By RON LIEBER
You don’t need to be behind on your mortgage payments to ask for a better deal from your bank.
Surprised? It’s easy to see why. The government’s announcement on Tuesday that Fannie Mae and Freddie Mac would modify terms for borrowers who are at least 90 days late with their payments makes it seem as if only the delinquent are eligible for a personal bailout.
But 90 percent or so of homeowners are still current with their payments, and for them, it has often seemed as if the banks were playing a game of chicken. Sorry, but until you blow off the payments for a few months running and wreck your credit in the process, the lender won’t even consider renegotiating the terms.
On Monday, however, Citigroup announced a pre-emptive campaign to talk to people before they fall behind on their payments. It plans to reach out to borrowers in distressed areas, including Arizona, California, Florida, Indiana, Michigan, Nevada and Ohio, and offer new terms to those who anticipate trouble making their payments.
And it turns out that other banks may also be willing to negotiate with borrowers who are current with their payments, even if they aren’t promoting it as aggressively as Citi.
JPMorgan Chase, HSBC and Bank of America, which took over Countrywide and its soured mortgage portfolio, have modified terms for such borrowers. And some of these adjustments are patterned after plans that the Federal Deposit Insurance Corporation put into place after it took over IndyMac.
There are several prerequisites to consider if you’re a borrower who is paying on time and wants some kind of a break. The home in question must be your primary residence. And the banks generally need to have your mortgage on their books and not have sold it off to Fannie Mae or Freddie Mac or someone else.
Then, the big question will be how financially strained you are. Perhaps your loan is about to adjust to a higher rate that is barely affordable — or already has. Or maybe you live in a two-income household where one income has disappeared or fallen drastically because of reduced sales commissions. Or, possibly, you lied about how much money you were making when you applied for a mortgage back in 2006 when nobody bothered checking.
Whatever the reason, the bank wants to know your current debt to (pretax) income ratio. If your monthly household income is $10,000, the bank may consider you overburdened if you’re paying more than $4,000 or so toward your housing costs, or 40 percent of your income. So don’t bother trying to get a better deal if your percentage is down near 25 percent.
If you think you may qualify, then you need to figure out whom to talk to. You should expect that every major mortgage lender or servicer is utterly overwhelmed right now. Calling the 800 number on your bank statement may lead to long hold times or representatives confused about changing internal guidelines.
Try asking immediately to speak to a loss mitigation or workout specialist. Chase has helpfully set up a separate number, (866) 550-5705, to take customers of Chase, EMC Mortgage and Washington Mutual straight to a loan modification specialist. Whomever you’re dealing with, write down everything they say and get the phone extension for people who are particularly helpful so you can talk to them again when things go wrong.
Then, expect a grilling. Chase will want a hardship letter, explaining what has gone wrong and why you need a break on your loan terms. A bank may ask for your last few pay stubs, a few years of tax returns and other financial information. “Expect to have your numbers crunched pretty hard,” said a Chase spokesman, Tom Kelly.
A bank may turn you down because you’re not struggling enough. Or, if you’re out of work, the bank may decide that foreclosure will be cleaner than lowering your payments to a level that you still won’t be able to afford.
If you do get a better deal — and it’s possible that very few people current on a 30-year fixed-rate mortgage will — don’t expect much of a gift. As far as the banks are concerned, they want to extract as much as possible, as long as it doesn’t break you.
In reducing the size of your monthly payments, they can play with the interest rate or the principal owed, either temporarily or permanently. If at all possible, the banks want any adjustment to be temporary and would prefer not to reduce the principal owed by a single penny.
At IndyMac, many mortgage customers whose payments were about to adjust upward to unaffordable levels were switched into loans with much lower interest rates for five years. The alterations are aimed at keeping the debt-to-income ratio at 38 percent or below. Then, the rate adjusts upward by no more than 1 percentage point each year until it hits the prevailing average at that point.
Other banks are doing something called principal forbearance. There, the bank carves off a chunk of the money you owe and puts it aside. You continue making payments, now lowered, on the rest of the loan. When you sell or refinance later, however, the bank adds that chunk back onto the total amount you must repay. By then, it is hoped, the value of the home has rebounded or you’ve built up enough equity to make the bank whole.
Alas, this is not exactly a handout. We’re not at the point yet where widespread offers of no-strings reductions in principal are available (or mandated by the government). But banks do seem to hope that if they continue to offer a bit more flexibility in dribs and drabs every few months, borrowers will forget that they owe $100,000 more than their home is worth and remember that they like their neighborhood and don’t want to turn the keys over to the bank.
So if you’re devoting a big chunk of your income to dutifully sending the mortgage lender a check, it may be worth calling to see if you can figure out a way to make the payment smaller.
Report your loan modification to rlieber@nytimes.com.
Copyright 2008 The New York Times Company. All rights reserved.
Wednesday, November 12, 2008
Wednesday, November 05, 2008
Letter to Senators Schumer and Clinton regarding allowing Bankruptcy Judges to modify mortgages in Chapter 13 bankruptcy
Dear Senators Schumer and Clinton:
I wanted to congratulate you on a spectacular election for Senate Democrats. Both of you deserve a great deal of credit for your roles in last night’s gain of seats for your caucus in the Senate.
I am a bankruptcy and real estate attorney with over 15 years of experience representing individuals and businesses in personal and business bankruptcy (my firm has filed hundreds of bankruptcy petitions) and have represented both debtors and creditors. As you are both aware, housing values have decreased substantially, the value of many houses is less than the amount of their mortgage(s) and foreclosure rates are rising geometrically throughout the country.
The solution to this housing crisis is to allow bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases. I believe that this change in law would be beneficial to both homeowners and to banks. Rather than people losing their houses in a foreclosure proceeding, Chapter 13 would provide a mechanism whereby a debtor (borrower) prepares a plan to pay the bank the arrears due under a mortgage over a three to five year period and retain their house. It would seem to me, that banks would rather be paid monies due them secured by their mortgages, than own devalued residential real estate.
Several law and finance professors have done studies which have shown that allowing homeowners to modify their mortgages in Chapter 13 would not negatively impact banks. The proof is actually simple, since under the present law, judges in Chapter 13 cases are allowed to modify mortgages on investment properties and vacation homes There has been no significant impact or effect on mortgages on those properties. Common sense would dictate that the law should be changed to allow bankruptcy judges to modify mortgages on individual’s primary residences as well.
Additionally, in 2005 Congress passed BAPCPA (the Bankruptcy Abuse and Consumer Protection Act), which greatly changed personal and business bankruptcy. One of the requirements of the new law is mandatory credit counseling, both prior to a bankruptcy filing and after the bankruptcy filing. These classes take approximately three hours and they cost a debtor $90-150. Studies have shown that mandatory credit counseling has little impact on an individual’s subsequent bankruptcy filing. I believe that the statistics show that 97% of all people who take the initial credit counseling course file a Chapter 7 bankruptcy petition, notwithstanding the credit counseling. The requirement of mandatory credit counseling increases the cost of bankruptcy and prevents the filing of emergency bankruptcy petitions to save individual’s houses from foreclosure, and should be repealed by Congress.
Now that Democrats have increased their control of the Senate and President-elect Obama has expressed his support for allowing bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases, we would hope that either of you would propose legislation to remedy these issues. If you or your staff have any further questions, please do not hesitate to contact the undersigned. Your attention to this matter is appreciated.
James Shenwick
I wanted to congratulate you on a spectacular election for Senate Democrats. Both of you deserve a great deal of credit for your roles in last night’s gain of seats for your caucus in the Senate.
I am a bankruptcy and real estate attorney with over 15 years of experience representing individuals and businesses in personal and business bankruptcy (my firm has filed hundreds of bankruptcy petitions) and have represented both debtors and creditors. As you are both aware, housing values have decreased substantially, the value of many houses is less than the amount of their mortgage(s) and foreclosure rates are rising geometrically throughout the country.
The solution to this housing crisis is to allow bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases. I believe that this change in law would be beneficial to both homeowners and to banks. Rather than people losing their houses in a foreclosure proceeding, Chapter 13 would provide a mechanism whereby a debtor (borrower) prepares a plan to pay the bank the arrears due under a mortgage over a three to five year period and retain their house. It would seem to me, that banks would rather be paid monies due them secured by their mortgages, than own devalued residential real estate.
Several law and finance professors have done studies which have shown that allowing homeowners to modify their mortgages in Chapter 13 would not negatively impact banks. The proof is actually simple, since under the present law, judges in Chapter 13 cases are allowed to modify mortgages on investment properties and vacation homes There has been no significant impact or effect on mortgages on those properties. Common sense would dictate that the law should be changed to allow bankruptcy judges to modify mortgages on individual’s primary residences as well.
Additionally, in 2005 Congress passed BAPCPA (the Bankruptcy Abuse and Consumer Protection Act), which greatly changed personal and business bankruptcy. One of the requirements of the new law is mandatory credit counseling, both prior to a bankruptcy filing and after the bankruptcy filing. These classes take approximately three hours and they cost a debtor $90-150. Studies have shown that mandatory credit counseling has little impact on an individual’s subsequent bankruptcy filing. I believe that the statistics show that 97% of all people who take the initial credit counseling course file a Chapter 7 bankruptcy petition, notwithstanding the credit counseling. The requirement of mandatory credit counseling increases the cost of bankruptcy and prevents the filing of emergency bankruptcy petitions to save individual’s houses from foreclosure, and should be repealed by Congress.
Now that Democrats have increased their control of the Senate and President-elect Obama has expressed his support for allowing bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases, we would hope that either of you would propose legislation to remedy these issues. If you or your staff have any further questions, please do not hesitate to contact the undersigned. Your attention to this matter is appreciated.
James Shenwick
Wednesday, October 29, 2008
Fraudulent Transfers to Employees
Shenwick & Associates has recently received calls from employees of struggling businesses inquiring whether bonuses paid to employees are recoverable in bankruptcy. These inquiries stem from recent articles in the New York Times, CFO.com, and Creditslips.org that discuss the possibility that the Bankruptcy Code may allow Lehman Brothers as a debtor-in-possession to "claw back" some of the $5.7 billion in bonuses that were paid out to its employees and executives in the past year.
Under section 548 of the Bankruptcy Code, a trustee in bankruptcy can recover fraudulent transfers made prior to bankruptcy. Specifically, section 548(a)(1)(B) of the Bankruptcy Code allows recovery by the debtor-in-possession if constructive fraud exists. Constructive fraud exists if the debtor: (1) made a transfer within 2 years of the filing of its bankruptcy petition; (2) received less than "reasonable equivalent value" in exchange for the transfer; and (3) either was insolvent at the time the transfer was made, made insolvent by the transfer, or the transfer was made to the benefit of an insider under an employment contract and not in the "ordinary course of business."
In a post on Creditslips.org, Adam Levitin, a professor of law at Georgetown University, stated that the third element would likely be the deciding factor if a fraudulent transfer claim was filed in the Lehman Brothers bankruptcy case. He reasoned that the first two elements were easily established because the bonuses being challenged were made within one year of the bankruptcy petition and generally, bonuses that are paid in addition to a salary are clearly transfers made for less than reasonable equivalent value.
It is this author's experience that in these cases the third factor is always the key factor. The defenses available to an employee who seek to retain his or her bonus are that the company was solvent when the bonus was paid or the bonus was made in the ordinary course of business.
Accordingly, regardless of insolvency, Lehman Brothers may succeed in a fraudulent transfer claim if it can establish that the bonuses were made to insiders and were not made in the ordinary course of business.
For more information about the recovery of bonuses under the Bankruptcy Code, please contact Jim Shenwick.
Under section 548 of the Bankruptcy Code, a trustee in bankruptcy can recover fraudulent transfers made prior to bankruptcy. Specifically, section 548(a)(1)(B) of the Bankruptcy Code allows recovery by the debtor-in-possession if constructive fraud exists. Constructive fraud exists if the debtor: (1) made a transfer within 2 years of the filing of its bankruptcy petition; (2) received less than "reasonable equivalent value" in exchange for the transfer; and (3) either was insolvent at the time the transfer was made, made insolvent by the transfer, or the transfer was made to the benefit of an insider under an employment contract and not in the "ordinary course of business."
In a post on Creditslips.org, Adam Levitin, a professor of law at Georgetown University, stated that the third element would likely be the deciding factor if a fraudulent transfer claim was filed in the Lehman Brothers bankruptcy case. He reasoned that the first two elements were easily established because the bonuses being challenged were made within one year of the bankruptcy petition and generally, bonuses that are paid in addition to a salary are clearly transfers made for less than reasonable equivalent value.
It is this author's experience that in these cases the third factor is always the key factor. The defenses available to an employee who seek to retain his or her bonus are that the company was solvent when the bonus was paid or the bonus was made in the ordinary course of business.
Accordingly, regardless of insolvency, Lehman Brothers may succeed in a fraudulent transfer claim if it can establish that the bonuses were made to insiders and were not made in the ordinary course of business.
For more information about the recovery of bonuses under the Bankruptcy Code, please contact Jim Shenwick.
Monday, October 27, 2008
New York Times: Banks Mine Data and Woo Troubled Borrowers
By BRAD STONE
Published: October 21, 2008
Brenda Jerez hardly seems like the kind of person lenders would fight over.
“It’s like I’ve got some big tag: target this person so you can get them back into debt,” Brenda Jerez said of credit offers.
Three years ago, she became ill with cancer and ran up $50,000 on her credit cards after she was forced to leave her accounting job. She filed for bankruptcy protection last year.
For months after she emerged from insolvency last fall, 6 to 10 new credit card and auto loan offers arrived every week that specifically mentioned her bankruptcy and, despite her poor credit history, dangled a range of seemingly too-good-to-be-true financing options.
“Good news! You are approved for both Visa and MasterCard — that’s right, 2 platinum credit cards!” read one buoyant letter sent this spring to Ms. Jerez, offering a $10,000 credit limit if only she returned a $35 processing fee with her application.
“It’s like I’ve got some big tag: target this person so you can get them back into debt,” said Ms. Jerez, of Jersey City, who still gets offers, even as it has become clear that loans to troubled borrowers have become a chief cause of the financial crisis. One letter that arrived last month, from First Premier Bank, promoted a platinum MasterCard for people with “less-than-perfect credit.”
Singling out even struggling American consumers like Ms. Jerez is one of the overlooked causes of the debt boom and the resulting crisis, which threatens to choke the global economy.
Using techniques that grew more sophisticated over the last decade, businesses comb through an array of sources, including bank and court records, to create detailed profiles of the financial lives of more than 100 million Americans.
They then sell that information as marketing leads to banks, credit card issuers and mortgage brokers, who fiercely compete to find untapped customers — even those who would normally have trouble qualifying for the credit they were being pitched.
These tailor-made offers land in mailboxes, or are sold over the phone by telemarketers, just ahead of the next big financial step in consumers’ lives, creating the appearance of almost irresistible serendipity.
These leads, which typically cost a few cents for each household profile, are often called “trigger lists” in the industry. One company, First American, sells a list of consumers to lenders called a “farming kit.”
This marketplace for personal data has been a crucial factor in powering the unrivaled lending machine in the United States. European countries, by contrast, have far stricter laws limiting the sale of personal information. Those countries also have far lower per-capita debt levels.
The companies that sell and use such data say they are simply providing a service to people who are likely to need it. But privacy advocates say that buying data dossiers on consumers gives banks an unfair advantage.
“They get people who they know are in trouble, they know are desperate, and they aggressively market a product to them which is not in their best interest,” said Jim Campen, executive director of the Americans for Fairness in Lending, an advocacy group that fights abusive credit and lending practices. “It’s the wrong product at the wrong time.”
Compiling Histories
To knowledgeable consumers, the offers can seem eerily personalized and aimed at pushing them into poor financial decisions.
Like many Americans, Brandon Laroque, a homeowner from Raleigh, N.C., gets many unsolicited letters asking him to refinance from the favorable fixed rate on his home to a riskier variable rate and to take on new, high-rate credit cards.
The offers contain personal details, like the outstanding balance on his mortgage, which lenders can easily obtain from the credit bureaus like Equifax, Experian and TransUnion.
“It almost seems like they are trying to get you into trouble,” he says.
The American information economy has been evolving for decades. Equifax, for example, has been compiling financial histories of consumers for more than a century. Since 1970, use of that data has been regulated by the Federal Trade Commission under the Fair Credit Reporting Act. But Equifax and its rivals started offering new sets of unregulated demographic data over the last decade — not just names, addresses and Social Security numbers of people, but also their marital status, recent births in their family, education history, even the kind of car they own, their television cable service and the magazines they read.
During the housing boom, “The mortgage industry was coming up with very creative lending products and then they were leaning heavily on us to find prospects to make the offers to,” said Steve Ely, president of North America Personal Solutions at Equifax.
The data agencies start by categorizing consumers into groups. Equifax, for example, says that 115 million Americans are listed in its “Niches 2.0” database. Its “Oodles of Offspring” grouping contains heads of household who make an average of $36,000 a year, are high school graduates and have children, blue-collar jobs and a low home value. People in the “Midlife Munchkins” group make $71,000 a year, have children or grandchildren, white-collar jobs and a high level of education.
Profiling Methods
Other data vendors offer similar categories of names, which are bought by companies like credit card issuers that want to sell to that demographic group.
In addition to selling these buckets of names, data compilers and banks also employ a variety of methods to estimate the likelihood that people will need new debt, even before they know it themselves.
One technique is called “predictive modeling.” Financial institutions and their consultants might look at who is responding favorably to an existing mailing campaign — one that asks people to refinance their homes, for example — and who has simply thrown the letter in the trash.
The attributes of the people who bite on the offer, like their credit card debt, cash savings and home value, are then plugged into statistical models. Those models then are used for the next round of offers, sent to people with similar financial lives.
The brochure for one Equifax data product, called TargetPoint Predictive Triggers, advertises “advanced profiling techniques” to identify people who show a “statistical propensity to acquire new credit” within 90 days.
An Equifax spokesman said the exact formula was part of the company’s “secret sauce.”
Data brokers also sell another controversial product called “mortgage triggers.” When consumers apply for home loans, banks check their credit history with one of the three credit bureaus.
In 2005, Experian, and then rivals Equifax and TransUnion, started selling lists of these consumers to other banks and brokers, whose loan officers would then contact the customer and compete for the loan.
At Visions Marketing Services, a company in Lancaster, Pa., that conducts telemarketing campaigns for banks, mortgage trigger leads were marketing gold during the housing boom.
