
“It’s definitely alarming to look at those statistics,” she said. “The current model for modifications doesn’t necessarily produce sustainable results.”
While the program is too new to predict its long-term success, the data on previous modification efforts is not encouraging.
Sixty percent of modifications undertaken by banks in late 2008 were in default a year later, according to the latest Mortgage Metrics Report compiled by the Office of Thrift Supervision and the comptroller of the currency.
Many of these private plans either kept the payments the same or increased them. Inevitably, those mortgages suffered the highest failure rate: about two-thirds of the borrowers defaulted again.
Loans for which the payments were decreased by at least 20 percent failed at a slower but still significant rate of about 40 percent.
The government program takes a more aggressive approach, lowering the interest rates for all loans. On many loans, terms are also extended or principal payments put off for years. Treasury data shows that the median savings for borrowers receiving permanent modifications is $512 a month.
Many borrowers remain deeply indebted, however. They owe not only on the house, but on homeowner association fees, home equity loans, car loans, alimony and credit card interest.
Even after modification, $61 out of every $100 earned by the borrower goes to servicing debt, government figures show. For increasing numbers of modification recipients, mortgage relief is apparently not enough to stave off financial collapse.
“If you can help 60 percent, and 40 percent have to fall back, is that worthwhile?” asked John Courson, president of the Mortgage Bankers Association. “Clearly for the 60 percent it was, and the 40 percent weren’t going to make it anyway.”
The Treasury said on Wednesday that it had always anticipated that some homeowners would not sustain a modification, which was one reason the program had been greatly expanded. New elements focus on allowing distressed homeowners to sell their properties for less than they owe and on shaving the principal owed by borrowers.
The notion of cutting principal, however, has already run into some resistance from the big banks, which do not want borrowers to get the idea that their mortgage can be chopped on a whim.
Copyright 2010 The New York Times Company. All rights reserved.
The number of homeowners who defaulted on their mortgages even after securing cheaper terms through the government’s modification program nearly doubled in March, continuing a trend that could undermine the entire program.
Data released Wednesday by the Treasury Department and the Housing and Urban Development Department showed that 2,879 modified loans had been ended since the program’s inception in the fall, up from 1,499 in February and 1,005 in January.
The Treasury Department said it could not explain the growing number of what it called cancellations, almost all of which were apparently prompted by the borrower’s being unable to make the new payment. A scant number — 37 — were because the loan had been paid off, presumably because the borrower sold the house.
About seven million households are behind on their mortgage payments.
The Obama administration’s modification program has been widely criticized for doing little to help them. The program received another bad review on Wednesday with the release of a report from the Congressional Oversight Panel.
The Treasury’s stated goal is for the modification program to help as many as four million households, the oversight report said, “but only some of these offers will result in temporary modifications, and only some of those modifications will convert to final, five-year status.”
The report continued: “Even among borrowers who receive five-year modifications, some will eventually fall behind on their payments and once again face foreclosure. In the final reckoning, the goal itself seems small in comparison to the magnitude of the problem.”
The Treasury took issue with the report and said the pace of modifications was picking up. The number of active permanent modifications in March was 227,922, an increase of 35 percent from those in February. An additional 108,212 permanent modifications are awaiting borrower approval.
Shaun Donovan, secretary of Housing and Urban Development, said in an interview that those were the important numbers to focus on.
“One percent of these loans defaulting is a tiny fraction,” Mr. Donovan said. “Given how stressed these borrowers are, even in the best situation, there will be redefaults. But I don’t think there is any evidence that would cause us to worry at this point.”
Julia R. Gordon, senior policy counsel for the Center for Responsible Lending in Washington, said she expected the number of post-modification defaults to continue to rise.
“It’s definitely alarming to look at those statistics,” she said. “The current model for modifications doesn’t necessarily produce sustainable results.”
While the program is too new to predict its long-term success, the data on previous modification efforts is not encouraging.
Sixty percent of modifications undertaken by banks in late 2008 were in default a year later, according to the latest Mortgage Metrics Report compiled by the Office of Thrift Supervision and the comptroller of the currency.
Many of these private plans either kept the payments the same or increased them. Inevitably, those mortgages suffered the highest failure rate: about two-thirds of the borrowers defaulted again.
Loans for which the payments were decreased by at least 20 percent failed at a slower but still significant rate of about 40 percent.
The government program takes a more aggressive approach, lowering the interest rates for all loans. On many loans, terms are also extended or principal payments put off for years. Treasury data shows that the median savings for borrowers receiving permanent modifications is $512 a month.
Many borrowers remain deeply indebted, however. They owe not only on the house, but on homeowner association fees, home equity loans, car loans, alimony and credit card interest.
Even after modification, $61 out of every $100 earned by the borrower goes to servicing debt, government figures show. For increasing numbers of modification recipients, mortgage relief is apparently not enough to stave off financial collapse.
“If you can help 60 percent, and 40 percent have to fall back, is that worthwhile?” asked John Courson, president of the Mortgage Bankers Association. “Clearly for the 60 percent it was, and the 40 percent weren’t going to make it anyway.”
The Treasury said on Wednesday that it had always anticipated that some homeowners would not sustain a modification, which was one reason the program had been greatly expanded. New elements focus on allowing distressed homeowners to sell their properties for less than they owe and on shaving the principal owed by borrowers.
The notion of cutting principal, however, has already run into some resistance from the big banks, which do not want borrowers to get the idea that their mortgage can be chopped on a whim.
Copyright 2010 The New York Times Company. All rights reserved.
Monday, April 12, 2010
NYT: Don't the Farm on the Housing Recovery
By ROBERT J. SHILLER
MUCH hope has been pinned on the recovery in home prices that began about a year ago. A long-lasting housing recovery might provide a balm to households, mortgage lenders and the entire United States economy. But will the recovery be sustained?
