By DUFF WILSON
More Americans filed for bankruptcy protection in March than during any month since the federal personal bankruptcy law was tightened in October 2005, a new report says, a result of high unemployment and the housing crash.
Federal courts reported over 158,000 bankruptcy filings in March, or 6,900 a day, a rise of 35 percent from February, according to a report to be released on Friday by Automated Access to Court Electronic Records, a data collection company known as Aacer. Filings were up 19 percent over March 2009. The previous record over the last five years was 133,000 in October.
“Even with the restrictive new law, we’re back up over where we were before the law changed,” Mike Bickford, president of Aacer, said in a phone interview Thursday from his headquarters in Oklahoma City. He faulted the stagnant economy, saying a surge in bankruptcies generally follows economic contraction by 6 to 18 months, and he pointed to March as a historically busy month for bankruptcy filings.
Other experts point out that filings invoking Chapter 7 of the bankruptcy code, a simple and inexpensive option, are rising faster than more complex Chapter 13 reorganization filings, under which consumers repay a portion of their debts so they can keep their homes, suggesting that more homeowners are simply walking away from underwater mortgages.
“Fewer people are trying to save their homes,” Katherine M. Porter, a University of Iowa law professor and bankruptcy expert, said in an interview by phone on Thursday. “They realize their payments are not affordable, and bankruptcy judges do not have the power to adjust the mortgages to make them more affordable.”
Statistics from the United States Trustee Program, the Justice Department office that oversees bankruptcy cases, show that Chapter 7 filings as a percentage of all bankruptcies have increased to about 73 percent in 2009 from about 62 percent in 2006-07. Of the 158,141 bankruptcy filings in March, 118,505, or 75 percent, were Chapter 7s and 38,241 were Chapter 13s, the Aacer report says.
“We think that means fewer and fewer families think they’re really going to save their homes,” Professor Porter said. “They don’t have any equity, so why try to keep up with their home payments?”
The nation’s high unemployment rate is one more reason for people to choose Chapter 7, Professor Porter said. “To file Chapter 13, you need ongoing income, and to the extent we have more people who are unemployed, they can’t use Chapter 13 because they don’t have that income to pay into the plan,” she said.
Finally, Professor Porter said, March is the high season for bankruptcy filings because many people in financial distress get a tax refund check that they can use to pay the $1,500 to $3,500 that a bankruptcy lawyer charges.
“People use their tax refunds to pay their attorney fees,” she said.
Copyright 2010 The New York Times Company. All rights reserved.
Friday, April 02, 2010
Thursday, April 01, 2010
Treatment of 401(k) accounts in bankruptcy
In these difficult economic times, many clients have contacted us regarding the treatment of their 401(k)s and 401(k) loan repayments in a chapter 7 bankruptcy filing. The first rule is that in bankruptcy, a 401(k) is exempt from a bankruptcy estate under § 282(2)(e) of the New York State Debtor and Creditor law and therefore creditors cannot attach the proceeds of a 401(k) account. Therefore, if it all possible, a debtor should not borrow from their 401(k) to pay creditors.
But if someone does borrow money from their 401(k), how do these loan repayments affect a personal bankruptcy filing?
1. In order to qualify for Chapter 7 personal bankruptcy, there are two tests that need to be met–the first is the "Disposable Income Test" and the second is the "Means Test".
2. The Disposable Income Test takes an individual's after-tax monthly income and subtracts their ordinary and necessary living and business expenses. If an individual has positive disposable income (or their after-tax income exceeds their living and business expenses), then they do not qualify for chapter 7 bankruptcy and must file for chapter 13 bankruptcy or not file at all.
The question is, are 401(k) loan repayments eligible to be a deduction for the disposable income test? In this jurisdiction (the Southern District of New York), the standard appears to be that if the 401(k) loan repayments are required by an employer or the entity that administers the 401(k) pension plan, those loans would be an allowed deductible expense.
3. Are 401(k) loan payments deductible for purposes of the means test? The answer appears to be no, based on several cases, including Egebjerg v. Anderson (In re Egebjerg), 574 F.3d 1045 (9th Cir. 2009) and In re Koch, 408 B.R. 539 (Bankr. S.D.Fla. 2009). In both of these cases, the courts concluded that 401(k) loan repayments do not qualify as a § 707(b)(2)(A)(ii)(I) other necessary expense-involuntary deductions (which is at line 26 of the form) for purposes of the means test.
Based on the above, it would be best for clients not to borrow against their 401(k) if they are contemplating filing for bankruptcy. Even if an individual borrows from a 401(k) plan, they may still be eligible to file for personal bankruptcy based on their overall income, expenses, assets and liabilities, although these calculations need to be done by an experienced bankruptcy attorney.
Anyone with questions regarding personal bankruptcy should contact Jim Shenwick.
But if someone does borrow money from their 401(k), how do these loan repayments affect a personal bankruptcy filing?
1. In order to qualify for Chapter 7 personal bankruptcy, there are two tests that need to be met–the first is the "Disposable Income Test" and the second is the "Means Test".
2. The Disposable Income Test takes an individual's after-tax monthly income and subtracts their ordinary and necessary living and business expenses. If an individual has positive disposable income (or their after-tax income exceeds their living and business expenses), then they do not qualify for chapter 7 bankruptcy and must file for chapter 13 bankruptcy or not file at all.
The question is, are 401(k) loan repayments eligible to be a deduction for the disposable income test? In this jurisdiction (the Southern District of New York), the standard appears to be that if the 401(k) loan repayments are required by an employer or the entity that administers the 401(k) pension plan, those loans would be an allowed deductible expense.
3. Are 401(k) loan payments deductible for purposes of the means test? The answer appears to be no, based on several cases, including Egebjerg v. Anderson (In re Egebjerg), 574 F.3d 1045 (9th Cir. 2009) and In re Koch, 408 B.R. 539 (Bankr. S.D.Fla. 2009). In both of these cases, the courts concluded that 401(k) loan repayments do not qualify as a § 707(b)(2)(A)(ii)(I) other necessary expense-involuntary deductions (which is at line 26 of the form) for purposes of the means test.
Based on the above, it would be best for clients not to borrow against their 401(k) if they are contemplating filing for bankruptcy. Even if an individual borrows from a 401(k) plan, they may still be eligible to file for personal bankruptcy based on their overall income, expenses, assets and liabilities, although these calculations need to be done by an experienced bankruptcy attorney.
Anyone with questions regarding personal bankruptcy should contact Jim Shenwick.
Wednesday, March 24, 2010
NYT: Bankruptcy Ruling in Student Loan Case
By ADAM LIPTAK
WASHINGTON — The Supreme Court on Tuesday made it easier for people who say they cannot repay their student loans to receive bankruptcy protection. But the case arose in an unusual way, and the ruling is unlikely to have a broad impact.
The case involved Francisco J. Espinosa, an airline ramp agent who took out four student loans in 1988 and 1989 for a total of $13,250 to attend a trade school in Arizona. Four years later, he filed for protection under the bankruptcy laws, proposing to repay the principal over five years without interest.
Neither Mr. Espinosa nor the judge who approved his proposal followed the procedures contemplated by the law. Chapter 13 of the Bankruptcy Code allows student loans like Mr. Espinosa’s to be discharged only if a bankruptcy judge finds that repayment would impose an “undue hardship.” But the judge in his case made no such finding.
Nor did Mr. Espinosa notify his lender in the way required by law, which calls for the service of a summons and complaint like those in a civil lawsuit.
But the lender did receive notices from the court about Mr. Espinosa’s proposal and the court’s approval of it. Although the loan was the only debt Mr. Espinosa listed in his proposal, the lender did not object or appeal.
Mr. Espinosa finished paying the principal back in 1997, and the bankruptcy court then discharged the interest he would have owed. Years later, the lender tried to re-open the case.
The Supreme Court’s decision on Tuesday rejected positions advanced by the federal government, more than 30 states and the student loan industry. The lender in Mr. Espinosa’s case, United Student Aid Funds, warned in a brief that a decision in his favor would “open the floodgates” to allowing others to avoid paying their debts, including “taxes, domestic support obligations, drunk driving personal injury and death liabilities, and criminal fines and restitution.”
But the court, in a unanimous decision by Justice Clarence Thomas, resolved the case on a narrow ground. It was undisputed, Justice Thomas wrote, that there had been legal misfires along the way in Mr. Espinosa’s case. The issue before the court, he said, was whether the lender had waited too long to object to them.
“The bankruptcy court’s failure to find undue hardship before confirming Espinosa’s plan was a legal error,” Justice Thomas wrote in the case, United Student Aid Funds v. Espinosa, No. 08-1134. “But the order remains enforceable and binding on United because United had notice of the error and failed to object or timely appeal.”
The rules allowing cases to be re-opened in extraordinary circumstances did not apply here, Justice Thomas wrote, as they do not “provide a license for litigants to sleep on their rights.”
Copyright 2010 The New York Times Company. All rights reserved.
WASHINGTON — The Supreme Court on Tuesday made it easier for people who say they cannot repay their student loans to receive bankruptcy protection. But the case arose in an unusual way, and the ruling is unlikely to have a broad impact.
The case involved Francisco J. Espinosa, an airline ramp agent who took out four student loans in 1988 and 1989 for a total of $13,250 to attend a trade school in Arizona. Four years later, he filed for protection under the bankruptcy laws, proposing to repay the principal over five years without interest.
Neither Mr. Espinosa nor the judge who approved his proposal followed the procedures contemplated by the law. Chapter 13 of the Bankruptcy Code allows student loans like Mr. Espinosa’s to be discharged only if a bankruptcy judge finds that repayment would impose an “undue hardship.” But the judge in his case made no such finding.
Nor did Mr. Espinosa notify his lender in the way required by law, which calls for the service of a summons and complaint like those in a civil lawsuit.
But the lender did receive notices from the court about Mr. Espinosa’s proposal and the court’s approval of it. Although the loan was the only debt Mr. Espinosa listed in his proposal, the lender did not object or appeal.
Mr. Espinosa finished paying the principal back in 1997, and the bankruptcy court then discharged the interest he would have owed. Years later, the lender tried to re-open the case.
The Supreme Court’s decision on Tuesday rejected positions advanced by the federal government, more than 30 states and the student loan industry. The lender in Mr. Espinosa’s case, United Student Aid Funds, warned in a brief that a decision in his favor would “open the floodgates” to allowing others to avoid paying their debts, including “taxes, domestic support obligations, drunk driving personal injury and death liabilities, and criminal fines and restitution.”
But the court, in a unanimous decision by Justice Clarence Thomas, resolved the case on a narrow ground. It was undisputed, Justice Thomas wrote, that there had been legal misfires along the way in Mr. Espinosa’s case. The issue before the court, he said, was whether the lender had waited too long to object to them.
“The bankruptcy court’s failure to find undue hardship before confirming Espinosa’s plan was a legal error,” Justice Thomas wrote in the case, United Student Aid Funds v. Espinosa, No. 08-1134. “But the order remains enforceable and binding on United because United had notice of the error and failed to object or timely appeal.”
The rules allowing cases to be re-opened in extraordinary circumstances did not apply here, Justice Thomas wrote, as they do not “provide a license for litigants to sleep on their rights.”
Copyright 2010 The New York Times Company. All rights reserved.
Monday, March 01, 2010
Business bankruptcies and the WARN Act
Despite some mildly positive jobs numbers for January, we're still getting calls from many business owners who are considering bankruptcy here at Shenwick & Associates. In the past, we've discussed closing down a business. But there's another consideration larger companies need to take into account-the WARN (Worker Adjustment and Retraining) Act, which imposes obligations upon certain employers to provide terminated employees with a minimum of 60 days prior notice of facilities closings and layoffs under certain circumstances.
Only employers that have 100 or more employees are covered under the WARN Act. One of those businesses covered by the WARN Act was electronics superstore chain Circuit City, which filed for Chapter 11 bankruptcy on November 10, 2008, eight days after announcing a mass layoff. The employees were actually terminated on December 31, 2008, after the chain finished their going out of business sales.
One of the terminated employees filed a class action adversary proceeding (bankruptcy litigation) against the Debtor, claiming that a WARN Act claim arose on the date of termination, which would be a post-petition claim. However, the debtor asserted that a WARN Act claim arises on the date that an employer fails to give the required statutory notice of a covered employee's pending termination, which in this case would be a pre-petition claim.
The U.S. Bankruptcy Court for the Eastern District of Virginia agreed with the debtor, dismissing the adversary proceeding and holding that under the "conduct test," the claim arose when the debtor ordered the mass layoff. Therefore, the appropriate venue for the terminated workers' claims would be through the filing of claims in the bankruptcy case, not in an adversary proceeding.
For more information about the WARN Act and business bankruptcy questions, please contact Jim Shenwick.
Only employers that have 100 or more employees are covered under the WARN Act. One of those businesses covered by the WARN Act was electronics superstore chain Circuit City, which filed for Chapter 11 bankruptcy on November 10, 2008, eight days after announcing a mass layoff. The employees were actually terminated on December 31, 2008, after the chain finished their going out of business sales.
One of the terminated employees filed a class action adversary proceeding (bankruptcy litigation) against the Debtor, claiming that a WARN Act claim arose on the date of termination, which would be a post-petition claim. However, the debtor asserted that a WARN Act claim arises on the date that an employer fails to give the required statutory notice of a covered employee's pending termination, which in this case would be a pre-petition claim.
The U.S. Bankruptcy Court for the Eastern District of Virginia agreed with the debtor, dismissing the adversary proceeding and holding that under the "conduct test," the claim arose when the debtor ordered the mass layoff. Therefore, the appropriate venue for the terminated workers' claims would be through the filing of claims in the bankruptcy case, not in an adversary proceeding.
For more information about the WARN Act and business bankruptcy questions, please contact Jim Shenwick.
Monday, January 25, 2010
NYT: Underwater, But Will They Leave Pool?
By RICHARD H. THALER
MUCH has been said about the high rate of home foreclosures, but the most interesting question may be this: Why is the mortgage default rate so low?
After all, millions of American homeowners are “underwater,” meaning that they owe more on their mortgages than their homes are worth. In Nevada, nearly two-thirds of homeowners are in this category. Yet most of them are dutifully continuing to pay their mortgages, despite substantial financial incentives for walking away from them.
A family that financed the entire purchase of a $600,000 home in 2006 could now find itself still owing most of that mortgage, even though the home is now worth only $300,000. The family could rent a similar home for much less than its monthly mortgage payment, saving thousands of dollars a year and hundreds of thousands over a decade.
Some homeowners may keep paying because they think it’s immoral to default. This view has been reinforced by government officials like former Treasury Secretary Henry M. Paulson Jr., who while in office said that anyone who walked away from a mortgage would be “simply a speculator — and one who is not honoring his obligation.” (The irony of a former investment banker denouncing speculation seems to have been lost on him.)
But does this really come down to a question of morality?
A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a “norm asymmetry.” In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It’s as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.
That norm might have been appropriate when the lender was the local banker. More commonly these days, however, the loan was initiated by an aggressive mortgage broker who maximized his fees at the expense of the borrower’s costs, while the debt was packaged and sold to investors who bought mortgage-backed securities in the hope of earning high returns, using models that predicted possible default rates.
The morality argument is especially weak in a state like California or Arizona, where mortgages are so-called nonrecourse loans. That means the mortgage is secured by the home itself; in a default, the lender has no claim on a borrower’s other possessions. Nonrecourse mortgages may be viewed as financial transactions in which the borrower has the explicit option of giving the lender the keys to the house and walking away. Under these circumstances, deciding whether to default might be no more controversial than deciding whether to claim insurance after your house burns down.
In fact, borrowers in nonrecourse states pay extra for the right to default without recourse. In a report prepared for the Department of Housing and Urban Development, Susan Woodward, an economist, estimated that home buyers in such states paid an extra $800 in closing costs for each $100,000 they borrowed. These fees are not made explicit to the borrower, but if they were, more people might be willing to default, figuring that they had paid for the right to do so.
Morality aside, there are other factors deterring “strategic defaults,” whether in recourse or nonrecourse states. These include the economic and emotional costs of giving up one’s home and moving, the perceived social stigma of defaulting, and a serious hit to a borrower’s credit rating. Still, if they added up these costs, many households might find them to be far less than the cost of paying off an underwater mortgage.
An important implication is that we could be facing another wave of foreclosures, spurred less by spells of unemployment and more by strategic thinking. Research shows that bankruptcies and foreclosures are “contagious.” People are less likely to think it’s immoral to walk away from their home if they know others who have done so. And if enough people do it, the stigma begins to erode.
A spurt of strategic defaults in a neighborhood might also reduce some other psychic costs. For example, defaulting is more attractive if I can rent a nearby house that is much like mine (whose owner has also defaulted) without taking my children away from their friends and their school.
So far, lenders have been reluctant to renegotiate mortgages, and government programs to stimulate renegotiation have not gained much traction.
Eric Posner, a law professor, and Luigi Zingales, an economist, both from the University of Chicago, have made an interesting suggestion: Any homeowner whose mortgage is underwater and who lives in a ZIP code where home prices have fallen at least 20 percent should be eligible for a loan modification. The bank would be required to reduce the mortgage by the average price reduction of homes in the neighborhood. In return, it would get 50 percent of the average gain in neighborhood prices — if there is one — when the house is eventually sold.
Because their homes would no longer be underwater, many people would no longer have a reason to default. And they would be motivated to maintain their homes because, if they later sold for more than the average price increase, they would keep all the extra profit.
Banks are unlikely to endorse this if they think people will keep paying off their mortgages. But if a new wave of foreclosures begins, the banks, too, would be better off under this plan. Rather than getting only the house’s foreclosure value, they would also get part of the eventual upside when the owner voluntarily sold the house.
This plan, which would require Congressional action, would not cost the government anything. It may not be perfect, but something like it may be necessary to head off a tsunami of strategic defaults.
Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago.
Copyright 2010 The New York Times Company. All rights reserved.
MUCH has been said about the high rate of home foreclosures, but the most interesting question may be this: Why is the mortgage default rate so low?
After all, millions of American homeowners are “underwater,” meaning that they owe more on their mortgages than their homes are worth. In Nevada, nearly two-thirds of homeowners are in this category. Yet most of them are dutifully continuing to pay their mortgages, despite substantial financial incentives for walking away from them.
A family that financed the entire purchase of a $600,000 home in 2006 could now find itself still owing most of that mortgage, even though the home is now worth only $300,000. The family could rent a similar home for much less than its monthly mortgage payment, saving thousands of dollars a year and hundreds of thousands over a decade.
Some homeowners may keep paying because they think it’s immoral to default. This view has been reinforced by government officials like former Treasury Secretary Henry M. Paulson Jr., who while in office said that anyone who walked away from a mortgage would be “simply a speculator — and one who is not honoring his obligation.” (The irony of a former investment banker denouncing speculation seems to have been lost on him.)