“We called people who were astounded,” said Alan E. Geller, chief executive of the firm. “They said, ‘I can’t believe you just called me. How did you know we were just getting ready to do that?’ ”
“We were just sitting back laughing,” he said. In the midst of the high-flying housing market, mortgage triggers became more than a nuisance or potential invasion of privacy. They allowed aggressive brokers to aim at needy, overwhelmed consumers with offers that often turned out to be too good to be true. When Mercurion Suladdin, a county librarian in Sandy, Utah, filled out an application with Ameriquest to refinance her home, she quickly got a call from a salesman at Beneficial, a division of HSBC bank where she had taken out a previous loan.
The salesman said he desperately wanted to keep her business. To get the deal, he drove to her house from nearby Salt Lake City and offered her a free Ford Taurus at signing.
What she thought was a fixed-interest rate mortgage soon adjusted upward, and Ms. Suladdin fell behind on her payments and came close to foreclosure before Utah’s attorney general and the activist group Acorn interceded on behalf of her and other homeowners in the state.
“I was being bombarded by so many offers that, after a while, it just got more and more confusing,” she says of her ill-fated decision not to carefully read the fine print on her loan documents.
Data brokers and lenders defend mortgage triggers and compare them to offering a second medical opinion.
“This is an opportunity for consumers to receive options and to understand what’s available,” said Ben Waldshan, chief executive of Data Warehouse, a direct marketing company in Boca Raton, Fla.
Among its other services, according to its Web site, Data Warehouse charges banks $499 for 2,500 names of subprime borrowers who have fallen into debt and need to refinance.
Representatives of these data firms argue that their products merely help lenders more carefully pair people with the proper loans, at their moment of greatest need. The onus is on the banks, they say, to use that information responsibly.
“The whole reason companies like Experian and other information providers exist is not only to expand the opportunity to sell to consumers but to mitigate the risk associated with lending to consumers,” said Peg Smith, executive vice president and chief privacy officer at Experian. “It is up to the bank to keep the right balance.”
Decrease in Mailings
In today’s tight credit world, the number of these kinds of credit offers is falling rapidly. Banks mailed about 1.8 billion offers for secured and unsecured loans during the first six months of this year, down 33 percent from the same period in 2006, according to Mintel Comperemedia, a tracking firm.
Countrywide Financial, one of the most aggressive companies in the selling of subprime loans during the housing boom, says it sent out between six million and eight million pieces of targeted mail a month between 2004 and 2006. That is in addition to tens of thousands of telemarketing phone calls urging consumers to either refinance their homes or take out new loans.
Even with the drop-off over the last year in such mailings, lenders continue to be eager customers for refined data on consumers, say people at banks and data companies. The information on consumers has become so specific that banks now use it not just to determine whom to aim at and when, but what specifically to say in each offer.
For example, unsolicited letters from banks now often state what each person’s individual savings might be if a new home loan or new credit card replaced their existing loan or card.
Peter Harvey, chief executive of Intellidyn, a consulting company based in Hingham, Mass., that helps banks with their targeted marketing, says the industry’s newest challenge is to personalize each offer without appearing too invasive.
He describes one marketing campaign several years ago that crossed the line: a bank purchased satellite imagery of a particular neighborhood and on each envelope that contained a personalized credit offer, highlighted that recipient’s home on the image.
The campaign flopped. “It was just too eerie,” Mr. Harvey said.
Copyright 2008 The New York Times Company. All rights reserved.
Published: October 21, 2008
Brenda Jerez hardly seems like the kind of person lenders would fight over.
“It’s like I’ve got some big tag: target this person so you can get them back into debt,” Brenda Jerez said of credit offers.
Three years ago, she became ill with cancer and ran up $50,000 on her credit cards after she was forced to leave her accounting job. She filed for bankruptcy protection last year.
For months after she emerged from insolvency last fall, 6 to 10 new credit card and auto loan offers arrived every week that specifically mentioned her bankruptcy and, despite her poor credit history, dangled a range of seemingly too-good-to-be-true financing options.
“Good news! You are approved for both Visa and MasterCard — that’s right, 2 platinum credit cards!” read one buoyant letter sent this spring to Ms. Jerez, offering a $10,000 credit limit if only she returned a $35 processing fee with her application.
“It’s like I’ve got some big tag: target this person so you can get them back into debt,” said Ms. Jerez, of Jersey City, who still gets offers, even as it has become clear that loans to troubled borrowers have become a chief cause of the financial crisis. One letter that arrived last month, from First Premier Bank, promoted a platinum MasterCard for people with “less-than-perfect credit.”
Singling out even struggling American consumers like Ms. Jerez is one of the overlooked causes of the debt boom and the resulting crisis, which threatens to choke the global economy.
Using techniques that grew more sophisticated over the last decade, businesses comb through an array of sources, including bank and court records, to create detailed profiles of the financial lives of more than 100 million Americans.
They then sell that information as marketing leads to banks, credit card issuers and mortgage brokers, who fiercely compete to find untapped customers — even those who would normally have trouble qualifying for the credit they were being pitched.
These tailor-made offers land in mailboxes, or are sold over the phone by telemarketers, just ahead of the next big financial step in consumers’ lives, creating the appearance of almost irresistible serendipity.
These leads, which typically cost a few cents for each household profile, are often called “trigger lists” in the industry. One company, First American, sells a list of consumers to lenders called a “farming kit.”
This marketplace for personal data has been a crucial factor in powering the unrivaled lending machine in the United States. European countries, by contrast, have far stricter laws limiting the sale of personal information. Those countries also have far lower per-capita debt levels.
The companies that sell and use such data say they are simply providing a service to people who are likely to need it. But privacy advocates say that buying data dossiers on consumers gives banks an unfair advantage.
“They get people who they know are in trouble, they know are desperate, and they aggressively market a product to them which is not in their best interest,” said Jim Campen, executive director of the Americans for Fairness in Lending, an advocacy group that fights abusive credit and lending practices. “It’s the wrong product at the wrong time.”
Compiling Histories
To knowledgeable consumers, the offers can seem eerily personalized and aimed at pushing them into poor financial decisions.
Like many Americans, Brandon Laroque, a homeowner from Raleigh, N.C., gets many unsolicited letters asking him to refinance from the favorable fixed rate on his home to a riskier variable rate and to take on new, high-rate credit cards.
The offers contain personal details, like the outstanding balance on his mortgage, which lenders can easily obtain from the credit bureaus like Equifax, Experian and TransUnion.
“It almost seems like they are trying to get you into trouble,” he says.
The American information economy has been evolving for decades. Equifax, for example, has been compiling financial histories of consumers for more than a century. Since 1970, use of that data has been regulated by the Federal Trade Commission under the Fair Credit Reporting Act. But Equifax and its rivals started offering new sets of unregulated demographic data over the last decade — not just names, addresses and Social Security numbers of people, but also their marital status, recent births in their family, education history, even the kind of car they own, their television cable service and the magazines they read.
During the housing boom, “The mortgage industry was coming up with very creative lending products and then they were leaning heavily on us to find prospects to make the offers to,” said Steve Ely, president of North America Personal Solutions at Equifax.
The data agencies start by categorizing consumers into groups. Equifax, for example, says that 115 million Americans are listed in its “Niches 2.0” database. Its “Oodles of Offspring” grouping contains heads of household who make an average of $36,000 a year, are high school graduates and have children, blue-collar jobs and a low home value. People in the “Midlife Munchkins” group make $71,000 a year, have children or grandchildren, white-collar jobs and a high level of education.
Profiling Methods
Other data vendors offer similar categories of names, which are bought by companies like credit card issuers that want to sell to that demographic group.
In addition to selling these buckets of names, data compilers and banks also employ a variety of methods to estimate the likelihood that people will need new debt, even before they know it themselves.
One technique is called “predictive modeling.” Financial institutions and their consultants might look at who is responding favorably to an existing mailing campaign — one that asks people to refinance their homes, for example — and who has simply thrown the letter in the trash.
The attributes of the people who bite on the offer, like their credit card debt, cash savings and home value, are then plugged into statistical models. Those models then are used for the next round of offers, sent to people with similar financial lives.
The brochure for one Equifax data product, called TargetPoint Predictive Triggers, advertises “advanced profiling techniques” to identify people who show a “statistical propensity to acquire new credit” within 90 days.
An Equifax spokesman said the exact formula was part of the company’s “secret sauce.”
Data brokers also sell another controversial product called “mortgage triggers.” When consumers apply for home loans, banks check their credit history with one of the three credit bureaus.
In 2005, Experian, and then rivals Equifax and TransUnion, started selling lists of these consumers to other banks and brokers, whose loan officers would then contact the customer and compete for the loan.
At Visions Marketing Services, a company in Lancaster, Pa., that conducts telemarketing campaigns for banks, mortgage trigger leads were marketing gold during the housing boom.
“We called people who were astounded,” said Alan E. Geller, chief executive of the firm. “They said, ‘I can’t believe you just called me. How did you know we were just getting ready to do that?’ ”
“We were just sitting back laughing,” he said. In the midst of the high-flying housing market, mortgage triggers became more than a nuisance or potential invasion of privacy. They allowed aggressive brokers to aim at needy, overwhelmed consumers with offers that often turned out to be too good to be true. When Mercurion Suladdin, a county librarian in Sandy, Utah, filled out an application with Ameriquest to refinance her home, she quickly got a call from a salesman at Beneficial, a division of HSBC bank where she had taken out a previous loan.
The salesman said he desperately wanted to keep her business. To get the deal, he drove to her house from nearby Salt Lake City and offered her a free Ford Taurus at signing.
What she thought was a fixed-interest rate mortgage soon adjusted upward, and Ms. Suladdin fell behind on her payments and came close to foreclosure before Utah’s attorney general and the activist group Acorn interceded on behalf of her and other homeowners in the state.
“I was being bombarded by so many offers that, after a while, it just got more and more confusing,” she says of her ill-fated decision not to carefully read the fine print on her loan documents.
Data brokers and lenders defend mortgage triggers and compare them to offering a second medical opinion.
“This is an opportunity for consumers to receive options and to understand what’s available,” said Ben Waldshan, chief executive of Data Warehouse, a direct marketing company in Boca Raton, Fla.
Among its other services, according to its Web site, Data Warehouse charges banks $499 for 2,500 names of subprime borrowers who have fallen into debt and need to refinance.
Representatives of these data firms argue that their products merely help lenders more carefully pair people with the proper loans, at their moment of greatest need. The onus is on the banks, they say, to use that information responsibly.
“The whole reason companies like Experian and other information providers exist is not only to expand the opportunity to sell to consumers but to mitigate the risk associated with lending to consumers,” said Peg Smith, executive vice president and chief privacy officer at Experian. “It is up to the bank to keep the right balance.”
Decrease in Mailings
In today’s tight credit world, the number of these kinds of credit offers is falling rapidly. Banks mailed about 1.8 billion offers for secured and unsecured loans during the first six months of this year, down 33 percent from the same period in 2006, according to Mintel Comperemedia, a tracking firm.
Countrywide Financial, one of the most aggressive companies in the selling of subprime loans during the housing boom, says it sent out between six million and eight million pieces of targeted mail a month between 2004 and 2006. That is in addition to tens of thousands of telemarketing phone calls urging consumers to either refinance their homes or take out new loans.
Even with the drop-off over the last year in such mailings, lenders continue to be eager customers for refined data on consumers, say people at banks and data companies. The information on consumers has become so specific that banks now use it not just to determine whom to aim at and when, but what specifically to say in each offer.
For example, unsolicited letters from banks now often state what each person’s individual savings might be if a new home loan or new credit card replaced their existing loan or card.
Peter Harvey, chief executive of Intellidyn, a consulting company based in Hingham, Mass., that helps banks with their targeted marketing, says the industry’s newest challenge is to personalize each offer without appearing too invasive.
He describes one marketing campaign several years ago that crossed the line: a bank purchased satellite imagery of a particular neighborhood and on each envelope that contained a personalized credit offer, highlighted that recipient’s home on the image.
The campaign flopped. “It was just too eerie,” Mr. Harvey said.
Copyright 2008 The New York Times Company. All rights reserved.
Monday, October 13, 2008
New York Times article-One Thing You Can Control: Your Credit Score
By Ron Lieber
It’s been nearly impossible to think about much other than retirement, college or other savings in recent days. The pain has been all too acute and, unfortunately, the damage is not contained. Lurking beyond the devastation in the markets are other problems, like the fact that consumers are having an increasingly hard time getting loans.
I know it seems odd to think about your own creditworthiness at a time like this. Isn’t borrowing what got the world into this mess in the first place?
Your credit score, however, is something that you have a fair bit of control over, since it reflects your behavior as a borrower. Right about now, focusing on something within your control may feel like real progress. Last week, we started down that road with a look at budgets and spending, and there’s more to come.
Credit matters if you need a new mortgage because you have to move for your current job (or a new job if you lose your old one). It matters for many of the loans you may use to send a child to college. And it matters if you need to use credit cards for a time because your income has fallen or disappeared and there is no other option.
You don’t always know ahead of time when your creditworthiness will be a factor. But if an immediate need to borrow emerges, which it may for any number of people in the coming months, there will be no time to fix any problems. That’s why it’s a good idea to focus on it now.
Lenders are already rendering harsher judgments, and they’re likely to get even tougher. The Federal Reserve Board survey of senior bank loan officers in July, the most recent such survey, showed tightening lending standards across every major loan category.
“It’s a 10,000-decibel wake-up call and a slap in the face to people who viewed credit as a right rather than a privilege,” John R. Ulzheimer, the author of “You’re Nothing But a Number.”
That number he wrote about is the almighty FICO score. A company called Fair Isaac supplies the formula that generates the score. The three major credit bureaus, Equifax, Experian, and TransUnion, create their own versions of the FICO score using data from the credit reports they keep on you. They also, confusingly, create their own alternative credit scores, but more about those another time. For today’s column, the term “credit score” is synonymous with FICO score.
If you want to see the credit history that serves as data for the score, you can get a free copy of your credit report free each year, once from each of the bureaus, at annualcreditreport.com. If you want to see the FICO scores themselves, you can pay $47.85 for the three of them at myfico.com. Click “products,” then select the “FICO Credit Complete” package.
The median FICO score is roughly 720, according to Fair Isaac, though that number will probably drift a bit lower in the coming months. That’s a good SAT math score, but a score at that level may cause some problems as lenders get more strict.
So first, let’s review the new standards in a few major lending categories, keeping in mind that banks do make exceptions in some cases. Then, let’s look at some tips for improving your credit standing.
CREDIT CARDS If you’re looking to get the best interest rate or some of the richest reward offerings, representatives from card shopping sites like cardratings.com and creditcards.com figure you will need at least a score in the 720 to 750 range right now.
For a card with a credit limit of $20,000 or $25,000, a score closer to 700 was often adequate until recently, said Mr. Ulzheimer, the author, who is also the president of consumer education for credit.com, a credit information and application site.
The Fed loan officer survey said that 65 percent of domestic banks had tightened lending standards for cards, up from 30 percent in its April survey.
AUTO LOANS It’s not easy to get one right now. In 2007, 83 percent of people who applied for one got one, according to CNW Marketing Research of Bandon, Ore. The approval rate this year? Sixty percent, through Oct. 8.
Meanwhile, the minimum credit score required for the very best rate was 786 at the end of September according to CNW, up from 741 a year ago. Marc Cannon, a spokesman for AutoNation, the largest car dealer in the United States, added that there was no magic number for good rates, because it could depend on car type, cost and loan length.
MORTGAGES Here, it’s especially hard to come up with a bottom line number, because different entities (lenders, mortgage insurers, Fannie Mae and Freddie Mac) can add fees or dictate terms. In general, the bigger your down payment, the better chance you’ll have at getting the best available rate, as long as you have a credit score of at least 740 or so.
If you can’t come up with a big down payment, there are still loans available. There is one bright spot for borrowers: The Federal Housing Administration backs certain loans that lenders make to borrowers with down payments of as little as 3 percent, even if their credit scores are below average.
If only such programs were available for lower-scoring people elsewhere. Until they are, your score remains crucial, and there are a number of things you can do to improve or preserve it.
CHECK FOR ERRORS First, examine your credit report for accounts you don’t recognize. If you find any, it may be a simple error, but it could be a sign that a thief is opening new accounts in your name.
You’ll also want to look for any incorrect indications of late payments or other black marks. If you find any, report them to the credit bureau, since the errors are probably hurting your credit score. They are supposed to respond within 30 days.
PAY ON TIME It’s obvious, but it’s also crucial, because payment history accounts for about 35 percent of the FICO calculation for the general population (it could be more, or less, for certain individuals though). Just 60 or 65 percent of credit reports show no late payments, which means a lot of other people are still messing this up.
It’s easy to get lulled into complacency when, say, doctors’ billing services decline to report you to the credit bureaus for ignoring their bills for three months. Sure, they may be lenient, but don’t think that a mortgage company won’t report you for being a single day late.
If you have trouble remembering to send in bills, pay them automatically each month through your bank account or credit card. Then, pay the card bill automatically as well each month, or set multiple reminders for yourself to pay that bill on time.
REDEFINE YOUR DEBT About 30 percent of your score reflects the amount of money you owe. If you pay your credit card bills off each month, you may think that you’re home free on this front and that your debt is zero.
But that may not be the case. The credit report data used by the FICO system show your credit limit and your end-of-month balance, before you pay the bill. If you have just one credit card with a credit limit of $5,000 and you’re spending $4,000 each month, that can rough up your score, even if you’re paying it off in full every month.
Mr. Ulzheimer, the author and credit.com educator, suggested that if you were applying for any sort of loan or card soon that you put away your other cards for a few months so that you show no balance at all. If that’s not possible or practical, lower your spending so that your monthly bills are no more than 10 percent of the available credit on all of your cards. It also may be worth asking for a higher limit on a card or two, just to improve this ratio.
BEWARE OF RETAIL CARDS Given the overall economic environment, you’ll probably be looking for savings everywhere you can find them come holiday gift-shopping season.
But stay away from those deals offering 10 percent off when you open up a store credit card account.
These cards can hurt your credit score if you open too many in a short time, and their credit limits tend to be lower than standard credit cards, Mr. Ulzheimer noted. That can contribute to the same problem he addressed in the section above.
So use an existing credit card. Or spend cash. Better yet, give cash. It may come in even handier than a great credit score in the coming months.
Copyright (c) 2008 The New York Times Company. All rights reserved.
