By GRETCHEN MORGENSON
As some of the nation’s largest lenders have conceded that their foreclosure procedures might have been improperly handled, lawsuits have revealed myriad missteps in crucial documents.
The flawed practices that GMAC Mortgage, JPMorgan Chase and Bank of America have recently begun investigating are so prevalent, lawyers and legal experts say, that additional lenders and loan servicers are likely to halt foreclosure proceedings and may have to reconsider past evictions.
Problems emerging in courts across the nation are varied but all involve documents that must be submitted before foreclosures can proceed legally. Homeowners, lawyers and analysts have been citing such problems for the last few years, but it appears to have reached such intensity recently that banks are beginning to re-examine whether all of the foreclosure papers were prepared properly.
In some cases, documents have been signed by employees who say they have not verified crucial information like amounts owed by borrowers. Other problems involve questionable legal notarization of documents, in which, for example, the notarizations predate the actual preparation of documents — suggesting that signatures were never actually reviewed by a notary.
Other problems occurred when notarizations took place so far from where the documents were signed that it was highly unlikely that the notaries witnessed the signings, as the law requires.
On still other important documents, a single official’s name is signed in such radically different ways that some appear to be forgeries. Additional problems have emerged when multiple banks have all argued that they have the right to foreclose on the same property, a result of a murky trail of documentation and ownership.
There is no doubt that the enormous increase in foreclosures in recent years has strained the resources of lenders and their legal representatives, creating challenges that any institution might find overwhelming. According to the Mortgage Bankers Association, the percentage of loans that were delinquent by 90 days or more stood at 9.5 percent in the first quarter of 2010, up from 4 percent in the same period of 2008.
But analysts say that the wave of defaults still does not excuse lenders’ failures to meet their legal obligations before trying to remove defaulting borrowers from their homes.
“It reflects the hubris that as long as the money was going through the pipeline, these companies didn’t really have to make sure the documents were in order,” said Kathleen C. Engel, dean for intellectual life at Suffolk University Law School and an expert in mortgage law. “Suddenly they have a lot at stake, and playing fast and loose is going to be more costly than it was in the past.”
Attorneys general in at least six states, including Massachusetts, Iowa, Florida and Illinois, are investigating improper foreclosure practices. Last week, Jennifer Brunner, the secretary of state of Ohio, referred examples of what her office considers possible notary abuse by Chase Home Mortgage to federal prosecutors for investigation.
The implications are not yet clear for borrowers who have been evicted from their homes as a result of improper filings. But legal experts say that courts may impose sanctions on lenders or their representatives or may force banks to pay borrowers’ legal costs in these cases.
Judges may dismiss the foreclosures altogether, barring lenders from refiling and awarding the home to the borrower. That would create a loss for the lender or investor holding the note underlying the property. Almost certainly, lawyers say, lawsuits on behalf of borrowers will multiply.
In Florida, problems with foreclosure cases are especially acute. A recent sample of foreclosure cases in the 12th Judicial Circuit of Florida showed that 20 percent of those set for summary judgment involved deficient documents, according to chief judge Lee E. Haworth.
“We have sent repeated notices to law firms saying, ‘You are not following the rules, and if you don’t clean up your act, we are going to impose sanctions on you,’ ” Mr. Haworth said in an interview. “They say, ‘We’ll fix it, we’ll fix it, we’ll fix it.’ But they don’t.”
As a result, Mr. Haworth said, on Sept. 17, Harry Rapkin, a judge overseeing foreclosures in the district, dismissed 61 foreclosure cases. The plaintiffs can refile but they need to pay new filing fees, Mr. Haworth said.
The byzantine mortgage securitization process that helped inflate the housing bubble allowed home loans to change hands so many times before they were eventually pooled and sold to investors that it is now extremely difficult to track exactly which lenders have claims to a home.
Many lenders or loan servicers that begin the foreclosure process after a borrower defaults do not produce documentation proving that they have the legal right to foreclosure, known as standing.
As a substitute, the banks usually present affidavits attesting to ownership of the note signed by an employee of a legal services firm acting as an agent for the lender or loan servicer. Such affidavits allow foreclosures to proceed, but because they are often dubiously prepared, many questions have arisen about their validity.
Although lawyers for troubled borrowers have contended for years that banks in many cases have not properly documented their rights to foreclose, the issue erupted in mid-September when GMAC said it was halting foreclosure proceedings in 23 states because of problems with its legal practices. The move by GMAC followed testimony by an employee who signed affidavits for the lender; he said that he executed 400 of them each day without reading them or verifying that the information in them was correct.
JPMorgan Chase and Bank of America followed with similar announcements.
But these three large lenders are not the only companies employing people who have failed to verify crucial aspects of a foreclosure case, court documents show.
Last May, Herman John Kennerty, a loan administration manager in the default document group of Wells Fargo Mortgage, testified to lawyers representing a troubled borrower that he typically signed 50 to 150 foreclosure documents a day. In that case, in King County Superior Court in Seattle, he also stated that he did not independently verify the information to which he was attesting.
Wells Fargo did not respond to requests for comment.
In other cases, judges are finding that banks’ claims of standing in a foreclosure case can conflict with other evidence.
Last Thursday, Paul F. Isaacs, a judge in Bourbon County Circuit Court in Kentucky, reversed a ruling he had made in August giving Bank of New York Mellon the right to foreclose on a couple’s home. According to court filings, Mr. Isaacs had relied on the bank’s documentation that it said showed it held the note underlying the property in a trust. But after the borrowers supplied evidence indicating that the note may in fact reside in a different trust, the judge reversed himself. The court will revisit the matter soon.
Bank of New York said it was reviewing the ruling and could not comment.
Another problematic case involves a foreclosure action taken by Deutsche Bank against a borrower in the Bronx in New York. The bank says it has the right to foreclose because the mortgage was assigned to it on Oct. 15, 2009.
But according to court filings made by David B. Shaev, a lawyer at Shaev & Fleischman who represents the borrower, the assignment to Deutsche Bank is riddled with problems. First, the company that Deutsche said had assigned it the mortgage, the Sand Canyon Corporation, no longer had any rights to the underlying property when the transfer was supposed to have occurred.
Additional questions have arisen over the signature verifying an assignment of the mortgage. Court documents show that Tywanna Thomas, assistant vice president of American Home Mortgage Servicing, assigned the mortgage from Sand Canyon to Deutsche Bank in October 2009. On assignments of mortgages in other cases, Ms. Thomas’s signatures differ so wildly that it appears that three people signed the documents using Ms. Thomas’s name.
Given the differences in the signatures, Mr. Shaev filed court papers last July contending that the assignment is a sham, “prepared to create an appearance of a creditor as a real party in interest/standing, when in fact it is likely that the chain of title required in these matters was not performed, lost or both.”
Mr. Shaev also asked the judge overseeing the case, Shelley C. Chapman, to order Ms. Thomas to appear to answer questions the lawyer has raised.
John Gallagher, a spokesman for Deutsche Bank, which is trustee for the securitization that holds the note in this case, said companies servicing mortgage loans engaged the law firms that oversee foreclosure proceedings. “Loan servicers are obligated to adhere to all legal requirements,” he said, “and Deutsche Bank, as trustee, has consistently informed servicers that they are required to execute these actions in a proper and timely manner.”
Reached by phone on Saturday, Ms. Thomas declined to comment.
The United States Trustee, a unit of the Justice Department, is also weighing in on dubious court documents filed by lenders. Last January, it supported a request by Silvia Nuer, a borrower in foreclosure in the Bronx, for sanctions against JPMorgan Chase.
In testimony, a lawyer for Chase conceded that a law firm that had previously represented the bank, the Steven J. Baum firm of Buffalo, had filed inaccurate documents as it sought to take over the property from Ms. Nuer.
The Chase lawyer told a judge last January that his predecessors had combed through the chain of title on the property and could not find a proper assignment. The firm found “something didn’t happen that needed to be fixed,” he explained, and then, according to court documents, it prepared inaccurate documents to fill in the gaps.
The Baum firm did not return calls to comment.
A lawyer for the United States Trustee said that the Nuer case “does not represent an isolated example of misconduct by Chase in the Southern District of New York.”
Chase declined to comment.
“The servicers have it in their control to get the right documents and do this properly, but it is so much cheaper to run it through a foreclosure mill,” said Linda M. Tirelli, a lawyer in White Plains who represents Ms. Nuer in the case against Chase. “This is not about getting a free house for my client. It’s about a level playing field. If I submitted false documents like this to the court, I’d have my license handed to me.”
Copyright 2010 The New York Times Company. All rights reserved.
Monday, October 04, 2010
Friday, August 27, 2010
New New York bankruptcy exemptions
Here at Shenwick & Associates, one of the questions we're most frequently asked is "what will I be able to keep after for filing for Chapter 7 or Chapter 13 bankruptcy?" When a bankruptcy petition is filed, a bankruptcy estate is created for the benefit of the debtor's creditors, which consists of all of the Debtor's property except for what state or federal law allows to be exempted. Often, there are no assets left over for distribution to creditors after property is exempted, and the case becomes a "no asset" case.
What property a Debtor may keep in bankruptcy depends on which state the Debtor is filing for bankruptcy from. Every state has their own laws about what can be exempted from the bankruptcy estate, and some states allow a Debtor to choose whether to exempt property under state laws or the federal exemptions contained in § 522(d) of the Bankruptcy Code.
Under current New York law, Debtors may only use the New York State exemptions, which aside from increasing certain exemptions (such as the homestead exemption), have not been substantively revised and updated in many years.
However, New York bankruptcy exemptions are about to undergo their biggest transformation in years. New York State Senate bill S. 7034A and Assembly bill A. 8735A have been passed by the Legislature and are expected to be signed into law by Governor Paterson in the very near future.
The scope of the bill is very broad, but a few of the major changes are:
• The homestead exemption would increase from $50,000 to: $150,000 for the counties of Kings, New York, Queens, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam; $125,000 for the counties of Dutchess, Albany, Columbia, Orange, Saratoga, and Ulster; $75,000 for the remaining counties in the state.
• The motor vehicle exemption would increase from $2,400 to $4,000. If the vehicle was equipped for a disabled person, the limit would be $10,000.
• The aggregate individual bankruptcy exemption for cash, household goods and clothing would increase from $5,000 to $10,000.
• The New York Banking Department will publish cost of living adjustments to exemption amounts every three years commencing April 1, 2012.
• Debtors will now be able to choose whether to use the New York exemptions or the federal exemptions. This will be especially useful for Debtors who do not own a home, since the "wildcard" exemption in § 522(d)(5) of the Bankruptcy Code allows Debtors to exempt a significant amount of cash.
A married couple filing jointly for bankruptcy can double the amount of the exemptions listed above.
To find how to make the best choices to protect your precious property in bankruptcy, please contact Jim Shenwick.
What property a Debtor may keep in bankruptcy depends on which state the Debtor is filing for bankruptcy from. Every state has their own laws about what can be exempted from the bankruptcy estate, and some states allow a Debtor to choose whether to exempt property under state laws or the federal exemptions contained in § 522(d) of the Bankruptcy Code.
Under current New York law, Debtors may only use the New York State exemptions, which aside from increasing certain exemptions (such as the homestead exemption), have not been substantively revised and updated in many years.
However, New York bankruptcy exemptions are about to undergo their biggest transformation in years. New York State Senate bill S. 7034A and Assembly bill A. 8735A have been passed by the Legislature and are expected to be signed into law by Governor Paterson in the very near future.
The scope of the bill is very broad, but a few of the major changes are:
• The homestead exemption would increase from $50,000 to: $150,000 for the counties of Kings, New York, Queens, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam; $125,000 for the counties of Dutchess, Albany, Columbia, Orange, Saratoga, and Ulster; $75,000 for the remaining counties in the state.
• The motor vehicle exemption would increase from $2,400 to $4,000. If the vehicle was equipped for a disabled person, the limit would be $10,000.
• The aggregate individual bankruptcy exemption for cash, household goods and clothing would increase from $5,000 to $10,000.
• The New York Banking Department will publish cost of living adjustments to exemption amounts every three years commencing April 1, 2012.