Alas, the evidence is equivocal at best.
The most obvious reason for hope is that, unlike stock prices, home prices tend to show a great deal of momentum. Correcting for seasonal effects, home prices as measured by the S.&P./Case-Shiller 10-City Home Price Index increased each month from June 1995 to April 2006, then decreased almost every month to May 2009. Since then, they have risen through January, the latest month for which data is available.
So, because home prices have been climbing of late, isn’t it plausible that they’ll keep doing so?
If only it were that simple.
Home price booms and busts do end, sometimes quite suddenly, as was the case for the boom of 1995 to 2006 and the bust of 2006 to 2009. Today, we need to worry about strong headwinds, as the government begins to withdraw its support of a still-troubled lending industry and as foreclosures are dumping millions of homes onto the market.
Consider some leading indicators. The National Association of Home Builders index of traffic of prospective home buyers measures the number of people who are just starting to think about buying. In the past, it has predicted market turning points: the index peaked in June 2005, 10 months before the 2006 peak in home prices, and bottomed in November 2008, six months before the 2009 bottom in prices.
The index’s current signals are negative. After peaking again in September 2009, it has been falling steadily, suggesting that home prices may have reached another downward turning point.
But why? Unfortunately, it is hard to pinpoint causes for a change in demand for housing. The factors clearly include government economic policy, like interest-rate changes and tax credits. But these moves don’t line up neatly with major turning points in the market.
Sociological processes may be driving these changes. Trends in news media coverage, for example, generate conversations in barbershops and hotel lobbies, which in turn alter the conventional wisdom about investing.
Consider how that process might have worked during the run-up to the 2006 turning point in home prices. In May 2005, two months before the peak in the N.A.H.B. traffic index, Consumer Reports magazine had a cover article, “Your Home: How to Protect Your Biggest Investment,” that conveyed a very bullish sentiment.
“Despite years of dire warnings from some economists that the housing boom is about to end, it hasn’t,” the magazine said. “Indeed, last year prices rose even more — about 11 percent nationally.”
The article went on to give advice: “You can no more time the real estate market than you can the stock market,” it said. “If you need a house, and can afford one, go ahead and buy.”
The article extended to the housing market the conventional wisdom that then prevailed about the stock market — namely, that it was quite efficient, without identifiable bubbles and bursts. According to this theory, there was an identifiable profit opportunity: buy and hold stocks, and by extension, housing, and watch your wealth grow.
But as 2005 continued, the conventional wisdom began to change.
Some people in the United States were by then aware of the 2004-5 home price decline in Britain. Some were learning a new lexicon: “housing bubble,” “housing crash” and “subprime mortgage.” Newspapers and magazines began to include some derisive reviews of a March 2005 book by David Lereah, “Are You Missing the Real Estate Boom?” And accounts began to appear of the risky behavior of an army of real estate flippers.
In May 2005, I included in the second edition of my book, “Irrational Exuberance,” a new data series of real United States home prices that I constructed, going back to 1890. I was amazed to discover that no one had published such a long-term series before.
This data revealed that the home price boom was anomalous, by historical standards. It looked very much like a bubble, and a big one. The chart was reproduced many times in newspapers and magazines, starting with an article by David Leonhardt in The New York Times in August 2005.
In short, a public case began to be built that we really were experiencing a housing bubble. By 2006 a variety of narratives, taken together, appear to have produced a different mind-set for many people — creating a tipping point that stopped the growth in demand for homes in its tracks.
THE question now is whether a strong case has been built for a new bull market since the home-price turning point in May 2009. Though there is no way to be precise, I don’t believe it has.
Since that turning point, most public discourse on housing has not been about a new long-term view of the market. Instead, it focused initially on whether the recession was over and on the extraordinary measures the government was taking to support the housing market.
Now we’re shifting into a new phase. The recession is generally viewed as being over, and those extraordinary measures are being lifted.
On March 31, the Federal Reserve ended its program of buying more than $1 trillion of mortgage-backed securities, and the homebuyer tax credit expires on April 30.
Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast.
Momentum may be on the forecasts’ side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.
Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.
Copyright 2010 The New York Times Company. All rights reserved.
MUCH hope has been pinned on the recovery in home prices that began about a year ago. A long-lasting housing recovery might provide a balm to households, mortgage lenders and the entire United States economy. But will the recovery be sustained?
Alas, the evidence is equivocal at best.
The most obvious reason for hope is that, unlike stock prices, home prices tend to show a great deal of momentum. Correcting for seasonal effects, home prices as measured by the S.&P./Case-Shiller 10-City Home Price Index increased each month from June 1995 to April 2006, then decreased almost every month to May 2009. Since then, they have risen through January, the latest month for which data is available.
So, because home prices have been climbing of late, isn’t it plausible that they’ll keep doing so?
If only it were that simple.
Home price booms and busts do end, sometimes quite suddenly, as was the case for the boom of 1995 to 2006 and the bust of 2006 to 2009. Today, we need to worry about strong headwinds, as the government begins to withdraw its support of a still-troubled lending industry and as foreclosures are dumping millions of homes onto the market.
Consider some leading indicators. The National Association of Home Builders index of traffic of prospective home buyers measures the number of people who are just starting to think about buying. In the past, it has predicted market turning points: the index peaked in June 2005, 10 months before the 2006 peak in home prices, and bottomed in November 2008, six months before the 2009 bottom in prices.
The index’s current signals are negative. After peaking again in September 2009, it has been falling steadily, suggesting that home prices may have reached another downward turning point.
But why? Unfortunately, it is hard to pinpoint causes for a change in demand for housing. The factors clearly include government economic policy, like interest-rate changes and tax credits. But these moves don’t line up neatly with major turning points in the market.