But does this really come down to a question of morality?
A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a “norm asymmetry.” In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It’s as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.
That norm might have been appropriate when the lender was the local banker. More commonly these days, however, the loan was initiated by an aggressive mortgage broker who maximized his fees at the expense of the borrower’s costs, while the debt was packaged and sold to investors who bought mortgage-backed securities in the hope of earning high returns, using models that predicted possible default rates.
The morality argument is especially weak in a state like California or Arizona, where mortgages are so-called nonrecourse loans. That means the mortgage is secured by the home itself; in a default, the lender has no claim on a borrower’s other possessions. Nonrecourse mortgages may be viewed as financial transactions in which the borrower has the explicit option of giving the lender the keys to the house and walking away. Under these circumstances, deciding whether to default might be no more controversial than deciding whether to claim insurance after your house burns down.
In fact, borrowers in nonrecourse states pay extra for the right to default without recourse. In a report prepared for the Department of Housing and Urban Development, Susan Woodward, an economist, estimated that home buyers in such states paid an extra $800 in closing costs for each $100,000 they borrowed. These fees are not made explicit to the borrower, but if they were, more people might be willing to default, figuring that they had paid for the right to do so.
Morality aside, there are other factors deterring “strategic defaults,” whether in recourse or nonrecourse states. These include the economic and emotional costs of giving up one’s home and moving, the perceived social stigma of defaulting, and a serious hit to a borrower’s credit rating. Still, if they added up these costs, many households might find them to be far less than the cost of paying off an underwater mortgage.
An important implication is that we could be facing another wave of foreclosures, spurred less by spells of unemployment and more by strategic thinking. Research shows that bankruptcies and foreclosures are “contagious.” People are less likely to think it’s immoral to walk away from their home if they know others who have done so. And if enough people do it, the stigma begins to erode.
A spurt of strategic defaults in a neighborhood might also reduce some other psychic costs. For example, defaulting is more attractive if I can rent a nearby house that is much like mine (whose owner has also defaulted) without taking my children away from their friends and their school.
So far, lenders have been reluctant to renegotiate mortgages, and government programs to stimulate renegotiation have not gained much traction.
Eric Posner, a law professor, and Luigi Zingales, an economist, both from the University of Chicago, have made an interesting suggestion: Any homeowner whose mortgage is underwater and who lives in a ZIP code where home prices have fallen at least 20 percent should be eligible for a loan modification. The bank would be required to reduce the mortgage by the average price reduction of homes in the neighborhood. In return, it would get 50 percent of the average gain in neighborhood prices — if there is one — when the house is eventually sold.
Because their homes would no longer be underwater, many people would no longer have a reason to default. And they would be motivated to maintain their homes because, if they later sold for more than the average price increase, they would keep all the extra profit.
Banks are unlikely to endorse this if they think people will keep paying off their mortgages. But if a new wave of foreclosures begins, the banks, too, would be better off under this plan. Rather than getting only the house’s foreclosure value, they would also get part of the eventual upside when the owner voluntarily sold the house.
This plan, which would require Congressional action, would not cost the government anything. It may not be perfect, but something like it may be necessary to head off a tsunami of strategic defaults.
Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago.
Copyright 2010 The New York Times Company. All rights reserved.
Friday, January 22, 2010
NYT: Basking In Islands of Legalisms
By FLOYD NORRIS
The Cook Islands have a smaller population — about 20,000 — than one apartment complex in Manhattan, and an economy with little to offer except tourism and pearl exports. The country contracts out its national defense to New Zealand, which is four hours away by plane.
But sand and sun are not the attractions for some Americans who have sent their money to the Cook Islands.
Under Cook Islands law, foreign court orders are generally disregarded, which is helpful for someone trying to keep assets away from creditors.
In fact, getting an American court order can make it harder to get money out of the Cook Islands. If someone who stashed funds in a Cook Islands trust asks for the money back because a court ordered him to do so, Cook Islands law says that person is acting under duress, and the local trustee can refuse to return the money.
Over the years, a number of less-than-upstanding Americans have found the islands attractive for that reason, among them former corporate raiders, penny stock promoters and telemarketers who defrauded customers.
The latest to use that tactic is the wife of Jamie L. Solow, a former broker in Florida who evidently has a silver tongue and certainly has a lot of angry former customers. In one year, he earned more than $3 million in commissions selling a form of collateralized debt obligations known as “inverse floaters” to individual investors who claim he never warned them of the risks.
The investments proved to be disastrous, and the Securities and Exchange Commission persuaded a jury in West Palm Beach, Fla., that he had committed securities fraud.
Now a federal judge has ordered Mr. Solow to go to prison on Monday for civil contempt for failing to come up with a large part of the $6 million he was ordered to pay in disgorgement, interest and penalties.
Mr. Solow claimed he had virtually no assets, since his wife owned everything in the family and had put most of it in a Cook Islands trust. A couple of months after the jury verdict, but before the final judgment was issued, she put an undisclosed amount of cash and jewelry in a safe deposit box in a Swiss bank in Zurich.
Mr. Solow did sell all the assets he acknowledged owning — an old pickup truck and some office furniture — and sent $2,639 to the court. The family Rolls Royce was also sold, for $205,000, but the Solows say it was actually owned by Mrs. Solow, even though her husband had put up the money to buy it and signed the sale documents.
This week, Mr. Solow asked that his incarceration be delayed, on the grounds that he and his wife were now willing to ask the Cook Islands trustee to return the money. They have not actually made that request, and in the past, Cook Islands trustees have refused to honor such requests. In ordering Mr. Solow to prison, Judge Donald M. Middlebrooks, of the United States District Court for the Southern District of Florida, said his inability to pay was self-created, and thus no excuse.
Nor was the judge impressed by Mr. Solow’s contention that the S.E.C. itself was to blame for his inability to pay, since it had won an order barring him from the securities industry, and thus prevented him from working.
“Mr. Solow’s ‘chosen profession’ consisted of committing fraud against his investors,” the judge wrote. “That being the case, an opportunity to do different work, outside his ‘chosen field,’ may better serve his ability to satisfy the disgorgement order.”
In setting up the trust, Mr. Solow’s wife, Gina, followed a blueprint laid out in a 2005 article in an accounting publication, written by Howard D. Rosen, a lawyer in Florida whom she hired a few days after the jury verdict in early 2008.
The Solows own a waterfront home in Hillsboro Beach, Fla., which they view as their permanent residence even though they have not lived in it for several years because of hurricane damage. “It has been condemned due to the roof falling in,” Mr. Solow’s attorney, Carl F. Schoeppl, said Thursday, adding that he did not know how much repairs would cost.
The house was already encumbered by $2.4 million in mortgages, but a Cook Islands bank lent $5.2 million more secured by the house. The money from that was immediately placed in a Cook Islands trust to benefit only Mrs. Solow.
The judge noted that the mortgage could not have been taken out without Mr. Solow’s consent.
The house is now listed for sale for $6.1 million, far less than the combined mortgages, but the bank in the Cook Islands was taking no real risk. The proceeds from the mortgage were deposited in the Cook Islands, and the interest earned is used to pay the interest on the mortgage.
Mrs. Solow also took out a $1.2 million mortgage on the Fort Lauderdale condominium she owns, and in which the couple live.
Mr. Rosen, the lawyer who set up the trust, said in the article that it was a challenge to protect real estate from American courts, since the property obviously could not be moved overseas.
“The only effective method available to protect an immovable asset,” he wrote, “is to make the asset unattractive to a creditor by removing its value — make the asset not worth going after. (Think about it: Would you spend your time and money to sue someone if all they had was a piece of real property worth $1 million encumbered by a $950,000 mortgage?) This technique is implemented by pledging the asset as collateral for a loan and by then protecting the loan proceeds with the client’s other liquid assets in the offshore trust.”
In a telephone interview, Mr. Rosen, who had testified in the case on behalf of Mr. Solow, told me that Judge Middlebrooks “simply does not understand the laws of the United States” and voiced confidence that an appeals court would overturn the ruling.
In an e-mail message, he compared the use of an offshore trust to a company’s decision to incorporate in Delaware rather than some other state. “Establishing a trust in the Cook Islands or other suitable asset protection jurisdiction in order to gain a protective advantage is no different,” he wrote. “It is a choice-of-law matter.”
Of course, Delaware law does not say companies can ignore judgments issued by judges in other states.
Even if Judge Middlebrooks’s order is upheld on appeal, the S.E.C. could be in for a long battle to get the money. More than a decade ago, the Federal Trade Commission persuaded a federal court to jail a married couple, Michael and Denyse Anderson, for civil contempt after they violated a court order to return funds to the United States that had been put into a Cook Islands trust. The commission said the two were involved in a telemarketing Ponzi scheme.
After several months, Mr. and Mrs. Anderson agreed to direct the trustee to release the money, and were released from jail. But the trustee refused, citing the United States court order as a form of duress, and the Cook Island courts upheld that decision.
Eventually, the F.T.C. was able to recover most of the money, which went to a fund to repay victims of the fraud, because the trustee agreed to settle. That happened after the commission threatened to file contempt charges against ANZ, the Australian bank in which the Cook Islands bank had deposited the money. ANZ, which has offices in the United States, evidently persuaded the trustee to agree to a settlement.
Promoters of Cook Island trusts learned from that case, and now make sure to use banks that have no American operations. It seems likely that a request from Mrs. Solow now would be similarly refused by the trustee.
It is worth noting that nearly all of the asset-moving activities in this case came after the S.E.C. notified Mr. Solow that it intended to file suit, and many of them came after the jury rendered its verdict. Perhaps it could have been avoided if there had been an asset protection freeze in place.
The S.E.C. says it has been seeking more such freezes. Mary L. Schapiro, the commission’s chairwoman, said last week that the commission “sought 82 asset freezes to preserve assets for the benefit of investors” in fiscal year 2009, “an increase of 78 percent compared to 46” in the previous year.
But it did not seek such an order in the Solow case, and probably would have had a difficult time getting one. It most often does so in insider trading cases, where it is preserving the apparently ill-gotten gains from being sent abroad, and in cases where it can persuade a judge that there is reason to fear the defendant would move assets and that it is highly likely the S.E.C. will win the case.
The S.E.C. has now filed a follow-up case against Mrs. Solow, who was not a defendant in the original case, and is seeking to garnish any bank accounts she has. But the money is long gone.
Copyright 2010 The New York Times Company. all rights reserved.
The Cook Islands have a smaller population — about 20,000 — than one apartment complex in Manhattan, and an economy with little to offer except tourism and pearl exports. The country contracts out its national defense to New Zealand, which is four hours away by plane.
But sand and sun are not the attractions for some Americans who have sent their money to the Cook Islands.
Under Cook Islands law, foreign court orders are generally disregarded, which is helpful for someone trying to keep assets away from creditors.
In fact, getting an American court order can make it harder to get money out of the Cook Islands. If someone who stashed funds in a Cook Islands trust asks for the money back because a court ordered him to do so, Cook Islands law says that person is acting under duress, and the local trustee can refuse to return the money.
Over the years, a number of less-than-upstanding Americans have found the islands attractive for that reason, among them former corporate raiders, penny stock promoters and telemarketers who defrauded customers.
The latest to use that tactic is the wife of Jamie L. Solow, a former broker in Florida who evidently has a silver tongue and certainly has a lot of angry former customers. In one year, he earned more than $3 million in commissions selling a form of collateralized debt obligations known as “inverse floaters” to individual investors who claim he never warned them of the risks.
The investments proved to be disastrous, and the Securities and Exchange Commission persuaded a jury in West Palm Beach, Fla., that he had committed securities fraud.
Now a federal judge has ordered Mr. Solow to go to prison on Monday for civil contempt for failing to come up with a large part of the $6 million he was ordered to pay in disgorgement, interest and penalties.
Mr. Solow claimed he had virtually no assets, since his wife owned everything in the family and had put most of it in a Cook Islands trust. A couple of months after the jury verdict, but before the final judgment was issued, she put an undisclosed amount of cash and jewelry in a safe deposit box in a Swiss bank in Zurich.
Mr. Solow did sell all the assets he acknowledged owning — an old pickup truck and some office furniture — and sent $2,639 to the court. The family Rolls Royce was also sold, for $205,000, but the Solows say it was actually owned by Mrs. Solow, even though her husband had put up the money to buy it and signed the sale documents.
This week, Mr. Solow asked that his incarceration be delayed, on the grounds that he and his wife were now willing to ask the Cook Islands trustee to return the money. They have not actually made that request, and in the past, Cook Islands trustees have refused to honor such requests. In ordering Mr. Solow to prison, Judge Donald M. Middlebrooks, of the United States District Court for the Southern District of Florida, said his inability to pay was self-created, and thus no excuse.
Nor was the judge impressed by Mr. Solow’s contention that the S.E.C. itself was to blame for his inability to pay, since it had won an order barring him from the securities industry, and thus prevented him from working.
“Mr. Solow’s ‘chosen profession’ consisted of committing fraud against his investors,” the judge wrote. “That being the case, an opportunity to do different work, outside his ‘chosen field,’ may better serve his ability to satisfy the disgorgement order.”
In setting up the trust, Mr. Solow’s wife, Gina, followed a blueprint laid out in a 2005 article in an accounting publication, written by Howard D. Rosen, a lawyer in Florida whom she hired a few days after the jury verdict in early 2008.
The Solows own a waterfront home in Hillsboro Beach, Fla., which they view as their permanent residence even though they have not lived in it for several years because of hurricane damage. “It has been condemned due to the roof falling in,” Mr. Solow’s attorney, Carl F. Schoeppl, said Thursday, adding that he did not know how much repairs would cost.
The house was already encumbered by $2.4 million in mortgages, but a Cook Islands bank lent $5.2 million more secured by the house. The money from that was immediately placed in a Cook Islands trust to benefit only Mrs. Solow.
The judge noted that the mortgage could not have been taken out without Mr. Solow’s consent.
The house is now listed for sale for $6.1 million, far less than the combined mortgages, but the bank in the Cook Islands was taking no real risk. The proceeds from the mortgage were deposited in the Cook Islands, and the interest earned is used to pay the interest on the mortgage.
Mrs. Solow also took out a $1.2 million mortgage on the Fort Lauderdale condominium she owns, and in which the couple live.
Mr. Rosen, the lawyer who set up the trust, said in the article that it was a challenge to protect real estate from American courts, since the property obviously could not be moved overseas.
“The only effective method available to protect an immovable asset,” he wrote, “is to make the asset unattractive to a creditor by removing its value — make the asset not worth going after. (Think about it: Would you spend your time and money to sue someone if all they had was a piece of real property worth $1 million encumbered by a $950,000 mortgage?) This technique is implemented by pledging the asset as collateral for a loan and by then protecting the loan proceeds with the client’s other liquid assets in the offshore trust.”
In a telephone interview, Mr. Rosen, who had testified in the case on behalf of Mr. Solow, told me that Judge Middlebrooks “simply does not understand the laws of the United States” and voiced confidence that an appeals court would overturn the ruling.
In an e-mail message, he compared the use of an offshore trust to a company’s decision to incorporate in Delaware rather than some other state. “Establishing a trust in the Cook Islands or other suitable asset protection jurisdiction in order to gain a protective advantage is no different,” he wrote. “It is a choice-of-law matter.”
Of course, Delaware law does not say companies can ignore judgments issued by judges in other states.
Even if Judge Middlebrooks’s order is upheld on appeal, the S.E.C. could be in for a long battle to get the money. More than a decade ago, the Federal Trade Commission persuaded a federal court to jail a married couple, Michael and Denyse Anderson, for civil contempt after they violated a court order to return funds to the United States that had been put into a Cook Islands trust. The commission said the two were involved in a telemarketing Ponzi scheme.
After several months, Mr. and Mrs. Anderson agreed to direct the trustee to release the money, and were released from jail. But the trustee refused, citing the United States court order as a form of duress, and the Cook Island courts upheld that decision.
Eventually, the F.T.C. was able to recover most of the money, which went to a fund to repay victims of the fraud, because the trustee agreed to settle. That happened after the commission threatened to file contempt charges against ANZ, the Australian bank in which the Cook Islands bank had deposited the money. ANZ, which has offices in the United States, evidently persuaded the trustee to agree to a settlement.
Promoters of Cook Island trusts learned from that case, and now make sure to use banks that have no American operations. It seems likely that a request from Mrs. Solow now would be similarly refused by the trustee.
It is worth noting that nearly all of the asset-moving activities in this case came after the S.E.C. notified Mr. Solow that it intended to file suit, and many of them came after the jury rendered its verdict. Perhaps it could have been avoided if there had been an asset protection freeze in place.
The S.E.C. says it has been seeking more such freezes. Mary L. Schapiro, the commission’s chairwoman, said last week that the commission “sought 82 asset freezes to preserve assets for the benefit of investors” in fiscal year 2009, “an increase of 78 percent compared to 46” in the previous year.
But it did not seek such an order in the Solow case, and probably would have had a difficult time getting one. It most often does so in insider trading cases, where it is preserving the apparently ill-gotten gains from being sent abroad, and in cases where it can persuade a judge that there is reason to fear the defendant would move assets and that it is highly likely the S.E.C. will win the case.
The S.E.C. has now filed a follow-up case against Mrs. Solow, who was not a defendant in the original case, and is seeking to garnish any bank accounts she has. But the money is long gone.
Copyright 2010 The New York Times Company. all rights reserved.
Tuesday, January 05, 2010
NYT: U.S. Loan Effort Is Seen as Adding to Housing Woes
By PETER S. GOODMAN
The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.
Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.
As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.
Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.
“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”
Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.
“Then the carpenters can go back to work,” Mr. Katari said. “The roofers can go back to work, and we start building housing again. If this drips out over the next few years, that whole sector of the economy isn’t going to recover.”
The Treasury Department publicly maintains that its program is on track. “The program is meeting its intended goal of providing immediate relief to homeowners across the country,” a department spokeswoman, Meg Reilly, wrote in an e-mail message.
But behind the scenes, Treasury officials appear to have concluded that growing numbers of delinquent borrowers simply lack enough income to afford their homes and must be eased out.
In late November, with scant public disclosure, the Treasury Department started the Foreclosure Alternatives Program, through which it will encourage arrangements that result in distressed borrowers surrendering their homes. The program will pay incentives to mortgage companies that allow homeowners to sell properties for less than they owe on their mortgages — short sales, in real estate parlance. The government will also pay incentives to mortgage companies that allow delinquent borrowers to hand over their deeds in lieu of foreclosing.
Ms. Reilly, the Treasury spokeswoman, said the foreclosure alternatives program did not represent a new policy. “We have said from the start that modifications will not be the solution for all homeowners and will not solve the housing crisis alone,” Ms. Reilly said by e-mail. “This has always been a multi-pronged effort.”