• Debtors will now be able to choose whether to use the New York exemptions or the federal exemptions. This will be especially useful for Debtors who do not own a home, since the "wildcard" exemption in § 522(d)(5) of the Bankruptcy Code allows Debtors to exempt a significant amount of cash.
A married couple filing jointly for bankruptcy can double the amount of the exemptions listed above.
To find how to make the best choices to protect your precious property in bankruptcy, please contact Jim Shenwick.
Thursday, August 12, 2010
NYT: Borrowers Refuse to Pay Billions in Home Equity Loans
By DAVID STREITFELD
PHOENIX — During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.
The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.
Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.
The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.
“When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” said Christopher A. Combs, a real estate lawyer here, where the problem is especially pronounced. “Their chances are pretty good of walking away and not having the bank collect.”
Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.
Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”
Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.
“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”
But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.
“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.”
Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next. “I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”
Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”
Desert Schools, the largest credit union in Arizona, increased its allowance for loan losses of all types by 926 percent in the last two years. It declined to comment.
The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.
“No one had ever seen a national real estate bubble,” said Keith Leggett, a senior economist with the American Bankers Association. “We would love to change history so more conservative underwriting practices were put in place.”
The delinquency rate on home equity loans was 4.12 percent in the first quarter, down slightly from the fourth quarter of 2009, when it was the highest in 26 years of such record keeping. Borrowers who default can expect damage to their creditworthiness and in some cases tax consequences.
Nevertheless, Mr. Leggett said, “more than a sliver” of the debt will never be repaid.
Eric Hairston plans to be among this group. During the boom, he bought as an investment a three-apartment property in Hoboken, N.J. At the peak, when the building was worth as much as $1.5 million, he took out a $190,000 home equity loan.
Mr. Hairston, who worked in the technology department of the investment bank Lehman Brothers, invested in a Northern California pizza catering company. When real estate cratered, Mr. Hairston went into default.
The building was sold this spring for $750,000. Only a small slice went to the home equity lender, which reserved the right to come after Mr. Hairston for the rest of what it was owed.
Mr. Hairston, who now works for the pizza company, has not heard again from his lender.
Since the lender made a bad loan, Mr. Hairston argues, a 10 percent settlement would be reasonable. “It’s not the homeowner’s fault that the value of the collateral drops,” he said.
Marc McCain, a Phoenix lawyer, has been retained by about 300 new clients in the last year, many of whom were planning to walk away from properties they could afford but wanted to be rid of — strategic defaulters. On top of their unpaid mortgage obligations, they had home equity loans of $50,000 to $150,000.
Fewer than 5 percent of these clients said they would continue paying their home equity loan no matter what. Ten percent intend to negotiate a short sale on their house, where the holders of the primary mortgage and the home equity loan agree to accept less than what they are owed. In such deals primary mortgage holders get paid first.
The other 85 percent said they would default and worry about the debt only if and when they were forced to, Mr. McCain said.
“People want to have some green pastures in front of them,” said Mr. McCain, who recently negotiated a couple’s $75,000 home equity debt into a $3,500 settlement. “It’s come to the point where morality is no longer an issue.”
Darin Bolton, a software engineer, defaulted on the loans for his house in a Chicago suburb last year because “we felt we were just tossing our money into a hole.” This spring, he moved into a rental a few blocks away.
“I’m kind of banking on there being too many of us for the lenders to pursue,” he said. “There is strength in numbers.”
John Collins Rudolf contributed reporting.
Copyright 2010 The New York Times Company. All rights reserved.
PHOENIX — During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.
The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.
Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.
The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.
“When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” said Christopher A. Combs, a real estate lawyer here, where the problem is especially pronounced. “Their chances are pretty good of walking away and not having the bank collect.”
Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.
Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”
Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.
“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”
But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.
“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.”
Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next. “I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”
Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”
Desert Schools, the largest credit union in Arizona, increased its allowance for loan losses of all types by 926 percent in the last two years. It declined to comment.
The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.
“No one had ever seen a national real estate bubble,” said Keith Leggett, a senior economist with the American Bankers Association. “We would love to change history so more conservative underwriting practices were put in place.”
The delinquency rate on home equity loans was 4.12 percent in the first quarter, down slightly from the fourth quarter of 2009, when it was the highest in 26 years of such record keeping. Borrowers who default can expect damage to their creditworthiness and in some cases tax consequences.
Nevertheless, Mr. Leggett said, “more than a sliver” of the debt will never be repaid.
Eric Hairston plans to be among this group. During the boom, he bought as an investment a three-apartment property in Hoboken, N.J. At the peak, when the building was worth as much as $1.5 million, he took out a $190,000 home equity loan.
Mr. Hairston, who worked in the technology department of the investment bank Lehman Brothers, invested in a Northern California pizza catering company. When real estate cratered, Mr. Hairston went into default.
The building was sold this spring for $750,000. Only a small slice went to the home equity lender, which reserved the right to come after Mr. Hairston for the rest of what it was owed.
Mr. Hairston, who now works for the pizza company, has not heard again from his lender.
Since the lender made a bad loan, Mr. Hairston argues, a 10 percent settlement would be reasonable. “It’s not the homeowner’s fault that the value of the collateral drops,” he said.
Marc McCain, a Phoenix lawyer, has been retained by about 300 new clients in the last year, many of whom were planning to walk away from properties they could afford but wanted to be rid of — strategic defaulters. On top of their unpaid mortgage obligations, they had home equity loans of $50,000 to $150,000.
Fewer than 5 percent of these clients said they would continue paying their home equity loan no matter what. Ten percent intend to negotiate a short sale on their house, where the holders of the primary mortgage and the home equity loan agree to accept less than what they are owed. In such deals primary mortgage holders get paid first.
The other 85 percent said they would default and worry about the debt only if and when they were forced to, Mr. McCain said.
“People want to have some green pastures in front of them,” said Mr. McCain, who recently negotiated a couple’s $75,000 home equity debt into a $3,500 settlement. “It’s come to the point where morality is no longer an issue.”
Darin Bolton, a software engineer, defaulted on the loans for his house in a Chicago suburb last year because “we felt we were just tossing our money into a hole.” This spring, he moved into a rental a few blocks away.
“I’m kind of banking on there being too many of us for the lenders to pursue,” he said. “There is strength in numbers.”
John Collins Rudolf contributed reporting.
Copyright 2010 The New York Times Company. All rights reserved.
Monday, August 02, 2010
NYT: Old Debts That Won't Die
By ANDREW MARTIN
Timothy McCollough freely admits that he stopped making payments on his Chase Manhattan credit card in 1999. He says he did not have the means to pay after he was disabled by a head injury that cost him his job as a school security guard.
But more than a decade later, Mr. McCollough, who is 52 and lives in Laurel, Mont., is still haunted by the unpaid balance, which was originally about $3,000.
In 2007, he was sued a second time over the debt, and this time the suit contended that he owed significantly more: $3,816 in credit card debt, plus $5,536 in interest and $481 in legal fees. As he did the first time, Mr. McCollough sent a handwritten note to the court explaining that the statute of limitations on the debt had passed.
“I have had no dealing with any credit card in 8 1/2 years,” he wrote to the court. “The pain they caused is worth more than the money they want.”
Mr. McCollough is not the only borrower being pursued for a balance that has expired. Such claims are routinely sold on debt collection Web sites, where out-of-statute debt is for sale for a penny or less on the dollar.
In most states, it is legal for collectors to pursue out-of-statute debt, as long as they do not file a lawsuit or threaten to do so.
But some lawsuits are filed anyway, and consumer groups and even some industry consultants argue that collectors routinely harass debtors for unpaid balances that have exceeded the statute of limitations. In some cases, collectors have unlawfully added fees and interest.
“It’s so cheap, if you can work it smart, you don’t need to collect that much,” said John Pratt, a consultant to the debt-buying industry and an author of “Debt Purchasing: An Investor’s Guide to Buying Debt” (Morris Publishing, 2005). He said investors in old debt generally hoped to recoup two and half times what they paid for a group of claims.
Because collectors cannot sue on old debt, he said, they are more likely to resort to abusive tactics. “Time-barred debt is where the worst abuse has occurred towards the debtor,” he said.
In a report issued July 12, the Federal Trade Commission called for “significant reforms” in the debt collection industry and recommended that states change the murky laws that govern out-of-statute debt.
The statute of limitations for debt varies by state, generally from three to 10 years. In many states, collectors can restart the clock if they can persuade the consumer to make even a tiny payment toward the old debt. Debt collectors generally do not tell consumers that making a payment will revive the debt so it can be legally pursued.
“The point of the payments is not so much to get the money” as it is to restart the clock, said Daniel Schlanger, a New York lawyer who represents consumers in cases against debt collectors.
The F.T.C., in its report, recommends that states make sure the statute of limitations for outstanding debt is clear and that collectors filing a lawsuit be required to prove that the debt is not out of statute.
In addition, the agency recommends that states require collectors to tell consumers that they are not entitled to sue on out-of-statute debt and that making a partial payment revives the entire liability.
Rozanne Andersen, chief executive of ACA International, an association of debt collection companies, said she did not believe that old consumer debt should expire at all. The money is owed whether the debt is a month old or 10 years old, she said.
Ms. Andersen says her association opposes filing lawsuits against out-of-statute debt or using trickery to get consumers to pay. But she says she sees nothing wrong with debt collectors pursuing legitimate debts, even if that might spur the borrower to restart the statute of limitations.
In addition, she said it was ridiculous to expect debt collectors to warn consumers that their debts had expired.
“It suggests that if a consumer can avoid paying for a certain period of time, they will enjoy a windfall,” she said, adding later, “People are obligated to pay their debts, whether the statute of limitations period has run or not.”
The debt collection industry has undergone a transformation in the last decade. Credit card issuers, health care providers and cellphone companies now routinely sell debt that they deem uncollectible to debt buyers, who then either try to collect it themselves, turn it over to a collections law firm or sell it again.
The price of secondhand debt depends on factors like the age of the debt, average balance, how much documentation is available to prove the debt and where the debtors are located.
Out-of-statute debt is readily available on various Web sites that cater to the collections industry. For instance, a Chaska, Minn., company called Credit Card Reseller is offering an $8 million portfolio of Bank of America credit card accounts, which on average have a balance of $4,981 and were written off by the bank in 2003.
The expected asking price is $16,000, or two-tenths of a cent for every dollar owed.
While collectors are not supposed to file lawsuits to pursue out-of-statute debt, some consumer lawyers say it happens routinely. In California, for instance, Victoria Byers of Los Angeles was sued last year for $1,708 over an old AT&T cellphone bill that she disputed. Her last payment was made in 2005.
Last month, Ms. Byers, who is 50, filed her own suit contending that the debt collector, Professional Collection Consultants, and its lawyer, Scott Wu, violated the Fair Debt Collection Practices Act. Her suit asserts that the collection firm and Mr. Wu routinely file lawsuits on stale debt in the hopes of obtaining default judgments.
Ms. Byers’s lawyer, Michael Stone, said he based the accusation on the high volume of lawsuits filed by Mr. Wu and on the “reckless” manner in which they treated Ms. Byers.
Clark Garen, a lawyer for Professional Collection Consultants, denied that his firm purposely set out to collect expired debt. As a result of the accusations in the Byers lawsuit, he said the firm reviewed its record of filing lawsuits and found a small number of instances in which lawsuits were filed against debt in which the statute of limitations had expired.
Of the 11,946 lawsuits that it filed over the last four years in California, 73 involved debt in which the statute of limitation had expired, Mr. Garen said. Professional Collection Consultants is dropping the lawsuits in which a judgment has not been entered and refunding $44,710.82 to consumers in 29 of the cases in which some money was collected, he said.
Mr. McCollough, the man who was pursued for his old Chase credit card debt, also ended up countersuing the collection law firm that sued him, Johnson Rodenburg & Lauinger of Bismarck, N.D. Last year, a Montana jury awarded him $311,000 in damages, primarily for emotional distress. The decision is being appealed.