Sociological processes may be driving these changes. Trends in news media coverage, for example, generate conversations in barbershops and hotel lobbies, which in turn alter the conventional wisdom about investing.
Consider how that process might have worked during the run-up to the 2006 turning point in home prices. In May 2005, two months before the peak in the N.A.H.B. traffic index, Consumer Reports magazine had a cover article, “Your Home: How to Protect Your Biggest Investment,” that conveyed a very bullish sentiment.
“Despite years of dire warnings from some economists that the housing boom is about to end, it hasn’t,” the magazine said. “Indeed, last year prices rose even more — about 11 percent nationally.”
The article went on to give advice: “You can no more time the real estate market than you can the stock market,” it said. “If you need a house, and can afford one, go ahead and buy.”
The article extended to the housing market the conventional wisdom that then prevailed about the stock market — namely, that it was quite efficient, without identifiable bubbles and bursts. According to this theory, there was an identifiable profit opportunity: buy and hold stocks, and by extension, housing, and watch your wealth grow.
But as 2005 continued, the conventional wisdom began to change.
Some people in the United States were by then aware of the 2004-5 home price decline in Britain. Some were learning a new lexicon: “housing bubble,” “housing crash” and “subprime mortgage.” Newspapers and magazines began to include some derisive reviews of a March 2005 book by David Lereah, “Are You Missing the Real Estate Boom?” And accounts began to appear of the risky behavior of an army of real estate flippers.
In May 2005, I included in the second edition of my book, “Irrational Exuberance,” a new data series of real United States home prices that I constructed, going back to 1890. I was amazed to discover that no one had published such a long-term series before.
This data revealed that the home price boom was anomalous, by historical standards. It looked very much like a bubble, and a big one. The chart was reproduced many times in newspapers and magazines, starting with an article by David Leonhardt in The New York Times in August 2005.
In short, a public case began to be built that we really were experiencing a housing bubble. By 2006 a variety of narratives, taken together, appear to have produced a different mind-set for many people — creating a tipping point that stopped the growth in demand for homes in its tracks.
THE question now is whether a strong case has been built for a new bull market since the home-price turning point in May 2009. Though there is no way to be precise, I don’t believe it has.
Since that turning point, most public discourse on housing has not been about a new long-term view of the market. Instead, it focused initially on whether the recession was over and on the extraordinary measures the government was taking to support the housing market.
Now we’re shifting into a new phase. The recession is generally viewed as being over, and those extraordinary measures are being lifted.
On March 31, the Federal Reserve ended its program of buying more than $1 trillion of mortgage-backed securities, and the homebuyer tax credit expires on April 30.
Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast.
Momentum may be on the forecasts’ side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.
Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.
Copyright 2010 The New York Times Company. All rights reserved.
NYT: Americans Face Tighter Credit
By NELSON D. SCHWARTZ
Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.
That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.
The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.
“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”
The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.
Along with the sell-off in bonds, the Federal Reserve has halted its emergency $1.25 trillion program to buy mortgage debt, placing even more upward pressure on rates.
“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School. “It’s a really big risk.”
Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home, according to Mr. Mayer.
The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year.
Another area in which higher rates are likely to affect consumers is credit card use. And last week, the Federal Reserve reported that the average interest rate on credit cards reached 14.26 percent in February, the highest since 2001. That is up from 12.03 percent when rates bottomed in the fourth quarter of 2008 — a jump that amounts to about $200 a year in additional interest payments for the typical American household.
With losses from credit card defaults rising and with capital to back credit cards harder to come by, issuers are likely to increase rates to 16 or 17 percent by the fall, according to Dennis Moroney, a research director at the TowerGroup, a financial research company.
“The banks don’t have a lot of pricing options,” Mr. Moroney said. “They’re targeting people who carry a balance from month to month.”
Similarly, many car loans have already become significantly more expensive, with rates at auto finance companies rising to 4.72 percent in February from 3.26 percent in December, according to the Federal Reserve.
Washington, too, is expecting to have to pay more to borrow the money it needs for programs. The Office of Management and Budget expects the rate on the benchmark 10-year United States Treasury note to remain close to 3.9 percent for the rest of the year, but then rise to 4.5 percent in 2011 and 5 percent in 2012.
The run-up in rates is quickening as investors steer more of their money away from bonds and as Washington unplugs the economic life support programs that kept rates low through the financial crisis. Mortgage rates and car loans are linked to the yield on long-term bonds.
Besides the inflation fears set off by the strengthening economy, Mr. Gross said he was also wary of Treasury bonds because he feared the burgeoning supply of new debt issued to finance the government’s huge budget deficits would overwhelm demand, driving interest rates higher.
Nine months ago, United States government debt accounted for half of the assets in Mr. Gross’s flagship fund, Pimco Total Return. That has shrunk to 30 percent now — the lowest ever in the fund’s 23-year history — as Mr. Gross has sold American bonds in favor of debt from Europe, particularly Germany, as well as from developing countries like Brazil.
Last week, the yield on the benchmark 10-year Treasury note briefly crossed the psychologically important threshold of 4 percent, as the Treasury auctioned off $82 billion in new debt. That is nearly twice as much as the government paid in the fall of 2008, when investors sought out ultrasafe assets like Treasury securities after the collapse of Lehman Brothers and the beginning of the credit crisis.
Though still very low by historical standards, the rise of bond yields since then is reversing a decline that began in 1981, when 10-year note yields reached nearly 16 percent.
From that peak, steadily dropping interest rates have fed a three-decade lending boom, during which American consumers borrowed more and more but managed to hold down the portion of their income devoted to paying off loans.
Indeed, total household debt is now nine times what it was in 1981 — rising twice as fast as disposable income over the same period — yet the portion of disposable income that goes toward covering that debt has budged only slightly, increasing to 12.6 percent from 10.7 percent.