Whatever the merits of its plans, the administration has clearly failed to reverse the foreclosure crisis.
In 2008, more than 1.7 million homes were “lost” through foreclosures, short sales or deeds in lieu of foreclosure, according to Moody’s Economy.com. Last year, more than two million homes were lost, and Economy.com expects that this year’s number will swell to 2.4 million.
“I don’t think there’s any way for Treasury to tweak their plan, or to cajole, pressure or entice servicers to do more to address the crisis,” said Mark Zandi, chief economist at Moody’s Economy.com. “For some folks, it is doing more harm than good, because ultimately, at the end of the day, they are going back into the foreclosure morass.”
Mr. Zandi argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth.
Increasingly, such borrowers are inclined to walk away and accept foreclosure, rather than continuing to make payments on properties in which they own no equity. A paper by researchers at the Amherst Securities Group suggests that being underwater “is a far more important predictor of defaults than unemployment.”
From its inception, the Obama plan has drawn criticism for failing to compel banks to write down the size of outstanding mortgage balances, which would restore equity for underwater borrowers, giving them greater incentive to make payments. A vast majority of modifications merely decrease monthly payments by lowering the interest rate.
Mr. Zandi proposes that the Treasury Department push banks to write down some loan balances by reimbursing the companies for their losses. He pointedly rejects the notion that government ought to get out of the way and let foreclosures work their way through the market, saying that course risks a surge of foreclosures and declining house prices that could pull the economy back into recession.
“We want to overwhelm this problem,” he said. “If we do go back into recession, it will be very difficult to get out.”
Under the current program, the government provides cash incentives to mortgage companies that lower monthly payments for borrowers facing hardships. The Treasury Department set a goal of three to four million permanent loan modifications by 2012.
“That’s overly optimistic at this stage,” said Richard H. Neiman, the superintendent of banks for New York State and an appointee to the Congressional Oversight Panel, a body created to keep tabs on taxpayer bailout funds. “There’s a great deal of frustration and disappointment.”
As of mid-December, some 759,000 homeowners had received loan modifications on a trial basis typically lasting three to five months. But only about 31,000 had received permanent modifications — a step that requires borrowers to make timely trial payments and submit paperwork verifying their financial situation.
The government has pressured mortgage companies to move faster. Still, it argues that trial modifications are themselves a considerable help.
“Almost three-quarters of a million Americans now are benefiting from modification programs that reduce their monthly payments dramatically, on average $550 a month,” Treasury Secretary Timothy F. Geithner said last month at a hearing before the Congressional Oversight Panel. “That is a meaningful amount of support.”
But mortgage experts and lawyers who represent borrowers facing foreclosure argue that recipients of trial loan modifications often wind up worse off.
In Lakeland, Fla., Jaimie S. Smith, 29, called her mortgage company, then Washington Mutual, in October 2008, when she realized she would get a smaller bonus from her employer, a furniture company, threatening her ability to continue the $1,250 monthly mortgage payments on her three-bedroom house.
In April, Chase, which had taken over Washington Mutual, lowered her payment to $1,033.62 in a trial that was supposed to last three months.
Ms. Smith made all three payments on time and submitted required documents, Chase confirms. She called the bank almost weekly to inquire about a permanent loan modification. Each time, she says, Chase told her to continue making trial payments and await word on a permanent modification.
Then, in October, a startling legal notice arrived in the mail: Chase had foreclosed on her house and sold it at auction for $100. (The purchaser? Chase.)
“I cried,” she said. “I was hysterical. I bawled my eyes out.”
Later that week came another letter from Chase: “Congratulations on qualifying for a Making Home Affordable loan modification!”
When Ms. Smith frantically called the bank to try to overturn the sale, she was told that the house was no longer hers. Chase would not tell her how long she could remain there, she says. She feared the sheriff would show up at her door with eviction papers, or that she would return home to find her belongings piled on the curb. So Ms. Smith anxiously set about looking for a new place to live.
She had been planning to continue an online graduate school program in supply chain management, and she had about $4,000 in borrowed funds to pay tuition. She scrapped her studies and used the money to pay the security deposit and first month’s rent on an apartment.
Later, she hired a lawyer, who is seeking compensation from Chase. A judge later vacated the sale. Chase is still offering to make her loan modification permanent, but Ms. Smith has already moved out and is conflicted about what to do.
“I could have just walked away,” said Ms. Smith. “If they had said, ‘We can’t work with you,’ I’d have said: ‘What are my options? Short sale?’ None of this would have happened. God knows, I never would have wanted to go through this. I’d still be in grad school. I would not have paid all that money to them. I could have saved that money.”
A Chase spokeswoman, Christine Holevas, confirmed that the bank mistakenly foreclosed on Ms. Smith’s house and sold it at the same time it was extending the loan modification offer.
“There was a systems glitch,” Ms. Holevas said. “We are sorry that an error happened. We’re trying very hard to do what we can to keep folks in their homes. We are dealing with many, many individuals.”
Many borrowers complain they were told by mortgage companies their credit would not be damaged by accepting a loan modification, only to discover otherwise.
In a telephone conference with reporters, Jack Schakett, Bank of America’s credit loss mitigation executive, confirmed that even borrowers who were current before agreeing to loan modifications and who then made timely payments were reported to credit rating agencies as making only partial payments.
The biggest source of concern remains the growing numbers of underwater borrowers — now about one-third of all American homeowners with mortgages, according to Economy.com. The Obama administration clearly grasped the threat as it created its program, yet opted not to focus on writing down loan balances.
“This is a conscious choice we made, not to start with principal reduction,” Mr. Geithner told the Congressional Oversight Panel. “We thought it would be dramatically more expensive for the American taxpayer, harder to justify, create much greater risk of unfairness.”
Mr. Geithner’s explanation did not satisfy the panel’s chairwoman, Elizabeth Warren.
“Are we creating a program in which we’re talking about potentially spending $75 billion to try to modify people into mortgages that will reduce the number of foreclosures in the short term, but just kick the can down the road?” she asked, raising the prospect “that we’ll be looking at an economy with elevated mortgage foreclosures not just for a year or two, but for many years. How do you deal with that problem, Mr. Secretary?”
A good question, Mr. Geithner conceded.
“What to do about it,” he said. “That’s a hard thing.”
Copyright 2010 The New York Times Company. All rights reserved.
The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.
Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.
As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.
Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.
“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”
Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.
“Then the carpenters can go back to work,” Mr. Katari said. “The roofers can go back to work, and we start building housing again. If this drips out over the next few years, that whole sector of the economy isn’t going to recover.”
The Treasury Department publicly maintains that its program is on track. “The program is meeting its intended goal of providing immediate relief to homeowners across the country,” a department spokeswoman, Meg Reilly, wrote in an e-mail message.
But behind the scenes, Treasury officials appear to have concluded that growing numbers of delinquent borrowers simply lack enough income to afford their homes and must be eased out.
In late November, with scant public disclosure, the Treasury Department started the Foreclosure Alternatives Program, through which it will encourage arrangements that result in distressed borrowers surrendering their homes. The program will pay incentives to mortgage companies that allow homeowners to sell properties for less than they owe on their mortgages — short sales, in real estate parlance. The government will also pay incentives to mortgage companies that allow delinquent borrowers to hand over their deeds in lieu of foreclosing.
Ms. Reilly, the Treasury spokeswoman, said the foreclosure alternatives program did not represent a new policy. “We have said from the start that modifications will not be the solution for all homeowners and will not solve the housing crisis alone,” Ms. Reilly said by e-mail. “This has always been a multi-pronged effort.”
Whatever the merits of its plans, the administration has clearly failed to reverse the foreclosure crisis.
In 2008, more than 1.7 million homes were “lost” through foreclosures, short sales or deeds in lieu of foreclosure, according to Moody’s Economy.com. Last year, more than two million homes were lost, and Economy.com expects that this year’s number will swell to 2.4 million.
“I don’t think there’s any way for Treasury to tweak their plan, or to cajole, pressure or entice servicers to do more to address the crisis,” said Mark Zandi, chief economist at Moody’s Economy.com. “For some folks, it is doing more harm than good, because ultimately, at the end of the day, they are going back into the foreclosure morass.”
Mr. Zandi argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth.
Increasingly, such borrowers are inclined to walk away and accept foreclosure, rather than continuing to make payments on properties in which they own no equity. A paper by researchers at the Amherst Securities Group suggests that being underwater “is a far more important predictor of defaults than unemployment.”
From its inception, the Obama plan has drawn criticism for failing to compel banks to write down the size of outstanding mortgage balances, which would restore equity for underwater borrowers, giving them greater incentive to make payments. A vast majority of modifications merely decrease monthly payments by lowering the interest rate.
Mr. Zandi proposes that the Treasury Department push banks to write down some loan balances by reimbursing the companies for their losses. He pointedly rejects the notion that government ought to get out of the way and let foreclosures work their way through the market, saying that course risks a surge of foreclosures and declining house prices that could pull the economy back into recession.
“We want to overwhelm this problem,” he said. “If we do go back into recession, it will be very difficult to get out.”
Under the current program, the government provides cash incentives to mortgage companies that lower monthly payments for borrowers facing hardships. The Treasury Department set a goal of three to four million permanent loan modifications by 2012.
“That’s overly optimistic at this stage,” said Richard H. Neiman, the superintendent of banks for New York State and an appointee to the Congressional Oversight Panel, a body created to keep tabs on taxpayer bailout funds. “There’s a great deal of frustration and disappointment.”
As of mid-December, some 759,000 homeowners had received loan modifications on a trial basis typically lasting three to five months. But only about 31,000 had received permanent modifications — a step that requires borrowers to make timely trial payments and submit paperwork verifying their financial situation.
The government has pressured mortgage companies to move faster. Still, it argues that trial modifications are themselves a considerable help.
“Almost three-quarters of a million Americans now are benefiting from modification programs that reduce their monthly payments dramatically, on average $550 a month,” Treasury Secretary Timothy F. Geithner said last month at a hearing before the Congressional Oversight Panel. “That is a meaningful amount of support.”
But mortgage experts and lawyers who represent borrowers facing foreclosure argue that recipients of trial loan modifications often wind up worse off.
In Lakeland, Fla., Jaimie S. Smith, 29, called her mortgage company, then Washington Mutual, in October 2008, when she realized she would get a smaller bonus from her employer, a furniture company, threatening her ability to continue the $1,250 monthly mortgage payments on her three-bedroom house.
In April, Chase, which had taken over Washington Mutual, lowered her payment to $1,033.62 in a trial that was supposed to last three months.
Ms. Smith made all three payments on time and submitted required documents, Chase confirms. She called the bank almost weekly to inquire about a permanent loan modification. Each time, she says, Chase told her to continue making trial payments and await word on a permanent modification.
Then, in October, a startling legal notice arrived in the mail: Chase had foreclosed on her house and sold it at auction for $100. (The purchaser? Chase.)
“I cried,” she said. “I was hysterical. I bawled my eyes out.”
Later that week came another letter from Chase: “Congratulations on qualifying for a Making Home Affordable loan modification!”
When Ms. Smith frantically called the bank to try to overturn the sale, she was told that the house was no longer hers. Chase would not tell her how long she could remain there, she says. She feared the sheriff would show up at her door with eviction papers, or that she would return home to find her belongings piled on the curb. So Ms. Smith anxiously set about looking for a new place to live.
She had been planning to continue an online graduate school program in supply chain management, and she had about $4,000 in borrowed funds to pay tuition. She scrapped her studies and used the money to pay the security deposit and first month’s rent on an apartment.
Later, she hired a lawyer, who is seeking compensation from Chase. A judge later vacated the sale. Chase is still offering to make her loan modification permanent, but Ms. Smith has already moved out and is conflicted about what to do.
“I could have just walked away,” said Ms. Smith. “If they had said, ‘We can’t work with you,’ I’d have said: ‘What are my options? Short sale?’ None of this would have happened. God knows, I never would have wanted to go through this. I’d still be in grad school. I would not have paid all that money to them. I could have saved that money.”
A Chase spokeswoman, Christine Holevas, confirmed that the bank mistakenly foreclosed on Ms. Smith’s house and sold it at the same time it was extending the loan modification offer.
“There was a systems glitch,” Ms. Holevas said. “We are sorry that an error happened. We’re trying very hard to do what we can to keep folks in their homes. We are dealing with many, many individuals.”
Many borrowers complain they were told by mortgage companies their credit would not be damaged by accepting a loan modification, only to discover otherwise.
In a telephone conference with reporters, Jack Schakett, Bank of America’s credit loss mitigation executive, confirmed that even borrowers who were current before agreeing to loan modifications and who then made timely payments were reported to credit rating agencies as making only partial payments.
The biggest source of concern remains the growing numbers of underwater borrowers — now about one-third of all American homeowners with mortgages, according to Economy.com. The Obama administration clearly grasped the threat as it created its program, yet opted not to focus on writing down loan balances.
“This is a conscious choice we made, not to start with principal reduction,” Mr. Geithner told the Congressional Oversight Panel. “We thought it would be dramatically more expensive for the American taxpayer, harder to justify, create much greater risk of unfairness.”
Mr. Geithner’s explanation did not satisfy the panel’s chairwoman, Elizabeth Warren.
“Are we creating a program in which we’re talking about potentially spending $75 billion to try to modify people into mortgages that will reduce the number of foreclosures in the short term, but just kick the can down the road?” she asked, raising the prospect “that we’ll be looking at an economy with elevated mortgage foreclosures not just for a year or two, but for many years. How do you deal with that problem, Mr. Secretary?”
A good question, Mr. Geithner conceded.
“What to do about it,” he said. “That’s a hard thing.”
Copyright 2010 The New York Times Company. All rights reserved.
Wednesday, December 02, 2009
Asset Protection
At Shenwick & Associates, we are getting an increasing number of calls about asset protection. Asset protection involves the use of various legal techniques in conjunction with statutory and common law (i.e. debtor and creditor law, trusts and estates law) to protect the assets of individuals and business from civil money judgments. It is better to do asset protection planning sooner, rather then later and prior to lawsuits by creditors.
Asset protection is a complex and evolving area of law, with many potential pitfalls for the unwary. One of the biggest concerns in formulating an asset protection plan is avoiding claims of fraudulent conveyances. A fraudulent conveyance involves the intent to defraud or delay creditors. Factors that may be indicia of a fraudulent conveyance include: (1) lacking the financial means to pay off a debt after the transfer of assets; (2) concealing the ownership or location of assets from creditors; and (3) deliberately placing property in a location beyond the reach of creditors. Claims for fraudulent conveyance can be brought under the Bankruptcy Code or New York State law.
One option to protect assets is to create a Domestic Asset Protection Trust. Delaware law provides that, notwithstanding the fact that a Domestic Asset Protection Trust is self settled (funded by the client), it is still “spendthrift,” which means that under Delaware law, a creditor cannot reach those assets. A Domestic Asset Protection Trust will not protect a client from alimony, maintenance, child support or personal injury claims. Due to its prominence in corporate and business law, Delaware is an ideal jurisdiction for such an entity.
For more information about how to protect your assets from creditors, please contact Jim Shenwick.
Asset protection is a complex and evolving area of law, with many potential pitfalls for the unwary. One of the biggest concerns in formulating an asset protection plan is avoiding claims of fraudulent conveyances. A fraudulent conveyance involves the intent to defraud or delay creditors. Factors that may be indicia of a fraudulent conveyance include: (1) lacking the financial means to pay off a debt after the transfer of assets; (2) concealing the ownership or location of assets from creditors; and (3) deliberately placing property in a location beyond the reach of creditors. Claims for fraudulent conveyance can be brought under the Bankruptcy Code or New York State law.
One option to protect assets is to create a Domestic Asset Protection Trust. Delaware law provides that, notwithstanding the fact that a Domestic Asset Protection Trust is self settled (funded by the client), it is still “spendthrift,” which means that under Delaware law, a creditor cannot reach those assets. A Domestic Asset Protection Trust will not protect a client from alimony, maintenance, child support or personal injury claims. Due to its prominence in corporate and business law, Delaware is an ideal jurisdiction for such an entity.
For more information about how to protect your assets from creditors, please contact Jim Shenwick.
Wednesday, November 25, 2009
From the Hospital to Bankruptcy Court
November 25, 2009
By KEVIN SACK
NASHVILLE — Some of the debtors sitting forlornly in this city’s old stone bankruptcy court have lost a job or gotten divorced. Others have been summoned to face their creditors because they spent mindlessly beyond their means. But all too often these days, they are there merely because they, or their children, got sick.
Wes and Katie Covington, from Smyrna, Tenn., were already in debt from a round of fertility treatments when complications with her pregnancy and surgery on his knee left them with unmanageable bills. For Christine L. Phillips of Nashville, it was a $10,000 trip to the emergency room after a car wreck, on the heels of costly operations to remove a cyst and repair a damaged nerve.
Jodie and Charlie Mullins of Dickson, Tenn., were making ends meet on his patrolman’s salary until she developed debilitating back pain that required spinal surgery and forced her to quit nursing school. As with many medical bankruptcies, they had health insurance but their policy had a $3,000 deductible and, to their surprise, covered only 80 percent of their costs.
“I always promised myself that if I ever got in trouble, I’d work two jobs to get out of it,” said Mr. Mullins, a 16-year veteran of the Dickson police force. “But it gets to the point where two or three or four jobs wouldn’t take care of it. The bills just were out of sight.”
Although statistics are elusive, there is a general sense among bankruptcy lawyers and court officials, in Nashville as elsewhere, that the share of personal bankruptcies caused by illness is growing.
In the campaign to broaden support for the overhaul of American health care, few arguments have packed as much rhetorical punch as the there-but-for-the-grace-of-God notion that average families, through no fault of their own, are going bankrupt because of medical debt.
President Obama, in addressing a joint session of Congress in September, called on lawmakers to protect those “who live every day just one accident or illness away from bankruptcy.” He added: “These are not primarily people on welfare. These are middle-class Americans.”
The Senate majority leader, Harry Reid of Nevada, made a similar case on Saturday in a floor speech calling for passage of a measure to open debate on his chamber’s health care bill.
The legislation moving through Congress would attack the problem in numerous ways.
Bills in both houses would expand eligibility for Medicaid and provide health insurance subsidies for those making up to four times the federal poverty level. Insurers would be prohibited from denying coverage to those with pre-existing health conditions. Out-of-pocket medical costs would be capped annually.
How many personal bankruptcies might be avoided is unpredictable, as it is not clear how often medical debt plays a back-breaking role. There were 1.1 million personal bankruptcy filings in 2008, including 12,500 in Nashville, and more are expected this year.
Last summer, Harvard researchers published a headline-grabbing paper that concluded that illness or medical bills contributed to 62 percent of bankruptcies in 2007, up from about half in 2001. More than three-fourths of those with medical debt had health insurance.