Fred Simpson, a Missoula, Mont., lawyer representing Johnson Rodenburg, declined to comment and pointed instead to his appellate brief, in which cites an “accumulation of errors” by the district court.
In his closing arguments at the trial, Mr. Simpson pointed out that Mr. McCollough still owed the balance on his Chase card.
“The money was green and he spent it,” Mr. Simpson said. “If Mr. McCollough paid his credit card bill to Chase Manhattan, we wouldn’t be here this morning.”
Copyright 2010 The New York Times Company. All rights reserved.
Timothy McCollough freely admits that he stopped making payments on his Chase Manhattan credit card in 1999. He says he did not have the means to pay after he was disabled by a head injury that cost him his job as a school security guard.
But more than a decade later, Mr. McCollough, who is 52 and lives in Laurel, Mont., is still haunted by the unpaid balance, which was originally about $3,000.
In 2007, he was sued a second time over the debt, and this time the suit contended that he owed significantly more: $3,816 in credit card debt, plus $5,536 in interest and $481 in legal fees. As he did the first time, Mr. McCollough sent a handwritten note to the court explaining that the statute of limitations on the debt had passed.
“I have had no dealing with any credit card in 8 1/2 years,” he wrote to the court. “The pain they caused is worth more than the money they want.”
Mr. McCollough is not the only borrower being pursued for a balance that has expired. Such claims are routinely sold on debt collection Web sites, where out-of-statute debt is for sale for a penny or less on the dollar.
In most states, it is legal for collectors to pursue out-of-statute debt, as long as they do not file a lawsuit or threaten to do so.
But some lawsuits are filed anyway, and consumer groups and even some industry consultants argue that collectors routinely harass debtors for unpaid balances that have exceeded the statute of limitations. In some cases, collectors have unlawfully added fees and interest.
“It’s so cheap, if you can work it smart, you don’t need to collect that much,” said John Pratt, a consultant to the debt-buying industry and an author of “Debt Purchasing: An Investor’s Guide to Buying Debt” (Morris Publishing, 2005). He said investors in old debt generally hoped to recoup two and half times what they paid for a group of claims.
Because collectors cannot sue on old debt, he said, they are more likely to resort to abusive tactics. “Time-barred debt is where the worst abuse has occurred towards the debtor,” he said.
In a report issued July 12, the Federal Trade Commission called for “significant reforms” in the debt collection industry and recommended that states change the murky laws that govern out-of-statute debt.
The statute of limitations for debt varies by state, generally from three to 10 years. In many states, collectors can restart the clock if they can persuade the consumer to make even a tiny payment toward the old debt. Debt collectors generally do not tell consumers that making a payment will revive the debt so it can be legally pursued.
“The point of the payments is not so much to get the money” as it is to restart the clock, said Daniel Schlanger, a New York lawyer who represents consumers in cases against debt collectors.
The F.T.C., in its report, recommends that states make sure the statute of limitations for outstanding debt is clear and that collectors filing a lawsuit be required to prove that the debt is not out of statute.
In addition, the agency recommends that states require collectors to tell consumers that they are not entitled to sue on out-of-statute debt and that making a partial payment revives the entire liability.
Rozanne Andersen, chief executive of ACA International, an association of debt collection companies, said she did not believe that old consumer debt should expire at all. The money is owed whether the debt is a month old or 10 years old, she said.
Ms. Andersen says her association opposes filing lawsuits against out-of-statute debt or using trickery to get consumers to pay. But she says she sees nothing wrong with debt collectors pursuing legitimate debts, even if that might spur the borrower to restart the statute of limitations.
In addition, she said it was ridiculous to expect debt collectors to warn consumers that their debts had expired.
“It suggests that if a consumer can avoid paying for a certain period of time, they will enjoy a windfall,” she said, adding later, “People are obligated to pay their debts, whether the statute of limitations period has run or not.”
The debt collection industry has undergone a transformation in the last decade. Credit card issuers, health care providers and cellphone companies now routinely sell debt that they deem uncollectible to debt buyers, who then either try to collect it themselves, turn it over to a collections law firm or sell it again.
The price of secondhand debt depends on factors like the age of the debt, average balance, how much documentation is available to prove the debt and where the debtors are located.
Out-of-statute debt is readily available on various Web sites that cater to the collections industry. For instance, a Chaska, Minn., company called Credit Card Reseller is offering an $8 million portfolio of Bank of America credit card accounts, which on average have a balance of $4,981 and were written off by the bank in 2003.
The expected asking price is $16,000, or two-tenths of a cent for every dollar owed.
While collectors are not supposed to file lawsuits to pursue out-of-statute debt, some consumer lawyers say it happens routinely. In California, for instance, Victoria Byers of Los Angeles was sued last year for $1,708 over an old AT&T cellphone bill that she disputed. Her last payment was made in 2005.
Last month, Ms. Byers, who is 50, filed her own suit contending that the debt collector, Professional Collection Consultants, and its lawyer, Scott Wu, violated the Fair Debt Collection Practices Act. Her suit asserts that the collection firm and Mr. Wu routinely file lawsuits on stale debt in the hopes of obtaining default judgments.
Ms. Byers’s lawyer, Michael Stone, said he based the accusation on the high volume of lawsuits filed by Mr. Wu and on the “reckless” manner in which they treated Ms. Byers.
Clark Garen, a lawyer for Professional Collection Consultants, denied that his firm purposely set out to collect expired debt. As a result of the accusations in the Byers lawsuit, he said the firm reviewed its record of filing lawsuits and found a small number of instances in which lawsuits were filed against debt in which the statute of limitations had expired.
Of the 11,946 lawsuits that it filed over the last four years in California, 73 involved debt in which the statute of limitation had expired, Mr. Garen said. Professional Collection Consultants is dropping the lawsuits in which a judgment has not been entered and refunding $44,710.82 to consumers in 29 of the cases in which some money was collected, he said.
Mr. McCollough, the man who was pursued for his old Chase credit card debt, also ended up countersuing the collection law firm that sued him, Johnson Rodenburg & Lauinger of Bismarck, N.D. Last year, a Montana jury awarded him $311,000 in damages, primarily for emotional distress. The decision is being appealed.
Fred Simpson, a Missoula, Mont., lawyer representing Johnson Rodenburg, declined to comment and pointed instead to his appellate brief, in which cites an “accumulation of errors” by the district court.
In his closing arguments at the trial, Mr. Simpson pointed out that Mr. McCollough still owed the balance on his Chase card.
“The money was green and he spent it,” Mr. Simpson said. “If Mr. McCollough paid his credit card bill to Chase Manhattan, we wouldn’t be here this morning.”
Copyright 2010 The New York Times Company. All rights reserved.
Monday, July 26, 2010
NYT: The Roller-Coaster Ride Called a Short Sale
By VIVIAN S. TOY
With property values down by as much as 30 percent in New York City, some homeowners who bought at the height of the market are finding themselves underwater and are being forced to sell their homes in short sales.
In the months after the Lehman Brothers crash, most of the short-sale action was in the boroughs outside of Manhattan and in the suburbs. This year, however, short sales appear to be picking up in Manhattan, real estate and mortgage brokers say.
A recent search of sales listings found almost 20 advertised short sales, and that did not include short sales disguised with euphemistic terms like “owner must sell.” The advertised short sales range from a $250,000 two-bedroom on the Upper East Side to a $2 million three-bedroom designed by Philippe Starck in the financial district. They include town houses, co-ops, condops and condos.
And the number of short sales, in which a home sells for less than the amount owed on the mortgage, will most likely continue to grow. The number of lis pendens filings — a first step in the foreclosure process for houses and condos — doubled in 2009 in Manhattan, to 724 from 334 in 2008; this year, 382 had been filed by the end of June, according to the Furman Center for Real Estate and Urban Policy of New York University.
“Short sales are happening and they’re all over the map,” said Melissa Cohn, the president of the Manhattan Mortgage Company. “We’re seeing multimillion-dollar foreclosures and short sales that no one ever anticipated in New York City.”
Jonathan J. Miller, the president of the appraisal firm Miller Samuel and a market analyst, said that 2010 might well be dubbed the Year of the Short Sale nationally. “A short sale is going to be the only way for many people who bought at the peak and who are now underwater to move on with their lives if they have to relocate or downsize,” he said.
Short sales are a gentler alternative to foreclosure for both sellers and lenders. “Compared to a foreclosure, a short sale generally allows an easier transition for the borrower, less impact on their credit history, and larger net proceeds to the loan’s owner,” said Tom Kelly, a spokesman for JPMorgan Chase, adding that Chase encourages borrowers who are unable to keep their homes to consider short sales.
Some advertised short sales seem like bargains, but most are priced just a little under market — low enough to generate interest from buyers, but not too low to raise objections from lenders.
Short sales, however, are not for the faint-hearted. While there is a possibility for a good price, there is also a good chance that the deal will not go through. Many cooks are involved in this stew. The buyer must negotiate the price with both the seller and the seller’s lender. At the same time, the seller must negotiate with the lender on the terms for forgiving the amount still owed on the mortgage. Meanwhile the bank is negotiating fees for lawyers and brokers. The process can take six to nine months.
For Sharay Hayes, who owns a four-story town house on Strivers Row in Harlem, a short sale may be the only way to avoid bankruptcy. Mr. Hayes inherited a share of the house, where he has lived since he was 3, from his grandfather in 2001. Over the years, he took out several mortgages to buy out six relatives and to restore the house’s 19th-century grandeur while renovating it with 21st-century finishes and luxuries like a steam room and a whirlpool tub.
Until late last year, he kept up with payments on the $1.8 million he owes on the house. But his “entire portfolio of income earning was in real estate,” he said, namely rental properties in Ohio. Those investments went south when the auto plant that employed most of his tenants was shuttered about a year ago; he also is on the verge of losing these properties.
“That’s another nightmare I’m trying to wake up from,” Mr. Hayes said.
He has had his Harlem home on and off the market since 2006 for as much as $2.9 million, but with the recession, houses in the immediate area now are selling for closer to $1 million. His current broker, Gordon Sokich, the president of Luxor Homes and Investment Realty, an agency that specializes in distressed property sales, advised him to put it on the market for $850,000.
The low price prompted a bidding war and the house is now in contract for $975,000. Mr. Sokich said he expected the bank to counter with a higher price. “We don’t know what the bank’s bottom line is,” he said. He added that because Mr. Hayes has several liens on the house, the first lien is probably the only one that will be repaid in full.
“Once I conceded that I was going to lose my home,” Mr. Hayes said, “I felt like every day I was in the bedroom with my shades drawn, hoping it would go away.” But the prospect of a short sale “buys me some time.”
Because lenders can always sue after a short sale for what is still owed on a mortgage, sellers are advised to ask their lenders to waive the right to sue. But even with a waiver, lenders will often try to make up some of what is owed, either by seeking a cash payment at the closing or a promissory note. Any amount that is forgiven can be considered income by the Internal Revenue Service.
“The seller generally walks away with nothing,” said John Bradbury, a Manhattan lawyer who has taught seminars on short sales to real estate agents. “but they get out from under a mortgage they can no longer afford.”
Short sales often take months because many mortgages are owned by multiple investors, each of whom must agree to the process. Banks, too, are overwhelmed by foreclosure filings and applications for loan modifications. In addition, banks are not about to broadcast how much of a loss they’re willing to take in a short sale.
“There’s no 1-800 number that you can call to find out what a bank will take,” Mr. Bradbury said. “It’s all done on a case-by-case basis, which is what lends itself to the painfully long process.”
Phil Tesoriero, the owner of Exceptional Homes Real Estate in Farmingdale, N.Y., and the teacher of a certification course on short sales, said he had seen short sales take anywhere from 45 days to 18 months. He has handled scores of short sales in Queens and Long Island, where he estimated there are a few thousand short sale listings.
Finding the right person at a bank to approve a short sale is often the biggest problem. “That person hasn’t been born yet,” Mr. Tesoriero deadpanned. “If I get the same person on the phone twice, it’s a miracle.” The best way to deal with that, he said, “is to present a proposal that doesn’t require much conversation.” And, he added, “that means sending a proposal that makes sense for the bank.”