Household debt has been dropping for the last two years as recession-battered consumers cut back on borrowing, but at $13.5 trillion, it still exceeds disposable income by $2.5 trillion.
The long decline in rates also helped prop up the stock market; lower rates for investments like bonds make stocks more attractive.
That tailwind, which prevented even worse economic pain during the recession, has ceased, according to interviews with economists, analysts and money managers.
“We’ve had almost a 30-year rally,” said David Wyss, chief economist for Standard & Poor’s. “That’s come to an end.”
Just as significant as the bottom-line impact will be the psychological fallout from not being able to buy more while paying less — an unusual state of affairs that made consumer spending the most important measure of economic health.
“We’ve gotten spoiled by the idea that interest rates will stay in the low single-digits forever,” said Jim Caron, an interest rate strategist with Morgan Stanley. “We’ve also had a generation of consumers and investors get used to low rates.”
For young home buyers today considering 30-year mortgages with a rate of just over 5 percent, it might be hard to conceive of a time like October 1981, when mortgage rates peaked at 18.2 percent. That meant monthly payments of $1,523 then compared with $556 now for a $100,000 loan.
No one expects rates to return to anything resembling 1981 levels. Still, for much of Wall Street, the question is not whether rates will go up, but rather by how much.
Some firms, like Morgan Stanley, are predicting that rates could rise by a percentage point and a half by the end of the year. Others, like JPMorgan Chase are forecasting a more modest half-point jump.
But the consensus is clear, according to Terrence M. Belton, global head of fixed-income strategy for J. P. Morgan Securities. “Everyone knows that rates will eventually go higher,” he said.
Copyright 2010 The New York Times Company. All rights reserved.
Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.
That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.
The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.
“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”
The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.
Along with the sell-off in bonds, the Federal Reserve has halted its emergency $1.25 trillion program to buy mortgage debt, placing even more upward pressure on rates.
“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School. “It’s a really big risk.”
Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home, according to Mr. Mayer.
The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year.
Another area in which higher rates are likely to affect consumers is credit card use. And last week, the Federal Reserve reported that the average interest rate on credit cards reached 14.26 percent in February, the highest since 2001. That is up from 12.03 percent when rates bottomed in the fourth quarter of 2008 — a jump that amounts to about $200 a year in additional interest payments for the typical American household.
With losses from credit card defaults rising and with capital to back credit cards harder to come by, issuers are likely to increase rates to 16 or 17 percent by the fall, according to Dennis Moroney, a research director at the TowerGroup, a financial research company.
“The banks don’t have a lot of pricing options,” Mr. Moroney said. “They’re targeting people who carry a balance from month to month.”
Similarly, many car loans have already become significantly more expensive, with rates at auto finance companies rising to 4.72 percent in February from 3.26 percent in December, according to the Federal Reserve.
Washington, too, is expecting to have to pay more to borrow the money it needs for programs. The Office of Management and Budget expects the rate on the benchmark 10-year United States Treasury note to remain close to 3.9 percent for the rest of the year, but then rise to 4.5 percent in 2011 and 5 percent in 2012.
The run-up in rates is quickening as investors steer more of their money away from bonds and as Washington unplugs the economic life support programs that kept rates low through the financial crisis. Mortgage rates and car loans are linked to the yield on long-term bonds.
Besides the inflation fears set off by the strengthening economy, Mr. Gross said he was also wary of Treasury bonds because he feared the burgeoning supply of new debt issued to finance the government’s huge budget deficits would overwhelm demand, driving interest rates higher.
Nine months ago, United States government debt accounted for half of the assets in Mr. Gross’s flagship fund, Pimco Total Return. That has shrunk to 30 percent now — the lowest ever in the fund’s 23-year history — as Mr. Gross has sold American bonds in favor of debt from Europe, particularly Germany, as well as from developing countries like Brazil.
Last week, the yield on the benchmark 10-year Treasury note briefly crossed the psychologically important threshold of 4 percent, as the Treasury auctioned off $82 billion in new debt. That is nearly twice as much as the government paid in the fall of 2008, when investors sought out ultrasafe assets like Treasury securities after the collapse of Lehman Brothers and the beginning of the credit crisis.
Though still very low by historical standards, the rise of bond yields since then is reversing a decline that began in 1981, when 10-year note yields reached nearly 16 percent.
From that peak, steadily dropping interest rates have fed a three-decade lending boom, during which American consumers borrowed more and more but managed to hold down the portion of their income devoted to paying off loans.
Indeed, total household debt is now nine times what it was in 1981 — rising twice as fast as disposable income over the same period — yet the portion of disposable income that goes toward covering that debt has budged only slightly, increasing to 12.6 percent from 10.7 percent.
Household debt has been dropping for the last two years as recession-battered consumers cut back on borrowing, but at $13.5 trillion, it still exceeds disposable income by $2.5 trillion.
The long decline in rates also helped prop up the stock market; lower rates for investments like bonds make stocks more attractive.
That tailwind, which prevented even worse economic pain during the recession, has ceased, according to interviews with economists, analysts and money managers.
“We’ve had almost a 30-year rally,” said David Wyss, chief economist for Standard & Poor’s. “That’s come to an end.”
Just as significant as the bottom-line impact will be the psychological fallout from not being able to buy more while paying less — an unusual state of affairs that made consumer spending the most important measure of economic health.
“We’ve gotten spoiled by the idea that interest rates will stay in the low single-digits forever,” said Jim Caron, an interest rate strategist with Morgan Stanley. “We’ve also had a generation of consumers and investors get used to low rates.”
For young home buyers today considering 30-year mortgages with a rate of just over 5 percent, it might be hard to conceive of a time like October 1981, when mortgage rates peaked at 18.2 percent. That meant monthly payments of $1,523 then compared with $556 now for a $100,000 loan.