But the researchers’ methodology has been criticized as defining medical bankruptcy too broadly and for the ideological leanings of its authors, some of whom are outspoken advocates for nationalized health care.
At the bankruptcy court in Nashville, lawyers provided a spectrum of estimates for the share of cases in Middle Tennessee where medical debt was decisive, from 15 percent to 50 percent. But many said they felt the number had been growing, and might be higher than was obvious because medical bills are often disguised as credit card debt.
“This has really become the insurance system for the country,” said Susan R. Limor, a bankruptcy trustee who calculated that 13 of the 48 Chapter 7 liquidation cases on her docket one recent afternoon included medical debts of more than $1,000.
Under Chapter 7, a debtor’s assets are liquidated and the proceeds are used to pay creditors; any remaining debts are discharged, and filers are left with a 10-year stain on their credit ratings.
“You can’t believe how many people discharge medical debts,” Ms. Limor said. “It’s a kind of trailing indicator of who’s suffering in this economy.”
Kyle D. Craddock, a bankruptcy lawyer here, said his medical cases were heartbreaking because the financial devastation was so rapid and ill-timed. “They’re sick, they’re bankrupt, and if they stay sick for too long, they end up losing their jobs as well,” he said.
That was the case for Ms. Phillips, 45, who said she was fired in October from her job in a shipping department because she had missed so much work while recuperating from her car accident and operations. Her firing came only 11 days after she filed for bankruptcy, listing about $7,000 in unpaid medical bills among her $187,000 in liabilities.
“The medical bills put me over the edge,” said Ms. Phillips, who lost her health insurance along with her job. “I had no money for food at this point. How was I going to do it?”
It was the same for the Mullinses, who have two children. They had a mortgage and owed money on credit cards and student loans. “But the medical problem is what took us down,” said Ms. Mullins, who is packing to move from the two-bedroom house they will soon surrender to Wells Fargo. “Everything was due, they wanted their money now, now, now, and it just became overwhelming.”
For some, like Nathan W. Hale, 34, who had an attack of pancreatitis two months after losing his job with a Nashville cable company, it is the absence of insurance that pulls them under. Others, like Robin P. Herron, 35, of Eagleville, Tenn., have insurance, but it is not enough. Her Blue Cross Blue Shield policy covered only 80 percent of the cost when her daughter needed surgery to remove a cyst from a fallopian tube, leaving her $6,000 in debt.
After cortisone injections failed to cure his gimpy knee, Mr. Covington, 31, had surgery because the pain was forcing him to miss days of work as an emergency medical technician. His recovery kept him off the job for five months.
Simultaneously, his wife, a 911 dispatcher, developed sciatica while pregnant and had to take months off on reduced disability pay. Their insurance policy, with an $850 monthly premium, has a $4,000 annual deductible per family.
As the bills rolled in, the Covingtons compounded their troubles by placing medical charges on credit cards, simply to make the collection agencies stop calling. They fell months behind on their mortgage, and by August had lost their house and both cars.
Mr. Covington, who has taken a second job, said he found it ironic that it had not been the recession that forced them into bankruptcy. “I tell my wife that we beat the economy,” he said, “but health care beat us.”
Copyright 2009 The New York TImes Company. All rights reserved.
By KEVIN SACK
NASHVILLE — Some of the debtors sitting forlornly in this city’s old stone bankruptcy court have lost a job or gotten divorced. Others have been summoned to face their creditors because they spent mindlessly beyond their means. But all too often these days, they are there merely because they, or their children, got sick.
Wes and Katie Covington, from Smyrna, Tenn., were already in debt from a round of fertility treatments when complications with her pregnancy and surgery on his knee left them with unmanageable bills. For Christine L. Phillips of Nashville, it was a $10,000 trip to the emergency room after a car wreck, on the heels of costly operations to remove a cyst and repair a damaged nerve.
Jodie and Charlie Mullins of Dickson, Tenn., were making ends meet on his patrolman’s salary until she developed debilitating back pain that required spinal surgery and forced her to quit nursing school. As with many medical bankruptcies, they had health insurance but their policy had a $3,000 deductible and, to their surprise, covered only 80 percent of their costs.
“I always promised myself that if I ever got in trouble, I’d work two jobs to get out of it,” said Mr. Mullins, a 16-year veteran of the Dickson police force. “But it gets to the point where two or three or four jobs wouldn’t take care of it. The bills just were out of sight.”
Although statistics are elusive, there is a general sense among bankruptcy lawyers and court officials, in Nashville as elsewhere, that the share of personal bankruptcies caused by illness is growing.
In the campaign to broaden support for the overhaul of American health care, few arguments have packed as much rhetorical punch as the there-but-for-the-grace-of-God notion that average families, through no fault of their own, are going bankrupt because of medical debt.
President Obama, in addressing a joint session of Congress in September, called on lawmakers to protect those “who live every day just one accident or illness away from bankruptcy.” He added: “These are not primarily people on welfare. These are middle-class Americans.”
The Senate majority leader, Harry Reid of Nevada, made a similar case on Saturday in a floor speech calling for passage of a measure to open debate on his chamber’s health care bill.
The legislation moving through Congress would attack the problem in numerous ways.
Bills in both houses would expand eligibility for Medicaid and provide health insurance subsidies for those making up to four times the federal poverty level. Insurers would be prohibited from denying coverage to those with pre-existing health conditions. Out-of-pocket medical costs would be capped annually.
How many personal bankruptcies might be avoided is unpredictable, as it is not clear how often medical debt plays a back-breaking role. There were 1.1 million personal bankruptcy filings in 2008, including 12,500 in Nashville, and more are expected this year.
Last summer, Harvard researchers published a headline-grabbing paper that concluded that illness or medical bills contributed to 62 percent of bankruptcies in 2007, up from about half in 2001. More than three-fourths of those with medical debt had health insurance.
But the researchers’ methodology has been criticized as defining medical bankruptcy too broadly and for the ideological leanings of its authors, some of whom are outspoken advocates for nationalized health care.
At the bankruptcy court in Nashville, lawyers provided a spectrum of estimates for the share of cases in Middle Tennessee where medical debt was decisive, from 15 percent to 50 percent. But many said they felt the number had been growing, and might be higher than was obvious because medical bills are often disguised as credit card debt.
“This has really become the insurance system for the country,” said Susan R. Limor, a bankruptcy trustee who calculated that 13 of the 48 Chapter 7 liquidation cases on her docket one recent afternoon included medical debts of more than $1,000.
Under Chapter 7, a debtor’s assets are liquidated and the proceeds are used to pay creditors; any remaining debts are discharged, and filers are left with a 10-year stain on their credit ratings.
“You can’t believe how many people discharge medical debts,” Ms. Limor said. “It’s a kind of trailing indicator of who’s suffering in this economy.”
Kyle D. Craddock, a bankruptcy lawyer here, said his medical cases were heartbreaking because the financial devastation was so rapid and ill-timed. “They’re sick, they’re bankrupt, and if they stay sick for too long, they end up losing their jobs as well,” he said.
That was the case for Ms. Phillips, 45, who said she was fired in October from her job in a shipping department because she had missed so much work while recuperating from her car accident and operations. Her firing came only 11 days after she filed for bankruptcy, listing about $7,000 in unpaid medical bills among her $187,000 in liabilities.
“The medical bills put me over the edge,” said Ms. Phillips, who lost her health insurance along with her job. “I had no money for food at this point. How was I going to do it?”
It was the same for the Mullinses, who have two children. They had a mortgage and owed money on credit cards and student loans. “But the medical problem is what took us down,” said Ms. Mullins, who is packing to move from the two-bedroom house they will soon surrender to Wells Fargo. “Everything was due, they wanted their money now, now, now, and it just became overwhelming.”
For some, like Nathan W. Hale, 34, who had an attack of pancreatitis two months after losing his job with a Nashville cable company, it is the absence of insurance that pulls them under. Others, like Robin P. Herron, 35, of Eagleville, Tenn., have insurance, but it is not enough. Her Blue Cross Blue Shield policy covered only 80 percent of the cost when her daughter needed surgery to remove a cyst from a fallopian tube, leaving her $6,000 in debt.
After cortisone injections failed to cure his gimpy knee, Mr. Covington, 31, had surgery because the pain was forcing him to miss days of work as an emergency medical technician. His recovery kept him off the job for five months.
Simultaneously, his wife, a 911 dispatcher, developed sciatica while pregnant and had to take months off on reduced disability pay. Their insurance policy, with an $850 monthly premium, has a $4,000 annual deductible per family.
As the bills rolled in, the Covingtons compounded their troubles by placing medical charges on credit cards, simply to make the collection agencies stop calling. They fell months behind on their mortgage, and by August had lost their house and both cars.
Mr. Covington, who has taken a second job, said he found it ironic that it had not been the recession that forced them into bankruptcy. “I tell my wife that we beat the economy,” he said, “but health care beat us.”
Copyright 2009 The New York TImes Company. All rights reserved.
Tuesday, November 17, 2009
Developments in Personal Bankruptcy in These Tough Times
The following is the outline of a Continuing Legal Education course given by James H. Shenwick, Esq. at First American Title Insurance Company of New York on November 12, 2009.
I. Introduction
a. Why do people file for bankruptcy today?
1. Credit card debts
2. Business reversals and job loss
3. Falling real estate values
4. High housing costs
5. Student loans
6. Divorce
7. Medical bills and illness
b. Many of the problems that are causing individuals to file for personal bankruptcy are real estate related. Fortunately, the Bankruptcy Code and New York State Debtor and Creditor Law provide many remedies to real estate issues and other debtor/creditor problems facing individuals in 2009 in New York State.
• Chapter 7 bankruptcy constitutes the vast majority of individual filings, and can be very helpful in dealing with many debtor/creditor problems that individuals have these days.
c. 1 million Americans filed for bankruptcy from January 2009 to October 2009, and experts predict that bankruptcies could reach 1.5 million this year before leveling off at 1.6 million next year.
d. The goal of this outline is to explain contemporary issues facing debtors in New York State in 2009 and strategies for dealing with those issues.
II. Chapter 7 Personal Bankruptcy-“BAPCPA”
A. In 2005, Congress radically revised and amended Chapter 7 personal bankruptcy laws. These changes include median income and means testing, where if an individual (single, married or with children) has income that exceeds a certain dollar amount, then the bankruptcy filing is considered an abuse of the system and facially they are not permitted to file Chapter 7 bankruptcy.
B. The first test under the revised code is whether a debtor exceeds the median income for their family size based on their state of residence. Pursuant to the 2005 amendments, a case where the debtor makes less than the median is presumed to be a non-abusive filing, and a below-median debtor may file for Chapter 7 bankruptcy. Effective March 15, 2009, the median income of a single person in New York State is $46,523. For a family of two, the income threshold for the Median Income Test is $57,006, for a family of three it is $67,991 and for a family of four it is $83,036. Add $6,900 for each individual in excess of four. Median income figures are periodically revised by the Census Bureau.
C. However, all is not lost for a debtor who exceeds his or her state median income threshold. If an individual’s income exceeds the median income for their respective state and family size, they may still be allowed to file for Chapter 7 bankruptcy if they pass the so-called “Means Test,” i.e. the results show that the bankruptcy filing is not a presumption of abuse under § 707(b)(7) of the Bankruptcy Code. The Means Test (officially known as Form 22A, “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation”) is one of the most complicated calculations in the law. It consists of eight pages, and is similar to doing a 1040 tax return for an individual. The Means Test incorporates the debts that an individual has (both unsecured and secured (i.e. mortgages and car loans), taxes that they owe, and expenses specified by the IRS in its financial analysis standards–food, clothing, household supplies, personal care, out-of-pocket health care and miscellaneous (National Standards); housing and utilities (non-mortgage expenses), housing and utilities (mortgage/rental expense), with adjustments, transportation (vehicle operation/public transportation/transportation ownership or lease expenses)(you are entitled to an expense allowance in this category regardless of whether you pay the expenses of operating a vehicle and regardless of whether you use public transportation)–as well as many other factors.
D. However, with proper planning, most individuals or couples whose income exceeds the median income can still pass the Means Test and will be allowed to file for Chapter 7 bankruptcy, notwithstanding the legislative intent of the changes under BAPCPA, which was to try and minimize the number of individuals who could file for Chapter 7 bankruptcy and force them to either not file for bankruptcy or to file for Chapter 13 bankruptcy.
E. Means Test Planning Opportunities:
1. If an individual’s debts are primarily business debts, then the debtor is not required to take the Means Test.
2. The data that is used to calculate the Means Test is a six-month rolling look back at the debtor’s income and expenses. Accordingly, if a debtor is self-employed or is an independent contractor, they may be able to arrange their financial affairs so that they have less income for the months included in the Means Test, and therefore pass the Means Test. This is known as pre-bankruptcy planning.
3. Our experience is that 95% of all debtors pass the means test and qualify for Chapter 7 personal bankruptcy.
III. Why do the vast majority of Americans who file for bankruptcy file for Chapter 7 bankruptcy?
A. Chapter 7 bankruptcy provides individuals who qualify to file under this chapter with a “discharge,” which can wipe out a significant amount of an individual’s debt.
B. What debts are discharged in a Chapter 7 personal bankruptcy?
i. Credit card debt
ii. Personal, business, automobile and real estate loans
iii. Lines of credit
iv. Medical bills
v. Utility bills
vi. Personal and “good guy” guaranties-“good guy” guaranties are guaranties created for the leasing of commercial space
C. Certain “old income taxes” may be dischargeable if:
i. The tax return was filed more than two years prior to the bankruptcy filing;
ii. The taxes are more than three years old;
iii. The taxes were assessed more than 240 days before the filing of the petition;
iv. There was no attempt to avoid or evade the taxes.
If all of these conditions are met, the taxes are dischargeable in bankruptcy.
D. The IRS has heightened its scrutiny of the discharge of income taxes in bankruptcy, and their position (based on case law) is that if you spend too much money on luxury items and/or pay other creditors ahead of the IRS, then according to the IRS, those tax debts would not be dischargeable, and the IRS will commence an adversary proceeding (litigation in a bankruptcy case) to object to the discharge of these taxes. See Wright v. Internal Revenue Service, 191 B.R. 291 (S.D.N.Y. 1995); Haesloop v. U.S. (In re Haesloop), 2000 Bankr. LEXIS 1104, 2000 WL 1607316 (Bankr. E.D.N.Y. Aug. 30, 2000); Lynch v. United States, 299 B.R. 62 (Bankr. S.D.N.Y. 2003); Epstein v. United States, 303 B.R. 280 (Bankr. E.D.N.Y. 2004)
E. What is not dischargeable in a Chapter 7 bankruptcy filing?
i. Recent income taxes (2-3 years old)
ii. “Trust fund” taxes (i.e. sales or employment taxes)
iii. Student loans
iv. Domestic support obligations (i.e. alimony and child support payments)
v. Debts incurred within 90 days of a bankruptcy filing that aggregate at least $550 for luxury goods or services and cash advances aggregating more than $825 within 70 days.
Chapter 7 bankruptcy is a very effective tool for the right debtor!
F. New BAPCPA (2005) requirements in Chapter 7 bankruptcy
i. Under BAPCPA, in addition to the list of creditors, schedules of assets, liabilities, income and expenses debtors must now provide:
a. A certificate of credit counseling;
b. Payment advices from employers received 60 days before filing (if any);
c. A statement of monthly net income and any anticipated increase in income or expenses after filing;
d. Tax returns or transcripts filed in the most recent tax year;
f. Photo ID; and
g. Social Security card
ii. Failure to provide the documents within 45 days after the petition has been filed (with a possibility of a 45-day extension) results in automatic dismissal of the case.
iii. Also new under BAPCPA, a debtor must have received pre-petition credit briefing (in person, by phone or internet) from an approved non-profit entity that outlined opportunities for credit counseling and assisted the Debtor in performing a personal budget analysis in the 180 days before filing a petition. Greenpath, one of the approved credit counseling agencies, charges approximately $45.
vi. Additionally, within 45 days after the first Meeting of Creditors, the debtor must also take a post-petition financial management course and file a certificate of completion with the Bankruptcy Court. The cost of this course from Greenpath is also approximately $45.
iv. The Bankruptcy Court may grant a waiver based on the Debtor’s sworn statement that they were unable to obtain the counseling services within five days of making the request and had to file immediately, but the waiver expires 30 days after the petition is filed.
v. The briefing is not required if the Bankruptcy Court determines that the Debtor is mentally incapacitated, physically disabled, or is an active member of the military in a combat zone.
G. What are the negatives of filing for Chapter 7 bankruptcy?
i. The filing stays on a person’s credit report for seven to ten years
ii. A debtor may only file for Chapter 7 bankruptcy every eight years (however, if a debtor files for Chapter 7, receives a discharge, and then gets into further financial trouble, they can file under Chapter 11 or 13 of the Bankruptcy Code).
H. Property of the Bankruptcy Estate:
i. This includes tax refunds
ii. Lawsuits (usually personal injury cases) commenced by the debtor prior to the bankruptcy filing
iii. Inheritances received by the debtor within 180 days of the bankruptcy filing.
IV. Chapter 7 bankruptcy can be very effective for individuals with real estate in which they live that is “underwater” (where the fair market value of the property is less than the value of the mortgages to which the property is subject)
A. When we talk about real estate, we’re talking about houses, townhouses, co-ops and condos. In order to qualify for the homestead exemption, a debtor must reside in the property at the time the bankruptcy is filed.
In 2005, New York State increased the homestead exemption to $50,000 per Debtor, so a married couple under New York law can exempt $100,000 of equity in a residence. Let’s look at a few examples of how residential real estate issues play out in a Chapter 7 bankruptcy filing.
Real Estate Scenarios:
For example, let’s take a look at a married couple considering filing for bankruptcy and the value of their property and mortgage(s) on their property.
FMV $600,000
Mortgage ($500,000)
Equity $100,000
In this scenario, the couple could file for Chapter 7 bankruptcy, discharge their unsecured debts, and keep their house, provided that they continue to make mortgage payments.
FMV $700,000
Mortgage ($500,000)
Equity $200,000
NYS Homestead Exemption ($100,000)
Non-Exempt Equity $100,000
In this scenario in a Chapter 7 bankruptcy, the Chapter 7 Trustee would sell the house and receive $100,000 for the equity above the homestead exemption (less costs and expenses), and that money would be used to pay the couple’s creditors. The Trustee would pay $100,000 to the Debtors at the end of their case as a result of their homestead exemption. Alternatively, the debtors could repurchase the house from the Trustee by buying the equity from the Trustee (redemption).
FMV $400,000
Mortgage ($500,000)
Negative Equity ($100,000)
In this scenario, the house has a negative equity of $100,000 and is “underwater” and would not be sold by the Chapter 7 Trustee. However, in order to keep the house, the debtor must reaffirm the debt to the mortgagee before the case is discharged and continue to make the payments on the mortgage, notwithstanding the fact that the value of the house is less than the amount of the mortgage.