It’s been nearly impossible to think about much other than retirement, college or other savings in recent days. The pain has been all too acute and, unfortunately, the damage is not contained. Lurking beyond the devastation in the markets are other problems, like the fact that consumers are having an increasingly hard time getting loans.
I know it seems odd to think about your own creditworthiness at a time like this. Isn’t borrowing what got the world into this mess in the first place?
Your credit score, however, is something that you have a fair bit of control over, since it reflects your behavior as a borrower. Right about now, focusing on something within your control may feel like real progress. Last week, we started down that road with a look at budgets and spending, and there’s more to come.
Credit matters if you need a new mortgage because you have to move for your current job (or a new job if you lose your old one). It matters for many of the loans you may use to send a child to college. And it matters if you need to use credit cards for a time because your income has fallen or disappeared and there is no other option.
You don’t always know ahead of time when your creditworthiness will be a factor. But if an immediate need to borrow emerges, which it may for any number of people in the coming months, there will be no time to fix any problems. That’s why it’s a good idea to focus on it now.
Lenders are already rendering harsher judgments, and they’re likely to get even tougher. The Federal Reserve Board survey of senior bank loan officers in July, the most recent such survey, showed tightening lending standards across every major loan category.
“It’s a 10,000-decibel wake-up call and a slap in the face to people who viewed credit as a right rather than a privilege,” John R. Ulzheimer, the author of “You’re Nothing But a Number.”
That number he wrote about is the almighty FICO score. A company called Fair Isaac supplies the formula that generates the score. The three major credit bureaus, Equifax, Experian, and TransUnion, create their own versions of the FICO score using data from the credit reports they keep on you. They also, confusingly, create their own alternative credit scores, but more about those another time. For today’s column, the term “credit score” is synonymous with FICO score.
If you want to see the credit history that serves as data for the score, you can get a free copy of your credit report free each year, once from each of the bureaus, at annualcreditreport.com. If you want to see the FICO scores themselves, you can pay $47.85 for the three of them at myfico.com. Click “products,” then select the “FICO Credit Complete” package.
The median FICO score is roughly 720, according to Fair Isaac, though that number will probably drift a bit lower in the coming months. That’s a good SAT math score, but a score at that level may cause some problems as lenders get more strict.
So first, let’s review the new standards in a few major lending categories, keeping in mind that banks do make exceptions in some cases. Then, let’s look at some tips for improving your credit standing.
CREDIT CARDS If you’re looking to get the best interest rate or some of the richest reward offerings, representatives from card shopping sites like cardratings.com and creditcards.com figure you will need at least a score in the 720 to 750 range right now.
For a card with a credit limit of $20,000 or $25,000, a score closer to 700 was often adequate until recently, said Mr. Ulzheimer, the author, who is also the president of consumer education for credit.com, a credit information and application site.
The Fed loan officer survey said that 65 percent of domestic banks had tightened lending standards for cards, up from 30 percent in its April survey.
AUTO LOANS It’s not easy to get one right now. In 2007, 83 percent of people who applied for one got one, according to CNW Marketing Research of Bandon, Ore. The approval rate this year? Sixty percent, through Oct. 8.
Meanwhile, the minimum credit score required for the very best rate was 786 at the end of September according to CNW, up from 741 a year ago. Marc Cannon, a spokesman for AutoNation, the largest car dealer in the United States, added that there was no magic number for good rates, because it could depend on car type, cost and loan length.
MORTGAGES Here, it’s especially hard to come up with a bottom line number, because different entities (lenders, mortgage insurers, Fannie Mae and Freddie Mac) can add fees or dictate terms. In general, the bigger your down payment, the better chance you’ll have at getting the best available rate, as long as you have a credit score of at least 740 or so.
If you can’t come up with a big down payment, there are still loans available. There is one bright spot for borrowers: The Federal Housing Administration backs certain loans that lenders make to borrowers with down payments of as little as 3 percent, even if their credit scores are below average.
If only such programs were available for lower-scoring people elsewhere. Until they are, your score remains crucial, and there are a number of things you can do to improve or preserve it.
CHECK FOR ERRORS First, examine your credit report for accounts you don’t recognize. If you find any, it may be a simple error, but it could be a sign that a thief is opening new accounts in your name.
You’ll also want to look for any incorrect indications of late payments or other black marks. If you find any, report them to the credit bureau, since the errors are probably hurting your credit score. They are supposed to respond within 30 days.
PAY ON TIME It’s obvious, but it’s also crucial, because payment history accounts for about 35 percent of the FICO calculation for the general population (it could be more, or less, for certain individuals though). Just 60 or 65 percent of credit reports show no late payments, which means a lot of other people are still messing this up.
It’s easy to get lulled into complacency when, say, doctors’ billing services decline to report you to the credit bureaus for ignoring their bills for three months. Sure, they may be lenient, but don’t think that a mortgage company won’t report you for being a single day late.
If you have trouble remembering to send in bills, pay them automatically each month through your bank account or credit card. Then, pay the card bill automatically as well each month, or set multiple reminders for yourself to pay that bill on time.
REDEFINE YOUR DEBT About 30 percent of your score reflects the amount of money you owe. If you pay your credit card bills off each month, you may think that you’re home free on this front and that your debt is zero.
But that may not be the case. The credit report data used by the FICO system show your credit limit and your end-of-month balance, before you pay the bill. If you have just one credit card with a credit limit of $5,000 and you’re spending $4,000 each month, that can rough up your score, even if you’re paying it off in full every month.
Mr. Ulzheimer, the author and credit.com educator, suggested that if you were applying for any sort of loan or card soon that you put away your other cards for a few months so that you show no balance at all. If that’s not possible or practical, lower your spending so that your monthly bills are no more than 10 percent of the available credit on all of your cards. It also may be worth asking for a higher limit on a card or two, just to improve this ratio.
BEWARE OF RETAIL CARDS Given the overall economic environment, you’ll probably be looking for savings everywhere you can find them come holiday gift-shopping season.
But stay away from those deals offering 10 percent off when you open up a store credit card account.
These cards can hurt your credit score if you open too many in a short time, and their credit limits tend to be lower than standard credit cards, Mr. Ulzheimer noted. That can contribute to the same problem he addressed in the section above.
So use an existing credit card. Or spend cash. Better yet, give cash. It may come in even handier than a great credit score in the coming months.
Copyright (c) 2008 The New York Times Company. All rights reserved.
New York Times op-ed: Fight for the Family Home
By Eric S. Nguyen
Cambridge, Mass.
Lenders have been foreclosing on about 250,000 homes every month this year — one every 10 seconds. And among the hardest-hit Americans have been families with school-age children. Many of those families file for bankruptcy; indeed, nearly two-thirds of those trying to save their homes in bankruptcy have young children. Yet our laws make it especially difficult for families to keep their homes.
Consider two different couples facing foreclosure. The first rents a penthouse apartment to live in and then takes out a loan to purchase a house to rent out as an investment property. After racking up a mountain of credit card charges, the couple files for bankruptcy.
The second couple has two young children and buys a home to live in. When illness keeps the mother from working for six months, the family falls behind on bills and files for bankruptcy. Which family should have a chance to keep its home?
If you said the family with children living in their own home, you might be surprised to learn that Congress disagrees. While the bankruptcy code Congress amended in 2005 allows a judge to modify mortgage terms for an investment property in order to make the monthly payments affordable, it expressly prohibits modification of terms on a primary residence without the foreclosing bank’s permission. A court can insist that creditors give more time and better terms for people in bankruptcy to pay back loans on cars, boats, rental property and vacation homes — but not on the family home.
For parents with children, of course, there is little relief in keeping the car but losing the home. Data that I have analyzed from Harvard’s 2001 Consumer Bankruptcy Project, a survey of 1,250 people who had recently filed for bankruptcy, indicate that a key reason families with children file is to keep from losing their houses. Having young children nearly doubles the likelihood that the average family in bankruptcy will continue making mortgage payments — to keep the children in the same school and stay in the same neighborhood.
Bankruptcy laws should be flexible enough to allow some parents who will regain their financial footing to continue to make house payments, while denying the same relief to financially irresponsible investors. In addition to helping families, this would help reduce the depressing effect of foreclosures on house prices. And it would cost the taxpayer nothing.
Congress missed the chance to include this critical reform in its recent $700 billion bailout for financial institutions. But both Republicans and Democrats should see the wisdom of fixing the problem quickly. Automatic foreclosures on family homes do not reflect our shared sense of fairness. And bankruptcy reform is an important step on the road to recovery.
Eric S. Nguyen is a student at Harvard Law School.
Copyright (c) 2008 The New York Times Company. All rights reserved.
Cambridge, Mass.
Lenders have been foreclosing on about 250,000 homes every month this year — one every 10 seconds. And among the hardest-hit Americans have been families with school-age children. Many of those families file for bankruptcy; indeed, nearly two-thirds of those trying to save their homes in bankruptcy have young children. Yet our laws make it especially difficult for families to keep their homes.
Consider two different couples facing foreclosure. The first rents a penthouse apartment to live in and then takes out a loan to purchase a house to rent out as an investment property. After racking up a mountain of credit card charges, the couple files for bankruptcy.
The second couple has two young children and buys a home to live in. When illness keeps the mother from working for six months, the family falls behind on bills and files for bankruptcy. Which family should have a chance to keep its home?
If you said the family with children living in their own home, you might be surprised to learn that Congress disagrees. While the bankruptcy code Congress amended in 2005 allows a judge to modify mortgage terms for an investment property in order to make the monthly payments affordable, it expressly prohibits modification of terms on a primary residence without the foreclosing bank’s permission. A court can insist that creditors give more time and better terms for people in bankruptcy to pay back loans on cars, boats, rental property and vacation homes — but not on the family home.
For parents with children, of course, there is little relief in keeping the car but losing the home. Data that I have analyzed from Harvard’s 2001 Consumer Bankruptcy Project, a survey of 1,250 people who had recently filed for bankruptcy, indicate that a key reason families with children file is to keep from losing their houses. Having young children nearly doubles the likelihood that the average family in bankruptcy will continue making mortgage payments — to keep the children in the same school and stay in the same neighborhood.
Bankruptcy laws should be flexible enough to allow some parents who will regain their financial footing to continue to make house payments, while denying the same relief to financially irresponsible investors. In addition to helping families, this would help reduce the depressing effect of foreclosures on house prices. And it would cost the taxpayer nothing.
Congress missed the chance to include this critical reform in its recent $700 billion bailout for financial institutions. But both Republicans and Democrats should see the wisdom of fixing the problem quickly. Automatic foreclosures on family homes do not reflect our shared sense of fairness. And bankruptcy reform is an important step on the road to recovery.
Eric S. Nguyen is a student at Harvard Law School.
Copyright (c) 2008 The New York Times Company. All rights reserved.
Wednesday, October 08, 2008
Letter to Sen. Chris Dodd and Rep. Barney Frank on personal bankruptcy and Chapter 13 bankruptcy filings
Gentlemen:
The purpose of this letter is to acknowledge your efforts regarding the $700 billion bailout bill and also bring to your attention certain issues regarding personal bankruptcy in the current financial crisis that many United States citizens are experiencing.
I am a bankruptcy and real estate attorney with over 15 years of experience representing individuals and businesses in personal and business bankruptcy (my firm has filed hundreds of bankruptcy petitions) and have represented both debtors and creditors. As you are both aware, housing values have decreased substantially, the value of many houses is less than the amount of their mortgage(s) and foreclosure rates are rising geometrically throughout the country.
The solution to this housing crisis is to allow bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases. I believe that this change in law would be beneficial to both homeowners and to banks. Rather than people losing their houses in a foreclosure proceeding, Chapter 13 would provide a mechanism whereby a debtor (borrower) prepares a plan to pay the bank the arrears due under a mortgage over a three to five year period and retain their house. It would seem to me, that banks would rather be paid monies due them secured by their mortgages, than own devalued residential real estate.
Several law and finance professors have done studies which have shown that allowing homeowners to modify their mortgages in Chapter 13 would not negatively impact banks. The proof is actually simple, since under the present law, judges in Chapter 13 cases are allowed to modify mortgages on investment properties and vacation homes There has been no significant impact or effect on mortgages on those properties. Common sense would dictate that the law should be changed to allow bankruptcy judges to modify mortgages on individual’s primary residences as well.
Additionally, in 2005 Congress passed BAPCPA (the Bankruptcy Abuse and Consumer Protection Act), which greatly changed personal and business bankruptcy. One of the requirements of the new law is mandatory credit counseling, both prior to a bankruptcy filing and after the bankruptcy filing. These classes take approximately three hours and they cost a debtor $90-150. Studies have shown that these mandatory credit counseling has little impact on an individual’s subsequent bankruptcy filing. I believe that the statistics show that 97% of all people who take the initial credit counseling course file a Chapter 7 bankruptcy petition, notwithstanding the credit counseling. The requirement of mandatory credit counseling increases the cost of bankruptcy and prevents the filing of emergency bankruptcy petitions to save individual’s houses from foreclosure, and should be repealed by Congress.
We would hope that either of you would propose legislation to remedy these issues. If you or your staff have any further questions, please do not hesitate to contact the undersigned. Your attention to this matter is appreciated.
Sincerely,
/s/ James H. Shenwick
James H. Shenwick
The purpose of this letter is to acknowledge your efforts regarding the $700 billion bailout bill and also bring to your attention certain issues regarding personal bankruptcy in the current financial crisis that many United States citizens are experiencing.
I am a bankruptcy and real estate attorney with over 15 years of experience representing individuals and businesses in personal and business bankruptcy (my firm has filed hundreds of bankruptcy petitions) and have represented both debtors and creditors. As you are both aware, housing values have decreased substantially, the value of many houses is less than the amount of their mortgage(s) and foreclosure rates are rising geometrically throughout the country.
The solution to this housing crisis is to allow bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases. I believe that this change in law would be beneficial to both homeowners and to banks. Rather than people losing their houses in a foreclosure proceeding, Chapter 13 would provide a mechanism whereby a debtor (borrower) prepares a plan to pay the bank the arrears due under a mortgage over a three to five year period and retain their house. It would seem to me, that banks would rather be paid monies due them secured by their mortgages, than own devalued residential real estate.
Several law and finance professors have done studies which have shown that allowing homeowners to modify their mortgages in Chapter 13 would not negatively impact banks. The proof is actually simple, since under the present law, judges in Chapter 13 cases are allowed to modify mortgages on investment properties and vacation homes There has been no significant impact or effect on mortgages on those properties. Common sense would dictate that the law should be changed to allow bankruptcy judges to modify mortgages on individual’s primary residences as well.
Additionally, in 2005 Congress passed BAPCPA (the Bankruptcy Abuse and Consumer Protection Act), which greatly changed personal and business bankruptcy. One of the requirements of the new law is mandatory credit counseling, both prior to a bankruptcy filing and after the bankruptcy filing. These classes take approximately three hours and they cost a debtor $90-150. Studies have shown that these mandatory credit counseling has little impact on an individual’s subsequent bankruptcy filing. I believe that the statistics show that 97% of all people who take the initial credit counseling course file a Chapter 7 bankruptcy petition, notwithstanding the credit counseling. The requirement of mandatory credit counseling increases the cost of bankruptcy and prevents the filing of emergency bankruptcy petitions to save individual’s houses from foreclosure, and should be repealed by Congress.
We would hope that either of you would propose legislation to remedy these issues. If you or your staff have any further questions, please do not hesitate to contact the undersigned. Your attention to this matter is appreciated.
Sincerely,
/s/ James H. Shenwick
James H. Shenwick
Friday, October 03, 2008
Blackberry and iPod Portable Electronics Repair
Yesterday my Blackberry broke. Rather than throw it out, I had it repaired at Portatronics. Their number is (646) 797-2838. They have two locations in midtown Manhattan at 2 West 46th St (at 5th Ave), 16th Floor and at 307 W. 38th St (at 8th Ave). Their hours are 10 a.m. to 7 p.m. The service was amazing! In 10 minutes they fixed the "spin wheel" and the cost was $59. I recommend them highly for Blackberry, iPod and any portable electronic device repairs.
Tuesday, September 23, 2008
Assuming Leases in Bankruptcy
During these difficult economic times, many businesses that have been contacting Shenwick & Associates are faced with the threat of insolvency. Insolvency occurs when a business is unable to pay its debts as they become due. A very common business expense is a lease obligation. For most businesses, an office lease is essential to survival. Without a space to operate following eviction, most businesses would immediately fail. In order to prevent the harsh consequences of eviction, a business may seek protection through bankruptcy.
Two very important provisions of the Bankruptcy Code provide both immediate and remedial relief to business debtors facing eviction. First, under section 362 of the Bankruptcy Code, the business immediately receives the protections of the automatic stay. Specifically, section 362(a)(1) prevents the landlord from pursuing or continuing eviction proceedings against the debtor. Second, under section 365(a), the debtor in a chapter 11 filing may assume unexpired leases that were entered into prior to bankruptcy. The ability to assume a lease is a wonderful tool because it allows the business to avoid eviction by reinstating the lease. In order to properly assume a lease under section 365(a), the debtor must cure previous defaults, compensate the landlord for losses caused by the previous default, and provide adequate assurance of future performance. By properly assuming the lease, the business avoids eviction and remains in possession under the lease.
For businesses faced with the threat of eviction, the Bankruptcy Code may provide the relief they seek. Specifically, seeking bankruptcy protection allows the business to stay current and future eviction proceedings and reinstates the lease. With the lease reinstated, the business' chances of survival in these harsh times are dramatically improved. For more information about protecting your office space through the bankruptcy process, please contact Jim Shenwick.
Two very important provisions of the Bankruptcy Code provide both immediate and remedial relief to business debtors facing eviction. First, under section 362 of the Bankruptcy Code, the business immediately receives the protections of the automatic stay. Specifically, section 362(a)(1) prevents the landlord from pursuing or continuing eviction proceedings against the debtor. Second, under section 365(a), the debtor in a chapter 11 filing may assume unexpired leases that were entered into prior to bankruptcy. The ability to assume a lease is a wonderful tool because it allows the business to avoid eviction by reinstating the lease. In order to properly assume a lease under section 365(a), the debtor must cure previous defaults, compensate the landlord for losses caused by the previous default, and provide adequate assurance of future performance. By properly assuming the lease, the business avoids eviction and remains in possession under the lease.