No one expects rates to return to anything resembling 1981 levels. Still, for much of Wall Street, the question is not whether rates will go up, but rather by how much.
Some firms, like Morgan Stanley, are predicting that rates could rise by a percentage point and a half by the end of the year. Others, like JPMorgan Chase are forecasting a more modest half-point jump.
But the consensus is clear, according to Terrence M. Belton, global head of fixed-income strategy for J. P. Morgan Securities. “Everyone knows that rates will eventually go higher,” he said.
Copyright 2010 The New York Times Company. All rights reserved.
Friday, April 02, 2010
Pay Garnishments Rise as Debtors Fall Behind
By JOHN COLLINS RUDOLF
PHOENIX — When the bank sued Leann Weaver for not paying her credit card balance, her reaction was typical for someone in that situation. Personal and financial setbacks weighed her down, and she knew she owed the $2,470. So she never went to court to defend herself.
She was startled by what happened next. When she swiped her debit card at the grocery store, it was declined. It turned out Capital One Bank had taken $224.25 from her paycheck, a quarter of her wages for two weeks of work at a retail chain, and her bank account was overdrawn.
“They’re kicking somebody who’s already in the dirt,” she said.
One of the worst economic downturns of modern history has produced a big increase in the number of delinquent borrowers, and creditors are suing them by the millions. Concern is mounting in government and among consumer advocates that the debtors are not always getting a fair shake in these cases.
Most consumers never offer a defense, and creditors win their lawsuits without having to offer proof of the debts, much less justify to a judge the huge interest charges and penalties they often tack on.
After winning, creditors can secure a court order to seize part of the debtor’s paycheck or the funds in a bank account, a procedure called garnishment. No national statistics are kept, but the pay seizures are rising fast in some areas — up 121 percent in the Phoenix area since 2005, and 55 percent in the Atlanta area since 2004. In Cleveland, garnishments jumped 30 percent between 2008 and 2009 alone.
Debt collectors say they are being forced into the action by combative debtors who dodge attempts to settle. “I think there’s a lack of accountability among debtors, and a lack of interest in reaching out to their creditors to resolve things amicably,” said Fred N. Blitt, president of the National Association of Retail Collection Attorneys.
Bankruptcy can clear away most debts. Yet sweeping changes to federal law in 2005 — pushed by the banking lobby — complicated that process and more than doubled the average cost of filing, to more than $2,000. Many low-income debtors must save for months before they can afford to go broke.
In some states, courts allow creditors to charge high interest rates for years after a lawsuit is decided in their favor. In others, creditors can win lawsuits by default and seize wages and bank accounts without a case ever appearing before a judge.
Lack of participation is the most fundamental problem. Some consumers do not even know they are being sued; the people who are supposed to serve them with formal notice have sometimes been caught skipping that step and doctoring the paperwork.
In far more cases, consumers are served but still do not offer a defense. Few can afford lawyers; others are intimidated or confused. In their absence, judges can offer little relief.
In the rare event that a consumer battles back, creditors frequently lack the documentation to prove their claim, and cases are dropped. That is because many past-due debts are owned not by the banks that issued them, but by debt collectors who bought, for cents on the dollar, a list of names and amounts due.
“If the consumers were armed with more education about how to defend against these debts, they’d be successful,” said Jeffrey Lipman, a civil magistrate in Des Moines.
The case of Sidney Jones shows how punishing the system can be. In January 2001, Mr. Jones, 45, a maintenance worker from California Crossroads, Va., took out a $4,097 personal loan from Beneficial Virginia, a subprime lender now owned by HSBC, the big bank.
He fell behind, and Beneficial sued. Mr. Jones did not appear in court. “I just thought they were going to take what I owed,” he said.
By default, Beneficial won a judgment of $4,750, plus $900 in lawyers’ fees, with the debt accruing interest at 27.55 percent until paid in full. The bank started garnishing his wages in March 2003.
Over the next six years, the bank deducted more than $10,000 from Mr. Jones’s paychecks, but he made little headway on his debt. According to a court order secured by Beneficial’s lawyers last spring, he still owed the company $3,965, a sum nearly equal to the original loan amount.
Mr. Jones, who did not graduate from high school, was baffled. “Where did all this money go that I paid them?” he said.
Dale Pittman, a consumer law lawyer in Petersburg, Va. , took Mr. Jones’s case without charge, and found that all but $134 of his payments had gone toward interest, fees and court costs. “It’s a perfectly legal result under Virginia law,” Mr. Pittman said.
HSBC said it ceased collection shortly after Mr. Pittman took the case, but declined further comment. “We are confident we are treating our customers fairly and with integrity,” Kate Durham, a spokeswoman for HSBC North America, said in an e-mail message.
The rare debtors who press their claims, and catch a sympathetic judge, have a shot at a result more to their liking.
Ruth M. Owens, a disabled Cleveland woman, was sued by Discover Bank in 2004 for an unpaid credit card. Ms. Owens offered a defense, sending a handwritten note to the court.
“After paying my monthly utilities, there is no money left except a little food money and sometimes it isn’t enough,” she wrote.
Robert Triozzi, a judge at the time, heard the case. He found that over a period of several years, Ms. Owens had paid nearly $3,500 on an original balance of $1,900. But Discover was suing her for $5,564, mostly for late fees, compound interest, penalties and other charges. He called Discover’s actions “unconscionable” and threw the case out.
Discover defended its actions. “This account was placed with an attorney only after all other efforts to reach the card member were exhausted,” Matthew Towson, a bank spokesman, said in an e-mail message.
Going to court is no guarantee of victory, of course. Consumers who do go are sometimes intercepted by collection lawyers, who press them to sign papers settling without a trial. These settlements may be against the interests of debtors, but they sign anyway.