He urged starting with a list price not too far off the market value, providing good comparables to support the price, and not wasting the bank’s time by presenting hopelessly lowball offers.
Carol Kaplan, a spokeswoman for the American Bankers Association, said that short sales, like foreclosures and mortgage modifications, had been long processes in recent years, “because of the number of them in the pipeline and the amount of paperwork involved.” She said that although banks preferred short sales to foreclosures, “they also want to make sure that there is no other option that would allow the homeowner to repay the loan in full.”
Banks generally will not entertain a short sale until a seller has a signed contract and 10 percent down from a prospective buyer. The Obama administration started a program this spring to encourage more short sales by allowing lenders to preapprove a listing price and setting time limits for the approval process. But many people in Manhattan do not qualify for the program, because it excludes anyone who owes more than $729,750 and whose monthly payment exceeds 31 percent of gross income.
It is only when the offer is in hand that the seller submits an application to the bank. This includes a hardship letter documenting why he or she can no longer pay the mortgage — kind of like a co-op board package in reverse, this time to prove lack of resources.
For buyers, uncertainty is the main thing that sets a short sale apart from a regular sale. Because short sales can take months, a buyer seeking a mortgage may need to seek several extensions on a locked-in rate. Lawyers advise buyers to include a contract clause that allows them to pull out of the deal after a specified time period if the bank drags its heels on a decision.
Bill Dakak exercised that option earlier this year on the potential short sale of a studio in an Upper East Side co-op. He had a signed contract for $210,000 on a renovated apartment that had sold in 2005 for $399,000. His broker, Mark Baum, an agent with Prudential Douglas Elliman, said that the bank obtained and then somehow lost an appraisal and questioned the comparables provided by the seller’s broker. Weeks turned into months.
Mr. Dakak’s contract allowed him to back out after three months, and he did. “You’re asking for a response and you get nothing,” he said. “I needed to move on, and honestly I walked away from it feeling like the bank wasn’t interested in selling.”
Mr. Dakak, who works in finance in Miami and was looking for a pied-à-terre, wound up spending $160,000 in the same building, on a studio in need of updating.
Short sales tend to attract “somewhat sophisticated buyers,” said Mary Vetri, a senior vice president of Brown Harris Stevens who helped complete a short sale on a one-bedroom condo in a Midtown high-rise in December. She represented the seller, who had bought the place in 2007 for about $850,000, but then lost his job and tried selling it at $899,000. After a year at that price, it was dropped to $739,000.
It sold for $690,000, when similar apartments in the building were listed for about $20,000 more. The buyer, Ms. Vetri said, “didn’t need to move right away and he was educated on short sales and involved enough so that we were all focused on getting it accomplished.” The sale closed six months after going to contract.
Even when all the paperwork is submitted and various parties work hard to keep a short sale moving, a deal can still unwind after months of waiting.
When former clients came to Robin Lyon-Gardiner, a vice president of Brown Harris Stevens, saying they could no longer afford their two-bedroom condo with an office and a garden on the Upper West Side, she knew it would have to be a short sale. The couple owed close to $1.2 million on the place, but a similar apartment in the building had sold in a short sale for $940,000.
Ms. Lyon-Gardiner priced it at $975,000 last August, setting off two bidding wars. The first ended in a contract for $999,000, but that buyer “got cold feet and walked away,” she said. The second contract with different buyers was for $1.1 million.
The broker for the buyers, Carla de Leon, an agent at Halstead Property, had taken a class on short sales. She warned her clients that the process could drag on for months. “I also told them they had to be realistic,” she said, “because I had learned that there was only a 60 to 70 percent chance that the deal would even get done.” But her clients were game.
For months, the two brokers were in constant contact with each other, the owner’s lawyer and the bank. “I never got through to anyone who could tell me anything,” Ms. de Leon said, “but I felt it was important to keep trying. Because maybe I might get the one person who would feel sorry for me and try to move it along.”
At one point, the bank lost the file and the seller had to resubmit the application. Then, about six months after the contract was signed, the bank finally made a decision.
“After all that — it was so much heartache and so much time — they declined it,” Ms. Lyon-Gardiner said. “I never had a listing that so many people wanted and nobody ended up getting.”
Ms. de Leon said her buyers, whose deposit was returned, were stunned. “They didn’t understand how the bank could sit on it for so long or why the bank wouldn’t want the most they could get for the property,” she said.
At last word, the owners planned to declare bankruptcy.
Copyright 2010 The New York Times Company. All rights reserved.
With property values down by as much as 30 percent in New York City, some homeowners who bought at the height of the market are finding themselves underwater and are being forced to sell their homes in short sales.
In the months after the Lehman Brothers crash, most of the short-sale action was in the boroughs outside of Manhattan and in the suburbs. This year, however, short sales appear to be picking up in Manhattan, real estate and mortgage brokers say.
A recent search of sales listings found almost 20 advertised short sales, and that did not include short sales disguised with euphemistic terms like “owner must sell.” The advertised short sales range from a $250,000 two-bedroom on the Upper East Side to a $2 million three-bedroom designed by Philippe Starck in the financial district. They include town houses, co-ops, condops and condos.
And the number of short sales, in which a home sells for less than the amount owed on the mortgage, will most likely continue to grow. The number of lis pendens filings — a first step in the foreclosure process for houses and condos — doubled in 2009 in Manhattan, to 724 from 334 in 2008; this year, 382 had been filed by the end of June, according to the Furman Center for Real Estate and Urban Policy of New York University.
“Short sales are happening and they’re all over the map,” said Melissa Cohn, the president of the Manhattan Mortgage Company. “We’re seeing multimillion-dollar foreclosures and short sales that no one ever anticipated in New York City.”
Jonathan J. Miller, the president of the appraisal firm Miller Samuel and a market analyst, said that 2010 might well be dubbed the Year of the Short Sale nationally. “A short sale is going to be the only way for many people who bought at the peak and who are now underwater to move on with their lives if they have to relocate or downsize,” he said.
Short sales are a gentler alternative to foreclosure for both sellers and lenders. “Compared to a foreclosure, a short sale generally allows an easier transition for the borrower, less impact on their credit history, and larger net proceeds to the loan’s owner,” said Tom Kelly, a spokesman for JPMorgan Chase, adding that Chase encourages borrowers who are unable to keep their homes to consider short sales.
Some advertised short sales seem like bargains, but most are priced just a little under market — low enough to generate interest from buyers, but not too low to raise objections from lenders.
Short sales, however, are not for the faint-hearted. While there is a possibility for a good price, there is also a good chance that the deal will not go through. Many cooks are involved in this stew. The buyer must negotiate the price with both the seller and the seller’s lender. At the same time, the seller must negotiate with the lender on the terms for forgiving the amount still owed on the mortgage. Meanwhile the bank is negotiating fees for lawyers and brokers. The process can take six to nine months.
For Sharay Hayes, who owns a four-story town house on Strivers Row in Harlem, a short sale may be the only way to avoid bankruptcy. Mr. Hayes inherited a share of the house, where he has lived since he was 3, from his grandfather in 2001. Over the years, he took out several mortgages to buy out six relatives and to restore the house’s 19th-century grandeur while renovating it with 21st-century finishes and luxuries like a steam room and a whirlpool tub.
Until late last year, he kept up with payments on the $1.8 million he owes on the house. But his “entire portfolio of income earning was in real estate,” he said, namely rental properties in Ohio. Those investments went south when the auto plant that employed most of his tenants was shuttered about a year ago; he also is on the verge of losing these properties.
“That’s another nightmare I’m trying to wake up from,” Mr. Hayes said.
He has had his Harlem home on and off the market since 2006 for as much as $2.9 million, but with the recession, houses in the immediate area now are selling for closer to $1 million. His current broker, Gordon Sokich, the president of Luxor Homes and Investment Realty, an agency that specializes in distressed property sales, advised him to put it on the market for $850,000.
The low price prompted a bidding war and the house is now in contract for $975,000. Mr. Sokich said he expected the bank to counter with a higher price. “We don’t know what the bank’s bottom line is,” he said. He added that because Mr. Hayes has several liens on the house, the first lien is probably the only one that will be repaid in full.
“Once I conceded that I was going to lose my home,” Mr. Hayes said, “I felt like every day I was in the bedroom with my shades drawn, hoping it would go away.” But the prospect of a short sale “buys me some time.”
Because lenders can always sue after a short sale for what is still owed on a mortgage, sellers are advised to ask their lenders to waive the right to sue. But even with a waiver, lenders will often try to make up some of what is owed, either by seeking a cash payment at the closing or a promissory note. Any amount that is forgiven can be considered income by the Internal Revenue Service.
“The seller generally walks away with nothing,” said John Bradbury, a Manhattan lawyer who has taught seminars on short sales to real estate agents. “but they get out from under a mortgage they can no longer afford.”
Short sales often take months because many mortgages are owned by multiple investors, each of whom must agree to the process. Banks, too, are overwhelmed by foreclosure filings and applications for loan modifications. In addition, banks are not about to broadcast how much of a loss they’re willing to take in a short sale.
“There’s no 1-800 number that you can call to find out what a bank will take,” Mr. Bradbury said. “It’s all done on a case-by-case basis, which is what lends itself to the painfully long process.”
Phil Tesoriero, the owner of Exceptional Homes Real Estate in Farmingdale, N.Y., and the teacher of a certification course on short sales, said he had seen short sales take anywhere from 45 days to 18 months. He has handled scores of short sales in Queens and Long Island, where he estimated there are a few thousand short sale listings.
Finding the right person at a bank to approve a short sale is often the biggest problem. “That person hasn’t been born yet,” Mr. Tesoriero deadpanned. “If I get the same person on the phone twice, it’s a miracle.” The best way to deal with that, he said, “is to present a proposal that doesn’t require much conversation.” And, he added, “that means sending a proposal that makes sense for the bank.”
He urged starting with a list price not too far off the market value, providing good comparables to support the price, and not wasting the bank’s time by presenting hopelessly lowball offers.
Carol Kaplan, a spokeswoman for the American Bankers Association, said that short sales, like foreclosures and mortgage modifications, had been long processes in recent years, “because of the number of them in the pipeline and the amount of paperwork involved.” She said that although banks preferred short sales to foreclosures, “they also want to make sure that there is no other option that would allow the homeowner to repay the loan in full.”
Banks generally will not entertain a short sale until a seller has a signed contract and 10 percent down from a prospective buyer. The Obama administration started a program this spring to encourage more short sales by allowing lenders to preapprove a listing price and setting time limits for the approval process. But many people in Manhattan do not qualify for the program, because it excludes anyone who owes more than $729,750 and whose monthly payment exceeds 31 percent of gross income.
It is only when the offer is in hand that the seller submits an application to the bank. This includes a hardship letter documenting why he or she can no longer pay the mortgage — kind of like a co-op board package in reverse, this time to prove lack of resources.
For buyers, uncertainty is the main thing that sets a short sale apart from a regular sale. Because short sales can take months, a buyer seeking a mortgage may need to seek several extensions on a locked-in rate. Lawyers advise buyers to include a contract clause that allows them to pull out of the deal after a specified time period if the bank drags its heels on a decision.
Bill Dakak exercised that option earlier this year on the potential short sale of a studio in an Upper East Side co-op. He had a signed contract for $210,000 on a renovated apartment that had sold in 2005 for $399,000. His broker, Mark Baum, an agent with Prudential Douglas Elliman, said that the bank obtained and then somehow lost an appraisal and questioned the comparables provided by the seller’s broker. Weeks turned into months.
Mr. Dakak’s contract allowed him to back out after three months, and he did. “You’re asking for a response and you get nothing,” he said. “I needed to move on, and honestly I walked away from it feeling like the bank wasn’t interested in selling.”
Mr. Dakak, who works in finance in Miami and was looking for a pied-à-terre, wound up spending $160,000 in the same building, on a studio in need of updating.
Short sales tend to attract “somewhat sophisticated buyers,” said Mary Vetri, a senior vice president of Brown Harris Stevens who helped complete a short sale on a one-bedroom condo in a Midtown high-rise in December. She represented the seller, who had bought the place in 2007 for about $850,000, but then lost his job and tried selling it at $899,000. After a year at that price, it was dropped to $739,000.