For businesses faced with the threat of eviction, the Bankruptcy Code may provide the relief they seek. Specifically, seeking bankruptcy protection allows the business to stay current and future eviction proceedings and reinstates the lease. With the lease reinstated, the business' chances of survival in these harsh times are dramatically improved. For more information about protecting your office space through the bankruptcy process, please contact Jim Shenwick.
Monday, September 15, 2008
Tougher Bankruptcy Laws Bite the Lenders
By Jessica Silver-Greenberg
The latest lesson for lenders from the housing crisis: Be careful what you wish for. Banks and other financial outfits spent eight years and $40 million lobbying for sweeping new bankruptcy rules that would limit their losses from deadbeat debtors. But it turns out those changes, enacted in 2005, are forcing more troubled borrowers to walk away from their homes—even those who didn't take on risky mortgages in the first place. And that's bad news for lenders, which suffer financially every time they have to take a troubled property on their books.
Before the new rules kicked in, many consumers could find debt relief—and keep their homes—by filing for bankruptcy protection. Now the process is much more onerous and expensive and the benefits more limited, making foreclosure seem appealing by comparison. A July paper by David Bernstein, a researcher at the U.S. Treasury, found that 800,000 fewer homeowners have filed for bankruptcy since the rules kicked in. A quarter of those people, says the report, have likely had to give up their homes as a result—boosting foreclosures nationwide at least 4%. "[The rules] are directly responsible for the rising foreclosure rate," notes another report by investment bank Credit Suisse (CSR). Counters Philip Corwin, counsel at the trade group American Bankers Assn.: "These studies don't stand up to scrutiny."
Banks and other lenders probably never imagined such an outcome when they pushed for changes to bankruptcy rules. The courts were clogged, the industry argued, with consumers looking for any easy out from bills they could pay. As a deterrent, companies wanted to raise the bankruptcy bar.
They got what they wanted. Previously, anybody could file for Chapter 7, the quick and cheap proceedings that liquidate financial assets but not the home to cover debts and dismiss unpaid bills. Now only low-income borrowers qualify, and Chapter 7 doesn't stave off foreclosure.
ONLY TEMPORARY RESPITE
As a result, many struggling borrowers have no other option but Chapter 13, which requires that people follow a court-mandated repayment plan for all their debts, including medical, credit-card, and other bills typically discharged under Chapter 7. Going the Chapter 13 route can halt a foreclosure already in process. But that's often only a temporary salve, since other debts aren't eliminated, and banks can resume foreclosure proceedings as soon as the payments begin to slip anew. Says Chicago bankruptcy lawyer David P. Leibowitz: "In some cases, bankruptcy has become so onerous that it's not worth it to save the house."
The pain of foreclosures, of course, isn't limited to the people losing their homes. A single foreclosure cuts the value of nearby homes by an average of $1,508 nationwide, according to a report by the Joint Economic Committee of Congress (JECC). Lenders, too, are feeling the bite. Financial firms, the JECC found, take a $50,000 hit on each property they inherit via foreclosure. That weighs on earnings and limits their ability to make fresh loans.
Cases such as Yvonne Reina's will mean more pain for everyone on the housing food chain. Reina hoped to keep her duplex in suburban Chicago by filing for bankruptcy. The 54-year-old claims processor fell behind on her mortgage payments after a knee injury left her unable to work. She consulted a lawyer about declaring Chapter 13. But he advised against it, saying the payment plan would be too burdensome, given her limited income. In March the bank foreclosed, and Reina moved into an apartment. Says Reina: "I just couldn't make it work anymore."
Silver-Greenberg is a reporter for BusinessWeek.com.
Copyright 2008 by The McGraw-Hill Companies Inc. All rights reserved.
The latest lesson for lenders from the housing crisis: Be careful what you wish for. Banks and other financial outfits spent eight years and $40 million lobbying for sweeping new bankruptcy rules that would limit their losses from deadbeat debtors. But it turns out those changes, enacted in 2005, are forcing more troubled borrowers to walk away from their homes—even those who didn't take on risky mortgages in the first place. And that's bad news for lenders, which suffer financially every time they have to take a troubled property on their books.
Before the new rules kicked in, many consumers could find debt relief—and keep their homes—by filing for bankruptcy protection. Now the process is much more onerous and expensive and the benefits more limited, making foreclosure seem appealing by comparison. A July paper by David Bernstein, a researcher at the U.S. Treasury, found that 800,000 fewer homeowners have filed for bankruptcy since the rules kicked in. A quarter of those people, says the report, have likely had to give up their homes as a result—boosting foreclosures nationwide at least 4%. "[The rules] are directly responsible for the rising foreclosure rate," notes another report by investment bank Credit Suisse (CSR). Counters Philip Corwin, counsel at the trade group American Bankers Assn.: "These studies don't stand up to scrutiny."
Banks and other lenders probably never imagined such an outcome when they pushed for changes to bankruptcy rules. The courts were clogged, the industry argued, with consumers looking for any easy out from bills they could pay. As a deterrent, companies wanted to raise the bankruptcy bar.
They got what they wanted. Previously, anybody could file for Chapter 7, the quick and cheap proceedings that liquidate financial assets but not the home to cover debts and dismiss unpaid bills. Now only low-income borrowers qualify, and Chapter 7 doesn't stave off foreclosure.
ONLY TEMPORARY RESPITE
As a result, many struggling borrowers have no other option but Chapter 13, which requires that people follow a court-mandated repayment plan for all their debts, including medical, credit-card, and other bills typically discharged under Chapter 7. Going the Chapter 13 route can halt a foreclosure already in process. But that's often only a temporary salve, since other debts aren't eliminated, and banks can resume foreclosure proceedings as soon as the payments begin to slip anew. Says Chicago bankruptcy lawyer David P. Leibowitz: "In some cases, bankruptcy has become so onerous that it's not worth it to save the house."
The pain of foreclosures, of course, isn't limited to the people losing their homes. A single foreclosure cuts the value of nearby homes by an average of $1,508 nationwide, according to a report by the Joint Economic Committee of Congress (JECC). Lenders, too, are feeling the bite. Financial firms, the JECC found, take a $50,000 hit on each property they inherit via foreclosure. That weighs on earnings and limits their ability to make fresh loans.
Cases such as Yvonne Reina's will mean more pain for everyone on the housing food chain. Reina hoped to keep her duplex in suburban Chicago by filing for bankruptcy. The 54-year-old claims processor fell behind on her mortgage payments after a knee injury left her unable to work. She consulted a lawyer about declaring Chapter 13. But he advised against it, saying the payment plan would be too burdensome, given her limited income. In March the bank foreclosed, and Reina moved into an apartment. Says Reina: "I just couldn't make it work anymore."
Silver-Greenberg is a reporter for BusinessWeek.com.
Copyright 2008 by The McGraw-Hill Companies Inc. All rights reserved.
Monday, September 08, 2008
When Chapter 11 Is the End of the Story
The 2005 rules are squeezing out bankrupt chains, which face harsher time constraints than in the past
When Sharper Image filed for bankruptcy back in February, new Chief Executive Officer Robert Conway decided to close half of the chain's 184 stores and craft a turnaround plan. But critical court deadlines loomed, and Conway, a restructuring specialist, gave up hope a few weeks later. In July the company shuttered the last location. Says Conway: "Not only do lenders have limited patience, but there are many additional pressures."
It would be difficult enough if retailers were just getting hit by the double whammy of weak consumer spending and tight credit. But new bankruptcy rules passed in 2005 are proving fatal for some. In Chapter 11, companies continue to operate while getting relief from creditors. The recent changes, though, require that businesses move more quickly on key decisions and find cash up front to pay off certain debts.
Facing those hurdles, retailers such as Sharper Image, Wickes Furniture, Bombay, Levitz Furniture, Friedman's, and Whitehall Jewelers have rapidly dissolved, going from broke to out of business in a matter of months. In previous downturns, it took years to reach that dramatic end—and most companies actually emerged from bankruptcy. The worry is that more retailers will disappear. Roughly 15 have filed for Chapter 11 so far this year, more than double the number in all of 2007, according to research firm bankruptcy.com.
Although the new rules apply to all companies, retailers are feeling the changes acutely. Before 2005, businesses had an unlimited amount of time to file a restructuring plan. Now they have 18 months to do so. After that, creditors and other interested parties can offer up their own ideas to the court. In a concession to mall owners and landlords, the new laws also force retailers to decide within 210 days whether to keep a location open. Under the old procedure, courts would grant extensions of two years or more. "Lenders are not willing to refinance a shopping center if a major tenant hasn't decided whether to stay," says J. David Forsyth, a partner at Sessions, Fishman, Nathan & Israel.
But time can be crucial. Retailers often need to monitor sales trends for at least a year, including the highly profitable holiday shopping season, before getting a complete picture of their prospects. Macy's (M), which filed for Chapter 11 in the early 1990s, took two years to hash out a plan and three years to climb out of its financial hole. "In stress situations, you have to analyze by circumstances and not make deals under a formula," says Harvey R. Miller, a partner at firm Weil, Gotshal & Manges, who is working with Goody's Family Clothing, the 355-store chain that filed for Chapter 11 on July 9.
Bankrupt companies also have to come up with cash to pay suppliers and utilities. Under the old laws, the two groups had to wait until a company emerged from bankruptcy before collecting. Those demands can be particularly burdensome on retailers, which may have bills from dozens of vendors and multiple water, gas, and electric companies. Steve & Barry's, the bankrupt apparel store that was acquired by a private equity firm on Aug. 22, manages operations across 39 states. Says Lawrence C. Gottlieb, a partner at Cooley Godward Kronish, which is representing creditors of the bankrupt Linens 'N Things: "Liquidity is sucked out of the debtor in a way that becomes hard to survive."
Copyright 2000-2008 by The McGraw-Hill Companies Inc. All rights reserved.
When Sharper Image filed for bankruptcy back in February, new Chief Executive Officer Robert Conway decided to close half of the chain's 184 stores and craft a turnaround plan. But critical court deadlines loomed, and Conway, a restructuring specialist, gave up hope a few weeks later. In July the company shuttered the last location. Says Conway: "Not only do lenders have limited patience, but there are many additional pressures."
It would be difficult enough if retailers were just getting hit by the double whammy of weak consumer spending and tight credit. But new bankruptcy rules passed in 2005 are proving fatal for some. In Chapter 11, companies continue to operate while getting relief from creditors. The recent changes, though, require that businesses move more quickly on key decisions and find cash up front to pay off certain debts.
Facing those hurdles, retailers such as Sharper Image, Wickes Furniture, Bombay, Levitz Furniture, Friedman's, and Whitehall Jewelers have rapidly dissolved, going from broke to out of business in a matter of months. In previous downturns, it took years to reach that dramatic end—and most companies actually emerged from bankruptcy. The worry is that more retailers will disappear. Roughly 15 have filed for Chapter 11 so far this year, more than double the number in all of 2007, according to research firm bankruptcy.com.
Although the new rules apply to all companies, retailers are feeling the changes acutely. Before 2005, businesses had an unlimited amount of time to file a restructuring plan. Now they have 18 months to do so. After that, creditors and other interested parties can offer up their own ideas to the court. In a concession to mall owners and landlords, the new laws also force retailers to decide within 210 days whether to keep a location open. Under the old procedure, courts would grant extensions of two years or more. "Lenders are not willing to refinance a shopping center if a major tenant hasn't decided whether to stay," says J. David Forsyth, a partner at Sessions, Fishman, Nathan & Israel.
But time can be crucial. Retailers often need to monitor sales trends for at least a year, including the highly profitable holiday shopping season, before getting a complete picture of their prospects. Macy's (M), which filed for Chapter 11 in the early 1990s, took two years to hash out a plan and three years to climb out of its financial hole. "In stress situations, you have to analyze by circumstances and not make deals under a formula," says Harvey R. Miller, a partner at firm Weil, Gotshal & Manges, who is working with Goody's Family Clothing, the 355-store chain that filed for Chapter 11 on July 9.
Bankrupt companies also have to come up with cash to pay suppliers and utilities. Under the old laws, the two groups had to wait until a company emerged from bankruptcy before collecting. Those demands can be particularly burdensome on retailers, which may have bills from dozens of vendors and multiple water, gas, and electric companies. Steve & Barry's, the bankrupt apparel store that was acquired by a private equity firm on Aug. 22, manages operations across 39 states. Says Lawrence C. Gottlieb, a partner at Cooley Godward Kronish, which is representing creditors of the bankrupt Linens 'N Things: "Liquidity is sucked out of the debtor in a way that becomes hard to survive."
Copyright 2000-2008 by The McGraw-Hill Companies Inc. All rights reserved.
Tuesday, August 26, 2008
New York Times: Obama Aides Defend Bank's Pay to Biden Son
August 25, 2008
Obama Aides Defend Bank’s Pay to Biden Son
By CHRISTOPHER DREW and MIKE McINTIRE
During the years that Senator Joseph R. Biden Jr. was helping the credit card industry win passage of a law making it harder for consumers to file for bankruptcy protection, his son had a consulting agreement that lasted five years with one of the largest companies pushing for the changes, aides to Senator Barack Obama’s presidential campaign acknowledged Sunday.
Mr. Biden’s son, Hunter, received consulting fees from the MBNA Corporation from 2001 to 2005 for work on online banking issues. Aides to Mr. Obama, who chose Mr. Biden as his vice-presidential running mate on Saturday, would not say how much the younger Mr. Biden, who works as both a lawyer and lobbyist in Washington, had received, though a company official had once described him as having a $100,000 a year retainer. But Obama aides said he had never lobbied for MBNA and that there was nothing improper about the payments.
Campaign officials acknowledged that the connection between the Bidens and MBNA, the enormous financial services company then based in their home state of Delaware, was one of the most sensitive issues they examined while vetting the senator for a spot on the ticket.
Mr. Biden’s support for the bankruptcy changes, which were signed into law in 2005, puts him at odds with Mr. Obama of Illinois, who opposed the bill and has criticized the presumptive Republican nominee, Senator John McCain of Arizona, for supporting it. Consumer advocates and other Democratic allies remain sharply critical of Mr. Biden’s actions, saying in recent days that they could hamper the campaign’s efforts to attack the Republicans over their handling of the nation’s credit crisis.
The financial services industry began seeking relief from Congress in the mid-1990s from an increase in bankruptcies that was cutting into its profits. Its initial support came from Republican lawmakers, who repeatedly introduced bills to make it more difficult for consumers to erase their debts. During that time, executives at MBNA, which was bought in 2006 by Bank of America, began donating heavily to both major political parties and many national politicians, including Mr. Biden.
In late 1996, the company hired the younger of Mr. Biden’s two sons, Robert Hunter Biden, known as Hunter, who had just graduated from Yale Law School, as a lawyer. The company promoted Mr. Biden to senior vice president by early 1998. And after the younger Mr. Biden worked at the Commerce Department on electronic commerce issues from 1998 to 2001, MBNA hired him back on a monthly consulting contract to advise it on such issues, aides said.
Consumer advocates say that Senator Biden was one of the first Democratic leaders to support the bankruptcy bill, and he voted for it four times — in 1998, 2000, 2001 and in March 2005, when its final version passed the Senate by a vote of 74 to 25.
Travis Plunkett, legislative director of the Consumer Federation of America, a consumer group that opposed the bill, said that Senator Biden had provided a “veneer of bipartisanship” that eventually helped the credit card companies win over other Democrats. “He provided cover to other Democrats to do what the credit industry was urging them to do,” Mr. Plunkett said.
Aides to the Obama campaign said Sunday that Senator Biden’s goal was always to strike a workable compromise between the competing interests on the bankruptcy bill, and that he was not influenced by his son’s work for MBNA or the campaign donations. They said he had sought several changes in the bill to protect consumers that upset MBNA executives, then the largest employer in Delaware, while acknowledging that he also voted against other amendments proposed by other Democrats.
Hunter Biden, through his assistant at his law firm, Oldaker Biden & Belair, referred a request for comment to the Obama campaign. James Mahoney, the head of corporate communications for Bank of America, said the consulting arrangement had ended by the time Bank of America took over MBNA in January 2006.
“Senator Biden has a 35-year record fighting for people against powerful interests, whether it’s drug companies, oil companies or insurance companies,” David Wade, a spokesman for the Obama campaign, said in a statement. “He took plenty of knocks from the largest employer in his state because he demanded changes in the bankruptcy bill. But legislating requires compromise. Senators cast tough votes. Congress worked on the bankruptcy bill for nearly a decade, over five Congresses, to forge a bipartisan compromise.”
Mr. Wade added: “Senator Biden took on entrenched interests and succeeded in improving the bill for low-income workers, women and children. There were times when amendments on both sides would have blown up a bipartisan compromise backed by three-quarters of the Senate. At those moments, Senator Biden had to make the tough calls and voted to pass a bill.”
Mr. Wade said Senator Biden took extra steps to protect consumers in votes to require people in bankruptcy to continue paying child support or alimony. He also took steps to affirm that the bill exempted debtors who have serious medical problems, are veterans or are in the armed service, the aide said.
But a review of the legislative record finds as many instances when Mr. Biden joined Republicans to defeat attempts by his Democratic colleagues, including Mr. Obama, to soften the bill’s impact on those same constituencies. He was one of five Democrats in March 2005 who voted against a proposal to require credit card companies to provide more effective warnings to consumers about the consequences of paying only the minimum amount due each month. Mr. Obama voted for it.
Mr. Biden also went against Mr. Obama to help defeat amendments aimed at strengthening protections for people forced into bankruptcy who have large medical debts or are in the military; Mr. Biden argued that the amendments were unnecessary because the legislation already carved out exemptions for those debtors. And he was one of four Democrats who sided with Republicans to defeat an effort, supported by Mr. Obama, to shift responsibility in certain cases from debtors to the predatory lenders who helped push them into bankruptcy.
In many of these battles, Mr. Biden’s Democratic colleagues often voiced their frustration with the big financial interests arrayed against them. Senator Paul Wellstone specifically cited MBNA during a floor debate in March 2001 over his call for stronger protections for debtors forced into bankruptcy because of medical bills — an amendment that Mr. Biden would later vote against.
“It just so happens that the people who find themselves in terrible economic circumstances through no fault of their own — major medical bills, they have lost their jobs, or there has been a divorce — it is my view as a former political scientist and now a senator for the State of Minnesota that those people do not have the same kind of clout that MBNA Corporation has,” Mr. Wellstone said.