“We’re signing off on a lot of settlement agreements where we shake our heads and ask, ‘Why is this person settling to this?’ ” Judge Lipman said.
For the working poor, losing a lawsuit can mean disaster. A 1968 federal law exempts 75 percent of a worker’s wages, or 30 times the minimum wage per week, from being taken in garnishment — whichever is less. But increases in the minimum wage have failed to keep up with inflation. As federal law stands now, just $217.50 a week is exempt from seizure. (A few states set higher cutoffs.)
The working poor “have difficulties maintaining payments on life’s necessities with their full paycheck,” said Angela Riccetti, a lawyer with Atlanta Legal Aid who represents indigent clients whose wages are being garnished. “You lose 25 percent of it and everything folds.”
For Leann Weaver, the woman at the grocery store, Capital One’s lawsuit made a bad situation worse. After being evicted from her apartment, she moved in with her grandparents. Without them, she might have ended up on the street or in a shelter, she said.
Capital One declined to comment on Ms. Weaver’s case. “We encourage anyone facing difficulties meeting their financial obligations to contact us right away,” Tatiana Stead, a bank spokeswoman, said in an e-mail message.
Ms. Weaver said she repeatedly asked Capital One for more time to pay her $2,470 debt, but last year the bank filed suit. She failed to show up in court, and a judgment was entered against her, swollen by $1,800 in interest and lawyers’ fees. Then the garnishment began, almost $500 a month, or a quarter of her pay.
“I can’t even look at my paychecks any more,” she said.
Copyright 2010 The New York Times Company. All rights reserved.
PHOENIX — When the bank sued Leann Weaver for not paying her credit card balance, her reaction was typical for someone in that situation. Personal and financial setbacks weighed her down, and she knew she owed the $2,470. So she never went to court to defend herself.
She was startled by what happened next. When she swiped her debit card at the grocery store, it was declined. It turned out Capital One Bank had taken $224.25 from her paycheck, a quarter of her wages for two weeks of work at a retail chain, and her bank account was overdrawn.
“They’re kicking somebody who’s already in the dirt,” she said.
One of the worst economic downturns of modern history has produced a big increase in the number of delinquent borrowers, and creditors are suing them by the millions. Concern is mounting in government and among consumer advocates that the debtors are not always getting a fair shake in these cases.
Most consumers never offer a defense, and creditors win their lawsuits without having to offer proof of the debts, much less justify to a judge the huge interest charges and penalties they often tack on.
After winning, creditors can secure a court order to seize part of the debtor’s paycheck or the funds in a bank account, a procedure called garnishment. No national statistics are kept, but the pay seizures are rising fast in some areas — up 121 percent in the Phoenix area since 2005, and 55 percent in the Atlanta area since 2004. In Cleveland, garnishments jumped 30 percent between 2008 and 2009 alone.
Debt collectors say they are being forced into the action by combative debtors who dodge attempts to settle. “I think there’s a lack of accountability among debtors, and a lack of interest in reaching out to their creditors to resolve things amicably,” said Fred N. Blitt, president of the National Association of Retail Collection Attorneys.
Bankruptcy can clear away most debts. Yet sweeping changes to federal law in 2005 — pushed by the banking lobby — complicated that process and more than doubled the average cost of filing, to more than $2,000. Many low-income debtors must save for months before they can afford to go broke.
In some states, courts allow creditors to charge high interest rates for years after a lawsuit is decided in their favor. In others, creditors can win lawsuits by default and seize wages and bank accounts without a case ever appearing before a judge.
Lack of participation is the most fundamental problem. Some consumers do not even know they are being sued; the people who are supposed to serve them with formal notice have sometimes been caught skipping that step and doctoring the paperwork.
In far more cases, consumers are served but still do not offer a defense. Few can afford lawyers; others are intimidated or confused. In their absence, judges can offer little relief.
In the rare event that a consumer battles back, creditors frequently lack the documentation to prove their claim, and cases are dropped. That is because many past-due debts are owned not by the banks that issued them, but by debt collectors who bought, for cents on the dollar, a list of names and amounts due.
“If the consumers were armed with more education about how to defend against these debts, they’d be successful,” said Jeffrey Lipman, a civil magistrate in Des Moines.
The case of Sidney Jones shows how punishing the system can be. In January 2001, Mr. Jones, 45, a maintenance worker from California Crossroads, Va., took out a $4,097 personal loan from Beneficial Virginia, a subprime lender now owned by HSBC, the big bank.
He fell behind, and Beneficial sued. Mr. Jones did not appear in court. “I just thought they were going to take what I owed,” he said.
By default, Beneficial won a judgment of $4,750, plus $900 in lawyers’ fees, with the debt accruing interest at 27.55 percent until paid in full. The bank started garnishing his wages in March 2003.
Over the next six years, the bank deducted more than $10,000 from Mr. Jones’s paychecks, but he made little headway on his debt. According to a court order secured by Beneficial’s lawyers last spring, he still owed the company $3,965, a sum nearly equal to the original loan amount.
Mr. Jones, who did not graduate from high school, was baffled. “Where did all this money go that I paid them?” he said.
Dale Pittman, a consumer law lawyer in Petersburg, Va. , took Mr. Jones’s case without charge, and found that all but $134 of his payments had gone toward interest, fees and court costs. “It’s a perfectly legal result under Virginia law,” Mr. Pittman said.
HSBC said it ceased collection shortly after Mr. Pittman took the case, but declined further comment. “We are confident we are treating our customers fairly and with integrity,” Kate Durham, a spokeswoman for HSBC North America, said in an e-mail message.
The rare debtors who press their claims, and catch a sympathetic judge, have a shot at a result more to their liking.