It sold for $690,000, when similar apartments in the building were listed for about $20,000 more. The buyer, Ms. Vetri said, “didn’t need to move right away and he was educated on short sales and involved enough so that we were all focused on getting it accomplished.” The sale closed six months after going to contract.
Even when all the paperwork is submitted and various parties work hard to keep a short sale moving, a deal can still unwind after months of waiting.
When former clients came to Robin Lyon-Gardiner, a vice president of Brown Harris Stevens, saying they could no longer afford their two-bedroom condo with an office and a garden on the Upper West Side, she knew it would have to be a short sale. The couple owed close to $1.2 million on the place, but a similar apartment in the building had sold in a short sale for $940,000.
Ms. Lyon-Gardiner priced it at $975,000 last August, setting off two bidding wars. The first ended in a contract for $999,000, but that buyer “got cold feet and walked away,” she said. The second contract with different buyers was for $1.1 million.
The broker for the buyers, Carla de Leon, an agent at Halstead Property, had taken a class on short sales. She warned her clients that the process could drag on for months. “I also told them they had to be realistic,” she said, “because I had learned that there was only a 60 to 70 percent chance that the deal would even get done.” But her clients were game.
For months, the two brokers were in constant contact with each other, the owner’s lawyer and the bank. “I never got through to anyone who could tell me anything,” Ms. de Leon said, “but I felt it was important to keep trying. Because maybe I might get the one person who would feel sorry for me and try to move it along.”
At one point, the bank lost the file and the seller had to resubmit the application. Then, about six months after the contract was signed, the bank finally made a decision.
“After all that — it was so much heartache and so much time — they declined it,” Ms. Lyon-Gardiner said. “I never had a listing that so many people wanted and nobody ended up getting.”
Ms. de Leon said her buyers, whose deposit was returned, were stunned. “They didn’t understand how the bank could sit on it for so long or why the bank wouldn’t want the most they could get for the property,” she said.
At last word, the owners planned to declare bankruptcy.
Copyright 2010 The New York Times Company. All rights reserved.
Monday, July 19, 2010
Chapter 13 Plan contributions
In our continuing series of posts regarding Chapter 13 bankruptcy, this month's topic discusses how much money a debtor must contribute to their Chapter 13 bankruptcy Plan. More specifically, what Plan contribution is required for a debtor whose income is over the median income (in New York State, the median income is currently $46,320 for a family of one, $57,902 for a family of two, $69,174 for a family of three, and $82,164 for a family of four (add $7,500 for each additional individual in excess of four)?
Prior to 2005, a Chapter 13 debtor was required to contribute their disposable income to fund a Chapter 13 plan. The disposable income number was based on the debtor's actual expenses on Schedules I (income) and J (expenses). However, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress added complexity by modifying and further detailing the definition of "disposable income" (in Section 1325(b)(2) of the Bankruptcy Code) and by requiring that debtors who exceed the median household income for their state contribute their "projected disposable income" to fund a Chapter 13 Plan.
Although "disposable income" is a defined term, both Bankruptcy Courts and bankruptcy attorneys have struggled with the definition of "projected disposable income." Recently, both the Supreme Court (in Hamilton v. Lanning, 560 U.S. ___, 130 S. Ct. 487 (2010)) and the Bankruptcy Court for the Eastern District of New York (in In re Almonte, 397 B.R. 659 (2008) and In re Mendelson, 412 B.R. 75 (2009), both decided by Bankruptcy Judge Grossman) have addressed this issue.
A common element in all three cases is that in the six months prior to the debtor's bankruptcy filing (which is the lookback period for "current monthly income," the starting point for determining "disposable income") they had non-recurring extraordinary incomesuch as severance pay for being terminated from a job and gifts or loans from friends or family. In these cases, the Chapter 13 Trustees said that based on their interpretation of the meaning of "projected disposable income," the debtor would have to fund a chapter 13 plan strictly based on their Chapter 13 Form 22C "means test" results. Counsel for the Chapter 13 debtors uniformly argued that the means test (in these cases) included sources of income that were extraordinary and not recurring, and this form should not be the sole basis for calculating Plan payments for the Chapter 13 debtor (which could be 36-60 months of future payments).
Judge Grossman in In re Almonte and In re Mendelson and the Supreme Court in Hamilton v. Lanning ruled for the Chapter 13 debtors, and indicated that the chapter 13 monthly payments should not include these extraordinary and non-recurring sources of income. Rather, they should use a "crystal ball" approach and look at the expected future monthly income of the debtor over the applicable commitment period of the proposed Plan.
Any individuals with questions about Chapter 13 bankruptcy should contact Jim Shenwick.
Prior to 2005, a Chapter 13 debtor was required to contribute their disposable income to fund a Chapter 13 plan. The disposable income number was based on the debtor's actual expenses on Schedules I (income) and J (expenses). However, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress added complexity by modifying and further detailing the definition of "disposable income" (in Section 1325(b)(2) of the Bankruptcy Code) and by requiring that debtors who exceed the median household income for their state contribute their "projected disposable income" to fund a Chapter 13 Plan.
Although "disposable income" is a defined term, both Bankruptcy Courts and bankruptcy attorneys have struggled with the definition of "projected disposable income." Recently, both the Supreme Court (in Hamilton v. Lanning, 560 U.S. ___, 130 S. Ct. 487 (2010)) and the Bankruptcy Court for the Eastern District of New York (in In re Almonte, 397 B.R. 659 (2008) and In re Mendelson, 412 B.R. 75 (2009), both decided by Bankruptcy Judge Grossman) have addressed this issue.
A common element in all three cases is that in the six months prior to the debtor's bankruptcy filing (which is the lookback period for "current monthly income," the starting point for determining "disposable income") they had non-recurring extraordinary incomesuch as severance pay for being terminated from a job and gifts or loans from friends or family. In these cases, the Chapter 13 Trustees said that based on their interpretation of the meaning of "projected disposable income," the debtor would have to fund a chapter 13 plan strictly based on their Chapter 13 Form 22C "means test" results. Counsel for the Chapter 13 debtors uniformly argued that the means test (in these cases) included sources of income that were extraordinary and not recurring, and this form should not be the sole basis for calculating Plan payments for the Chapter 13 debtor (which could be 36-60 months of future payments).
Judge Grossman in In re Almonte and In re Mendelson and the Supreme Court in Hamilton v. Lanning ruled for the Chapter 13 debtors, and indicated that the chapter 13 monthly payments should not include these extraordinary and non-recurring sources of income. Rather, they should use a "crystal ball" approach and look at the expected future monthly income of the debtor over the applicable commitment period of the proposed Plan.
Any individuals with questions about Chapter 13 bankruptcy should contact Jim Shenwick.
Monday, June 21, 2010
NYT: Peddling Relief, Firms Put Debtors in Deeper Hole
By PETER S. GOODMAN
PALM BEACH, Fla. — For the companies that promise relief to Americans confronting swelling credit card balances, these are days of lucrative opportunity.
So lucrative, that an industry trade association, the United States Organizations for Bankruptcy Alternatives, recently convened here, in the oceanfront confines of the Four Seasons Resort, to forge deals and plot strategy.
At a well-lubricated evening reception, a steel drum band played Bob Marley songs as hostesses in skimpy dresses draped leis around the necks of arriving entrepreneurs, some with deep tans.
The debt settlement industry can afford some extravagance. The long recession has delivered an abundance of customers — debt-saturated Americans, suffering lost jobs and income, sliding toward bankruptcy. The settlement companies typically harvest fees reaching 15 to 20 percent of the credit card balances carried by their customers, and they tend to collect upfront, regardless of whether a customer’s debt is actually reduced.
State attorneys general from New York to California and consumer watchdogs like the Better Business Bureau say the industry’s proceeds come at the direct expense of financially troubled Americans who are being fleeced of their last dollars with dubious promises.
Consumers rarely emerge from debt settlement programs with their credit card balances eliminated, these critics say, and many wind up worse off, with severely damaged credit, ceaseless threats from collection agents and lawsuits from creditors.
In the Kansas City area, Linda Robertson, 58, rues the day she bought the pitch from a debt settlement company advertising on the radio, promising to spare her from bankruptcy and eliminate her debts. She wound up sending nearly $4,000 into a special account established under the company’s guidance before a credit card company sued her, prompting her to drop out of the program.
By then, her account had only $1,470 remaining: The debt settlement company had collected the rest in fees. She is now filing for bankruptcy.
“They take advantage of vulnerable people,” she said. “When you’re desperate and you’re trying to get out of debt, they take advantage of you.” Debt settlement has swollen to some 2,000 firms, from a niche of perhaps a dozen companies a decade ago, according to trade associations and the Federal Trade Commission, which is completing new rules aimed at curbing abuses within the industry.
Last year, within the industry’s two leading trade associations — the United States Organizations for Bankruptcy Alternatives and the Association of Settlement Companies — some 250 companies collectively had more than 425,000 customers, who had enrolled roughly $11.7 billion in credit card balances in their programs.
As the industry has grown, so have allegations of unfair practices. Since 2004, at least 21 states have brought at least 128 enforcement actions against debt relief companies, according to the National Association of Attorneys General. Consumer complaints received by states more than doubled between 2007 and 2009, according to comments filed with the Federal Trade Commission.
“The industry’s not legitimate,” said Norman Googel, assistant attorney general in West Virginia, which has prosecuted debt settlement companies. “They’re targeting a group of people who are already drowning in debt. We’re talking about middle-class and lower middle-class people who had incomes, but they were using credit cards to survive.”
The industry counters that a few rogue operators have unfairly tarnished the reputations of well-intentioned debt settlement companies that provide a crucial service: liberating Americans from impossible credit card burdens.
With the unemployment rate near double digits and 6.7 million people out of work for six months or longer, many have relied on credit cards. By the middle of last year, 6.5 percent of all accounts were at least 30 days past due, up from less than 4 percent in 2005, according to Moody’s Economy.com.
Yet a 2005 alteration spurred by the financial industry made it harder for Americans to discharge credit card debts through bankruptcy, generating demand for alternatives like debt settlement.
The Arrangement
The industry casts itself as a victim of a smear campaign orchestrated by the giant banks that dominate the credit card trade and aim to hang on to the spoils: interest rates of 20 percent or more and exorbitant late fees.
“We’re the little guys in this,” said John Ansbach, the chief lobbyist for the United States Organizations for Bankruptcy Alternatives, better known as Usoba (pronounced you-SO-buh). “We exist to advocate for consumers. Two and a half billion dollars of unsecured debt has been settled by this industry, so how can you take the position that it has no value?”
But consumer watchdogs and state authorities argue that debt settlement companies generally fail to deliver.
In the typical arrangement, the companies direct consumers to set up special accounts and stock them with monthly deposits while skipping their credit card payments. Once balances reach sufficient size, negotiators strike lump-sum settlements with credit card companies that can cut debts in half. The programs generally last two to three years.
“What they don’t tell their customers is when you stop sending the money, creditors get angry,” said Andrew G. Pizor, a staff lawyer at the National Consumer Law Center. “Collection agents call. Sometimes they sue. People think they’re settling their problems and getting some relief, and lo and behold they get slammed with a lawsuit.”
In the case of two debt settlement companies sued last year by New York State, the attorney general alleged that no more than 1 percent of customers gained the services promised by marketers. A Colorado investigation came to a similar conclusion.
The industry’s own figures show that clients typically fail to secure relief. In a survey of its members, the Association of Settlement Companies found that three years after enrolling, only 34 percent of customers had either completed programs or were still saving for settlements.
“The industry is designed almost as a Ponzi scheme,” said Scott Johnson, chief executive of US Debt Resolve, a debt settlement company based in Dallas, which he portrays as a rare island of integrity in a sea of shady competitors. “Consumers come into these programs and pay thousands of dollars and then nothing happens. What they constantly have to have is more consumers coming into the program to come up with the money for more marketing.”