Mr. Biden’s supporters also point out that the Republicans controlled the Senate for much of the time when the bankruptcy bills were under consideration. MBNA employees have given Mr. Biden more than $214,000 in campaign donations over the years, the largest amount in his coffers tied to any single company. But the company’s employees have given even more lavishly to President George W. Bush and top Republican lawmakers.
Michael Luo contributed reporting.
Copyright 2008 The New York Times Company.
Obama Aides Defend Bank’s Pay to Biden Son
By CHRISTOPHER DREW and MIKE McINTIRE
During the years that Senator Joseph R. Biden Jr. was helping the credit card industry win passage of a law making it harder for consumers to file for bankruptcy protection, his son had a consulting agreement that lasted five years with one of the largest companies pushing for the changes, aides to Senator Barack Obama’s presidential campaign acknowledged Sunday.
Mr. Biden’s son, Hunter, received consulting fees from the MBNA Corporation from 2001 to 2005 for work on online banking issues. Aides to Mr. Obama, who chose Mr. Biden as his vice-presidential running mate on Saturday, would not say how much the younger Mr. Biden, who works as both a lawyer and lobbyist in Washington, had received, though a company official had once described him as having a $100,000 a year retainer. But Obama aides said he had never lobbied for MBNA and that there was nothing improper about the payments.
Campaign officials acknowledged that the connection between the Bidens and MBNA, the enormous financial services company then based in their home state of Delaware, was one of the most sensitive issues they examined while vetting the senator for a spot on the ticket.
Mr. Biden’s support for the bankruptcy changes, which were signed into law in 2005, puts him at odds with Mr. Obama of Illinois, who opposed the bill and has criticized the presumptive Republican nominee, Senator John McCain of Arizona, for supporting it. Consumer advocates and other Democratic allies remain sharply critical of Mr. Biden’s actions, saying in recent days that they could hamper the campaign’s efforts to attack the Republicans over their handling of the nation’s credit crisis.
The financial services industry began seeking relief from Congress in the mid-1990s from an increase in bankruptcies that was cutting into its profits. Its initial support came from Republican lawmakers, who repeatedly introduced bills to make it more difficult for consumers to erase their debts. During that time, executives at MBNA, which was bought in 2006 by Bank of America, began donating heavily to both major political parties and many national politicians, including Mr. Biden.
In late 1996, the company hired the younger of Mr. Biden’s two sons, Robert Hunter Biden, known as Hunter, who had just graduated from Yale Law School, as a lawyer. The company promoted Mr. Biden to senior vice president by early 1998. And after the younger Mr. Biden worked at the Commerce Department on electronic commerce issues from 1998 to 2001, MBNA hired him back on a monthly consulting contract to advise it on such issues, aides said.
Consumer advocates say that Senator Biden was one of the first Democratic leaders to support the bankruptcy bill, and he voted for it four times — in 1998, 2000, 2001 and in March 2005, when its final version passed the Senate by a vote of 74 to 25.
Travis Plunkett, legislative director of the Consumer Federation of America, a consumer group that opposed the bill, said that Senator Biden had provided a “veneer of bipartisanship” that eventually helped the credit card companies win over other Democrats. “He provided cover to other Democrats to do what the credit industry was urging them to do,” Mr. Plunkett said.
Aides to the Obama campaign said Sunday that Senator Biden’s goal was always to strike a workable compromise between the competing interests on the bankruptcy bill, and that he was not influenced by his son’s work for MBNA or the campaign donations. They said he had sought several changes in the bill to protect consumers that upset MBNA executives, then the largest employer in Delaware, while acknowledging that he also voted against other amendments proposed by other Democrats.
Hunter Biden, through his assistant at his law firm, Oldaker Biden & Belair, referred a request for comment to the Obama campaign. James Mahoney, the head of corporate communications for Bank of America, said the consulting arrangement had ended by the time Bank of America took over MBNA in January 2006.
“Senator Biden has a 35-year record fighting for people against powerful interests, whether it’s drug companies, oil companies or insurance companies,” David Wade, a spokesman for the Obama campaign, said in a statement. “He took plenty of knocks from the largest employer in his state because he demanded changes in the bankruptcy bill. But legislating requires compromise. Senators cast tough votes. Congress worked on the bankruptcy bill for nearly a decade, over five Congresses, to forge a bipartisan compromise.”
Mr. Wade added: “Senator Biden took on entrenched interests and succeeded in improving the bill for low-income workers, women and children. There were times when amendments on both sides would have blown up a bipartisan compromise backed by three-quarters of the Senate. At those moments, Senator Biden had to make the tough calls and voted to pass a bill.”
Mr. Wade said Senator Biden took extra steps to protect consumers in votes to require people in bankruptcy to continue paying child support or alimony. He also took steps to affirm that the bill exempted debtors who have serious medical problems, are veterans or are in the armed service, the aide said.
But a review of the legislative record finds as many instances when Mr. Biden joined Republicans to defeat attempts by his Democratic colleagues, including Mr. Obama, to soften the bill’s impact on those same constituencies. He was one of five Democrats in March 2005 who voted against a proposal to require credit card companies to provide more effective warnings to consumers about the consequences of paying only the minimum amount due each month. Mr. Obama voted for it.
Mr. Biden also went against Mr. Obama to help defeat amendments aimed at strengthening protections for people forced into bankruptcy who have large medical debts or are in the military; Mr. Biden argued that the amendments were unnecessary because the legislation already carved out exemptions for those debtors. And he was one of four Democrats who sided with Republicans to defeat an effort, supported by Mr. Obama, to shift responsibility in certain cases from debtors to the predatory lenders who helped push them into bankruptcy.
In many of these battles, Mr. Biden’s Democratic colleagues often voiced their frustration with the big financial interests arrayed against them. Senator Paul Wellstone specifically cited MBNA during a floor debate in March 2001 over his call for stronger protections for debtors forced into bankruptcy because of medical bills — an amendment that Mr. Biden would later vote against.
“It just so happens that the people who find themselves in terrible economic circumstances through no fault of their own — major medical bills, they have lost their jobs, or there has been a divorce — it is my view as a former political scientist and now a senator for the State of Minnesota that those people do not have the same kind of clout that MBNA Corporation has,” Mr. Wellstone said.
Mr. Biden’s supporters also point out that the Republicans controlled the Senate for much of the time when the bankruptcy bills were under consideration. MBNA employees have given Mr. Biden more than $214,000 in campaign donations over the years, the largest amount in his coffers tied to any single company. But the company’s employees have given even more lavishly to President George W. Bush and top Republican lawmakers.
Michael Luo contributed reporting.
Copyright 2008 The New York Times Company.
Monday, August 25, 2008
Credit con game
Credit con game
Debt settlement outfit falsely promised relief as clients’ woes grew; regulator acts
Aaron Elstein
For thousands of people far behind on their credit card payments and other bills, Robert Lovinger’s “Debt Meltdown Program” sounded awfully alluring.
He offered to help them reduce the amount of their bills by as much as 60% and, in some instances, to free them of debt altogether within 30 months. About 2,000 people joined, and they often ended up paying thousands of dollars for the Long Island-based service—which was marketed under several names, including The Debt Elimination Center and Edge Solutions.
What many customers got, in fact, was little or nothing. In some cases, Mr. Lovinger and his staff failed to contact creditors to settle customers’ delinquent bills; in others, they drove people deeper into debt by refusing to accept settlement offers from lenders, even after clients asked them to do so.
Federal regulators say that Mr. Lovinger and his wife, who was his business partner, even used customers’ money for personal expenses, including credit card bills, car payments and an employee party at a country club.
With complaints pouring in, the Manhattan-based Better Business Bureau of Metropolitan New York referred the matter to the Federal Trade Commission.
“The company took advantage of people who were in desperate situations,” says BBB Senior Vice President Susan McMillan, who led the bureau’s investigation.
Last fall, the FTC sued Mr. Lovinger and his wife for deceptive marketing. The couple settled the charges two weeks ago and agreed to pay the agency $7 million. They also agreed to sell their vacation home in Delray Beach, Fla. It was auctioned off for $307,400, according to Zillow.com.
Feeling his way
Mr. Lovinger denies that he did anything wrong intentionally and instead blames the company's woes on his own ignorance of the relatively new business of debt settlement. In a written response to questions, he said: “There was no prototype to follow. This led to growing pains and, in some cases, steep learning curves.”
Unfortunately, there are lots of people like Mr. Lovinger in the fast-growing and largely unregulated field of debt settlement. In the past few years, the FTC has sued a dozen operators for deceiving customers. The commission will host hearings next month to look into the business more closely.
The Association of Settlement Companies estimates that there are now 1,000 debt settlement outfits, double the number from three years ago. There is no federal oversight of the firms, many of which are legitimate businesses; policing them is the responsibility of overworked state regulators.
In New York state, the situation is clear: Debt settlement firms are barred from practicing. Many do so anyway, because they figure they're unlikely to be caught.
“Enforcement is extremely lax,” says Deanne Loonin, a staff attorney at the National Consumer Law Center in Boston.
New arrivals
Debt settlement firms emerged about a decade ago. They differ dramatically from traditional credit counselors, which typically advise clients on how to rethink and reduce their spending as they pay off their creditors.
Debt settlement companies, however, begin by telling clients to stop even trying to pay their bills. Instead, customers send cash each month to the debt settlement outfits, which pledge to negotiate with creditors once enough money has built up in the kitty. Meanwhile, interest continues to mount on the debts, and customers may face legal action from creditors.
Mr. Lovinger, who was trained as an electrical engineer, got into debt settlement in 1995. He entered the business after a New York state court shut down a company of his which falsely claimed that it could clean up people's tarnished credit reports, the state attorney general said.
He and his wife ran their debt settlement operation out of offices in Medford and Coram, L.I., attracting customers through online ads. At its peak, the company employed 45 people and generated $6 million in annual revenues, according to court documents.
Ven Letter, a worker at a northern California creamery, contributed to that revenue stream. He racked up $35,000 in credit card debt when his wife had medical problems after giving birth to their second child. In desperation, he turned to Edge Solutions for help. It only drove him deeper in the hole.
Blocked exits
He says, for example, that Edge rejected a settlement offer from a credit card company, which he wanted to accept. When Mr. Letter tried to exit the Edge program, the company would not return his $2,000 security deposit, he claims. On top of that, he says he paid $1,500 for credit counseling that he never received.
“They didn't do anything for me but screw up my credit for a long time,” Mr. Letter says.
In response, Mr. Lovinger insists that his company discouraged settlements only if they were not in a client's best interest. He adds, “We never charged money for credit counseling.”
Ms. McMillan of the Better Business Bureau says that her office received 45 complaints about Edge. She notes that after looking into them, the BBB assigned Edge a rating of “unsatisfactory.” Mr. Lovinger says he argued that his company was dealing with the complaints, and he threatened to sue the BBB. Shortly thereafter, the bureau alerted the FTC.
Mr. Lovinger, who is 47 years old, now finds himself in a state that his former clients would recognize: broke, and wondering what to do with the rest of his life. He says he has no money because he spent all of his debt settlement profits, and even borrowed heavily against his house, in order to develop a personal budgeting software program that failed to catch on.
In the meantime, he occasionally posts on his Web site, called The Finance Rebel Blog. The blog's mission: “shouting out against consumer financial injustice.”
Copyright (c) 2008 Crain Communications Inc. All rights reserved.
Debt settlement outfit falsely promised relief as clients’ woes grew; regulator acts
Aaron Elstein
For thousands of people far behind on their credit card payments and other bills, Robert Lovinger’s “Debt Meltdown Program” sounded awfully alluring.
He offered to help them reduce the amount of their bills by as much as 60% and, in some instances, to free them of debt altogether within 30 months. About 2,000 people joined, and they often ended up paying thousands of dollars for the Long Island-based service—which was marketed under several names, including The Debt Elimination Center and Edge Solutions.
What many customers got, in fact, was little or nothing. In some cases, Mr. Lovinger and his staff failed to contact creditors to settle customers’ delinquent bills; in others, they drove people deeper into debt by refusing to accept settlement offers from lenders, even after clients asked them to do so.
Federal regulators say that Mr. Lovinger and his wife, who was his business partner, even used customers’ money for personal expenses, including credit card bills, car payments and an employee party at a country club.
With complaints pouring in, the Manhattan-based Better Business Bureau of Metropolitan New York referred the matter to the Federal Trade Commission.
“The company took advantage of people who were in desperate situations,” says BBB Senior Vice President Susan McMillan, who led the bureau’s investigation.
Last fall, the FTC sued Mr. Lovinger and his wife for deceptive marketing. The couple settled the charges two weeks ago and agreed to pay the agency $7 million. They also agreed to sell their vacation home in Delray Beach, Fla. It was auctioned off for $307,400, according to Zillow.com.
Feeling his way
Mr. Lovinger denies that he did anything wrong intentionally and instead blames the company's woes on his own ignorance of the relatively new business of debt settlement. In a written response to questions, he said: “There was no prototype to follow. This led to growing pains and, in some cases, steep learning curves.”
Unfortunately, there are lots of people like Mr. Lovinger in the fast-growing and largely unregulated field of debt settlement. In the past few years, the FTC has sued a dozen operators for deceiving customers. The commission will host hearings next month to look into the business more closely.
The Association of Settlement Companies estimates that there are now 1,000 debt settlement outfits, double the number from three years ago. There is no federal oversight of the firms, many of which are legitimate businesses; policing them is the responsibility of overworked state regulators.
In New York state, the situation is clear: Debt settlement firms are barred from practicing. Many do so anyway, because they figure they're unlikely to be caught.
“Enforcement is extremely lax,” says Deanne Loonin, a staff attorney at the National Consumer Law Center in Boston.
New arrivals
Debt settlement firms emerged about a decade ago. They differ dramatically from traditional credit counselors, which typically advise clients on how to rethink and reduce their spending as they pay off their creditors.
Debt settlement companies, however, begin by telling clients to stop even trying to pay their bills. Instead, customers send cash each month to the debt settlement outfits, which pledge to negotiate with creditors once enough money has built up in the kitty. Meanwhile, interest continues to mount on the debts, and customers may face legal action from creditors.
Mr. Lovinger, who was trained as an electrical engineer, got into debt settlement in 1995. He entered the business after a New York state court shut down a company of his which falsely claimed that it could clean up people's tarnished credit reports, the state attorney general said.
He and his wife ran their debt settlement operation out of offices in Medford and Coram, L.I., attracting customers through online ads. At its peak, the company employed 45 people and generated $6 million in annual revenues, according to court documents.
Ven Letter, a worker at a northern California creamery, contributed to that revenue stream. He racked up $35,000 in credit card debt when his wife had medical problems after giving birth to their second child. In desperation, he turned to Edge Solutions for help. It only drove him deeper in the hole.
Blocked exits
He says, for example, that Edge rejected a settlement offer from a credit card company, which he wanted to accept. When Mr. Letter tried to exit the Edge program, the company would not return his $2,000 security deposit, he claims. On top of that, he says he paid $1,500 for credit counseling that he never received.
“They didn't do anything for me but screw up my credit for a long time,” Mr. Letter says.
In response, Mr. Lovinger insists that his company discouraged settlements only if they were not in a client's best interest. He adds, “We never charged money for credit counseling.”
Ms. McMillan of the Better Business Bureau says that her office received 45 complaints about Edge. She notes that after looking into them, the BBB assigned Edge a rating of “unsatisfactory.” Mr. Lovinger says he argued that his company was dealing with the complaints, and he threatened to sue the BBB. Shortly thereafter, the bureau alerted the FTC.
Mr. Lovinger, who is 47 years old, now finds himself in a state that his former clients would recognize: broke, and wondering what to do with the rest of his life. He says he has no money because he spent all of his debt settlement profits, and even borrowed heavily against his house, in order to develop a personal budgeting software program that failed to catch on.
In the meantime, he occasionally posts on his Web site, called The Finance Rebel Blog. The blog's mission: “shouting out against consumer financial injustice.”
Copyright (c) 2008 Crain Communications Inc. All rights reserved.
Tuesday, August 19, 2008
Residential evictions and bankruptcy law
Due to the current economic uncertainty, Shenwick & Associates has been receiving calls from many individuals who are being evicted, and also from landlords who are evicting tenants, with both sides inquiring about the interaction between residential evictions and bankruptcy law. As in many areas of the law, bankruptcy impacts residential evictions. This e-mail concerns the effect of bankruptcy law on residential (not commercial) evictions in New York. If the warrant of eviction has not issued in State Court, as long as the debtor continues to pay rent after filing for bankruptcy, the automatic stay prevents the debtor's landlord from obtaining a warrant of eviction. However, the situation becomes more complex if a tenant files for bankruptcy after the landlord obtains an eviction warrant.
Bankruptcy Code §362(b)(22) provides that the filing of a bankruptcy petition does not stay “…the continuation of any eviction…or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor” subject to §362(l) of the Bankruptcy Code.
Section 362(l)(1) states that,
“Except as otherwise provided in this subsection, subsection (b)(22) shall apply on the date that is 30 days after the date on which the bankruptcy petition is filed, if the debtor files with the petition and serves upon the lessor a certification under penalty of perjury that--
(A) under non-bankruptcy law applicable in the jurisdiction, there are circumstances under which the debtor would be permitted to cure the entire monetary default that gave rise to the judgment for possession, after that judgment for possession was entered; and
(B) the debtor (or an adult dependent of the debtor) has deposited with the clerk of the court, any rent that would become due during the 30-day period after the filing of the bankruptcy petition.”
In plain English, this provision provides that if a warrant of eviction has issued in a residential landlord-tenant case, then a bankruptcy filing will stay enforcement of the warrant, provided that there are circumstances where the debtor would be permitted under state law to cure the entire monetary amount and the debtor has deposited with the clerk of the court rent that would become due in the 30 day period following the bankruptcy.
Section 362(l)(2) provides that:
“If, within the 30-day period after the filing of the bankruptcy petition, the debtor…files with the court and serves upon the lessor a further certification under penalty of perjury that the debtor…has cured, under non-bankruptcy law applicable in the jurisdiction, the entire monetary default that gave rise to the judgment under which possession is sought by the lessor, subsection (b)(22) shall not apply, unless ordered to apply by the court under paragraph (3).”
In other words, the automatic stay will be effective if, within 30 days of filing for bankruptcy, the debtor can certify to the court and their landlord that they have cured the arrears due for the rent of their residential property. The stay is subject to the landlord's objection under §362(l)(3), which provides:
“(A) If the lessor files an objection to any certification filed by the debtor under paragraph (1) or (2), and serves such objection upon the debtor, the court shall hold a hearing within 10 days after the filing and service of such objection to determine if the certification filed by the debtor under paragraph (1) or (2) is true.