Ruth M. Owens, a disabled Cleveland woman, was sued by Discover Bank in 2004 for an unpaid credit card. Ms. Owens offered a defense, sending a handwritten note to the court.
“After paying my monthly utilities, there is no money left except a little food money and sometimes it isn’t enough,” she wrote.
Robert Triozzi, a judge at the time, heard the case. He found that over a period of several years, Ms. Owens had paid nearly $3,500 on an original balance of $1,900. But Discover was suing her for $5,564, mostly for late fees, compound interest, penalties and other charges. He called Discover’s actions “unconscionable” and threw the case out.
Discover defended its actions. “This account was placed with an attorney only after all other efforts to reach the card member were exhausted,” Matthew Towson, a bank spokesman, said in an e-mail message.
Going to court is no guarantee of victory, of course. Consumers who do go are sometimes intercepted by collection lawyers, who press them to sign papers settling without a trial. These settlements may be against the interests of debtors, but they sign anyway.
“We’re signing off on a lot of settlement agreements where we shake our heads and ask, ‘Why is this person settling to this?’ ” Judge Lipman said.
For the working poor, losing a lawsuit can mean disaster. A 1968 federal law exempts 75 percent of a worker’s wages, or 30 times the minimum wage per week, from being taken in garnishment — whichever is less. But increases in the minimum wage have failed to keep up with inflation. As federal law stands now, just $217.50 a week is exempt from seizure. (A few states set higher cutoffs.)
The working poor “have difficulties maintaining payments on life’s necessities with their full paycheck,” said Angela Riccetti, a lawyer with Atlanta Legal Aid who represents indigent clients whose wages are being garnished. “You lose 25 percent of it and everything folds.”
For Leann Weaver, the woman at the grocery store, Capital One’s lawsuit made a bad situation worse. After being evicted from her apartment, she moved in with her grandparents. Without them, she might have ended up on the street or in a shelter, she said.
Capital One declined to comment on Ms. Weaver’s case. “We encourage anyone facing difficulties meeting their financial obligations to contact us right away,” Tatiana Stead, a bank spokeswoman, said in an e-mail message.
Ms. Weaver said she repeatedly asked Capital One for more time to pay her $2,470 debt, but last year the bank filed suit. She failed to show up in court, and a judgment was entered against her, swollen by $1,800 in interest and lawyers’ fees. Then the garnishment began, almost $500 a month, or a quarter of her pay.
“I can’t even look at my paychecks any more,” she said.
Copyright 2010 The New York Times Company. All rights reserved.
Sharp Increase in March Bankruptcies
By DUFF WILSON
More Americans filed for bankruptcy protection in March than during any month since the federal personal bankruptcy law was tightened in October 2005, a new report says, a result of high unemployment and the housing crash.
Federal courts reported over 158,000 bankruptcy filings in March, or 6,900 a day, a rise of 35 percent from February, according to a report to be released on Friday by Automated Access to Court Electronic Records, a data collection company known as Aacer. Filings were up 19 percent over March 2009. The previous record over the last five years was 133,000 in October.
“Even with the restrictive new law, we’re back up over where we were before the law changed,” Mike Bickford, president of Aacer, said in a phone interview Thursday from his headquarters in Oklahoma City. He faulted the stagnant economy, saying a surge in bankruptcies generally follows economic contraction by 6 to 18 months, and he pointed to March as a historically busy month for bankruptcy filings.
Other experts point out that filings invoking Chapter 7 of the bankruptcy code, a simple and inexpensive option, are rising faster than more complex Chapter 13 reorganization filings, under which consumers repay a portion of their debts so they can keep their homes, suggesting that more homeowners are simply walking away from underwater mortgages.
“Fewer people are trying to save their homes,” Katherine M. Porter, a University of Iowa law professor and bankruptcy expert, said in an interview by phone on Thursday. “They realize their payments are not affordable, and bankruptcy judges do not have the power to adjust the mortgages to make them more affordable.”
Statistics from the United States Trustee Program, the Justice Department office that oversees bankruptcy cases, show that Chapter 7 filings as a percentage of all bankruptcies have increased to about 73 percent in 2009 from about 62 percent in 2006-07. Of the 158,141 bankruptcy filings in March, 118,505, or 75 percent, were Chapter 7s and 38,241 were Chapter 13s, the Aacer report says.
“We think that means fewer and fewer families think they’re really going to save their homes,” Professor Porter said. “They don’t have any equity, so why try to keep up with their home payments?”
The nation’s high unemployment rate is one more reason for people to choose Chapter 7, Professor Porter said. “To file Chapter 13, you need ongoing income, and to the extent we have more people who are unemployed, they can’t use Chapter 13 because they don’t have that income to pay into the plan,” she said.
Finally, Professor Porter said, March is the high season for bankruptcy filings because many people in financial distress get a tax refund check that they can use to pay the $1,500 to $3,500 that a bankruptcy lawyer charges.
“People use their tax refunds to pay their attorney fees,” she said.
Copyright 2010 The New York Times Company. All rights reserved.
More Americans filed for bankruptcy protection in March than during any month since the federal personal bankruptcy law was tightened in October 2005, a new report says, a result of high unemployment and the housing crash.
Federal courts reported over 158,000 bankruptcy filings in March, or 6,900 a day, a rise of 35 percent from February, according to a report to be released on Friday by Automated Access to Court Electronic Records, a data collection company known as Aacer. Filings were up 19 percent over March 2009. The previous record over the last five years was 133,000 in October.
“Even with the restrictive new law, we’re back up over where we were before the law changed,” Mike Bickford, president of Aacer, said in a phone interview Thursday from his headquarters in Oklahoma City. He faulted the stagnant economy, saying a surge in bankruptcies generally follows economic contraction by 6 to 18 months, and he pointed to March as a historically busy month for bankruptcy filings.