The Pitch
Linda Robertson knew nothing about the industry she was about to encounter when she picked up the phone at her Missouri home in February 2009 in response to a radio ad.
What she knew was that she could no longer manage even the monthly payments on her roughly $23,000 in credit card debt.
So much had come apart so quickly.
Before the recession, Ms. Robertson had been living in Phoenix, earning as much as $8,000 a month as a real estate appraiser. In 2005, she paid $185,000 for a three-bedroom house with a swimming pool and a yard dotted with hibiscus.
When the real estate business collapsed, she gave up her house to foreclosure and moved in with her son. She got a job as a waitress, earning enough to hang on to her car. She tapped credit cards to pay for gasoline and groceries.
By late 2007, she and her son could no longer afford his apartment. She moved home to Kansas City, where an aunt offered a room. She took a job on the night shift at a factory that makes plastic lids for packaged potato chips, earning $11.15 an hour.
Still, her credit card balances swelled.
The radio ad offered the services of a company based in Dallas with a soothing name: Financial Freedom of America. It cast itself as an antidote to the breakdown of middle-class life.
“We negotiate the past while you navigate the future,” read a caption on its Web site, next to a photo of a young woman nose-kissing an adorable boy. “The American Dream. It was never about bailouts or foreclosures. It was always about American values like hard work, ingenuity and looking out for your neighbor.”
When Ms. Robertson called, a customer service representative laid out a plan. Every month, Ms. Robertson would send $427.93 into a new account. Three years later, she would be debt-free. The representative told her the company would take $100 a month as an administrative fee, she recalled. His tone was take-charge.
“You talk about a rush-through,” Ms. Robertson said. “I didn’t even get to read the contract. It was all done. I had to sign it on the computer while he was on the phone. Then he called me back in 10 minutes to say it was done. He made me feel like this was the answer to my problems and I wasn’t going to have to face bankruptcy.”
Ms. Robertson made nine payments, according to Financial Freedom. Late last year, a sheriff’s deputy arrived at her door with court papers: One of her creditors, Capital One, had filed suit to collect roughly $5,000.
Panicked, she called Financial Freedom to seek guidance. “They said, ‘Oh, we don’t have any control over that, and you don’t have enough money in your account for us to settle with them,’ ” she recalled.
Her account held only $1,470, the representative explained, though she had by then deposited more than $3,700. Financial Freedom had taken the rest for its administrative fees, the company confirmed.
Financial Freedom later negotiated for her to make $100 monthly payments toward satisfying her debt to the creditor, but Ms. Robertson rejected that arrangement, no longer trusting the company. She demanded her money back.
She also filed a report with the Better Business Bureau in Dallas, adding to a stack of more than 100 consumer complaints lodged against the company. The bureau gives the company a failing grade of F.
Ms. Robertson received $1,470 back through the closure of her account, and then $1,120 — half the fees that Financial Freedom collected. Her pending bankruptcy has cost her $1,500 in legal fees.
“I trusted them,” she said. “They sounded like they were going to help me out. It’s a rip-off.”
Financial Freedom’s chief executive, Corey Butcher, rejected that characterization.
“We talked to her multiple times and verified the full details,” he said, adding that his company puts every client through a verification process to validate that they understand the risks — from lawsuits to garnished wages.
Intense and brooding, Mr. Butcher speaks of a personal mission to extricate consumers from credit card debt. But roughly half his customers fail to complete the program, he complained, with most of the cancellations coming within the first six months. He pinned the low completion rate on the same lack of discipline that has fostered many American ailments, from obesity to the foreclosure crisis.
“It comes from a lack of commitment,” Mr. Butcher said. “It’s like going and hiring a personal trainer at a health club. Some people act like they have lost the weight already, when actually they have to go to the gym three days a week, use the treadmill, cut back on their eating. They have to stick with it. At some point, the client has to take responsibility for their circumstance.”
Consumer watchdogs point to another reason customers wind up confused and upset: bogus marketing promises.
In April, the United States Government Accountability Office released a report drawing on undercover agents who posed as prospective customers at 20 debt settlement companies. According to the report, 17 of the 20 firms advised clients to stop paying their credit card bills. Some companies marketed their programs as if they had the imprimatur of the federal government, with one advertising itself as a “national debt relief stimulus plan.” Several claimed that 85 to 100 percent of their customers completed their programs.
“The vast majority of companies provided fraudulent and deceptive information,” said Gregory D. Kutz, managing director of forensic audits and special investigations at the G.A.O. in testimony before the Senate Commerce Committee during an April hearing.
At the same hearing, Senator Claire McCaskill, a Missouri Democrat, pressed Mr. Ansbach, the Usoba lobbyist, to explain why his organization refused to disclose its membership.
“The leadership in our trade group candidly was concerned that publishing a list of members ended up being a subpoena list,” Mr. Ansbach said.
“Probably a genuine concern,” Senator McCaskill replied.
The Coming Crackdown
On multiple fronts, state and federal authorities are now taking aim at the industry.
The Federal Trade Commission has proposed banning upfront fees, bringing vociferous lobbying from industry groups. The commission is expected to issue new rules this summer. Senator McCaskill has joined with fellow Democrat Charles E. Schumer of New York to sponsor a bill that would cap fees charged by debt settlement companies at 5 percent of the savings recouped by their customers. Legislation in several states, including New York, California and Illinois, would also cap fees. A new consumer protection agency created as part of the financial regulatory reform bill in Congress could further constrain the industry.
The prospect of regulation hung palpably over the trade show at this Atlantic-side resort, tempering the orchid-adorned buffet tables and poolside cocktails with a note of foreboding.
“The current debt settlement business model is going to die,” declared Jeffrey S. Tenenbaum, a lawyer in the Washington firm Venable, addressing a packed ballroom. “The only question is who the executioner is going to be.”
That warning did not dislodge the spirit of expansion. Exhibitors paid as much as $4,500 for display space to showcase their wares — software to manage accounts, marketing expertise, call centers — to attendees who came for two days of strategy sessions and networking.
Cody Krebs, a senior account executive from Southern California, manned a booth for LowerMyBills.com, whose Internet ads link customers to debt settlement companies. Like many who have entered the industry, he previously sold subprime mortgages. When that business collapsed, he found refuge selling new products to the same set of customers — people with poor credit.
“It’s been tremendous,” he said. “Business has tripled in the last year and a half.”
The threat of regulations makes securing new customers imperative now, before new rules can take effect, said Matthew G. Hearn, whose firm, Mstars of Minneapolis, trains debt settlement sales staffs. “Do what you have to do to get the deals on the board,” he said, pacing excitedly in front of a podium.
And if some debt settlement companies have gained an unsavory reputation, he added, make that a marketing opportunity.
“We aren’t like them,” Mr. Hearn said. “You need to constantly pitch that. ‘We aren’t bad actors. It’s the ones out there that are.’ ”
Copyright 2010 The New York Times Company. All rights reserved.
PALM BEACH, Fla. — For the companies that promise relief to Americans confronting swelling credit card balances, these are days of lucrative opportunity.
So lucrative, that an industry trade association, the United States Organizations for Bankruptcy Alternatives, recently convened here, in the oceanfront confines of the Four Seasons Resort, to forge deals and plot strategy.
At a well-lubricated evening reception, a steel drum band played Bob Marley songs as hostesses in skimpy dresses draped leis around the necks of arriving entrepreneurs, some with deep tans.
The debt settlement industry can afford some extravagance. The long recession has delivered an abundance of customers — debt-saturated Americans, suffering lost jobs and income, sliding toward bankruptcy. The settlement companies typically harvest fees reaching 15 to 20 percent of the credit card balances carried by their customers, and they tend to collect upfront, regardless of whether a customer’s debt is actually reduced.
State attorneys general from New York to California and consumer watchdogs like the Better Business Bureau say the industry’s proceeds come at the direct expense of financially troubled Americans who are being fleeced of their last dollars with dubious promises.
Consumers rarely emerge from debt settlement programs with their credit card balances eliminated, these critics say, and many wind up worse off, with severely damaged credit, ceaseless threats from collection agents and lawsuits from creditors.
In the Kansas City area, Linda Robertson, 58, rues the day she bought the pitch from a debt settlement company advertising on the radio, promising to spare her from bankruptcy and eliminate her debts. She wound up sending nearly $4,000 into a special account established under the company’s guidance before a credit card company sued her, prompting her to drop out of the program.
By then, her account had only $1,470 remaining: The debt settlement company had collected the rest in fees. She is now filing for bankruptcy.
“They take advantage of vulnerable people,” she said. “When you’re desperate and you’re trying to get out of debt, they take advantage of you.” Debt settlement has swollen to some 2,000 firms, from a niche of perhaps a dozen companies a decade ago, according to trade associations and the Federal Trade Commission, which is completing new rules aimed at curbing abuses within the industry.
Last year, within the industry’s two leading trade associations — the United States Organizations for Bankruptcy Alternatives and the Association of Settlement Companies — some 250 companies collectively had more than 425,000 customers, who had enrolled roughly $11.7 billion in credit card balances in their programs.
As the industry has grown, so have allegations of unfair practices. Since 2004, at least 21 states have brought at least 128 enforcement actions against debt relief companies, according to the National Association of Attorneys General. Consumer complaints received by states more than doubled between 2007 and 2009, according to comments filed with the Federal Trade Commission.
“The industry’s not legitimate,” said Norman Googel, assistant attorney general in West Virginia, which has prosecuted debt settlement companies. “They’re targeting a group of people who are already drowning in debt. We’re talking about middle-class and lower middle-class people who had incomes, but they were using credit cards to survive.”
The industry counters that a few rogue operators have unfairly tarnished the reputations of well-intentioned debt settlement companies that provide a crucial service: liberating Americans from impossible credit card burdens.
With the unemployment rate near double digits and 6.7 million people out of work for six months or longer, many have relied on credit cards. By the middle of last year, 6.5 percent of all accounts were at least 30 days past due, up from less than 4 percent in 2005, according to Moody’s Economy.com.
Yet a 2005 alteration spurred by the financial industry made it harder for Americans to discharge credit card debts through bankruptcy, generating demand for alternatives like debt settlement.
The Arrangement
The industry casts itself as a victim of a smear campaign orchestrated by the giant banks that dominate the credit card trade and aim to hang on to the spoils: interest rates of 20 percent or more and exorbitant late fees.
“We’re the little guys in this,” said John Ansbach, the chief lobbyist for the United States Organizations for Bankruptcy Alternatives, better known as Usoba (pronounced you-SO-buh). “We exist to advocate for consumers. Two and a half billion dollars of unsecured debt has been settled by this industry, so how can you take the position that it has no value?”
But consumer watchdogs and state authorities argue that debt settlement companies generally fail to deliver.
In the typical arrangement, the companies direct consumers to set up special accounts and stock them with monthly deposits while skipping their credit card payments. Once balances reach sufficient size, negotiators strike lump-sum settlements with credit card companies that can cut debts in half. The programs generally last two to three years.
“What they don’t tell their customers is when you stop sending the money, creditors get angry,” said Andrew G. Pizor, a staff lawyer at the National Consumer Law Center. “Collection agents call. Sometimes they sue. People think they’re settling their problems and getting some relief, and lo and behold they get slammed with a lawsuit.”
In the case of two debt settlement companies sued last year by New York State, the attorney general alleged that no more than 1 percent of customers gained the services promised by marketers. A Colorado investigation came to a similar conclusion.
The industry’s own figures show that clients typically fail to secure relief. In a survey of its members, the Association of Settlement Companies found that three years after enrolling, only 34 percent of customers had either completed programs or were still saving for settlements.
“The industry is designed almost as a Ponzi scheme,” said Scott Johnson, chief executive of US Debt Resolve, a debt settlement company based in Dallas, which he portrays as a rare island of integrity in a sea of shady competitors. “Consumers come into these programs and pay thousands of dollars and then nothing happens. What they constantly have to have is more consumers coming into the program to come up with the money for more marketing.”
The Pitch
Linda Robertson knew nothing about the industry she was about to encounter when she picked up the phone at her Missouri home in February 2009 in response to a radio ad.