(B) If the court upholds the objection of the lessor filed under subparagraph (A)
(i) subsection (b)(22) shall apply immediately and relief from the stay provided under subsection (a)(3) shall not be required to enable the lessor to complete the process to recover full possession of the property; and
(ii) the clerk of the court shall immediately serve upon the lessor and the debtor a certified copy of the court's order upholding the lessor's objection.”
Accordingly, the debtor must truthfully assert that they have cured their rent arrears, as the landlord may object to the debtor's certification. Ten days after the landlord objects, the court will hold a hearing that will determine whether the debtor has cured their rent arrears. If the tenant-debtor has in fact paid all required back rent, the stay will remain in effect. If not, the court will uphold the landlord-lessor's objection and the automatic stay will be immediately lifted, allowing the landlord-lessor to complete eviction proceedings against the tenant-debtor.
The certification is of utmost importance to a bankruptcy client whose landlord has already obtained an eviction warrant. This is because §362(l)(4) allows for the immediate lifting of the automatic stay should the tenant-debtor fail to file the certification if the eviction warrant is listed on the bankruptcy petition. If you are a residential tenant whose landlord has obtained an eviction warrant or a landlord who has obtained an eviction warrant against a now bankrupt tenant, please contact Shenwick & Associates to assess your rights under bankruptcy law.
Bankruptcy Code §362(b)(22) provides that the filing of a bankruptcy petition does not stay “…the continuation of any eviction…or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor” subject to §362(l) of the Bankruptcy Code.
Section 362(l)(1) states that,
“Except as otherwise provided in this subsection, subsection (b)(22) shall apply on the date that is 30 days after the date on which the bankruptcy petition is filed, if the debtor files with the petition and serves upon the lessor a certification under penalty of perjury that--
(A) under non-bankruptcy law applicable in the jurisdiction, there are circumstances under which the debtor would be permitted to cure the entire monetary default that gave rise to the judgment for possession, after that judgment for possession was entered; and
(B) the debtor (or an adult dependent of the debtor) has deposited with the clerk of the court, any rent that would become due during the 30-day period after the filing of the bankruptcy petition.”
In plain English, this provision provides that if a warrant of eviction has issued in a residential landlord-tenant case, then a bankruptcy filing will stay enforcement of the warrant, provided that there are circumstances where the debtor would be permitted under state law to cure the entire monetary amount and the debtor has deposited with the clerk of the court rent that would become due in the 30 day period following the bankruptcy.
Section 362(l)(2) provides that:
“If, within the 30-day period after the filing of the bankruptcy petition, the debtor…files with the court and serves upon the lessor a further certification under penalty of perjury that the debtor…has cured, under non-bankruptcy law applicable in the jurisdiction, the entire monetary default that gave rise to the judgment under which possession is sought by the lessor, subsection (b)(22) shall not apply, unless ordered to apply by the court under paragraph (3).”
In other words, the automatic stay will be effective if, within 30 days of filing for bankruptcy, the debtor can certify to the court and their landlord that they have cured the arrears due for the rent of their residential property. The stay is subject to the landlord's objection under §362(l)(3), which provides:
“(A) If the lessor files an objection to any certification filed by the debtor under paragraph (1) or (2), and serves such objection upon the debtor, the court shall hold a hearing within 10 days after the filing and service of such objection to determine if the certification filed by the debtor under paragraph (1) or (2) is true.
(B) If the court upholds the objection of the lessor filed under subparagraph (A)
(i) subsection (b)(22) shall apply immediately and relief from the stay provided under subsection (a)(3) shall not be required to enable the lessor to complete the process to recover full possession of the property; and
(ii) the clerk of the court shall immediately serve upon the lessor and the debtor a certified copy of the court's order upholding the lessor's objection.”
Accordingly, the debtor must truthfully assert that they have cured their rent arrears, as the landlord may object to the debtor's certification. Ten days after the landlord objects, the court will hold a hearing that will determine whether the debtor has cured their rent arrears. If the tenant-debtor has in fact paid all required back rent, the stay will remain in effect. If not, the court will uphold the landlord-lessor's objection and the automatic stay will be immediately lifted, allowing the landlord-lessor to complete eviction proceedings against the tenant-debtor.
The certification is of utmost importance to a bankruptcy client whose landlord has already obtained an eviction warrant. This is because §362(l)(4) allows for the immediate lifting of the automatic stay should the tenant-debtor fail to file the certification if the eviction warrant is listed on the bankruptcy petition. If you are a residential tenant whose landlord has obtained an eviction warrant or a landlord who has obtained an eviction warrant against a now bankrupt tenant, please contact Shenwick & Associates to assess your rights under bankruptcy law.
Thursday, July 31, 2008
Transfer Taxes Post-Piccadilly
Many of our commercial clients ask us about the tax consequences of purchasing assets from Chapter 11 debtors. In order to encourage successful reorganizations, the Bankruptcy Code, at 11 USC §1146(a), prevents the taxation of transfers under a confirmed Chapter 11 reorganization plan. This section of the Code was at issue in a recently decided Supreme Court case, Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 2008 WL 2404077. The Court, in a 7-2 decision by Justice Thomas, held that the statute is applicable only to transfers made after the confirmation of a Chapter 11 plan of reorganization.
The case arose when Florida sought to tax the transfers from Piccadilly to others that were made before the Chapter 11 plan was confirmed by the Bankruptcy Court. The 11th Circuit held that the tax exemption could cover pre-confirmation transfers, while the 3rd and 4th Circuits previously held that §1146(a) applied only to post-confirmation transfers. Interestingly, Justice Alito drafted the 3rd Circuit opinion and held that §1146(a) applied only to post-confirmation transfers. Baltimore County v. Hechinger Liquidation Trust (In re Hechinger Inv. Co. of Del., Inc.), 335 F.3d 243 (3d Cir. 2003). Had the Supreme Court found for Piccadilly and upheld the 11th Circuit's decision, it would have overruled one of its own Justices.
Piccadilly will impact state and local taxing authorities by providing additional revenue, but may also delay asset sales until after plan confirmation. However, depending on the facts, Chapter 11 debtors may also realize that the transfer tax exemption is less important where assets are depreciating.
For questions about transfer taxes, please contact Jim Shenwick of Shenwick & Associates.
The case arose when Florida sought to tax the transfers from Piccadilly to others that were made before the Chapter 11 plan was confirmed by the Bankruptcy Court. The 11th Circuit held that the tax exemption could cover pre-confirmation transfers, while the 3rd and 4th Circuits previously held that §1146(a) applied only to post-confirmation transfers. Interestingly, Justice Alito drafted the 3rd Circuit opinion and held that §1146(a) applied only to post-confirmation transfers. Baltimore County v. Hechinger Liquidation Trust (In re Hechinger Inv. Co. of Del., Inc.), 335 F.3d 243 (3d Cir. 2003). Had the Supreme Court found for Piccadilly and upheld the 11th Circuit's decision, it would have overruled one of its own Justices.
Piccadilly will impact state and local taxing authorities by providing additional revenue, but may also delay asset sales until after plan confirmation. However, depending on the facts, Chapter 11 debtors may also realize that the transfer tax exemption is less important where assets are depreciating.
For questions about transfer taxes, please contact Jim Shenwick of Shenwick & Associates.
Tuesday, July 01, 2008
Doctrine of Necessity
Many of our commercial bankruptcy clients that supply goods to Debtors have asked us about the Doctrine of Necessity, which permits creditors to be paid on pre-petition debts after a bankruptcy filing. The Doctrine is found in the Bankruptcy Code at 11 USC §105(a), which permits the court to "issue any order…that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]." In the late 19th century, the Doctrine was applied at common law in railroad reorganizations by judges who reordered priorities so that certain creditors would be paid in the name of "necessity."
Today, Section 105 of the Bankruptcy Code does not allow Judges to set aside the Code's priority rules. The rule in present-day Courts prohibits payments to selected unsecured creditors unless all unsecured creditors are paid, but exceptions to this rule exist depending on the circumstances. One exception is where the non-payment of an unsecured pre-bankruptcy filing claim would significantly weaken a Debtor's ability to function – i.e. if a supplier were not paid for goods and threatened to withhold future shipments, jeopardizing the Debtor's business and reorganization.
An example of a District Court allowing a Debtor to pay unsecured creditors pre-petition is In re Just for Feet, Inc., 242 B.R. 821 (D. Del. 1999), in which the United States District Court for the District of Delaware allowed Just for Feet, Inc., to continue to purchase name-brand athletic footwear from its vendors. Just for Feet, which filed for bankruptcy in 1999, was a shoe store that primarily sold name-brand athletic shoes. If the Court refused the Debtor's request to pay unsecured creditors' claims for pre-petition goods, the business would have ceased to exist because the Debtor would not have been able to buy merchandise for its stores.
For more information on the Doctrine of Necessity and the powers of Bankruptcy Courts, please contact Jim Shenwick of Shenwick & Associates
Today, Section 105 of the Bankruptcy Code does not allow Judges to set aside the Code's priority rules. The rule in present-day Courts prohibits payments to selected unsecured creditors unless all unsecured creditors are paid, but exceptions to this rule exist depending on the circumstances. One exception is where the non-payment of an unsecured pre-bankruptcy filing claim would significantly weaken a Debtor's ability to function – i.e. if a supplier were not paid for goods and threatened to withhold future shipments, jeopardizing the Debtor's business and reorganization.
An example of a District Court allowing a Debtor to pay unsecured creditors pre-petition is In re Just for Feet, Inc., 242 B.R. 821 (D. Del. 1999), in which the United States District Court for the District of Delaware allowed Just for Feet, Inc., to continue to purchase name-brand athletic footwear from its vendors. Just for Feet, which filed for bankruptcy in 1999, was a shoe store that primarily sold name-brand athletic shoes. If the Court refused the Debtor's request to pay unsecured creditors' claims for pre-petition goods, the business would have ceased to exist because the Debtor would not have been able to buy merchandise for its stores.
For more information on the Doctrine of Necessity and the powers of Bankruptcy Courts, please contact Jim Shenwick of Shenwick & Associates
Friday, May 30, 2008
Proofs of Claim in Commercial Bankruptcy Cases
Many of our commercial bankruptcy clients ask us if they need to file a Proof of Claim in Chapter 11 commercial bankruptcy cases. Let's briefly review the law regarding the filing of Proofs of Claims in Chapter 11 bankruptcy cases and related issues.
In a Chapter 11 bankruptcy petition, if a creditor is listed on the Debtor's bankruptcy schedules and the claim is not listed as disputed, contingent or unliquidated, then the creditor is not required to file a Proof of Claim. If a creditor is not listed on the bankruptcy petition schedules (which is often the case) and/or the claim is listed as disputed, contingent or unliquidated, then a creditor is required to file a Proof of Claim to evidence its claim against the Debtor. If a creditor files a Proof of Claim, it is then subject to the jurisdiction of the Bankruptcy Court. As an aside, in bankruptcy law we have the ultimate long arm statute, where service is made on parties by first class mail.
Whether or not a creditor files a Proof of Claim, if the Debtor desires to commence an adversary proceeding against a creditor, they can simply mail the summons and complaint to the creditor. Consequently, with respect to service of process, it is inconsequential whether a creditor files a Proof of Claim in a bankruptcy case. However, if a creditor files a Proof of Claim in a bankruptcy case, then it waives its right to a jury trial. The United States Bankruptcy Court for the Southern District of New York does not conduct jury trials. Accordingly, if a creditor is sued, it can remove or remand the case to the United States District Court for the Southern District of New York, if it desires a jury trial. On the other hand, if the creditor files a Proof of Claim and submits to the jurisdiction of the Bankruptcy Court, then it will not be able to obtain a jury trial. This was Judge Gonzalez's holding in In re WorldCom, Inc., Case No. 02-13533, Adv. Pro. No. 04-04338 (Bankr. S.D.N.Y. Dec. 7, 2007). In WorldCom, Judge Gonzalez ruled that if a creditor files a proof of claim, then it submits to bankruptcy court jurisdiction and waives its right to a jury trial in an adversary proceeding (bankruptcy litigation).
Therefore, before a creditor files a Proof of Claim in the case, it must weigh its potential recovery in the bankruptcy case as a result of filing the Proof of Claim versus submitting to Bankruptcy Court jurisdiction and waiving its right to a jury trial. It has been the experience of this law firm, however, that most creditors file a Proof of Claim and waive their right to a jury trial. Anyone who has questions regarding the filing of Proofs of Claims or creditors' rights in bankruptcy cases should contact Jim Shenwick of Shenwick and Associates.
In a Chapter 11 bankruptcy petition, if a creditor is listed on the Debtor's bankruptcy schedules and the claim is not listed as disputed, contingent or unliquidated, then the creditor is not required to file a Proof of Claim. If a creditor is not listed on the bankruptcy petition schedules (which is often the case) and/or the claim is listed as disputed, contingent or unliquidated, then a creditor is required to file a Proof of Claim to evidence its claim against the Debtor. If a creditor files a Proof of Claim, it is then subject to the jurisdiction of the Bankruptcy Court. As an aside, in bankruptcy law we have the ultimate long arm statute, where service is made on parties by first class mail.
Whether or not a creditor files a Proof of Claim, if the Debtor desires to commence an adversary proceeding against a creditor, they can simply mail the summons and complaint to the creditor. Consequently, with respect to service of process, it is inconsequential whether a creditor files a Proof of Claim in a bankruptcy case. However, if a creditor files a Proof of Claim in a bankruptcy case, then it waives its right to a jury trial. The United States Bankruptcy Court for the Southern District of New York does not conduct jury trials. Accordingly, if a creditor is sued, it can remove or remand the case to the United States District Court for the Southern District of New York, if it desires a jury trial. On the other hand, if the creditor files a Proof of Claim and submits to the jurisdiction of the Bankruptcy Court, then it will not be able to obtain a jury trial. This was Judge Gonzalez's holding in In re WorldCom, Inc., Case No. 02-13533, Adv. Pro. No. 04-04338 (Bankr. S.D.N.Y. Dec. 7, 2007). In WorldCom, Judge Gonzalez ruled that if a creditor files a proof of claim, then it submits to bankruptcy court jurisdiction and waives its right to a jury trial in an adversary proceeding (bankruptcy litigation).
Therefore, before a creditor files a Proof of Claim in the case, it must weigh its potential recovery in the bankruptcy case as a result of filing the Proof of Claim versus submitting to Bankruptcy Court jurisdiction and waiving its right to a jury trial. It has been the experience of this law firm, however, that most creditors file a Proof of Claim and waive their right to a jury trial. Anyone who has questions regarding the filing of Proofs of Claims or creditors' rights in bankruptcy cases should contact Jim Shenwick of Shenwick and Associates.
Wednesday, May 21, 2008
MessageSave for Microsoft Outlook
Shenwick and Associates practices bankruptcy and real estate law, and we do not often post reviews or comments on technology products. However, we’re making an exception for MessageSave by TechHit.com, a $49.95 plug-in to Microsoft Outlook that organizes sent and received e-mail messages. Having used this product for approximately three months, we have found that it saves us hours each week, reduces the tedium of saving e-mails and paid for itself in a matter of days.
The company allows for a 30-day trial and provides free technical support. However, we found that the product worked fine out of the box. Once you download MessageSave, an icon appears in Outlook. When you want to save an e-mail message in your inbox, you click the MessageSave icon and are prompted to browse to the folder where you want to save the file. You then click “save now” and the e-mail is saved. Correspondingly, after you send an e-mail, the message save window opens up and you browse to where you want to save the file.
MessageSave is highly customizable and one can modify the program so that the saved e-mails have a thread. We have configured the program so that every saved e-mail shows the sender, recipient, date and a brief description of the subject of the e-mail. Effectively, what the program does is reduce the number of steps and the amount of typing required to save an e-mail. Shenwick and Associates does not save e-mails to the Outlook folders—in our opinion, that is the worst place to store e-mails, because the .pst file becomes corrupted as it grows in size. As part of our case management approach to managing files, we have created a folder on our hard drive entitled "Client Files," and each client has a subfolder within the main folder. With this approach, our firm saves a great deal of time on e-mail management with this program. Without MessageSave, we would have to double-click on an e-mail, select “save as,” scroll to the client file, type a description of the file and changes the type of file to a message file. MessageSave significantly reduces the steps in saving e-mails, and we highly recommend it.
The company allows for a 30-day trial and provides free technical support. However, we found that the product worked fine out of the box. Once you download MessageSave, an icon appears in Outlook. When you want to save an e-mail message in your inbox, you click the MessageSave icon and are prompted to browse to the folder where you want to save the file. You then click “save now” and the e-mail is saved. Correspondingly, after you send an e-mail, the message save window opens up and you browse to where you want to save the file.
MessageSave is highly customizable and one can modify the program so that the saved e-mails have a thread. We have configured the program so that every saved e-mail shows the sender, recipient, date and a brief description of the subject of the e-mail. Effectively, what the program does is reduce the number of steps and the amount of typing required to save an e-mail. Shenwick and Associates does not save e-mails to the Outlook folders—in our opinion, that is the worst place to store e-mails, because the .pst file becomes corrupted as it grows in size. As part of our case management approach to managing files, we have created a folder on our hard drive entitled "Client Files," and each client has a subfolder within the main folder. With this approach, our firm saves a great deal of time on e-mail management with this program. Without MessageSave, we would have to double-click on an e-mail, select “save as,” scroll to the client file, type a description of the file and changes the type of file to a message file. MessageSave significantly reduces the steps in saving e-mails, and we highly recommend it.
Monday, May 05, 2008
New Southern District Bankruptcy Order on Motion for Relief from the Automatic Stay in real estate cases
Most of our readers probably think of Shenwick & Associates as a debtor bankruptcy firm, but we also have a substantial creditor rights practice. In that area of our practice, the most common motion that creditors use to protect their interests in the debtor's estate is a motion to lift the automatic stay. This is a motion to alter the automatic stay under Bankruptcy Code section 362 to allow the creditor to act against the debtor or the debtor's property, and the filing fee is $150.00. An example of this is a creditor seeking permission to foreclose on a lien because its security interest is not adequately protected.