Other experts point out that filings invoking Chapter 7 of the bankruptcy code, a simple and inexpensive option, are rising faster than more complex Chapter 13 reorganization filings, under which consumers repay a portion of their debts so they can keep their homes, suggesting that more homeowners are simply walking away from underwater mortgages.
“Fewer people are trying to save their homes,” Katherine M. Porter, a University of Iowa law professor and bankruptcy expert, said in an interview by phone on Thursday. “They realize their payments are not affordable, and bankruptcy judges do not have the power to adjust the mortgages to make them more affordable.”
Statistics from the United States Trustee Program, the Justice Department office that oversees bankruptcy cases, show that Chapter 7 filings as a percentage of all bankruptcies have increased to about 73 percent in 2009 from about 62 percent in 2006-07. Of the 158,141 bankruptcy filings in March, 118,505, or 75 percent, were Chapter 7s and 38,241 were Chapter 13s, the Aacer report says.
“We think that means fewer and fewer families think they’re really going to save their homes,” Professor Porter said. “They don’t have any equity, so why try to keep up with their home payments?”
The nation’s high unemployment rate is one more reason for people to choose Chapter 7, Professor Porter said. “To file Chapter 13, you need ongoing income, and to the extent we have more people who are unemployed, they can’t use Chapter 13 because they don’t have that income to pay into the plan,” she said.
Finally, Professor Porter said, March is the high season for bankruptcy filings because many people in financial distress get a tax refund check that they can use to pay the $1,500 to $3,500 that a bankruptcy lawyer charges.
“People use their tax refunds to pay their attorney fees,” she said.
Copyright 2010 The New York Times Company. All rights reserved.
Thursday, April 01, 2010
Treatment of 401(k) accounts in bankruptcy
In these difficult economic times, many clients have contacted us regarding the treatment of their 401(k)s and 401(k) loan repayments in a chapter 7 bankruptcy filing. The first rule is that in bankruptcy, a 401(k) is exempt from a bankruptcy estate under § 282(2)(e) of the New York State Debtor and Creditor law and therefore creditors cannot attach the proceeds of a 401(k) account. Therefore, if it all possible, a debtor should not borrow from their 401(k) to pay creditors.
But if someone does borrow money from their 401(k), how do these loan repayments affect a personal bankruptcy filing?
1. In order to qualify for Chapter 7 personal bankruptcy, there are two tests that need to be met–the first is the "Disposable Income Test" and the second is the "Means Test".
2. The Disposable Income Test takes an individual's after-tax monthly income and subtracts their ordinary and necessary living and business expenses. If an individual has positive disposable income (or their after-tax income exceeds their living and business expenses), then they do not qualify for chapter 7 bankruptcy and must file for chapter 13 bankruptcy or not file at all.
The question is, are 401(k) loan repayments eligible to be a deduction for the disposable income test? In this jurisdiction (the Southern District of New York), the standard appears to be that if the 401(k) loan repayments are required by an employer or the entity that administers the 401(k) pension plan, those loans would be an allowed deductible expense.
3. Are 401(k) loan payments deductible for purposes of the means test? The answer appears to be no, based on several cases, including Egebjerg v. Anderson (In re Egebjerg), 574 F.3d 1045 (9th Cir. 2009) and In re Koch, 408 B.R. 539 (Bankr. S.D.Fla. 2009). In both of these cases, the courts concluded that 401(k) loan repayments do not qualify as a § 707(b)(2)(A)(ii)(I) other necessary expense-involuntary deductions (which is at line 26 of the form) for purposes of the means test.
Based on the above, it would be best for clients not to borrow against their 401(k) if they are contemplating filing for bankruptcy. Even if an individual borrows from a 401(k) plan, they may still be eligible to file for personal bankruptcy based on their overall income, expenses, assets and liabilities, although these calculations need to be done by an experienced bankruptcy attorney.
Anyone with questions regarding personal bankruptcy should contact Jim Shenwick.
But if someone does borrow money from their 401(k), how do these loan repayments affect a personal bankruptcy filing?
1. In order to qualify for Chapter 7 personal bankruptcy, there are two tests that need to be met–the first is the "Disposable Income Test" and the second is the "Means Test".
2. The Disposable Income Test takes an individual's after-tax monthly income and subtracts their ordinary and necessary living and business expenses. If an individual has positive disposable income (or their after-tax income exceeds their living and business expenses), then they do not qualify for chapter 7 bankruptcy and must file for chapter 13 bankruptcy or not file at all.
The question is, are 401(k) loan repayments eligible to be a deduction for the disposable income test? In this jurisdiction (the Southern District of New York), the standard appears to be that if the 401(k) loan repayments are required by an employer or the entity that administers the 401(k) pension plan, those loans would be an allowed deductible expense.
3. Are 401(k) loan payments deductible for purposes of the means test? The answer appears to be no, based on several cases, including Egebjerg v. Anderson (In re Egebjerg), 574 F.3d 1045 (9th Cir. 2009) and In re Koch, 408 B.R. 539 (Bankr. S.D.Fla. 2009). In both of these cases, the courts concluded that 401(k) loan repayments do not qualify as a § 707(b)(2)(A)(ii)(I) other necessary expense-involuntary deductions (which is at line 26 of the form) for purposes of the means test.
Based on the above, it would be best for clients not to borrow against their 401(k) if they are contemplating filing for bankruptcy. Even if an individual borrows from a 401(k) plan, they may still be eligible to file for personal bankruptcy based on their overall income, expenses, assets and liabilities, although these calculations need to be done by an experienced bankruptcy attorney.
Anyone with questions regarding personal bankruptcy should contact Jim Shenwick.
Subscribe to:
Posts (Atom)