What she knew was that she could no longer manage even the monthly payments on her roughly $23,000 in credit card debt.
So much had come apart so quickly.
Before the recession, Ms. Robertson had been living in Phoenix, earning as much as $8,000 a month as a real estate appraiser. In 2005, she paid $185,000 for a three-bedroom house with a swimming pool and a yard dotted with hibiscus.
When the real estate business collapsed, she gave up her house to foreclosure and moved in with her son. She got a job as a waitress, earning enough to hang on to her car. She tapped credit cards to pay for gasoline and groceries.
By late 2007, she and her son could no longer afford his apartment. She moved home to Kansas City, where an aunt offered a room. She took a job on the night shift at a factory that makes plastic lids for packaged potato chips, earning $11.15 an hour.
Still, her credit card balances swelled.
The radio ad offered the services of a company based in Dallas with a soothing name: Financial Freedom of America. It cast itself as an antidote to the breakdown of middle-class life.
“We negotiate the past while you navigate the future,” read a caption on its Web site, next to a photo of a young woman nose-kissing an adorable boy. “The American Dream. It was never about bailouts or foreclosures. It was always about American values like hard work, ingenuity and looking out for your neighbor.”
When Ms. Robertson called, a customer service representative laid out a plan. Every month, Ms. Robertson would send $427.93 into a new account. Three years later, she would be debt-free. The representative told her the company would take $100 a month as an administrative fee, she recalled. His tone was take-charge.
“You talk about a rush-through,” Ms. Robertson said. “I didn’t even get to read the contract. It was all done. I had to sign it on the computer while he was on the phone. Then he called me back in 10 minutes to say it was done. He made me feel like this was the answer to my problems and I wasn’t going to have to face bankruptcy.”
Ms. Robertson made nine payments, according to Financial Freedom. Late last year, a sheriff’s deputy arrived at her door with court papers: One of her creditors, Capital One, had filed suit to collect roughly $5,000.
Panicked, she called Financial Freedom to seek guidance. “They said, ‘Oh, we don’t have any control over that, and you don’t have enough money in your account for us to settle with them,’ ” she recalled.
Her account held only $1,470, the representative explained, though she had by then deposited more than $3,700. Financial Freedom had taken the rest for its administrative fees, the company confirmed.
Financial Freedom later negotiated for her to make $100 monthly payments toward satisfying her debt to the creditor, but Ms. Robertson rejected that arrangement, no longer trusting the company. She demanded her money back.
She also filed a report with the Better Business Bureau in Dallas, adding to a stack of more than 100 consumer complaints lodged against the company. The bureau gives the company a failing grade of F.
Ms. Robertson received $1,470 back through the closure of her account, and then $1,120 — half the fees that Financial Freedom collected. Her pending bankruptcy has cost her $1,500 in legal fees.
“I trusted them,” she said. “They sounded like they were going to help me out. It’s a rip-off.”
Financial Freedom’s chief executive, Corey Butcher, rejected that characterization.
“We talked to her multiple times and verified the full details,” he said, adding that his company puts every client through a verification process to validate that they understand the risks — from lawsuits to garnished wages.
Intense and brooding, Mr. Butcher speaks of a personal mission to extricate consumers from credit card debt. But roughly half his customers fail to complete the program, he complained, with most of the cancellations coming within the first six months. He pinned the low completion rate on the same lack of discipline that has fostered many American ailments, from obesity to the foreclosure crisis.
“It comes from a lack of commitment,” Mr. Butcher said. “It’s like going and hiring a personal trainer at a health club. Some people act like they have lost the weight already, when actually they have to go to the gym three days a week, use the treadmill, cut back on their eating. They have to stick with it. At some point, the client has to take responsibility for their circumstance.”
Consumer watchdogs point to another reason customers wind up confused and upset: bogus marketing promises.
In April, the United States Government Accountability Office released a report drawing on undercover agents who posed as prospective customers at 20 debt settlement companies. According to the report, 17 of the 20 firms advised clients to stop paying their credit card bills. Some companies marketed their programs as if they had the imprimatur of the federal government, with one advertising itself as a “national debt relief stimulus plan.” Several claimed that 85 to 100 percent of their customers completed their programs.
“The vast majority of companies provided fraudulent and deceptive information,” said Gregory D. Kutz, managing director of forensic audits and special investigations at the G.A.O. in testimony before the Senate Commerce Committee during an April hearing.
At the same hearing, Senator Claire McCaskill, a Missouri Democrat, pressed Mr. Ansbach, the Usoba lobbyist, to explain why his organization refused to disclose its membership.
“The leadership in our trade group candidly was concerned that publishing a list of members ended up being a subpoena list,” Mr. Ansbach said.
“Probably a genuine concern,” Senator McCaskill replied.
The Coming Crackdown
On multiple fronts, state and federal authorities are now taking aim at the industry.
The Federal Trade Commission has proposed banning upfront fees, bringing vociferous lobbying from industry groups. The commission is expected to issue new rules this summer. Senator McCaskill has joined with fellow Democrat Charles E. Schumer of New York to sponsor a bill that would cap fees charged by debt settlement companies at 5 percent of the savings recouped by their customers. Legislation in several states, including New York, California and Illinois, would also cap fees. A new consumer protection agency created as part of the financial regulatory reform bill in Congress could further constrain the industry.
The prospect of regulation hung palpably over the trade show at this Atlantic-side resort, tempering the orchid-adorned buffet tables and poolside cocktails with a note of foreboding.
“The current debt settlement business model is going to die,” declared Jeffrey S. Tenenbaum, a lawyer in the Washington firm Venable, addressing a packed ballroom. “The only question is who the executioner is going to be.”
That warning did not dislodge the spirit of expansion. Exhibitors paid as much as $4,500 for display space to showcase their wares — software to manage accounts, marketing expertise, call centers — to attendees who came for two days of strategy sessions and networking.
Cody Krebs, a senior account executive from Southern California, manned a booth for LowerMyBills.com, whose Internet ads link customers to debt settlement companies. Like many who have entered the industry, he previously sold subprime mortgages. When that business collapsed, he found refuge selling new products to the same set of customers — people with poor credit.
“It’s been tremendous,” he said. “Business has tripled in the last year and a half.”
The threat of regulations makes securing new customers imperative now, before new rules can take effect, said Matthew G. Hearn, whose firm, Mstars of Minneapolis, trains debt settlement sales staffs. “Do what you have to do to get the deals on the board,” he said, pacing excitedly in front of a podium.
And if some debt settlement companies have gained an unsavory reputation, he added, make that a marketing opportunity.
“We aren’t like them,” Mr. Hearn said. “You need to constantly pitch that. ‘We aren’t bad actors. It’s the ones out there that are.’ ”
Copyright 2010 The New York Times Company. All rights reserved.
Thursday, June 10, 2010
John Tesh: Your score? And...what's your score again?
Confused about your score? Your credit score, that is? You're not alone. Many of us are in the dark about these scores that seem to have a large impact on us- our ability to get credit, to buy a car or a house- even our jobs! Credit score
Liz Pulliam Weston, a favorite of ours who puts the common sense to our cents, is here to tell us that the end of these dark ages about our credit scores may be coming to an end.
Free access to your credit scores may be just around the corner. The financial-reform bill recently passed in the Senate passed includes an amendment that would give individuals the right to see their scores if those numbers were used against them in a financial transaction.
In other words, if you were denied a mortgage or insurance, or had to pay more for either one because of your credit, you'd get to see the score that was used to make the decision.
This is a big deal, according to Weston. We've been able to see our credit reports- a history of what we've borrowed and how well we've repaid it- for free since 2003, but the three-digit scores calculated from those reports have continued to carry a price tag.
Consumer advocates, like Weston, have been pushing Congress to give people free access to their scores. But some proposals were mushy on the issue of which scores consumers would get to see.
Knowing the scores
Not all credit scores are created equal, and the credit bureaus are famous for selling consumers "educational" scores that aren't widely used by lenders. And there are many variations of the FICO score, including versions tailored to auto, credit card, installment loan and finance companies that are rarely seen.
"There was a question whether they would wind up with a score that isn't the same one used by the lender or the insurance company," said credit expert John Ulzheimer, who writes for Credit.com and who advised Sen. Mark Udall, D-Colo., in drafting this amendment. Under the amendment language, "you have a right to see the report and the score that was used. It's a transactional score versus an educational score."
Weston acknowledges that this amendment falls short of the full disclosure she has long wanted to see, which would be to ensure all consumers had free access to their FICOs, the credit scores used by most lenders. (Free FICOs, by the way, is a concept supported by Fair Isaac, the company that created the FICO scoring formula, and vigorously opposed by the credit bureaus that want to sell you those other scores.)
What you could expect to see
But this financial-services amendment is a better deal in some ways. If the amendment becomes law- it still has to survive the reconciliation process, in which the Senate's reform bill is merged with the one passed by the House- it will expand dramatically the universe of relevant scores to which you'll have access if your scores cause you a problem.
"In the past, scores like the FICO auto version have been like a unicorn. People talked about it all the time, but nobody had actually ever seen it," Ulzheimer says. "Now you'll get to see the unicorn."
The world of insurance scores is even more diverse. No one formula dominates this industry, as FICO does lending, and many of the largest insurers have their own proprietary scores. Seeing these numbers could start to peel back the mystery of insurance scoring, just as access to FICO scores a decade ago started cracking open the credit-scoring vault. As more people learned their FICOs and how important they were, the pressure mounted for the score's creators to disclose more about how they worked, and today we know far more about the inner machinery.
Another point about the amendment is that it would cut out the credit bureaus, the companies that have made getting your free annual credit reports so confusing in the first place..
The bureaus that run the federally mandated site, AnnualCreditReport.com (the ONLY site giving you completely free credit reports one time per year), hammer consumers with advertisements trying to encourage the purchase of credit scores and credit monitoring, when, in fact, you're just trying to get your free reports.
And some operate look-alike sites that appear to cash in on consumer confusion about where to get free reports.
Rather than giving bureaus another opportunity to profit on your financial information and confuse you in the process, the amendment would put the responsibili Credit report ty on the insurer or lender that was evaluating you. These companies are already required to send you a notice that provides free access to the credit report used in making an "adverse action," or decision, against you. The amendment would add the requirement that you be supplied with the score used.
A little less than advertised
There's one area where the amendment's promoters have tripped a bit, and that's in touting this as helpful to people who are looking for work. The wording says people would have a right to a score if the information in their credit reports was used against them, but employers don't look at scores- they typically look only at credit reports, so no scores would be generated in those cases. Using credit to discriminate in employment is a hot issue- as Weston has written about before- but this amendment wouldn't fix that problem.
Other than that, this could be a monumentally big win for consumers, and that's always a step in the right direction!
John
Copyright 2010 Tesh Media. All rights reserved.
Liz Pulliam Weston, a favorite of ours who puts the common sense to our cents, is here to tell us that the end of these dark ages about our credit scores may be coming to an end.
Free access to your credit scores may be just around the corner. The financial-reform bill recently passed in the Senate passed includes an amendment that would give individuals the right to see their scores if those numbers were used against them in a financial transaction.
In other words, if you were denied a mortgage or insurance, or had to pay more for either one because of your credit, you'd get to see the score that was used to make the decision.
This is a big deal, according to Weston. We've been able to see our credit reports- a history of what we've borrowed and how well we've repaid it- for free since 2003, but the three-digit scores calculated from those reports have continued to carry a price tag.
Consumer advocates, like Weston, have been pushing Congress to give people free access to their scores. But some proposals were mushy on the issue of which scores consumers would get to see.
Knowing the scores
Not all credit scores are created equal, and the credit bureaus are famous for selling consumers "educational" scores that aren't widely used by lenders. And there are many variations of the FICO score, including versions tailored to auto, credit card, installment loan and finance companies that are rarely seen.
"There was a question whether they would wind up with a score that isn't the same one used by the lender or the insurance company," said credit expert John Ulzheimer, who writes for Credit.com and who advised Sen. Mark Udall, D-Colo., in drafting this amendment. Under the amendment language, "you have a right to see the report and the score that was used. It's a transactional score versus an educational score."