Effective as of February 7, 2008, the Board of Judges for the Southern District of New York have promulgated General Order M-347, which requires that all motions for relief from the automatic stay under section 362 in cases filed by individuals concerning real property and cooperative apartments must include a completed copy of the "Relief from Stay- Real Estate and Cooperative Apartments" worksheet annexed as an exhibit to the motion. The fillable worksheet can be found on our website here and on the U.S. Bankruptcy Court for the Southern District of New York website here.
The five page worksheet asks for background information, including the address of the property, the name of the lender, the date of the mortgage and post-petition address for payment. Then it continues to ask for debt/value representations, including the total indebtedness of the debtor to the creditor at the time of the motion, the estimated market value of the property and the source of the valuation. It then asks the movant for more detailed information about the debt-a breakdown of the pre-petition and post-petition debt, which includes attorney’s fees, amounts applied to principal, interest, escrow and late fees.
The worksheet also requires exhibits to the motion for relief from the automatic stay:
1. Copies of documents that indicate the movant's interest in the subject property. For example, a complete and legible copy of the promissory note or
other debt instrument together with a complete and legible copy of the mortgage and any assignments in the chain from the original mortgagee to the moving party.
2. Copies of documents establishing proof of standing to bring the motion.
3. Copies of documents establishing that the movant's interest in the real property or cooperative apartment was perfected. For example, a complete and legible copy of the Financing Statement (UCC-1) filed with either the Clerk’s Office or the Register of the county the property or cooperative apartment is located in.
The worksheet closes with a declaration by the moving party that the foregoing information is true and correct based on personal knowledge of books and business records.
In our prior Cooler e-mails, we've written about abuse of the foreclosure process by secured creditors. This order by the Judges of the U.S. Bankruptcy Court for the Southern District of New York appears to be a response to these abuses. Whether you’re looking at bankruptcy from the creditor's or debtor's side, please contact Shenwick & Associates and let us know how we can be of service.
Effective as of February 7, 2008, the Board of Judges for the Southern District of New York have promulgated General Order M-347, which requires that all motions for relief from the automatic stay under section 362 in cases filed by individuals concerning real property and cooperative apartments must include a completed copy of the "Relief from Stay- Real Estate and Cooperative Apartments" worksheet annexed as an exhibit to the motion. The fillable worksheet can be found on our website here and on the U.S. Bankruptcy Court for the Southern District of New York website here.
The five page worksheet asks for background information, including the address of the property, the name of the lender, the date of the mortgage and post-petition address for payment. Then it continues to ask for debt/value representations, including the total indebtedness of the debtor to the creditor at the time of the motion, the estimated market value of the property and the source of the valuation. It then asks the movant for more detailed information about the debt-a breakdown of the pre-petition and post-petition debt, which includes attorney’s fees, amounts applied to principal, interest, escrow and late fees.
The worksheet also requires exhibits to the motion for relief from the automatic stay:
1. Copies of documents that indicate the movant's interest in the subject property. For example, a complete and legible copy of the promissory note or
other debt instrument together with a complete and legible copy of the mortgage and any assignments in the chain from the original mortgagee to the moving party.
2. Copies of documents establishing proof of standing to bring the motion.
3. Copies of documents establishing that the movant's interest in the real property or cooperative apartment was perfected. For example, a complete and legible copy of the Financing Statement (UCC-1) filed with either the Clerk’s Office or the Register of the county the property or cooperative apartment is located in.
The worksheet closes with a declaration by the moving party that the foregoing information is true and correct based on personal knowledge of books and business records.
In our prior Cooler e-mails, we've written about abuse of the foreclosure process by secured creditors. This order by the Judges of the U.S. Bankruptcy Court for the Southern District of New York appears to be a response to these abuses. Whether you’re looking at bankruptcy from the creditor's or debtor's side, please contact Shenwick & Associates and let us know how we can be of service.
Bigger Isn’t Always Better When It Comes to Outside Counsel
By Ruth E. Piller, Litigation News Associate Editor
General counsel are increasingly turning to small firms and solo
practitioners
Corporate legal clients once again seem to be developing an affinity for small law
firms—notwithstanding the merger mania of recent years and the perception that
large corporations want only to hire megafirms. With increasing frequency, the chief
legal officers of leading corporations are now retaining small law firms and even
solo practitioners.
"I do believe that we are seeing an increase in inside counsel using smaller,
boutique firms," says Horace W. Jordan Jr., Lake Forest, IL, cochair of the Section
of Litigation’s Corporate Counsel Committee. Jordan, who is general counsel for an
equipment leasing company, believes that two dynamics are responsible for this
change: "the billable hour and a feeling that the smaller firm might have more
flexibility in both arranging billings and understanding the client and its business."
Walter D. James III, Grapevine, TX, a member of the Section’s Criminal Litigation
and Environmental Litigation Committees, practiced at large Texas firms until 2004,
when he became a solo practitioner. James represents several Fortune 500
companies on environmental matters and says his clients like the fact that he does
not mark up litigation costs such as copying and long distance calls, as some big
firms do. In addition, he says, his clients know they can be big fish in a small pond
when he represents them, unlike experiences they have sometimes had at larger
firms.
"Generally speaking, what they like is the accessibility and accountability that come
with working with a smaller outfit," says Stephen J. Curley, Stamford, CT, cochair of
the Section’s Solo and Small Firm Committee. "It’s not lost on clients that in certain years they could be 10 to 20 percent of a firm's revenues and that they will get immediate attention and white-glove service when it comes to working with a solo.
On the other hand, their problems can be just as big, and those figures can be 1 or
2 percent of a much bigger firm’s revenue."
Like James, Curley left a large firm to form his own office. He says that he and
other solo and small firm practitioners have benefited from the increased use of
technology. For example, many benefits that were traditionally available only at the
larger firms "can be replicated through an artful use of technology in the hands of a
competent solo. You don’t need the 100,000-volume law library that the big firms
heavily invested in years ago. You don’t need the trappings of a class office space
in a landmark building like people used to insist on years ago." Also, with the
availability of remote access, he says, clients have realized there is no need to pay
for the overhead of a big firm.
That’s not to say that corporate clients have forgone the big firms completely. "We
use the large firms for big-ticket matters still because we have a relationship with
them,” Jordan says. "But the bulk of my work I have limited to firms, whether big or
small, that really know me and care about me. That sounds silly, perhaps, but it is
absolutely essential."
Curley says big firms have in part become the victims of their own success. When
the big firms command hourly rates approaching $1,000 for their most-senior
attorneys, he says, it becomes difficult for the client to call the senior partner from that office. When Curley left big-firm practice in 2002, he cut his rates literally in half, he says. Likewise, James says his rates, when compared to those of his colleagues at the big firms, are much lower. "For someone with my experience, it is just a bargain rate."
ABA member James G. Potter, San Francisco, senior vice president and general
counsel of Del Monte Foods Co., says that his company’s philosophy is to match
the legal resource to the project. "That is from a host of perspectives including cost and quality, and what that has resulted in is that we use far more medium and small firms than we do large firms," he says. Del Monte tends to use large firms, for
example, in areas that require very specialized expertise, such as in mergers and
acquisitions or intellectual property litigation. He adds, however: "It is virtually
impossible for a larger firm to cost efficiently handle a litigation matter where the
cost at issue is less than $1 million." Small firms are "extremely cost effective on
the smaller matters."
Although it is one thing to understand why corporate clients want to use smaller
outside counsel, it is another to attract those clients. James says that one way
small firms and solos can solicit clients is by building on existing relationships with friends and acquaintances. One of James’s biggest clients was once his opposing
counsel in Superfund cases. Afterward, when the lawyers went in-house with an
energy company, he maintained their friendship; now he now represents their
company on the largest Superfund site in Texas. "It’s not always about getting the
file that day," he says.
Curley credits the ABA with helping to make his solo practice attractive to corporate
clients; he calculates that 25 to 30 percent of his revenues each year are the direct
result of referrals from ABA contacts. "The contacts that I’ve developed and the
networking opportunities I’ve gotten because of the exposure I’ve received to other
attorneys, both litigators and nonlitigators, have really given me the comfort to
move out on my own," he says.
Copyright (c) 2008, American Bar Association. All rights reserved.
General counsel are increasingly turning to small firms and solo
practitioners
Corporate legal clients once again seem to be developing an affinity for small law
firms—notwithstanding the merger mania of recent years and the perception that
large corporations want only to hire megafirms. With increasing frequency, the chief
legal officers of leading corporations are now retaining small law firms and even
solo practitioners.
"I do believe that we are seeing an increase in inside counsel using smaller,
boutique firms," says Horace W. Jordan Jr., Lake Forest, IL, cochair of the Section
of Litigation’s Corporate Counsel Committee. Jordan, who is general counsel for an
equipment leasing company, believes that two dynamics are responsible for this
change: "the billable hour and a feeling that the smaller firm might have more
flexibility in both arranging billings and understanding the client and its business."
Walter D. James III, Grapevine, TX, a member of the Section’s Criminal Litigation
and Environmental Litigation Committees, practiced at large Texas firms until 2004,
when he became a solo practitioner. James represents several Fortune 500
companies on environmental matters and says his clients like the fact that he does
not mark up litigation costs such as copying and long distance calls, as some big
firms do. In addition, he says, his clients know they can be big fish in a small pond
when he represents them, unlike experiences they have sometimes had at larger
firms.
"Generally speaking, what they like is the accessibility and accountability that come
with working with a smaller outfit," says Stephen J. Curley, Stamford, CT, cochair of
the Section’s Solo and Small Firm Committee. "It’s not lost on clients that in certain years they could be 10 to 20 percent of a firm's revenues and that they will get immediate attention and white-glove service when it comes to working with a solo.
On the other hand, their problems can be just as big, and those figures can be 1 or
2 percent of a much bigger firm’s revenue."
Like James, Curley left a large firm to form his own office. He says that he and
other solo and small firm practitioners have benefited from the increased use of
technology. For example, many benefits that were traditionally available only at the
larger firms "can be replicated through an artful use of technology in the hands of a
competent solo. You don’t need the 100,000-volume law library that the big firms
heavily invested in years ago. You don’t need the trappings of a class office space
in a landmark building like people used to insist on years ago." Also, with the
availability of remote access, he says, clients have realized there is no need to pay
for the overhead of a big firm.
That’s not to say that corporate clients have forgone the big firms completely. "We
use the large firms for big-ticket matters still because we have a relationship with
them,” Jordan says. "But the bulk of my work I have limited to firms, whether big or
small, that really know me and care about me. That sounds silly, perhaps, but it is
absolutely essential."
Curley says big firms have in part become the victims of their own success. When
the big firms command hourly rates approaching $1,000 for their most-senior
attorneys, he says, it becomes difficult for the client to call the senior partner from that office. When Curley left big-firm practice in 2002, he cut his rates literally in half, he says. Likewise, James says his rates, when compared to those of his colleagues at the big firms, are much lower. "For someone with my experience, it is just a bargain rate."
ABA member James G. Potter, San Francisco, senior vice president and general
counsel of Del Monte Foods Co., says that his company’s philosophy is to match
the legal resource to the project. "That is from a host of perspectives including cost and quality, and what that has resulted in is that we use far more medium and small firms than we do large firms," he says. Del Monte tends to use large firms, for
example, in areas that require very specialized expertise, such as in mergers and
acquisitions or intellectual property litigation. He adds, however: "It is virtually
impossible for a larger firm to cost efficiently handle a litigation matter where the
cost at issue is less than $1 million." Small firms are "extremely cost effective on
the smaller matters."
Although it is one thing to understand why corporate clients want to use smaller
outside counsel, it is another to attract those clients. James says that one way
small firms and solos can solicit clients is by building on existing relationships with friends and acquaintances. One of James’s biggest clients was once his opposing
counsel in Superfund cases. Afterward, when the lawyers went in-house with an
energy company, he maintained their friendship; now he now represents their
company on the largest Superfund site in Texas. "It’s not always about getting the
file that day," he says.
Curley credits the ABA with helping to make his solo practice attractive to corporate
clients; he calculates that 25 to 30 percent of his revenues each year are the direct
result of referrals from ABA contacts. "The contacts that I’ve developed and the
networking opportunities I’ve gotten because of the exposure I’ve received to other
attorneys, both litigators and nonlitigators, have really given me the comfort to
move out on my own," he says.
Copyright (c) 2008, American Bar Association. All rights reserved.
Tuesday, April 29, 2008
New York Times editorial on foreclosure prevention
Waiting (Too Long) for Relief
Published: April 29, 2008
A year into the worst foreclosure crisis since the Depression, the House only now is getting serious about a foreclosure prevention bill.
It is bad enough that it will be weeks or months or next year before Congress actually passes a final relief measure. Worse is that the measure is more supportive of the mortgage industry, whose shoddy practices stoked the crisis, than of troubled homeowners, threatened communities or taxpayers who may have to foot the bill.
The measure, pushed by Representative Barney Frank, the Financial Services Committee chairman, is too much carrot and too little stick. It would guarantee troubled loans that are refinanced by lenders, provided the lenders reduce mortgage balances to an amount equal to 85 percent of the property’s current value.
Participation by lenders would be voluntary. If they or other parties to the loan — like mortgage investors — did not want to reduce the loan balances, they could continue with foreclosures. That is what has happened with other voluntary approaches.
Congress could fix that big flaw by finally allowing bankrupt borrowers to have their mortgages modified under court protection. Lenders would have a real incentive to participate in the bill’s rescue plan if they knew that borrowers had the option of going to court, where a judge could change the terms of a mortgage.
Amending the bankruptcy code will go nowhere without a push by the Democratic leadership, especially House Speaker Nancy Pelosi. The Senate is enfeebled by its bare Democratic majority and a cozy relationship with mortgage industry campaign donors. House members, too, would be loath to displease industry donors unless pushed by the leadership.
The leadership must also make it clear that lawmakers will no longer indulge the overwrought objections of the mortgage industry to the bankruptcy fix. Mainly, the industry claims that credit will dry up and mortgage costs will rise if borrowers are allowed, even temporarily, to modify their loans in bankruptcy. All other secured debt, like vacation homes and rental properties, can be modified in court and that has never frozen credit. The industry issued many of same dire warnings in the mid-1980s when the law was revised to allow farmers to have their mortgages modified in bankruptcy court. None of the supposed dangers came to pass.
Those and other issues have all been vetted before the House and Senate Judiciary Committees, and the bills those committees produced go to great lengths to meet all of the industry’s concerns. It is now up to Ms. Pelosi and her fellow Democratic leaders.
Copyright (c) The New York Times Company. All rights reserved.
Published: April 29, 2008
A year into the worst foreclosure crisis since the Depression, the House only now is getting serious about a foreclosure prevention bill.
It is bad enough that it will be weeks or months or next year before Congress actually passes a final relief measure. Worse is that the measure is more supportive of the mortgage industry, whose shoddy practices stoked the crisis, than of troubled homeowners, threatened communities or taxpayers who may have to foot the bill.
The measure, pushed by Representative Barney Frank, the Financial Services Committee chairman, is too much carrot and too little stick. It would guarantee troubled loans that are refinanced by lenders, provided the lenders reduce mortgage balances to an amount equal to 85 percent of the property’s current value.
Participation by lenders would be voluntary. If they or other parties to the loan — like mortgage investors — did not want to reduce the loan balances, they could continue with foreclosures. That is what has happened with other voluntary approaches.
Congress could fix that big flaw by finally allowing bankrupt borrowers to have their mortgages modified under court protection. Lenders would have a real incentive to participate in the bill’s rescue plan if they knew that borrowers had the option of going to court, where a judge could change the terms of a mortgage.
Amending the bankruptcy code will go nowhere without a push by the Democratic leadership, especially House Speaker Nancy Pelosi. The Senate is enfeebled by its bare Democratic majority and a cozy relationship with mortgage industry campaign donors. House members, too, would be loath to displease industry donors unless pushed by the leadership.
The leadership must also make it clear that lawmakers will no longer indulge the overwrought objections of the mortgage industry to the bankruptcy fix. Mainly, the industry claims that credit will dry up and mortgage costs will rise if borrowers are allowed, even temporarily, to modify their loans in bankruptcy. All other secured debt, like vacation homes and rental properties, can be modified in court and that has never frozen credit. The industry issued many of same dire warnings in the mid-1980s when the law was revised to allow farmers to have their mortgages modified in bankruptcy court. None of the supposed dangers came to pass.
Those and other issues have all been vetted before the House and Senate Judiciary Committees, and the bills those committees produced go to great lengths to meet all of the industry’s concerns. It is now up to Ms. Pelosi and her fellow Democratic leaders.
Copyright (c) The New York Times Company. All rights reserved.
Monday, April 21, 2008
Piling On: Borrowers Buried by Fees
By GRETCHEN MORGENSON
Published: April 20, 2008
Slowly but surely, a handful of public-minded bankruptcy court judges are drawing back the curtain on the mortgage servicing business, exposing, among other questionable practices, the sundry and onerous fees that big banks and financial companies levy on troubled borrowers.
It isn’t a pretty sight, if you are a borrower. But shining a light on this dark corner certainly qualifies as progress.
The cases come out of bankruptcy courts in Delaware, Louisiana and New York, and each one shows how improper, undisclosed or questionable fees unfairly penalize borrowers already struggling with mortgage debt or bankruptcy.
Given the number of new borrowers falling daily into the foreclosure mire, dubious practices by servicers are beyond troubling. Foreclosure filings rose 57 percent in March over the same period in 2007, according to RealtyTrac, the real estate and foreclosure Web site. It also said that banks repossessed more than 50,000 homes last month, more than twice the amount of one year earlier.
If even one of those repossessions was owing to improper fees or practices, that would be one too many.
The case out of the Eastern District of Louisiana, overseen by Judge Elizabeth W. Magner, is especially depressing. It involves Dorothy Chase Stewart, an elderly borrower and widow whose original loan of $61,200 was serviced by Wells Fargo. Judge Magner cited "abusive imposition of unwarranted fees and charges," and improper calculation of escrow payments, among other things. She found Wells Fargo negligent and assessed damages, sanctions and legal fees of $27,350.
The heart of the case is that Wells Fargo failed to notify the borrower when it assessed fees or charges on her account. This deepened her default and placed her on a downward spiral that was hard to escape. And Wells Fargo's practice of not notifying borrowers that they were being charged fees "is not peculiar to loans involved in a bankruptcy," the court said.
During a 12-month period beginning in 2001, for example, Well Fargo assessed 13 late fees totaling $360.23 without telling Ms. Stewart or her late husband, whose name was on the loan before he died. Even though the terms of the mortgage required that Wells Fargo apply any funds it received from the Stewarts to principal and interest charges first, the late fees were deducted first. This meant that the Stewarts' mortgage payments were insufficient, making them fall further behind — and keeping them subject to more late fees.