Reaffirmation is governed by section 524(c) of the Bankruptcy Code, and requires that the debtor file an agreement with the court stating that he or she agrees to be legally bound to repay the otherwise dischargeable debt. The reaffirmation agreement must be filed 60 days after the meeting of creditors. The debtor’s attorney must file an affidavit stating that such an agreement will not be a hardship for the debtor. In the case of a pro se debtor, the bankruptcy judge will interview the debtor to ensure the agreement is voluntary and that it does not present a hardship for the debtor. In any event, the debtor may rescind the agreement up to 60 days after the agreement is filed with the court, or the case is discharged, whichever is later.
Here’s a question for all of you-Under these circumstances why would the couple want to retain the house?
Wouldn’t they be better off economically to file for Chapter 7 bankruptcy and let the bank make a motion for relief from the automatic stay so they can foreclose and obtain title to the house? This a personal decision for the debtors would have to make, which may include non-economic considerations that would lead them to want to keep a house that is $100,000 “underwater.”
Scenario: One spouse files for bankruptcy, the other spouse does not and the house has equity.
In a Chapter 7 bankruptcy, the Trustee may be able to sell the house. However, under New York State law due to “tenancy-by-the-entirety” protection, the house cannot be sold. The creditor can docket a judgment against the property, which is good for 20 years, and the home cannot be sold or refinanced.
Under this scenario, NYS law may provide more protection to the non-filing spouse than bankruptcy law. See §§ 363(h), (i), and (j) of the Bankruptcy Code when dealing with a scenario where one spouse files for bankruptcy, the other spouse does not and the house has equity.
Note that if the home is transferred from one spouse to the other, this a fraudulent conveyance.
Planning opportunity: If the couple divorces, the house may be transferred from one spouse to the other for no consideration, pursuant to New York State equitable distribution law.
In Chapter 7 bankruptcy, the factors to be considered as to whether the Chapter 7 bankruptcy trustee can sell the house are: (i) the equity in the property; (ii) the respective ages of the debtor and the spouse; and (iii) the burden to the non-filing spouse of having to leave the house (i.e. the impact on minor children).
Section 363(h) of the Bankruptcy Code deals with the conditions which must be met for a Trustee to sell a co-owner’s interest in property (whether owned as tenants in common, joint tenants or tenants by the entirety), which include:
1. Partition of the property between the bankruptcy estate and the co-owners is impracticable;
2. Sale of the bankruptcy estate’s undivided interest in the property would realize significantly less for the estate than the sale of the property free of the interests of the co-owners;
3. The benefit to the bankruptcy estate of a sale of the property free of the interests of the co-owners outweighs the detriment, if any, to the co-owners.
In Community Natl. Bank and Trust Co. of New York v. Persky (In re Persky), 893 F.2d 15 (2d. Cir. 1989), the Second Circuit Court of Appeals reviewed a bankruptcy filing in which only one of the co-owners was indebted to the bank and filed for bankruptcy relief. The Court found that:
• The Bankruptcy Court had the power to review the Trustee’s discretion to sell the property.
• The benefit to the bankruptcy estate should be analyzed from the standpoint of the sale of the nondebtor spouse’s entire interest in the property, including their possessory and survivorship interests, in determining whether the property should be sold.
• Noneconomic factors should be considered when analyzing the detriment to the nondebtor spouse of a sale of the property.
Section 363(i) of the Bankruptcy Code provides that in a Chapter 7 bankruptcy, if the property is to be sold, the debtor’s spouse may purchase the estate’s share of the property.
Pursuant to §363(j) of the Bankruptcy Code, the Chapter 7 Trustee must distribute to the debtor’s spouse the proceeds of the sale (less costs and expenses), but not including any compensation of the Trustee, in accordance with the ownership interests of the non-filing spouse and the bankruptcy estate.
Pursuant to § 363(k) of the Bankruptcy Code, the mortgagee may also bid on the house and, if they’re successful, they may offset their secured claim against the purchase price of the house.
Mortgage Arrears and Chapter 7 Bankruptcy
The above scenarios assume that the debtors are current on their mortgage. If the debtors were not current, then the mortgage arrears would need to be cured in order to keep the house during Chapter 7 bankruptcy.
A. How does a debtor deal with mortgage arrears?
i. Negotiate with the lender prior to the bankruptcy filing.
ii. Negotiate with the lender after the bankruptcy filing for payment plan for the arrears. Pursuant to Bankruptcy Code § 524, a debtor must reaffirm within 60 days from the date of the first scheduled meeting of creditors. Once the reaffirmation is executed, unless the agreement is rescinded, the debtor is liable; if they default on the mortgage in the future after reaffirmation, the mortgage debt is not dischargeable.
iii. Loss mitigation in the Southern District of New York (see Section V below)
iv. Conversion of a Chapter 7 case to a Chapter 13 case, pursuant to Bankruptcy Code § 706.
v. Abandon the house to the mortgagee pursuant to the Chapter 7 filing, if you can’t work out a payment plan with the lender.
V. The Southern District of New York’s Loss-Mitigation Program
A. In response to a growing number of mortgage defaults and foreclosures, the U.S. Bankruptcy Court for the Southern District of New York (NYSB) adopted Loss Mitigation Program Procedures in January 2009. A full description of the program is available here.
B. “Loss mitigation” includes the full range of solutions that can prevent either the loss of a Debtor’s property to foreclosure, increased costs to the lender, or both. Loss mitigation commonly consists of the following general types of agreements, or a combination of them: loan modification, loan refinance, forbearance, short sale, or surrender of the property in full satisfaction of the mortgage.
C. Use of the NYSB Loss Mitigation Program Procedures requires that: (1) the individual must reside in the Southern District of New York (which includes the counties of New York, Bronx, Westchester, Rockland, Putnam, Orange, Dutchess, and Sullivan) and (2) loss mitigation can only be requested for an individual’s primary residence. Loss Mitigation is not available in the Eastern District of New York (which includes the counties of Kings, Queens, Richmond, Nassau and Suffolk). However, the Eastern District is contemplating setting up a similar program.
D. Parties are encouraged to request loss mitigation as early in the case as possible, but loss mitigation may be initiated at any time, by any of the following methods:
i. By the Debtor
a. A Debtor may request Loss Mitigation in a Chapter 7 or Chapter 13 Plan by filing and serving a Notice of Loss Mitigation Request (along with an affidavit of service) on a particular creditor. The creditor has 21 days to object. If no objection is filed, the debtor shall submit an order as soon as possible to the Judge assigned to the bankruptcy case. The order may be submitted: (1) after the expiration of the 21 days; or (2) with the Notice of Loss Mitigation Request on Notice of Presentment on the 22nd day.
b. A Debtor may also file and serve a Loss Mitigation Request-By the Debtor (along with an affidavit of service) for loss mitigation on a particular creditor separate from a Chapter 13 Plan. The creditor has 14 days to object. If no objection is filed, the debtor shall submit an order as soon as possible. The order may be submitted: (1) after the expiration of the 14 days; or (2) with the Loss Mitigation Request-By the Debtor on Notice of Presentment on the 15th day.
c. If a creditor has filed a motion requesting relief from the automatic stay pursuant to § 362 of the Bankruptcy Code (a Lift-Stay Motion), at any time prior
to the conclusion of the hearing on the Lift-Stay Motion, the Debtor may file a
Loss Mitigation Request-By the Debtor. The Debtor and creditor shall appear at the scheduled hearing on the Lift-Stay Motion, and the Bankruptcy Court will consider the Loss Mitigation Request-By the Debtor and any opposition by the Creditor.
ii. By a creditor.
A creditor may file a Loss Mitigation Request-By the Creditor. The Debtor shall have seven days to object. If no objection is filed, the creditor shall submit an order as soon as possible. The order may be submitted: (1) after the expiration of the seven days; or (2) with the request on Notice of Presentment on the 8th day.
iii. By the Bankruptcy Court.
The Bankruptcy Court may enter a Loss Mitigation Order at any time, provided
that the parties that will be bound by the Loss Mitigation Order have had notice and an opportunity to object.
D. Upon entry of a Loss-Mitigation Order:
i. Each creditor is authorized to contact the Debtor directly. It shall be presumed
that such communications do not violate the automatic stay.
ii. Except where necessary to prevent irreparable injury, loss or damage, a creditor shall not file a Lift-Stay Motion during the loss mitigation period. Any Lift-Stay
Motion filed by the creditor prior to the entry of the Loss Mitigation Order shall
be adjourned to a date after the last day of the loss mitigation period, and the stay
shall be extended pursuant to § 362(e) of the Bankruptcy Code.
iii. In a Chapter 13 case, the deadline by which a creditor must object to
confirmation of the Chapter 13 plan shall be extended to permit the creditor an
additional 14 days after the termination of loss mitigation, including any
extension of the loss mitigation period.
iv. All communications and information exchanged by the Loss Mitigation Parties
during loss mitigation will be inadmissible in any subsequent proceeding pursuant
to Federal Rule of Evidence 408.
E. The Loss Mitigation Parties shall provide either a written or verbal report to the bankruptcy court regarding the status of loss mitigation within the time set by the
bankruptcy court in the Loss Mitigation Order. The status report shall state whether one
or more loss mitigation sessions have been conducted, whether a resolution was reached,
and whether one or more of the Loss Mitigation Parties believe that additional loss
mitigation sessions would be likely to result in either a partial or complete resolution. A
status report may include a request for an extension of the loss mitigation period.
F. The Bankruptcy Court will consider any settlement reached during
loss mitigation. A settlement may be noticed and implemented in any manner
permitted by the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, including, but not limited to, a stipulation, sale, plan of reorganization or amended plan of reorganization.
G. Loss Mitigation may delay a motion to lift stay (filed by a mortgagee) to commence or continue a foreclosure action, and delay a foreclosure action as well.
VI. Exemptions in Chapter 7 Bankruptcy for a New York State Resident
A. IRA. The maximum amount of a qualified IRA that may be exempted is $1,000,000.
B. Under New York Debtor and Creditor Law §5205(a), an individual debtor may exempt up to $5,000 of personal property and a joint debtor may exempt up to $10,000 of personal property.
C. Homestead exemption-As discussed in Section IV above, in New York State, an individual debtor may exempt up $50,000 of equity in a residence, and a joint debtor may exempt up to $100,000 of equity in a residence.
D. An unlimited amount of rental or utility security deposits.
E. 60 days of food.
F. $7,500 (for an individual debtor) or $15,000 (for a joint debtor) of monies recovered for a personal injury.
VII. Remedies for Dealing with Judgments
A. Under New York Debtor and Creditor Law, a judgment is good for 20 years. A judgment docketed against a property would prevent the owner from selling or refinancing the property without satisfying the judgment.
B. If a married couple owns property as tenants by the entirety, a creditor can docket the judgment against the property, but can’t force a sale of the property. This is to prevent the innocent spouse from the consequences of the judgment debtor’s actions.
C. Creditors may file a motion to avoid a judicial lien under section 522(f) of the Bankruptcy Code. Section 522(f) of the Bankruptcy Code protects Debtors’ exemptions and discharge, and thus their fresh start, by allowing them to avoid certain liens on exempt property (but not consensual mortgages). A Debtor may avoid a judicial lien on any property to the extent that the property could have been exempted in the absence of the lien.
a. The formula for calculating avoidance of a lien is:
i. Add the lien being tested for avoidance, all other liens and the maximum exemption allowable in the absence of liens (in New York State, $50,000 for an individual Debtor, $100,000 for joint Debtors).
ii. From the above sum, subtract the value of the property in the absence of the lien to determine the extent of the impairment.
iii. If the extent of the impairment of the exemption exceeds the entire value of the Debtor’s lien, the entire lien is avoidable.
b. If the extent of impairment is less than the entire value of the Debtor’s lien, the lien can be avoided only to the extent of the impairment of the exemption and the rest remains as a lien.
c. If the property has increased in value, there may now be too much equity for § 522(f) to apply if the current date is used as the date of valuation. The Debtor will want to use the date the bankruptcy petition was originally filed as the date of valuation.
D. Judgments entered within 90 days of a bankruptcy filing are a voidable preference.
VIII. Cancellation of Record of Judgment Discharged in Bankruptcy under New York State Debtor and Creditor Law § 150
A. Under this section of New York State law, at any time after a year has elapsed since a Debtor is discharged from their debts in bankruptcy, a Debtor may apply, upon proof of their discharge of debts, to the court in which a judgment was rendered against the Debtor, or to the court in which the judgment was docketed, for an order directing that a discharge or a qualified discharge of record be marked upon the docket of the judgment.
B. If it appears after a hearing that the Debtor has been discharged from the payment of a judgment or the debt upon which it was recovered, the court must enter an order directing that a discharge or qualified discharge be marked on the docket of the judgment.
C. If it appears that any lien of the judgment upon real property owned by the Debtor prior to the commencement of the bankruptcy was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a discharge be marked on the docket of the judgment.
D. If (a) it does not appear whether the judgment was a lien on real property owned by the Debtor prior to the commencement of the bankruptcy, or (b) if it appears that the judgment was a lien on such real property, and it is not established to the satisfaction of the court that the lien was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a qualified discharge be marked on the docket of the judgment. If the court directs that a qualified discharge be marked on the docket of the judgment, it must specify in its order which of the two grounds stated above was the basis of its order.
VIII. Relief of Indebtedness Income
A. Under § 108 of the Internal Revenue Code, debt relief is considered income.
B. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
i. This provision applies to debt forgiven in calendar years 2007 through 2012.
ii. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).
iii. The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
iv. This provision does not apply to credit card debt or non-residential property. But a Chapter 7 bankruptcy filing eliminates relief of indebtedness debt.
IX. Chapter 13
A. What are the pros and cons?
i. Cons
a. The debtor is placed on an austerity budget and must pay their disposable income to the Chapter 13 Trustee on a monthly basis.
b. If the debtor is over the “median income,” then they must prepare a five year, 60 month plan. The shortest plans are generally three years.
c. The filing fee is $279 (which is $20 less then the filing fee for a Chapter 7 filing).
d. However, legal fees are greater than those for a Chapter 7 filing, since there are fees for preparing the plan, the hearing on plan confirmation, and the plan must be served on creditors and must be confirmable.
e. In the Southern District of New York, historically only 30% of Chapter 13 plans pay out over time.
f. Pursuant to §1322 of the Bankruptcy Code, first mortgages cannot be modified in Chapter 13. However, second mortgages can be modified and mortgages on investment properties and vacation homes can be modified.
g. The Chapter 13 Trustee receives a commission of 10% of the monies paid into a Chapter 13 plan.
h. Since 2005, when New York State increased the homestead exemption to $50,000, Chapter 7 can accomplish much of what can be accomplished with a Chapter 13 filing at a lesser cost to the Debtor.
ii. Pros
a. Chapter 13 allows the debtor to retain property that he or she would otherwise lose in a Chapter 7 liquidation (e.g. a car or a house with substantial equity)
b. A Chapter 13 debtor remains under bankruptcy court protection for the duration of the repayment plan (3-5 years)
X. Alternatives to Chapter 7 bankruptcy
A. Do nothing
B. File for Chapter 13 bankruptcy
C. File for Chapter 11 bankruptcy (which is an extremely expensive and time consuming process). A debtor would only file under this chapter if they didn’t fit within the confines of the Chapter 7 or Chapter 13 requirements, had a very unique problem or had an extremely high net worth.
D. Out of court workout with creditors
I. Introduction
a. Why do people file for bankruptcy today?
1. Credit card debts
2. Business reversals and job loss
3. Falling real estate values
4. High housing costs
5. Student loans
6. Divorce
7. Medical bills and illness
b. Many of the problems that are causing individuals to file for personal bankruptcy are real estate related. Fortunately, the Bankruptcy Code and New York State Debtor and Creditor Law provide many remedies to real estate issues and other debtor/creditor problems facing individuals in 2009 in New York State.
• Chapter 7 bankruptcy constitutes the vast majority of individual filings, and can be very helpful in dealing with many debtor/creditor problems that individuals have these days.
c. 1 million Americans filed for bankruptcy from January 2009 to October 2009, and experts predict that bankruptcies could reach 1.5 million this year before leveling off at 1.6 million next year.
d. The goal of this outline is to explain contemporary issues facing debtors in New York State in 2009 and strategies for dealing with those issues.
II. Chapter 7 Personal Bankruptcy-“BAPCPA”
A. In 2005, Congress radically revised and amended Chapter 7 personal bankruptcy laws. These changes include median income and means testing, where if an individual (single, married or with children) has income that exceeds a certain dollar amount, then the bankruptcy filing is considered an abuse of the system and facially they are not permitted to file Chapter 7 bankruptcy.
B. The first test under the revised code is whether a debtor exceeds the median income for their family size based on their state of residence. Pursuant to the 2005 amendments, a case where the debtor makes less than the median is presumed to be a non-abusive filing, and a below-median debtor may file for Chapter 7 bankruptcy. Effective March 15, 2009, the median income of a single person in New York State is $46,523. For a family of two, the income threshold for the Median Income Test is $57,006, for a family of three it is $67,991 and for a family of four it is $83,036. Add $6,900 for each individual in excess of four. Median income figures are periodically revised by the Census Bureau.
C. However, all is not lost for a debtor who exceeds his or her state median income threshold. If an individual’s income exceeds the median income for their respective state and family size, they may still be allowed to file for Chapter 7 bankruptcy if they pass the so-called “Means Test,” i.e. the results show that the bankruptcy filing is not a presumption of abuse under § 707(b)(7) of the Bankruptcy Code. The Means Test (officially known as Form 22A, “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation”) is one of the most complicated calculations in the law. It consists of eight pages, and is similar to doing a 1040 tax return for an individual. The Means Test incorporates the debts that an individual has (both unsecured and secured (i.e. mortgages and car loans), taxes that they owe, and expenses specified by the IRS in its financial analysis standards–food, clothing, household supplies, personal care, out-of-pocket health care and miscellaneous (National Standards); housing and utilities (non-mortgage expenses), housing and utilities (mortgage/rental expense), with adjustments, transportation (vehicle operation/public transportation/transportation ownership or lease expenses)(you are entitled to an expense allowance in this category regardless of whether you pay the expenses of operating a vehicle and regardless of whether you use public transportation)–as well as many other factors.
D. However, with proper planning, most individuals or couples whose income exceeds the median income can still pass the Means Test and will be allowed to file for Chapter 7 bankruptcy, notwithstanding the legislative intent of the changes under BAPCPA, which was to try and minimize the number of individuals who could file for Chapter 7 bankruptcy and force them to either not file for bankruptcy or to file for Chapter 13 bankruptcy.
E. Means Test Planning Opportunities:
1. If an individual’s debts are primarily business debts, then the debtor is not required to take the Means Test.
2. The data that is used to calculate the Means Test is a six-month rolling look back at the debtor’s income and expenses. Accordingly, if a debtor is self-employed or is an independent contractor, they may be able to arrange their financial affairs so that they have less income for the months included in the Means Test, and therefore pass the Means Test. This is known as pre-bankruptcy planning.
3. Our experience is that 95% of all debtors pass the means test and qualify for Chapter 7 personal bankruptcy.
III. Why do the vast majority of Americans who file for bankruptcy file for Chapter 7 bankruptcy?
A. Chapter 7 bankruptcy provides individuals who qualify to file under this chapter with a “discharge,” which can wipe out a significant amount of an individual’s debt.
B. What debts are discharged in a Chapter 7 personal bankruptcy?
i. Credit card debt
ii. Personal, business, automobile and real estate loans
iii. Lines of credit
iv. Medical bills
v. Utility bills
vi. Personal and “good guy” guaranties-“good guy” guaranties are guaranties created for the leasing of commercial space
C. Certain “old income taxes” may be dischargeable if:
i. The tax return was filed more than two years prior to the bankruptcy filing;
ii. The taxes are more than three years old;
iii. The taxes were assessed more than 240 days before the filing of the petition;
iv. There was no attempt to avoid or evade the taxes.
If all of these conditions are met, the taxes are dischargeable in bankruptcy.
D. The IRS has heightened its scrutiny of the discharge of income taxes in bankruptcy, and their position (based on case law) is that if you spend too much money on luxury items and/or pay other creditors ahead of the IRS, then according to the IRS, those tax debts would not be dischargeable, and the IRS will commence an adversary proceeding (litigation in a bankruptcy case) to object to the discharge of these taxes. See Wright v. Internal Revenue Service, 191 B.R. 291 (S.D.N.Y. 1995); Haesloop v. U.S. (In re Haesloop), 2000 Bankr. LEXIS 1104, 2000 WL 1607316 (Bankr. E.D.N.Y. Aug. 30, 2000); Lynch v. United States, 299 B.R. 62 (Bankr. S.D.N.Y. 2003); Epstein v. United States, 303 B.R. 280 (Bankr. E.D.N.Y. 2004)
E. What is not dischargeable in a Chapter 7 bankruptcy filing?
i. Recent income taxes (2-3 years old)
ii. “Trust fund” taxes (i.e. sales or employment taxes)
iii. Student loans
iv. Domestic support obligations (i.e. alimony and child support payments)
v. Debts incurred within 90 days of a bankruptcy filing that aggregate at least $550 for luxury goods or services and cash advances aggregating more than $825 within 70 days.
Chapter 7 bankruptcy is a very effective tool for the right debtor!
F. New BAPCPA (2005) requirements in Chapter 7 bankruptcy
i. Under BAPCPA, in addition to the list of creditors, schedules of assets, liabilities, income and expenses debtors must now provide:
a. A certificate of credit counseling;
b. Payment advices from employers received 60 days before filing (if any);
c. A statement of monthly net income and any anticipated increase in income or expenses after filing;
d. Tax returns or transcripts filed in the most recent tax year;
f. Photo ID; and
g. Social Security card
ii. Failure to provide the documents within 45 days after the petition has been filed (with a possibility of a 45-day extension) results in automatic dismissal of the case.
iii. Also new under BAPCPA, a debtor must have received pre-petition credit briefing (in person, by phone or internet) from an approved non-profit entity that outlined opportunities for credit counseling and assisted the Debtor in performing a personal budget analysis in the 180 days before filing a petition. Greenpath, one of the approved credit counseling agencies, charges approximately $45.
vi. Additionally, within 45 days after the first Meeting of Creditors, the debtor must also take a post-petition financial management course and file a certificate of completion with the Bankruptcy Court. The cost of this course from Greenpath is also approximately $45.
iv. The Bankruptcy Court may grant a waiver based on the Debtor’s sworn statement that they were unable to obtain the counseling services within five days of making the request and had to file immediately, but the waiver expires 30 days after the petition is filed.
v. The briefing is not required if the Bankruptcy Court determines that the Debtor is mentally incapacitated, physically disabled, or is an active member of the military in a combat zone.
G. What are the negatives of filing for Chapter 7 bankruptcy?
i. The filing stays on a person’s credit report for seven to ten years
ii. A debtor may only file for Chapter 7 bankruptcy every eight years (however, if a debtor files for Chapter 7, receives a discharge, and then gets into further financial trouble, they can file under Chapter 11 or 13 of the Bankruptcy Code).
H. Property of the Bankruptcy Estate:
i. This includes tax refunds
ii. Lawsuits (usually personal injury cases) commenced by the debtor prior to the bankruptcy filing
iii. Inheritances received by the debtor within 180 days of the bankruptcy filing.
IV. Chapter 7 bankruptcy can be very effective for individuals with real estate in which they live that is “underwater” (where the fair market value of the property is less than the value of the mortgages to which the property is subject)
A. When we talk about real estate, we’re talking about houses, townhouses, co-ops and condos. In order to qualify for the homestead exemption, a debtor must reside in the property at the time the bankruptcy is filed.
In 2005, New York State increased the homestead exemption to $50,000 per Debtor, so a married couple under New York law can exempt $100,000 of equity in a residence. Let’s look at a few examples of how residential real estate issues play out in a Chapter 7 bankruptcy filing.
Real Estate Scenarios:
For example, let’s take a look at a married couple considering filing for bankruptcy and the value of their property and mortgage(s) on their property.
FMV $600,000
Mortgage ($500,000)
Equity $100,000
In this scenario, the couple could file for Chapter 7 bankruptcy, discharge their unsecured debts, and keep their house, provided that they continue to make mortgage payments.
FMV $700,000
Mortgage ($500,000)
Equity $200,000
NYS Homestead Exemption ($100,000)
Non-Exempt Equity $100,000
In this scenario in a Chapter 7 bankruptcy, the Chapter 7 Trustee would sell the house and receive $100,000 for the equity above the homestead exemption (less costs and expenses), and that money would be used to pay the couple’s creditors. The Trustee would pay $100,000 to the Debtors at the end of their case as a result of their homestead exemption. Alternatively, the debtors could repurchase the house from the Trustee by buying the equity from the Trustee (redemption).
FMV $400,000
Mortgage ($500,000)
Negative Equity ($100,000)
In this scenario, the house has a negative equity of $100,000 and is “underwater” and would not be sold by the Chapter 7 Trustee. However, in order to keep the house, the debtor must reaffirm the debt to the mortgagee before the case is discharged and continue to make the payments on the mortgage, notwithstanding the fact that the value of the house is less than the amount of the mortgage.
Reaffirmation is governed by section 524(c) of the Bankruptcy Code, and requires that the debtor file an agreement with the court stating that he or she agrees to be legally bound to repay the otherwise dischargeable debt. The reaffirmation agreement must be filed 60 days after the meeting of creditors. The debtor’s attorney must file an affidavit stating that such an agreement will not be a hardship for the debtor. In the case of a pro se debtor, the bankruptcy judge will interview the debtor to ensure the agreement is voluntary and that it does not present a hardship for the debtor. In any event, the debtor may rescind the agreement up to 60 days after the agreement is filed with the court, or the case is discharged, whichever is later.
Here’s a question for all of you-Under these circumstances why would the couple want to retain the house?
Wouldn’t they be better off economically to file for Chapter 7 bankruptcy and let the bank make a motion for relief from the automatic stay so they can foreclose and obtain title to the house? This a personal decision for the debtors would have to make, which may include non-economic considerations that would lead them to want to keep a house that is $100,000 “underwater.”
Scenario: One spouse files for bankruptcy, the other spouse does not and the house has equity.
In a Chapter 7 bankruptcy, the Trustee may be able to sell the house. However, under New York State law due to “tenancy-by-the-entirety” protection, the house cannot be sold. The creditor can docket a judgment against the property, which is good for 20 years, and the home cannot be sold or refinanced.
Under this scenario, NYS law may provide more protection to the non-filing spouse than bankruptcy law. See §§ 363(h), (i), and (j) of the Bankruptcy Code when dealing with a scenario where one spouse files for bankruptcy, the other spouse does not and the house has equity.
Note that if the home is transferred from one spouse to the other, this a fraudulent conveyance.
Planning opportunity: If the couple divorces, the house may be transferred from one spouse to the other for no consideration, pursuant to New York State equitable distribution law.
In Chapter 7 bankruptcy, the factors to be considered as to whether the Chapter 7 bankruptcy trustee can sell the house are: (i) the equity in the property; (ii) the respective ages of the debtor and the spouse; and (iii) the burden to the non-filing spouse of having to leave the house (i.e. the impact on minor children).
Section 363(h) of the Bankruptcy Code deals with the conditions which must be met for a Trustee to sell a co-owner’s interest in property (whether owned as tenants in common, joint tenants or tenants by the entirety), which include:
1. Partition of the property between the bankruptcy estate and the co-owners is impracticable;
2. Sale of the bankruptcy estate’s undivided interest in the property would realize significantly less for the estate than the sale of the property free of the interests of the co-owners;
3. The benefit to the bankruptcy estate of a sale of the property free of the interests of the co-owners outweighs the detriment, if any, to the co-owners.
In Community Natl. Bank and Trust Co. of New York v. Persky (In re Persky), 893 F.2d 15 (2d. Cir. 1989), the Second Circuit Court of Appeals reviewed a bankruptcy filing in which only one of the co-owners was indebted to the bank and filed for bankruptcy relief. The Court found that:
• The Bankruptcy Court had the power to review the Trustee’s discretion to sell the property.
• The benefit to the bankruptcy estate should be analyzed from the standpoint of the sale of the nondebtor spouse’s entire interest in the property, including their possessory and survivorship interests, in determining whether the property should be sold.
• Noneconomic factors should be considered when analyzing the detriment to the nondebtor spouse of a sale of the property.
Section 363(i) of the Bankruptcy Code provides that in a Chapter 7 bankruptcy, if the property is to be sold, the debtor’s spouse may purchase the estate’s share of the property.
Pursuant to §363(j) of the Bankruptcy Code, the Chapter 7 Trustee must distribute to the debtor’s spouse the proceeds of the sale (less costs and expenses), but not including any compensation of the Trustee, in accordance with the ownership interests of the non-filing spouse and the bankruptcy estate.
Pursuant to § 363(k) of the Bankruptcy Code, the mortgagee may also bid on the house and, if they’re successful, they may offset their secured claim against the purchase price of the house.
Mortgage Arrears and Chapter 7 Bankruptcy
The above scenarios assume that the debtors are current on their mortgage. If the debtors were not current, then the mortgage arrears would need to be cured in order to keep the house during Chapter 7 bankruptcy.
A. How does a debtor deal with mortgage arrears?
i. Negotiate with the lender prior to the bankruptcy filing.
ii. Negotiate with the lender after the bankruptcy filing for payment plan for the arrears. Pursuant to Bankruptcy Code § 524, a debtor must reaffirm within 60 days from the date of the first scheduled meeting of creditors. Once the reaffirmation is executed, unless the agreement is rescinded, the debtor is liable; if they default on the mortgage in the future after reaffirmation, the mortgage debt is not dischargeable.
iii. Loss mitigation in the Southern District of New York (see Section V below)
iv. Conversion of a Chapter 7 case to a Chapter 13 case, pursuant to Bankruptcy Code § 706.
v. Abandon the house to the mortgagee pursuant to the Chapter 7 filing, if you can’t work out a payment plan with the lender.
V. The Southern District of New York’s Loss-Mitigation Program
A. In response to a growing number of mortgage defaults and foreclosures, the U.S. Bankruptcy Court for the Southern District of New York (NYSB) adopted Loss Mitigation Program Procedures in January 2009. A full description of the program is available here.
B. “Loss mitigation” includes the full range of solutions that can prevent either the loss of a Debtor’s property to foreclosure, increased costs to the lender, or both. Loss mitigation commonly consists of the following general types of agreements, or a combination of them: loan modification, loan refinance, forbearance, short sale, or surrender of the property in full satisfaction of the mortgage.
C. Use of the NYSB Loss Mitigation Program Procedures requires that: (1) the individual must reside in the Southern District of New York (which includes the counties of New York, Bronx, Westchester, Rockland, Putnam, Orange, Dutchess, and Sullivan) and (2) loss mitigation can only be requested for an individual’s primary residence. Loss Mitigation is not available in the Eastern District of New York (which includes the counties of Kings, Queens, Richmond, Nassau and Suffolk). However, the Eastern District is contemplating setting up a similar program.
D. Parties are encouraged to request loss mitigation as early in the case as possible, but loss mitigation may be initiated at any time, by any of the following methods:
i. By the Debtor
a. A Debtor may request Loss Mitigation in a Chapter 7 or Chapter 13 Plan by filing and serving a Notice of Loss Mitigation Request (along with an affidavit of service) on a particular creditor. The creditor has 21 days to object. If no objection is filed, the debtor shall submit an order as soon as possible to the Judge assigned to the bankruptcy case. The order may be submitted: (1) after the expiration of the 21 days; or (2) with the Notice of Loss Mitigation Request on Notice of Presentment on the 22nd day.
b. A Debtor may also file and serve a Loss Mitigation Request-By the Debtor (along with an affidavit of service) for loss mitigation on a particular creditor separate from a Chapter 13 Plan. The creditor has 14 days to object. If no objection is filed, the debtor shall submit an order as soon as possible. The order may be submitted: (1) after the expiration of the 14 days; or (2) with the Loss Mitigation Request-By the Debtor on Notice of Presentment on the 15th day.
c. If a creditor has filed a motion requesting relief from the automatic stay pursuant to § 362 of the Bankruptcy Code (a Lift-Stay Motion), at any time prior
to the conclusion of the hearing on the Lift-Stay Motion, the Debtor may file a
Loss Mitigation Request-By the Debtor. The Debtor and creditor shall appear at the scheduled hearing on the Lift-Stay Motion, and the Bankruptcy Court will consider the Loss Mitigation Request-By the Debtor and any opposition by the Creditor.
ii. By a creditor.
A creditor may file a Loss Mitigation Request-By the Creditor. The Debtor shall have seven days to object. If no objection is filed, the creditor shall submit an order as soon as possible. The order may be submitted: (1) after the expiration of the seven days; or (2) with the request on Notice of Presentment on the 8th day.
iii. By the Bankruptcy Court.
The Bankruptcy Court may enter a Loss Mitigation Order at any time, provided
that the parties that will be bound by the Loss Mitigation Order have had notice and an opportunity to object.
D. Upon entry of a Loss-Mitigation Order:
i. Each creditor is authorized to contact the Debtor directly. It shall be presumed
that such communications do not violate the automatic stay.
ii. Except where necessary to prevent irreparable injury, loss or damage, a creditor shall not file a Lift-Stay Motion during the loss mitigation period. Any Lift-Stay
Motion filed by the creditor prior to the entry of the Loss Mitigation Order shall
be adjourned to a date after the last day of the loss mitigation period, and the stay
shall be extended pursuant to § 362(e) of the Bankruptcy Code.
iii. In a Chapter 13 case, the deadline by which a creditor must object to
confirmation of the Chapter 13 plan shall be extended to permit the creditor an
additional 14 days after the termination of loss mitigation, including any
extension of the loss mitigation period.
iv. All communications and information exchanged by the Loss Mitigation Parties
during loss mitigation will be inadmissible in any subsequent proceeding pursuant
to Federal Rule of Evidence 408.
E. The Loss Mitigation Parties shall provide either a written or verbal report to the bankruptcy court regarding the status of loss mitigation within the time set by the
bankruptcy court in the Loss Mitigation Order. The status report shall state whether one
or more loss mitigation sessions have been conducted, whether a resolution was reached,
and whether one or more of the Loss Mitigation Parties believe that additional loss
mitigation sessions would be likely to result in either a partial or complete resolution. A
status report may include a request for an extension of the loss mitigation period.
F. The Bankruptcy Court will consider any settlement reached during
loss mitigation. A settlement may be noticed and implemented in any manner
permitted by the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, including, but not limited to, a stipulation, sale, plan of reorganization or amended plan of reorganization.
G. Loss Mitigation may delay a motion to lift stay (filed by a mortgagee) to commence or continue a foreclosure action, and delay a foreclosure action as well.
VI. Exemptions in Chapter 7 Bankruptcy for a New York State Resident
A. IRA. The maximum amount of a qualified IRA that may be exempted is $1,000,000.
B. Under New York Debtor and Creditor Law §5205(a), an individual debtor may exempt up to $5,000 of personal property and a joint debtor may exempt up to $10,000 of personal property.
C. Homestead exemption-As discussed in Section IV above, in New York State, an individual debtor may exempt up $50,000 of equity in a residence, and a joint debtor may exempt up to $100,000 of equity in a residence.
D. An unlimited amount of rental or utility security deposits.
E. 60 days of food.
F. $7,500 (for an individual debtor) or $15,000 (for a joint debtor) of monies recovered for a personal injury.
VII. Remedies for Dealing with Judgments
A. Under New York Debtor and Creditor Law, a judgment is good for 20 years. A judgment docketed against a property would prevent the owner from selling or refinancing the property without satisfying the judgment.
B. If a married couple owns property as tenants by the entirety, a creditor can docket the judgment against the property, but can’t force a sale of the property. This is to prevent the innocent spouse from the consequences of the judgment debtor’s actions.
C. Creditors may file a motion to avoid a judicial lien under section 522(f) of the Bankruptcy Code. Section 522(f) of the Bankruptcy Code protects Debtors’ exemptions and discharge, and thus their fresh start, by allowing them to avoid certain liens on exempt property (but not consensual mortgages). A Debtor may avoid a judicial lien on any property to the extent that the property could have been exempted in the absence of the lien.
a. The formula for calculating avoidance of a lien is:
i. Add the lien being tested for avoidance, all other liens and the maximum exemption allowable in the absence of liens (in New York State, $50,000 for an individual Debtor, $100,000 for joint Debtors).
ii. From the above sum, subtract the value of the property in the absence of the lien to determine the extent of the impairment.
iii. If the extent of the impairment of the exemption exceeds the entire value of the Debtor’s lien, the entire lien is avoidable.
b. If the extent of impairment is less than the entire value of the Debtor’s lien, the lien can be avoided only to the extent of the impairment of the exemption and the rest remains as a lien.
c. If the property has increased in value, there may now be too much equity for § 522(f) to apply if the current date is used as the date of valuation. The Debtor will want to use the date the bankruptcy petition was originally filed as the date of valuation.
D. Judgments entered within 90 days of a bankruptcy filing are a voidable preference.
VIII. Cancellation of Record of Judgment Discharged in Bankruptcy under New York State Debtor and Creditor Law § 150
A. Under this section of New York State law, at any time after a year has elapsed since a Debtor is discharged from their debts in bankruptcy, a Debtor may apply, upon proof of their discharge of debts, to the court in which a judgment was rendered against the Debtor, or to the court in which the judgment was docketed, for an order directing that a discharge or a qualified discharge of record be marked upon the docket of the judgment.