Then there were the multiple inspection fees Wells Fargo charged the borrowers. Because its computer system automatically generates a request for property inspections when a borrower becomes delinquent — to make sure the property is being kept up — the $15 cost of the inspections piled up. The court noted that the total cost to the borrower for one missed $554.11 mortgage payment was $465.36 in late fees and property inspection charges.
From late 2000 and 2007, Wells Fargo inspected the property on average every 54 days, the court found. But the court also determined that inspections charged to Ms. Stewart had often been performed on other people's properties. Of the nine broker appraisals charged to Ms. Stewart from 2002 to 2007, two were said to have been conducted on the same September day in 2005 when Jefferson Parish, where the Stewart home was located, was under an evacuation order because of Hurricane Katrina.
The broker appraisals were conducted by a division of Wells Fargo that charged more than double its costs for them, the court found. It concluded that the charges were an undisclosed fee disguised as a third-party vendor cost and illegally imposed by Wells Fargo. The bank also levied substantial legal fees and failed to credit back to the borrower $1,800 that had been charged for an eviction action but that had been returned by the sheriff because it never occurred.
While Wells Fargo claimed that the borrower owed $35,036, the judge said the actual figure was $24,924.10. The judge ordered Wells Fargo to provide a complete loan history on every case pending with her court after April 13, 2007.
A Wells Fargo spokesman said the bank "strongly disagrees with many aspects of the recent bankruptcy rulings in New Orleans and plans to appeal these matters. Wells Fargo continuously works to enhance its bankruptcy procedures to comply with the requirements of the bankruptcy courts throughout the country."
The second illuminating case emerged in federal bankruptcy court in Delaware and involved a problem that lawyers representing troubled borrowers say they often encounter: fees levied after a borrower has satisfied all obligations under a Chapter 13 bankruptcy and the case is discharged.
Mortgage lenders argue that their contracts allow them to recover all the fees and costs they incur when a borrower files a Chapter 13 bankruptcy plan, even those not approved by the court and charged after a case is resolved. But borrowers contend that because such charges have not been approved, they should be disallowed.
Judge Brendan Linehan Shannon put forward this example: If a lender imposed $5,200 in charges on a borrower to cover weekly property inspections and the court disallowed $4,000 of it, lenders still contend that they have the right to try to collect fees after the case concluded that the court did not approve.
"This cannot be," the judge wrote. "If the court and the Chapter 13 Trustee fully administer a case through completion of a 60-month Chapter 13 plan, only to have the debtor promptly refile on account of accrued, undisclosed fees and charges on her mortgage, it could fairly be said that we have all been on a fool's errand for five years."
Finally, borrowers can be cheered by an opinion written this month by Cecilia G. Morris, bankruptcy judge in the Southern District of New York.
The case involved Christopher W. and Bobbi Ann Schuessler, borrowers who had $120,000 of equity in their Burlingham, N.Y., home when their bank, Chase Home Finance, a unit of JPMorgan Chase, moved to begin foreclosure proceedings. The couple had filed for personal bankruptcy protection, which automatically prevents any seizure of their home.
But the bank moved for a so-called relief from the bankruptcy stay, and claimed the couple had no equity.
The Schuesslers got into trouble because Chase had refused a mortgage payment they tried to make at a local branch. Testimony in the case revealed a Chase policy of accepting mortgage payments in branches from borrowers who are current on their loans but rejecting payments from borrowers operating under bankruptcy protection.
The Schuesslers did not know this. When Chase rejected their payment, they briefly fell behind on their mortgage, according to the court documents. Then Chase moved to begin foreclosure proceedings.
"Without informing debtors, Chase Home Finance makes it impossible for JPMorgan Chase Bank branches to accept any payments," Judge Morris wrote. "It appeared that Chase Home Finance intended to commence an unwarranted foreclosure action, due to 'arrears' resulting from Chase Home Finance’s handling of the case in its bankruptcy department, rather than any default of the debtors."
Court documents also state that Chase was unable to show that it had tried to communicate with the borrowers before it began efforts to seize their home. The judge concluded that the way Chase deals with bankruptcy debtors is an abuse of the process. She instructed Chase to pay the borrowers' legal fees.
Thomas Kelly, a Chase spokesman, conceded that the bank had made some mistakes in the Schuessler case, especially the fact that the branch teller had not advised the borrowers where to send their payment when it was rejected.
"Payments from customers in bankruptcy require special handling under bankruptcy law so tellers are requested to tell customers to mail in the payment or call the toll-free number on the back of the form," he said. "In light of the judge’s concerns we are reviewing our practices." He also said the bank had followed industry practice in moving to foreclose quickly "so we could meet the guidelines for servicing loans for investors."
"These cases clearly indicate that bankruptcy courts are no longer being fooled by the maze of fees, firms and flim-flams of the mortgage servicing industry," said O. Max Gardner III, a lawyer who represents borrowers in Shelby, N.C. "The servicers and their lawyers should recognize the clear and present danger of these decisions while they still have time to turn their ships around and do the right thing."
Copyright (c) 2008 The New York Times Company. All rights reserved.
Published: April 20, 2008
Slowly but surely, a handful of public-minded bankruptcy court judges are drawing back the curtain on the mortgage servicing business, exposing, among other questionable practices, the sundry and onerous fees that big banks and financial companies levy on troubled borrowers.
It isn’t a pretty sight, if you are a borrower. But shining a light on this dark corner certainly qualifies as progress.
The cases come out of bankruptcy courts in Delaware, Louisiana and New York, and each one shows how improper, undisclosed or questionable fees unfairly penalize borrowers already struggling with mortgage debt or bankruptcy.
Given the number of new borrowers falling daily into the foreclosure mire, dubious practices by servicers are beyond troubling. Foreclosure filings rose 57 percent in March over the same period in 2007, according to RealtyTrac, the real estate and foreclosure Web site. It also said that banks repossessed more than 50,000 homes last month, more than twice the amount of one year earlier.
If even one of those repossessions was owing to improper fees or practices, that would be one too many.
The case out of the Eastern District of Louisiana, overseen by Judge Elizabeth W. Magner, is especially depressing. It involves Dorothy Chase Stewart, an elderly borrower and widow whose original loan of $61,200 was serviced by Wells Fargo. Judge Magner cited "abusive imposition of unwarranted fees and charges," and improper calculation of escrow payments, among other things. She found Wells Fargo negligent and assessed damages, sanctions and legal fees of $27,350.
The heart of the case is that Wells Fargo failed to notify the borrower when it assessed fees or charges on her account. This deepened her default and placed her on a downward spiral that was hard to escape. And Wells Fargo's practice of not notifying borrowers that they were being charged fees "is not peculiar to loans involved in a bankruptcy," the court said.
During a 12-month period beginning in 2001, for example, Well Fargo assessed 13 late fees totaling $360.23 without telling Ms. Stewart or her late husband, whose name was on the loan before he died. Even though the terms of the mortgage required that Wells Fargo apply any funds it received from the Stewarts to principal and interest charges first, the late fees were deducted first. This meant that the Stewarts' mortgage payments were insufficient, making them fall further behind — and keeping them subject to more late fees.
Then there were the multiple inspection fees Wells Fargo charged the borrowers. Because its computer system automatically generates a request for property inspections when a borrower becomes delinquent — to make sure the property is being kept up — the $15 cost of the inspections piled up. The court noted that the total cost to the borrower for one missed $554.11 mortgage payment was $465.36 in late fees and property inspection charges.
From late 2000 and 2007, Wells Fargo inspected the property on average every 54 days, the court found. But the court also determined that inspections charged to Ms. Stewart had often been performed on other people's properties. Of the nine broker appraisals charged to Ms. Stewart from 2002 to 2007, two were said to have been conducted on the same September day in 2005 when Jefferson Parish, where the Stewart home was located, was under an evacuation order because of Hurricane Katrina.
The broker appraisals were conducted by a division of Wells Fargo that charged more than double its costs for them, the court found. It concluded that the charges were an undisclosed fee disguised as a third-party vendor cost and illegally imposed by Wells Fargo. The bank also levied substantial legal fees and failed to credit back to the borrower $1,800 that had been charged for an eviction action but that had been returned by the sheriff because it never occurred.
While Wells Fargo claimed that the borrower owed $35,036, the judge said the actual figure was $24,924.10. The judge ordered Wells Fargo to provide a complete loan history on every case pending with her court after April 13, 2007.
A Wells Fargo spokesman said the bank "strongly disagrees with many aspects of the recent bankruptcy rulings in New Orleans and plans to appeal these matters. Wells Fargo continuously works to enhance its bankruptcy procedures to comply with the requirements of the bankruptcy courts throughout the country."
The second illuminating case emerged in federal bankruptcy court in Delaware and involved a problem that lawyers representing troubled borrowers say they often encounter: fees levied after a borrower has satisfied all obligations under a Chapter 13 bankruptcy and the case is discharged.
Mortgage lenders argue that their contracts allow them to recover all the fees and costs they incur when a borrower files a Chapter 13 bankruptcy plan, even those not approved by the court and charged after a case is resolved. But borrowers contend that because such charges have not been approved, they should be disallowed.
Judge Brendan Linehan Shannon put forward this example: If a lender imposed $5,200 in charges on a borrower to cover weekly property inspections and the court disallowed $4,000 of it, lenders still contend that they have the right to try to collect fees after the case concluded that the court did not approve.
"This cannot be," the judge wrote. "If the court and the Chapter 13 Trustee fully administer a case through completion of a 60-month Chapter 13 plan, only to have the debtor promptly refile on account of accrued, undisclosed fees and charges on her mortgage, it could fairly be said that we have all been on a fool's errand for five years."
Finally, borrowers can be cheered by an opinion written this month by Cecilia G. Morris, bankruptcy judge in the Southern District of New York.
The case involved Christopher W. and Bobbi Ann Schuessler, borrowers who had $120,000 of equity in their Burlingham, N.Y., home when their bank, Chase Home Finance, a unit of JPMorgan Chase, moved to begin foreclosure proceedings. The couple had filed for personal bankruptcy protection, which automatically prevents any seizure of their home.
But the bank moved for a so-called relief from the bankruptcy stay, and claimed the couple had no equity.
The Schuesslers got into trouble because Chase had refused a mortgage payment they tried to make at a local branch. Testimony in the case revealed a Chase policy of accepting mortgage payments in branches from borrowers who are current on their loans but rejecting payments from borrowers operating under bankruptcy protection.
The Schuesslers did not know this. When Chase rejected their payment, they briefly fell behind on their mortgage, according to the court documents. Then Chase moved to begin foreclosure proceedings.
"Without informing debtors, Chase Home Finance makes it impossible for JPMorgan Chase Bank branches to accept any payments," Judge Morris wrote. "It appeared that Chase Home Finance intended to commence an unwarranted foreclosure action, due to 'arrears' resulting from Chase Home Finance’s handling of the case in its bankruptcy department, rather than any default of the debtors."
Court documents also state that Chase was unable to show that it had tried to communicate with the borrowers before it began efforts to seize their home. The judge concluded that the way Chase deals with bankruptcy debtors is an abuse of the process. She instructed Chase to pay the borrowers' legal fees.
Thomas Kelly, a Chase spokesman, conceded that the bank had made some mistakes in the Schuessler case, especially the fact that the branch teller had not advised the borrowers where to send their payment when it was rejected.
"Payments from customers in bankruptcy require special handling under bankruptcy law so tellers are requested to tell customers to mail in the payment or call the toll-free number on the back of the form," he said. "In light of the judge’s concerns we are reviewing our practices." He also said the bank had followed industry practice in moving to foreclose quickly "so we could meet the guidelines for servicing loans for investors."
"These cases clearly indicate that bankruptcy courts are no longer being fooled by the maze of fees, firms and flim-flams of the mortgage servicing industry," said O. Max Gardner III, a lawyer who represents borrowers in Shelby, N.C. "The servicers and their lawyers should recognize the clear and present danger of these decisions while they still have time to turn their ships around and do the right thing."
Copyright (c) 2008 The New York Times Company. All rights reserved.
Monday, April 14, 2008
Bankruptcy Code Section 503(b)(9)
Section 503(b)(9) was introduced to the Bankruptcy Code by BAPCPA and it provides that goods that are shipped and received by the Debtor within 20 days of the bankruptcy filing are deemed to be administrative claims. However, § 503(b)(9) is silent as to the timing of that payment. The introductory language to § 503 provides that “after notice and hearing,” a § 503(b)(9) claim may be allowed, therefor some commentators have indicated that Court approval may be required for the payment of an administrative claim. Other commentators have indicated that it’s unclear, and that in fact administrative claims may be paid by the Debtor without Court order.
Another issue raised in this area of the law regards reclamation letters. BAPCPA § 546(c) provides that a creditor may send a letter reclaiming goods shipped within 45 days of the bankruptcy filing. Generally, the goods are not returned by the Debtor to the vendor, however, the vendor would be given an administrative claim under § 503(b)(9) for the portion of the reclamation claim that was received by the Debtor within 20 days of the bankruptcy filing.
Another issue regarding reclamation demands or claims is that they may be impacted by DIP financing. Section 546(c) provides that reclamation claims are subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof and case law indicates that there is something called a “Priority Lien Defense,” which provides that a DIP lender or other secure lender would have a higher priority to be paid than a reclamation creditor, and therefore if there is no carve-out in the DIP order for reclamation claims, reclamation creditors would not be able to be paid during the pendency of the case or receive their goods back and they would be paid pursuant to a confirmed Chapter 11 plan if monies were available, i.e. what this means is that if the business is liquidated and there are not sufficient monies to pay secured creditors and reclamation creditors, then secured creditors would take priority over reclamation creditors.
In fact, the commentators indicate that the § 503(b)(9) administrative claim therefore may be more valuable to a creditor than the reclamation claim. In this area of the law, it’s extremely important for counsel to a creditor to (i) review the DIP order to determine to whether monies are provided to pay administrative creditors and the treatment of reclamation claimants and (ii) the liens of other secured creditors.
Another issue raised in this area of the law regards reclamation letters. BAPCPA § 546(c) provides that a creditor may send a letter reclaiming goods shipped within 45 days of the bankruptcy filing. Generally, the goods are not returned by the Debtor to the vendor, however, the vendor would be given an administrative claim under § 503(b)(9) for the portion of the reclamation claim that was received by the Debtor within 20 days of the bankruptcy filing.
Another issue regarding reclamation demands or claims is that they may be impacted by DIP financing. Section 546(c) provides that reclamation claims are subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof and case law indicates that there is something called a “Priority Lien Defense,” which provides that a DIP lender or other secure lender would have a higher priority to be paid than a reclamation creditor, and therefore if there is no carve-out in the DIP order for reclamation claims, reclamation creditors would not be able to be paid during the pendency of the case or receive their goods back and they would be paid pursuant to a confirmed Chapter 11 plan if monies were available, i.e. what this means is that if the business is liquidated and there are not sufficient monies to pay secured creditors and reclamation creditors, then secured creditors would take priority over reclamation creditors.
In fact, the commentators indicate that the § 503(b)(9) administrative claim therefore may be more valuable to a creditor than the reclamation claim. In this area of the law, it’s extremely important for counsel to a creditor to (i) review the DIP order to determine to whether monies are provided to pay administrative creditors and the treatment of reclamation claimants and (ii) the liens of other secured creditors.
Monday, April 07, 2008
More Consumers Are Behind on Their Loans
More Americans have fallen behind on consumer loans than at any time in nearly 16 years, as credit problems once concentrated in mortgages have spread into other forms of debt, according to the American Bankers Association.
In a quarterly study, the association said the percentage of loans at least 30 days past due rose to 2.65 percent in the fourth quarter, from 2.44 percent in the third quarter and 2.23 percent a year earlier.
The rate of delinquencies was the highest since a 2.75 percent rate in the first quarter of 1992.
"There’s no question that the economy is weakening beyond housing, resulting in the loss of household purchasing power," said John Lonski, chief economist at Moody’s Investors Service.
"Deterioration of household credit should continue through 2008, though the rate may moderate," he said. "If it intensifies, then the current recession may prove more severe than anticipated."
The association’s chief economist, James Chessen, attributed the jump in the delinquency rate largely to auto loans.
Late payments on "indirect" auto loans, which are made through dealerships, totaled 3.13 percent, the highest on record. Delinquencies on direct auto loans rose to 1.90 percent, a 2 ½-year high.
Credit and debit card delinquencies rose to 4.38 percent, from 4.18 percent in the third quarter, after four consecutive quarterly declines.
Delinquencies on home equity loans rose to a 2 ½-year high of 2.39 percent, and on home equity lines of credit delinquencies rose to 0.96 percent, matching a level last seen in the fourth quarter of 1997.
The association’s study covers more than 300 banks that extend a majority of outstanding consumer loans. It covers direct auto, indirect auto, home equity, home improvement, marine, mobile home, personal and recreational vehicle loans.
Copyright(c) 2008 Reuters. All rights reserved.
In a quarterly study, the association said the percentage of loans at least 30 days past due rose to 2.65 percent in the fourth quarter, from 2.44 percent in the third quarter and 2.23 percent a year earlier.
The rate of delinquencies was the highest since a 2.75 percent rate in the first quarter of 1992.
"There’s no question that the economy is weakening beyond housing, resulting in the loss of household purchasing power," said John Lonski, chief economist at Moody’s Investors Service.
"Deterioration of household credit should continue through 2008, though the rate may moderate," he said. "If it intensifies, then the current recession may prove more severe than anticipated."
The association’s chief economist, James Chessen, attributed the jump in the delinquency rate largely to auto loans.
Late payments on "indirect" auto loans, which are made through dealerships, totaled 3.13 percent, the highest on record. Delinquencies on direct auto loans rose to 1.90 percent, a 2 ½-year high.
Credit and debit card delinquencies rose to 4.38 percent, from 4.18 percent in the third quarter, after four consecutive quarterly declines.
Delinquencies on home equity loans rose to a 2 ½-year high of 2.39 percent, and on home equity lines of credit delinquencies rose to 0.96 percent, matching a level last seen in the fourth quarter of 1997.
The association’s study covers more than 300 banks that extend a majority of outstanding consumer loans. It covers direct auto, indirect auto, home equity, home improvement, marine, mobile home, personal and recreational vehicle loans.
Copyright(c) 2008 Reuters. All rights reserved.
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