B. If it appears after a hearing that the Debtor has been discharged from the payment of a judgment or the debt upon which it was recovered, the court must enter an order directing that a discharge or qualified discharge be marked on the docket of the judgment.
C. If it appears that any lien of the judgment upon real property owned by the Debtor prior to the commencement of the bankruptcy was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a discharge be marked on the docket of the judgment.
D. If (a) it does not appear whether the judgment was a lien on real property owned by the Debtor prior to the commencement of the bankruptcy, or (b) if it appears that the judgment was a lien on such real property, and it is not established to the satisfaction of the court that the lien was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a qualified discharge be marked on the docket of the judgment. If the court directs that a qualified discharge be marked on the docket of the judgment, it must specify in its order which of the two grounds stated above was the basis of its order.
VIII. Relief of Indebtedness Income
A. Under § 108 of the Internal Revenue Code, debt relief is considered income.
B. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
i. This provision applies to debt forgiven in calendar years 2007 through 2012.
ii. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).
iii. The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
iv. This provision does not apply to credit card debt or non-residential property. But a Chapter 7 bankruptcy filing eliminates relief of indebtedness debt.
IX. Chapter 13
A. What are the pros and cons?
i. Cons
a. The debtor is placed on an austerity budget and must pay their disposable income to the Chapter 13 Trustee on a monthly basis.
b. If the debtor is over the “median income,” then they must prepare a five year, 60 month plan. The shortest plans are generally three years.
c. The filing fee is $279 (which is $20 less then the filing fee for a Chapter 7 filing).
d. However, legal fees are greater than those for a Chapter 7 filing, since there are fees for preparing the plan, the hearing on plan confirmation, and the plan must be served on creditors and must be confirmable.
e. In the Southern District of New York, historically only 30% of Chapter 13 plans pay out over time.
f. Pursuant to §1322 of the Bankruptcy Code, first mortgages cannot be modified in Chapter 13. However, second mortgages can be modified and mortgages on investment properties and vacation homes can be modified.
g. The Chapter 13 Trustee receives a commission of 10% of the monies paid into a Chapter 13 plan.
h. Since 2005, when New York State increased the homestead exemption to $50,000, Chapter 7 can accomplish much of what can be accomplished with a Chapter 13 filing at a lesser cost to the Debtor.
ii. Pros
a. Chapter 13 allows the debtor to retain property that he or she would otherwise lose in a Chapter 7 liquidation (e.g. a car or a house with substantial equity)
b. A Chapter 13 debtor remains under bankruptcy court protection for the duration of the repayment plan (3-5 years)
X. Alternatives to Chapter 7 bankruptcy
A. Do nothing
B. File for Chapter 13 bankruptcy
C. File for Chapter 11 bankruptcy (which is an extremely expensive and time consuming process). A debtor would only file under this chapter if they didn’t fit within the confines of the Chapter 7 or Chapter 13 requirements, had a very unique problem or had an extremely high net worth.
D. Out of court workout with creditors
Wednesday, October 28, 2009
Obtaining Credit After Filing for Bankruptcy
Here at Shenwick & Associates, our clients often ask us how filing for bankruptcy will affect their financial future, and if they will ever be able to obtain credit again. It's important to note that your bankruptcy filing will remain on your credit report for seven to 10 years. This means that any credit company or potential lender looking to determine your creditworthiness during that period will be able to see that you filed for bankruptcy, which will affect your ability to obtain credit.
While filing for bankruptcy may make it more difficult to get some types of credit, such as a car or home equity loan, many clients tell us that within a few weeks of filing for bankruptcy, they received numerous credit card offers in the mail. At first, this seems counterintuitive; why would they solicit my business after I just filed to have my credit card debt discharged? But keep in mind that after a bankruptcy filing, you have a significantly lighter debt load to manage, and if all of your debts were dischargeable, you are essentially debt-free. Congratulations, and welcome to your fresh start! A word of caution is warranted, however, when deciding how to manage your personal finances post-bankruptcy.
Some credit card companies may be willing to take a risk on you with the hope that with fewer debts to pay, as well as your inability to file for Chapter 7 bankruptcy protection for another eight years, you will be able to pay them each month. But it is important to note that the cards offered may not be the kinds of cards you've been used to. Often, although credit card companies may be eager to sign you up, bear in mind that you may be considered more of a risk, and thus the cards offered to you may have a much higher interest rate and/or a much lower credit limit.
Nonetheless, for clients looking to rehabilitate or rebuild their credit after filing for bankruptcy, these cards may provide a way to do so. Bear in mind the importance of careful budgeting and financial management to ensure that any use of credit is in your long-term best interests. Being debt-free after bankruptcy can be a wonderful thing, but don't let the fresh start go to your head!
For more information about Chapter 7 personal bankruptcy and managing your financial future, please contact Jim Shenwick.
While filing for bankruptcy may make it more difficult to get some types of credit, such as a car or home equity loan, many clients tell us that within a few weeks of filing for bankruptcy, they received numerous credit card offers in the mail. At first, this seems counterintuitive; why would they solicit my business after I just filed to have my credit card debt discharged? But keep in mind that after a bankruptcy filing, you have a significantly lighter debt load to manage, and if all of your debts were dischargeable, you are essentially debt-free. Congratulations, and welcome to your fresh start! A word of caution is warranted, however, when deciding how to manage your personal finances post-bankruptcy.
Some credit card companies may be willing to take a risk on you with the hope that with fewer debts to pay, as well as your inability to file for Chapter 7 bankruptcy protection for another eight years, you will be able to pay them each month. But it is important to note that the cards offered may not be the kinds of cards you've been used to. Often, although credit card companies may be eager to sign you up, bear in mind that you may be considered more of a risk, and thus the cards offered to you may have a much higher interest rate and/or a much lower credit limit.
Nonetheless, for clients looking to rehabilitate or rebuild their credit after filing for bankruptcy, these cards may provide a way to do so. Bear in mind the importance of careful budgeting and financial management to ensure that any use of credit is in your long-term best interests. Being debt-free after bankruptcy can be a wonderful thing, but don't let the fresh start go to your head!
For more information about Chapter 7 personal bankruptcy and managing your financial future, please contact Jim Shenwick.
Monday, October 12, 2009
The Return of the Mortgage Cramdown?
Washington Revives the Mortgage Cramdown
As foreclosures continue to surge, congressional Democrats are pitching courtroom solutions to homeowners' woes. The Administration is wary
By Theo Francis
With foreclosures continuing to climb and midterm elections just a year away, Congress once again is preparing to tackle the mortgage crisis aggressively. High on many a wish list: a renewed push to allow so-called cramdown, which would let bankruptcy judges adjust the terms of home loans to give borrowers relief.
The banking industry hates cramdown (from the idea of cramming deals down lenders' throats), but Democrats argue that earlier efforts to fix the housing mess have not done as well as hoped. Moody's Economy.com (MCO) estimates that 3.8 million homes will enter foreclosure this year, up 41% from 2008. No surprise, then, that lawmakers are getting an earful. "We have folks calling our office every day," says Senator Jeff Merkley (D-Ore.), who is pressing Treasury to streamline its program to restructure mortgages.
"TRYING TO LIGHT A FIRE"
So Capitol Hill is poring over more ideas. One bill, introduced by Senator Jack Reed (D-R.I.) on Sept. 30 and co-sponsored by Merkley and two other senators, would force lenders to pause before they foreclose and to offer borrowers a break on their mortgage bill if they qualify for help under the Treasury program. Under the same proposed law, states could require mortgage servicers to enter mediation with borrowers before being allowed to foreclose. The bill also would give the states $6.4 billion to help homeowners stay put. "We're really trying to light a fire under the Administration," Merkley says.
Others in the Senate are considering the temporary suspension of home-loan payments or brief monthly mortgage subsidies for unemployed homeowners. House Financial Services Committee Chairman Barney Frank (D-Mass.) is drafting similar legislation.
The Administration is considering new options, too. One would support the broader housing market by extending a homebuyer's tax credit and making it easier for Fannie Mae (FNM) and Freddie Mac (FRE) to finance mortgages. Another would fund state housing agencies and independent mortgage banks. A Treasury spokeswoman noted that the Administration's programs have done more than previous efforts but said it "aggressively continues to build on our progress to date."
Many congressional Democrats think mortgage lenders need to feel the lash before they'll speed up mortgage workouts. Those critics, led by Senator Richard J. Durbin (D-Ill.), figure banks and mortgage servicers will do their best not to cut principal or interest rates on a mortgage. Lenders want to avoid, or at least delay, the loss they take from lowering what homeowners must pay, critics say. And despite an Administration plan that gives subsidies to mortgage servicers who agree to rework loans, many believe the service firms still gain too much from the fees they collect in foreclosure to bother working out a loan.
Durbin and other lawmakers are calling on Democrats to support what is seen as the party's nuclear option: cramdown. The proposal, which sailed through the House last spring, only to stall in the Senate on a 45-51 vote, authorizes bankruptcy courts to adjust mortgages. If Durbin's bill were to pass, a judge could reduce principal or interest rates on home loans and stretch out mortgage payments—something bankruptcy courts can do already with virtually every other kind of debt.
Supporters say cramdown would free homeowners from debt they can't afford while prodding lenders to cut deals before reaching the courthouse. A bankruptcy-court solution would also cost taxpayers little or nothing. Detractors argue cramdown would spook the mortgage market, driving up borrowing costs and making loans harder to get.
Undeterred, Durbin, the second-ranking Senate Democrat, is willing to attach a cramdown provision to any convenient bill if it won't get a hearing on its own. The proposal "will always be part of the conversation, if for nothing else than to scare the [daylights] out of everyone," says one senior Senate aide.
The financial industry, which used major muscle to kill the provision last spring, is arming for the fight, too. "The vote in the Senate was so overwhelmingly close, we're always worried," says one lobbyist. The big banks are leaning on community banks for help: These institutions were largely innocent of the worst excesses of the crisis and tend to be viewed much more favorably on Capitol Hill. "We are kind of the white hat," says a lobbyist for smaller financial institutions. "You'll see a lot of the industry try to hide behind us."
Given the industry's stance, supporters of cramdown say a forceful campaign by the White House would help. President Barack Obama supported it during the campaign and soon after his election, while his chief economics adviser Lawrence H. Summers wrote columns in favor of the proposal last year. But congressional sources say the Administration did little to push for passage of the bill last spring—possibly because Obama was reluctant to place further stress on already fragile banks. Now one Treasury official says the department has "no immediate plans" to revive the measure. Yet even without stronger White House support, Durbin might attract enough senators to embrace the bill if foreclosures continue to surge.
With Jane Sasseen in Washington
Francis is a correspondent in BusinessWeek's Washington bureau.
Copyright 2000-2009 by The McGraw-Hill Companies Inc. All rights reserved.
As foreclosures continue to surge, congressional Democrats are pitching courtroom solutions to homeowners' woes. The Administration is wary
By Theo Francis
With foreclosures continuing to climb and midterm elections just a year away, Congress once again is preparing to tackle the mortgage crisis aggressively. High on many a wish list: a renewed push to allow so-called cramdown, which would let bankruptcy judges adjust the terms of home loans to give borrowers relief.
The banking industry hates cramdown (from the idea of cramming deals down lenders' throats), but Democrats argue that earlier efforts to fix the housing mess have not done as well as hoped. Moody's Economy.com (MCO) estimates that 3.8 million homes will enter foreclosure this year, up 41% from 2008. No surprise, then, that lawmakers are getting an earful. "We have folks calling our office every day," says Senator Jeff Merkley (D-Ore.), who is pressing Treasury to streamline its program to restructure mortgages.
"TRYING TO LIGHT A FIRE"
So Capitol Hill is poring over more ideas. One bill, introduced by Senator Jack Reed (D-R.I.) on Sept. 30 and co-sponsored by Merkley and two other senators, would force lenders to pause before they foreclose and to offer borrowers a break on their mortgage bill if they qualify for help under the Treasury program. Under the same proposed law, states could require mortgage servicers to enter mediation with borrowers before being allowed to foreclose. The bill also would give the states $6.4 billion to help homeowners stay put. "We're really trying to light a fire under the Administration," Merkley says.
Others in the Senate are considering the temporary suspension of home-loan payments or brief monthly mortgage subsidies for unemployed homeowners. House Financial Services Committee Chairman Barney Frank (D-Mass.) is drafting similar legislation.
The Administration is considering new options, too. One would support the broader housing market by extending a homebuyer's tax credit and making it easier for Fannie Mae (FNM) and Freddie Mac (FRE) to finance mortgages. Another would fund state housing agencies and independent mortgage banks. A Treasury spokeswoman noted that the Administration's programs have done more than previous efforts but said it "aggressively continues to build on our progress to date."
Many congressional Democrats think mortgage lenders need to feel the lash before they'll speed up mortgage workouts. Those critics, led by Senator Richard J. Durbin (D-Ill.), figure banks and mortgage servicers will do their best not to cut principal or interest rates on a mortgage. Lenders want to avoid, or at least delay, the loss they take from lowering what homeowners must pay, critics say. And despite an Administration plan that gives subsidies to mortgage servicers who agree to rework loans, many believe the service firms still gain too much from the fees they collect in foreclosure to bother working out a loan.
Durbin and other lawmakers are calling on Democrats to support what is seen as the party's nuclear option: cramdown. The proposal, which sailed through the House last spring, only to stall in the Senate on a 45-51 vote, authorizes bankruptcy courts to adjust mortgages. If Durbin's bill were to pass, a judge could reduce principal or interest rates on home loans and stretch out mortgage payments—something bankruptcy courts can do already with virtually every other kind of debt.
Supporters say cramdown would free homeowners from debt they can't afford while prodding lenders to cut deals before reaching the courthouse. A bankruptcy-court solution would also cost taxpayers little or nothing. Detractors argue cramdown would spook the mortgage market, driving up borrowing costs and making loans harder to get.
Undeterred, Durbin, the second-ranking Senate Democrat, is willing to attach a cramdown provision to any convenient bill if it won't get a hearing on its own. The proposal "will always be part of the conversation, if for nothing else than to scare the [daylights] out of everyone," says one senior Senate aide.
The financial industry, which used major muscle to kill the provision last spring, is arming for the fight, too. "The vote in the Senate was so overwhelmingly close, we're always worried," says one lobbyist. The big banks are leaning on community banks for help: These institutions were largely innocent of the worst excesses of the crisis and tend to be viewed much more favorably on Capitol Hill. "We are kind of the white hat," says a lobbyist for smaller financial institutions. "You'll see a lot of the industry try to hide behind us."
Given the industry's stance, supporters of cramdown say a forceful campaign by the White House would help. President Barack Obama supported it during the campaign and soon after his election, while his chief economics adviser Lawrence H. Summers wrote columns in favor of the proposal last year. But congressional sources say the Administration did little to push for passage of the bill last spring—possibly because Obama was reluctant to place further stress on already fragile banks. Now one Treasury official says the department has "no immediate plans" to revive the measure. Yet even without stronger White House support, Durbin might attract enough senators to embrace the bill if foreclosures continue to surge.
With Jane Sasseen in Washington
Francis is a correspondent in BusinessWeek's Washington bureau.
Copyright 2000-2009 by The McGraw-Hill Companies Inc. All rights reserved.
Tuesday, August 25, 2009
Junior Mortgages in Bankruptcy
At Shenwick & Associates, we hear from many clients who have multiple mortgages on their property and want to stay in their home while reducing their debt burden. Chapter 13, which allows individual debtors to reorganize their debts and pay off secured creditors, is often a good choice for these clients. However, the treatment of unsecured junior mortgages has been a confusing one for both Debtors and Bankruptcy Courts alike.
In In re Pond, 252 F.3d 122 (2d Cir. 2001), the Second Circuit Court of Appeals held that a Debtor could void a wholly unsecured junior mortgage loan. The Debtors in In re Latimer, (Bk. No. 08-21242, Bank. W.D.N.Y., Ninfo, J., Oct. 27, 2008) wanted to bifurcate a second mortgage on their house into a secured claim and an unsecured claim, arguing that Pond didn’t address the plain language of 11 U.S.C. §§ 1322(c)(2) and 1325(a)(5)(B), which appears to specifically allow this type of bifurcation.
Relying on precedents from other Circuit Courts of Appeal, the Bankruptcy Court agreed and held that the Debtors could bifurcate the second mortgage on the real property into an allowed secured claim and an unsecured claim. Although the Second Circuit Court of Appeals (which has appellate jurisdiction over cases from New York) has not yet considered this issue, this case provides authority for debtors to bifurcate and strip down undersecured junior mortgages on their home in Chapter 13.
For more information about Chapter 13 bankruptcy and how to preserve the equity in your home in bankruptcy, please contact Jim Shenwick.
In In re Pond, 252 F.3d 122 (2d Cir. 2001), the Second Circuit Court of Appeals held that a Debtor could void a wholly unsecured junior mortgage loan. The Debtors in In re Latimer, (Bk. No. 08-21242, Bank. W.D.N.Y., Ninfo, J., Oct. 27, 2008) wanted to bifurcate a second mortgage on their house into a secured claim and an unsecured claim, arguing that Pond didn’t address the plain language of 11 U.S.C. §§ 1322(c)(2) and 1325(a)(5)(B), which appears to specifically allow this type of bifurcation.
Relying on precedents from other Circuit Courts of Appeal, the Bankruptcy Court agreed and held that the Debtors could bifurcate the second mortgage on the real property into an allowed secured claim and an unsecured claim. Although the Second Circuit Court of Appeals (which has appellate jurisdiction over cases from New York) has not yet considered this issue, this case provides authority for debtors to bifurcate and strip down undersecured junior mortgages on their home in Chapter 13.
For more information about Chapter 13 bankruptcy and how to preserve the equity in your home in bankruptcy, please contact Jim Shenwick.
Monday, August 10, 2009
Bloomberg News: Consumer, Celebrity Bankruptcies May Hit 1.4 Million
By Linda Sandler and Andrew M. Harris
Aug. 10 (Bloomberg) -- Consumer bankruptcies show no sign of abating after rising more than a third this year and may hit 1.4 million by Dec. 31 as jobs are lost and loans are harder to get, according to the American Bankruptcy Institute.
More than 126,000 consumers filed for bankruptcy in the U.S. last month, 34 percent more than in July 2008, the ABI said in its latest report on Aug. 4. The increase came after a 36.5 percent rise in personal bankruptcies nationwide in the first six months, to 675,351, according to the ABI research group, which interprets data collected by the National Bankruptcy Research Center.
“Rising unemployment on top of high pre-existing debt burdens is a formula for higher bankruptcies through the end of this year,” ABI Executive Director Samuel Gerdano said in a statement. The group, composed of lawyers, accountants, bankers and judges, is based in Alexandria, Virginia.
Debt problems don’t stop with sub-prime borrowers. Celebrities who filed for bankruptcy in July included movie actor Stephen Baldwin, who sought protection from creditors after lenders began foreclosure procedures against his home. Lenny Dykstra filed for Chapter 11 bankruptcy in a petition that says the former Major League Baseball All-Star owes between $10 million and $50 million.
Banks Hurt
Also last month, con man lawyer Marc Dreier’s luxury Manhattan condominium sold for $8.2 million, 21 percent less than what he paid two years ago, in an auction at U.S. Bankruptcy Court in Manhattan. Proceeds will be used to pay creditors in Dreier’s bankruptcy case and victims of Dreier’s fraud, said Salvatore LaMonica, trustee in the Chapter 7 bankruptcy case.
Steeply rising filings by consumers are hurting commercial banks. JPMorgan Chase & Co., the second-largest U.S. bank, predicted more losses on consumer loans last month even as it announced a rise in second-quarter profit on record investment banking fees. Chief Executive Officer Jamie Dimon said he doesn’t expect the credit card business to make a profit this year or in 2010, and the company increased its loss projections for prime and subprime mortgages.
Credit Card Losses
JPMorgan said losses in its Chase credit-card portfolio may be 10 percent next quarter and will be “highly dependent” on unemployment after that. Losses for cards issued by Washington Mutual, which the bank acquired in September, may reach 24 percent by the end of the year, the company said.
JPMorgan’s credit cards lost $672 million, compared with income of $250 million in the second quarter last year. Home- equity charge-offs climbed to $1.3 billion, or 4.61 percent. Prime mortgage defaults rose to $481 million, or 3.07 percent, from $104 million, or 1.08 percent a year earlier.
Dimon, 53, said the company supported “proper consumer protection” and that pending legislation setting up an agency to monitor consumer lending practices would hurt short-term profits in credit cards.
Congress, in October 2005, enacted the Bankruptcy Abuse Prevention and Consumer Protection Act, a legislative reform package intended to make it harder for consumers to get court orders wiping out their uncollateralized debt.
The act required debt counseling and a means test for would-be filers.
Copyright 2009 Bloomberg L.P. All rights reserved.
Aug. 10 (Bloomberg) -- Consumer bankruptcies show no sign of abating after rising more than a third this year and may hit 1.4 million by Dec. 31 as jobs are lost and loans are harder to get, according to the American Bankruptcy Institute.
More than 126,000 consumers filed for bankruptcy in the U.S. last month, 34 percent more than in July 2008, the ABI said in its latest report on Aug. 4. The increase came after a 36.5 percent rise in personal bankruptcies nationwide in the first six months, to 675,351, according to the ABI research group, which interprets data collected by the National Bankruptcy Research Center.
“Rising unemployment on top of high pre-existing debt burdens is a formula for higher bankruptcies through the end of this year,” ABI Executive Director Samuel Gerdano said in a statement. The group, composed of lawyers, accountants, bankers and judges, is based in Alexandria, Virginia.
Debt problems don’t stop with sub-prime borrowers. Celebrities who filed for bankruptcy in July included movie actor Stephen Baldwin, who sought protection from creditors after lenders began foreclosure procedures against his home. Lenny Dykstra filed for Chapter 11 bankruptcy in a petition that says the former Major League Baseball All-Star owes between $10 million and $50 million.
Banks Hurt
Also last month, con man lawyer Marc Dreier’s luxury Manhattan condominium sold for $8.2 million, 21 percent less than what he paid two years ago, in an auction at U.S. Bankruptcy Court in Manhattan. Proceeds will be used to pay creditors in Dreier’s bankruptcy case and victims of Dreier’s fraud, said Salvatore LaMonica, trustee in the Chapter 7 bankruptcy case.
Steeply rising filings by consumers are hurting commercial banks. JPMorgan Chase & Co., the second-largest U.S. bank, predicted more losses on consumer loans last month even as it announced a rise in second-quarter profit on record investment banking fees. Chief Executive Officer Jamie Dimon said he doesn’t expect the credit card business to make a profit this year or in 2010, and the company increased its loss projections for prime and subprime mortgages.
Credit Card Losses
JPMorgan said losses in its Chase credit-card portfolio may be 10 percent next quarter and will be “highly dependent” on unemployment after that. Losses for cards issued by Washington Mutual, which the bank acquired in September, may reach 24 percent by the end of the year, the company said.
JPMorgan’s credit cards lost $672 million, compared with income of $250 million in the second quarter last year. Home- equity charge-offs climbed to $1.3 billion, or 4.61 percent. Prime mortgage defaults rose to $481 million, or 3.07 percent, from $104 million, or 1.08 percent a year earlier.
Dimon, 53, said the company supported “proper consumer protection” and that pending legislation setting up an agency to monitor consumer lending practices would hurt short-term profits in credit cards.
Congress, in October 2005, enacted the Bankruptcy Abuse Prevention and Consumer Protection Act, a legislative reform package intended to make it harder for consumers to get court orders wiping out their uncollateralized debt.
The act required debt counseling and a means test for would-be filers.
Copyright 2009 Bloomberg L.P. All rights reserved.
Monday, August 03, 2009
Short Sales of Real Estate
At Shenwick & Associates, with the continuing fall in the value of real estate, we have received many inquiries regarding short sales of real estate (where the balance on the loan exceeds the value of the real estate in residential or commercial properties). Section 363 of the Bankruptcy Code concerns the use, sale or lease of property, and has been in the news of late with the GM and Chrysler bankruptcies. There are two ways to sell real estate or other assets in bankruptcy. One is pursuant to Section 363 of the Bankruptcy Code, and the other is pursuant to a confirmed bankruptcy plan.
While Section 363 is the quicker way to sell assets, there is a benefit to selling real estate through a confirmed bankruptcy plan, due to the fact that the seller (the bankrupt entity or individual) will not have to pay city or state real estate transfer taxes, based on the U.S. Supreme Court case Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. __ (2008). Accordingly, it may be beneficial to all parties for the debtor to file a simple, boilerplate Plan and Disclosure Statement and then sell the real estate pursuant to that Plan.
Recently, Shenwick & Associates represented a lender who was foreclosing on a property in which the borrower's principal had guaranteed the debt. The borrower filed for Chapter 11 bankruptcy to stay the foreclosure. A deal was reached in which the property would be conveyed to the secured lender pursuant to a confirmed Chapter 11 Plan. The transaction was a win-win situation for all parties. The debtor was able to transfer property that was "underwater," the debtor's principal was relieved of liability under his personal guaranty and the secured creditor obtained title to property, without paying city and state transfer taxes.
Any parties having questions regarding this or other transactions involving real estate in bankruptcy should contact Shenwick & Associates.
While Section 363 is the quicker way to sell assets, there is a benefit to selling real estate through a confirmed bankruptcy plan, due to the fact that the seller (the bankrupt entity or individual) will not have to pay city or state real estate transfer taxes, based on the U.S. Supreme Court case Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. __ (2008). Accordingly, it may be beneficial to all parties for the debtor to file a simple, boilerplate Plan and Disclosure Statement and then sell the real estate pursuant to that Plan.
Recently, Shenwick & Associates represented a lender who was foreclosing on a property in which the borrower's principal had guaranteed the debt. The borrower filed for Chapter 11 bankruptcy to stay the foreclosure. A deal was reached in which the property would be conveyed to the secured lender pursuant to a confirmed Chapter 11 Plan. The transaction was a win-win situation for all parties. The debtor was able to transfer property that was "underwater," the debtor's principal was relieved of liability under his personal guaranty and the secured creditor obtained title to property, without paying city and state transfer taxes.
Any parties having questions regarding this or other transactions involving real estate in bankruptcy should contact Shenwick & Associates.
Thursday, July 23, 2009
NYT: Stores Go Dark Where Buyers Once Roamed
By CHRISTINE HAUGHNEY
Among the marks of Manhattan’s prosperity in recent years were the thousands of restaurants and shops that opened to meet an ever-growing demand. Confident in the appetite for spending — on expensive shampoo at 24-hour drugstores, cheese plates at sleek wine bars and clothes at minimalist boutiques — store owners signed high-rent leases with little haggling.
But as New Yorkers have drastically cut back, the shops that line the streets, from chain outlets to family-run shops, have started to disappear.
The storefront vacancy rate in Manhattan is now at its highest point since the early 1990s — an estimated 6.5 percent — and is expected to exceed 10 percent by the middle of next year, according to data gathered by Marcus & Millichap Research Services, a national real estate investment brokerage based in Encino, Calif.
And those numbers do not capture the full story. Some of the more desirable shopping districts are littered with empty storefronts. For example, Fifth Avenue between 42nd Street and 49th Street, the stretch just south of Saks Fifth Avenue, has a vacancy rate of 15.3 percent, according to the brokerage Cushman & Wakefield.
In SoHo, from West Houston Street to Grand Street and Broadway to West Broadway, among the high-end boutiques, art galleries and restaurants, 1 in 10 retail spaces are now empty or about to be.
“I’ve never seen such an across-the-board problem,” said Lorraine Nadel, a lawyer who has represented tenants and landlords for 18 years. “Store owners can’t pay their rent, and they can’t keep their businesses going.”
It has long been difficult to run a small business in Manhattan, but a number of struggling store owners cite high rents and their landlords’ unwillingness to negotiate as the leading obstacles to their survival.
“It’s a crisis,” said Stephen Null, director of the Coalition for Fair Business Rents, which has been promoting legislation to protect small businesses in lease negotiations since 1984. “Lease renewals are the single biggest killer of small businesses in New York City.”
Manhattan, with its high density, high incomes and near-constant foot traffic, has maintained a strong storefront culture while other urban areas have seen their downtowns empty out and lose customers to suburban malls.
Stores and restaurants in New York are open longer hours, increasing the potential for revenue, and residents tend to shop near where they live, if just by necessity.
But because stores are such a part of their neighborhoods, the closings can have more of an emotional impact on residents.
“New York is different than the rest of America because it is the last bastion of storefronts,” said Kenneth T. Jackson, a historian at Columbia University. “You don’t live in a city of eight and a half million people. You live in a city of neighborhoods.”
“We feel a loss when the store is gone,” he added.
In one block alone, on the west side of Lexington Avenue between 74th and 75th Streets, three stores have closed in the past few months: a women’s clothing shop called Cantaloup, a luggage shop and a design store — places that the locals say had thrived for years. Those closings followed that of a sandwich shop across the street.
“The fabric of the neighborhood is up for grabs right now,” said Elaine Abelson, a professor of history at the New School who has lived in the neighborhood for 35 years.
The outlook is even worse in other boroughs. Hessam Nadji, managing director of research services at Marcus & Millichap, estimates that vacancy rates in Brooklyn and Queens, currently at 7 to 10 percent, will rise to 12 to 15 percent by year’s end. He said some neighborhoods have been ravaged by vacancy rates of 25 to 40 percent.
The problem is so bad that the city has become involved. It has offered grants for worker training, and it held a session last Wednesday on how to negotiate leases. Scott M. Stringer, the Manhattan borough president, held a conference called “Rescue and Recovery for Small Businesses” on July 13 that drew 320 people, among them owners of an organic grocery store, a wine bar, and a coffeehouse and bookstore who swapped advice on how to keep their businesses afloat.
High rents in the recession are the “last straw for small business in New York City,” Mr. Stringer said, “and I hear it everywhere I go.”
Without these storefronts, he said, the city loses “our special sauce that gives us our panache.”
The City Council is weighing in, too, considering a Small Business Survival Act that would require businesses to have the option of 10-year leases, renewals and the right to mediation if they cannot reach an agreement.
The legislation does not have the support of the Bloomberg administration, which argues that tracking lease negotiations would be too costly because of expenses like hiring staff, and that the need for such a law has “greatly dissipated” because rents have declined.
But as jobs disappear and neighborhoods suffer, the tide of opinion is growing that the government may need to step in. While data on the challenges of small business owners is limited, a survey of 937 Hispanic small business owners conducted by the U.S.A. Latin Chamber of Commerce between November 2008 and January 2009 found that most of them said they would not stay in the city because their rents had become so high.
The closing of stores has started to chip away at the city’s tax collections. Sales tax revenues have declined by 3 percent through May, to $4.15 billion from $4.3 billion the year before, according to the city’s Office of Management and Budget.
Some neighborhoods seem better positioned to hold on to their storefronts. Times Square has had relatively fewer closings because more people have been staying in town for vacations and attending Broadway shows, said Tim Tompkins, president of the Times Square Alliance. Doug Griebel, president of the Columbus Avenue Business Improvement District and an owner of the Rosa Mexicano restaurants, said there were only two vacant storefronts on Columbus between 67th and 82nd Streets.
Gary Schwartzman, broker with Grubb & Ellis, a commercial real estate firm, said many landlords were trying to find ways to keep retail businesses open.
“The risk of losing a good tenant is something that landlords don’t want,” Mr. Schwartzman said. “Right now, it’s all about tenant retention.”
Ms. Nadel, the lawyer, says that if a landlord tells her that he or she will not negotiate with tenants, she points to a stack of eviction files and says the chances of finding a new tenant are slim.
“You can’t maintain the rents,” she says she tells them. “People have run through their savings. They’ve run through everything.”
Copyright 2009 The New York Times Company. All rights reserved.
Among the marks of Manhattan’s prosperity in recent years were the thousands of restaurants and shops that opened to meet an ever-growing demand. Confident in the appetite for spending — on expensive shampoo at 24-hour drugstores, cheese plates at sleek wine bars and clothes at minimalist boutiques — store owners signed high-rent leases with little haggling.
But as New Yorkers have drastically cut back, the shops that line the streets, from chain outlets to family-run shops, have started to disappear.
The storefront vacancy rate in Manhattan is now at its highest point since the early 1990s — an estimated 6.5 percent — and is expected to exceed 10 percent by the middle of next year, according to data gathered by Marcus & Millichap Research Services, a national real estate investment brokerage based in Encino, Calif.
And those numbers do not capture the full story. Some of the more desirable shopping districts are littered with empty storefronts. For example, Fifth Avenue between 42nd Street and 49th Street, the stretch just south of Saks Fifth Avenue, has a vacancy rate of 15.3 percent, according to the brokerage Cushman & Wakefield.
In SoHo, from West Houston Street to Grand Street and Broadway to West Broadway, among the high-end boutiques, art galleries and restaurants, 1 in 10 retail spaces are now empty or about to be.
“I’ve never seen such an across-the-board problem,” said Lorraine Nadel, a lawyer who has represented tenants and landlords for 18 years. “Store owners can’t pay their rent, and they can’t keep their businesses going.”
It has long been difficult to run a small business in Manhattan, but a number of struggling store owners cite high rents and their landlords’ unwillingness to negotiate as the leading obstacles to their survival.
“It’s a crisis,” said Stephen Null, director of the Coalition for Fair Business Rents, which has been promoting legislation to protect small businesses in lease negotiations since 1984. “Lease renewals are the single biggest killer of small businesses in New York City.”
Manhattan, with its high density, high incomes and near-constant foot traffic, has maintained a strong storefront culture while other urban areas have seen their downtowns empty out and lose customers to suburban malls.
Stores and restaurants in New York are open longer hours, increasing the potential for revenue, and residents tend to shop near where they live, if just by necessity.
But because stores are such a part of their neighborhoods, the closings can have more of an emotional impact on residents.
“New York is different than the rest of America because it is the last bastion of storefronts,” said Kenneth T. Jackson, a historian at Columbia University. “You don’t live in a city of eight and a half million people. You live in a city of neighborhoods.”
“We feel a loss when the store is gone,” he added.
In one block alone, on the west side of Lexington Avenue between 74th and 75th Streets, three stores have closed in the past few months: a women’s clothing shop called Cantaloup, a luggage shop and a design store — places that the locals say had thrived for years. Those closings followed that of a sandwich shop across the street.
“The fabric of the neighborhood is up for grabs right now,” said Elaine Abelson, a professor of history at the New School who has lived in the neighborhood for 35 years.
The outlook is even worse in other boroughs. Hessam Nadji, managing director of research services at Marcus & Millichap, estimates that vacancy rates in Brooklyn and Queens, currently at 7 to 10 percent, will rise to 12 to 15 percent by year’s end. He said some neighborhoods have been ravaged by vacancy rates of 25 to 40 percent.
The problem is so bad that the city has become involved. It has offered grants for worker training, and it held a session last Wednesday on how to negotiate leases. Scott M. Stringer, the Manhattan borough president, held a conference called “Rescue and Recovery for Small Businesses” on July 13 that drew 320 people, among them owners of an organic grocery store, a wine bar, and a coffeehouse and bookstore who swapped advice on how to keep their businesses afloat.
High rents in the recession are the “last straw for small business in New York City,” Mr. Stringer said, “and I hear it everywhere I go.”
Without these storefronts, he said, the city loses “our special sauce that gives us our panache.”
The City Council is weighing in, too, considering a Small Business Survival Act that would require businesses to have the option of 10-year leases, renewals and the right to mediation if they cannot reach an agreement.
The legislation does not have the support of the Bloomberg administration, which argues that tracking lease negotiations would be too costly because of expenses like hiring staff, and that the need for such a law has “greatly dissipated” because rents have declined.
But as jobs disappear and neighborhoods suffer, the tide of opinion is growing that the government may need to step in. While data on the challenges of small business owners is limited, a survey of 937 Hispanic small business owners conducted by the U.S.A. Latin Chamber of Commerce between November 2008 and January 2009 found that most of them said they would not stay in the city because their rents had become so high.
The closing of stores has started to chip away at the city’s tax collections. Sales tax revenues have declined by 3 percent through May, to $4.15 billion from $4.3 billion the year before, according to the city’s Office of Management and Budget.
Some neighborhoods seem better positioned to hold on to their storefronts. Times Square has had relatively fewer closings because more people have been staying in town for vacations and attending Broadway shows, said Tim Tompkins, president of the Times Square Alliance. Doug Griebel, president of the Columbus Avenue Business Improvement District and an owner of the Rosa Mexicano restaurants, said there were only two vacant storefronts on Columbus between 67th and 82nd Streets.
Gary Schwartzman, broker with Grubb & Ellis, a commercial real estate firm, said many landlords were trying to find ways to keep retail businesses open.
“The risk of losing a good tenant is something that landlords don’t want,” Mr. Schwartzman said. “Right now, it’s all about tenant retention.”
Ms. Nadel, the lawyer, says that if a landlord tells her that he or she will not negotiate with tenants, she points to a stack of eviction files and says the chances of finding a new tenant are slim.
“You can’t maintain the rents,” she says she tells them. “People have run through their savings. They’ve run through everything.”
Copyright 2009 The New York Times Company. All rights reserved.
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