Weston acknowledges that this amendment falls short of the full disclosure she has long wanted to see, which would be to ensure all consumers had free access to their FICOs, the credit scores used by most lenders. (Free FICOs, by the way, is a concept supported by Fair Isaac, the company that created the FICO scoring formula, and vigorously opposed by the credit bureaus that want to sell you those other scores.)
What you could expect to see
But this financial-services amendment is a better deal in some ways. If the amendment becomes law- it still has to survive the reconciliation process, in which the Senate's reform bill is merged with the one passed by the House- it will expand dramatically the universe of relevant scores to which you'll have access if your scores cause you a problem.
"In the past, scores like the FICO auto version have been like a unicorn. People talked about it all the time, but nobody had actually ever seen it," Ulzheimer says. "Now you'll get to see the unicorn."
The world of insurance scores is even more diverse. No one formula dominates this industry, as FICO does lending, and many of the largest insurers have their own proprietary scores. Seeing these numbers could start to peel back the mystery of insurance scoring, just as access to FICO scores a decade ago started cracking open the credit-scoring vault. As more people learned their FICOs and how important they were, the pressure mounted for the score's creators to disclose more about how they worked, and today we know far more about the inner machinery.
Another point about the amendment is that it would cut out the credit bureaus, the companies that have made getting your free annual credit reports so confusing in the first place..
The bureaus that run the federally mandated site, AnnualCreditReport.com (the ONLY site giving you completely free credit reports one time per year), hammer consumers with advertisements trying to encourage the purchase of credit scores and credit monitoring, when, in fact, you're just trying to get your free reports.
And some operate look-alike sites that appear to cash in on consumer confusion about where to get free reports.
Rather than giving bureaus another opportunity to profit on your financial information and confuse you in the process, the amendment would put the responsibili Credit report ty on the insurer or lender that was evaluating you. These companies are already required to send you a notice that provides free access to the credit report used in making an "adverse action," or decision, against you. The amendment would add the requirement that you be supplied with the score used.
A little less than advertised
There's one area where the amendment's promoters have tripped a bit, and that's in touting this as helpful to people who are looking for work. The wording says people would have a right to a score if the information in their credit reports was used against them, but employers don't look at scores- they typically look only at credit reports, so no scores would be generated in those cases. Using credit to discriminate in employment is a hot issue- as Weston has written about before- but this amendment wouldn't fix that problem.
Other than that, this could be a monumentally big win for consumers, and that's always a step in the right direction!
John
Copyright 2010 Tesh Media. All rights reserved.
Wednesday, June 09, 2010
USA Today: Only a fraction of those in need file for bankruptcy
By Christine Dugas, USA TODAY
Bankruptcy filings are nearing the record 2 million of 2005, when a new law took effect that was aimed at curbing abuse of the system. Filings could reach 1.7 million this year, says law professor Robert Lawless, but few experts believe that debtors are now gaming the system.
Instead, concern exists about a growing number of Americans who need bankruptcy protection but cannot get any benefit from it or simply cannot afford to file. As their financial problems worsen, that hurts everyone because it can hinder the economic turnaround.
"It's shocking that we are back to the 2005 level," says Katherine Porter, associate professor of law at the University of Iowa. "And the filing rate doesn't even begin to count the depth of the financial pain."
Bankruptcy laws changed in 2005 because filings skyrocketed and credit card companies and banks wanted to weed out deadbeat borrowers. The law made it harder — more expensive and more restrictive — for individuals to file Chapter 7 bankruptcy, which erases most debts.
Instead of seeking protection from bankruptcy, a number of debt-laden Americans have gone into a "shadow economy," or informal bankruptcy, according to some experts.
The signs are there: Student loan defaults and home foreclosures are rising, and bank card loan defaults have increased from 7.7% in March to 9.1% in April, according to S&P/Experian Consumer Credit Default Indices. But during the same two months, bankruptcy filings fell by 4%.
Bankruptcy is supposed to provide a fresh start to people who are in serious financial distress. But only a fraction are filing, Porter says.
'My future is gone'
Carmen Gardiner, 25, a 2007 graduate of Louisiana State University, is weighed down by her private student loans. Her debt is now about $80,000, and her monthly payments are more than $600. Gardiner's undergraduate degree is in psychology. She lives with her husband, who is still in college, and earns $13 an hour at a call center in Atlanta. They have a 6-month-old daughter.
She hasn't defaulted on her student loan. But she doesn't see much hope. Bankruptcy would not discharge her debt.
"I'm completely sour about the whole idea of going to college," she says. "My future is gone before I have a chance to make one. But if I could discharge this using bankruptcy, it would be better than winning the lottery."
There is little information about unregulated private student loan debt. But during an investor meeting, Sallie Mae, the USA's largest private student lender, recently projected that 40% of $6 billion in subprime private student loans will default, according to Student Lending Analytics, an independent research company. That means 360,000 to 540,000 borrowers are likely to default on their loans, SLA said.
The only way that people with private student loans can get help in bankruptcy is if they can prove undue hardship. And to do that they have to go through a separate trial, which is an extra cost, involves witnesses, legal assistance and extra expertise, says Deanne Loonin, staff attorney at the National Consumer Law Center. It is a huge barrier.
But in April, both the Senate and House introduced legislation to allow for private student loans to be dischargeable in bankruptcy. Before the bankruptcy law changed in 2005, only government-issued-or-guaranteed student loans were protected during bankruptcy.
"The high interest rates on private student loans have made them incredibly profitable for loan companies and saddled students with crushing debt," said Sen. Dick Durbin, D-Ill., who first introduced this legislation in June 2007.
Filers pay now or pay later
Only a fraction of those in serious financial distress are filing for bankruptcy, Porter says. In January, she and Ronald Mann, a professor of law at Columbia University, released a paper, "Saving up for Bankruptcy," that probed why that is happening.
For starters, it's simply expensive to file. Attorney and filing fees have risen, and under the new law additional forms, paperwork and attorney liability have added to the cost, Porter says. In the first two years after the law changed, the attorney fees for filing Chapter 7 bankruptcy rose from $712 to $1,078, according to a study by the U.S. Government Accountability Office. And the filing fees increased from $209 to $299.
Many debtors have no choice but to delay filing for bankruptcy. Some wait until they receive a tax refund, and others cash out their retirement savings to pay for a lawyer.
But postponing filing is not good for debtors. It's similar to delaying going to the doctor, because you'll just end up with more problems, says Lawless, professor of law at University of Illinois.
The system is not just more costly, it is more complex. It requires pre-bankruptcy credit counseling. It requires six months of income information and two years of tax returns. And if the debtor holds off filing, a lawyer has to continue to gather new information.
"The paper chase gets greater, and then the fee goes up," says William Brewer, a bankruptcy lawyer in Raleigh, N.C.
Hanging onto their homes
Another reason: Many Americans who are trying to save their homes do not file for bankruptcy. Under the bankruptcy law, filers can protect their summer home and yacht, but they can't protect their primary residence, says John Taylor, president of the National Community Reinvestment Coalition, a non-profit organization.
That wasn't such a big issue when home values were rising. But during the recession, many homeowners are seeing values plummeting and their mortgage payments rising.
Home foreclosure filings have outstripped bankruptcy filings, Porter says. And foreclosure shows no sign of slowing down. In the first quarter of the year, foreclosure filings were 16% higher than the same quarter in 2009, according to RealtyTrac. And March was the highest month since RealtyTrac began issuing reports.
Cordell Brooks, 47, who lives in Temple Hills, Md., may soon lose his home to foreclosure. During the recession he was laid off from his job as a graphics designer. Since then, he has worked as a substitute teacher and now is a contractor with Prince George's County Housing.
"I've gone from earning $40 an hour to $17.50," he says.
Brooks, who has owned his home since 1989, applied for a federal program known as Home Affordable Modification Program (HAMP) but was turned down. He has few options. He doesn't want to file for bankruptcy. But even if he did, it wouldn't help him save his home.
"Bankruptcy is not very useful at solving this particular type of financial distress," Porter says.
Homeowners who applied for loan modifications could have been turned down if they also have filed for bankruptcy. But as of this month, a debtor who requests loan modification cannot be discriminated against because they have filed for bankruptcy, says John Rao, an attorney at the National Consumer Law Center, which specializes in consumer credit and bankruptcy issues. And that will help homeowners who are also overwhelmed by other debt.
Is it time for a change?
When the bankruptcy law changed in 2005, barriers were erected to prevent abuse. But it seems that many honest Americans who are in financial crisis are now running into obstacles. That raises questions about what can be done to prevent debtors from falling through the cracks.
Congress is considering legislation to help college graduates weighed down by private student loan debt. If passed, the legislation could roll back the bankruptcy law so that private student loans can be discharged.
The Treasury Department has agreed to revise the federal mortgage modification program so that people can't be turned down for HAMP just because they have filed for bankruptcy. But some say that this is just a Band-Aid. And now few homeowners are getting permanent mortgage modification.
The 2005 bankruptcy reform did not change mortgage debt. "Debt secured by a principal residence has not been dischargeable since 1978," says Philip Corwin, an outside bankruptcy counsel for the American Bankers Association.
Recent efforts to introduce legislation to allow bankruptcy judges to modify home mortgages have failed. "If Congress had had the wisdom to pass that three years ago we would have forced all the parties to the table to work out reasonable solutions," Taylor says.
The financial industry says that the bankruptcy law is not causing the shadow economy. People can still file for it, and if they can't afford the fees at least the court filing fees can be waived, says Scott Talbott, senior vice president of the Financial Services Roundtable. And people with student loans who have undue hardship are able to get financial relief.
But undue hardship is extremely hard and costly to navigate, says Lauren Asher, associate director of Project on Student Debt. There is no definition in the bankruptcy code of undue hardship, and the court decisions on it have been harsh, Corwin says.
Free legal services have been cut back during the recession and are not available for many debtors. It would help to roll back some of the changes that have increased legal paperwork and risk of personal liability, Lawless says.
The bankruptcy problems are not likely to go away anytime soon. If Gardiner's career is stymied because she can't afford to go on to graduate school and is burdened with student loan debt, doors may be closed to her.
"Not going on with her career and being stuck in a low-wage job hurts everyone and drags down the economy," Porter says. "It is not surprising that the bankruptcy code is not a fit for the problems of today. The 2005 amendment was a move in the wrong direction, and I think it's time to think about redesigning bankruptcy."
Copyright 2010 USA TODAY, a division of Gannett Co. Inc. All rights reserved.
Bankruptcy filings are nearing the record 2 million of 2005, when a new law took effect that was aimed at curbing abuse of the system. Filings could reach 1.7 million this year, says law professor Robert Lawless, but few experts believe that debtors are now gaming the system.
Instead, concern exists about a growing number of Americans who need bankruptcy protection but cannot get any benefit from it or simply cannot afford to file. As their financial problems worsen, that hurts everyone because it can hinder the economic turnaround.
"It's shocking that we are back to the 2005 level," says Katherine Porter, associate professor of law at the University of Iowa. "And the filing rate doesn't even begin to count the depth of the financial pain."
Bankruptcy laws changed in 2005 because filings skyrocketed and credit card companies and banks wanted to weed out deadbeat borrowers. The law made it harder — more expensive and more restrictive — for individuals to file Chapter 7 bankruptcy, which erases most debts.
Instead of seeking protection from bankruptcy, a number of debt-laden Americans have gone into a "shadow economy," or informal bankruptcy, according to some experts.
The signs are there: Student loan defaults and home foreclosures are rising, and bank card loan defaults have increased from 7.7% in March to 9.1% in April, according to S&P/Experian Consumer Credit Default Indices. But during the same two months, bankruptcy filings fell by 4%.
Bankruptcy is supposed to provide a fresh start to people who are in serious financial distress. But only a fraction are filing, Porter says.
'My future is gone'
Carmen Gardiner, 25, a 2007 graduate of Louisiana State University, is weighed down by her private student loans. Her debt is now about $80,000, and her monthly payments are more than $600. Gardiner's undergraduate degree is in psychology. She lives with her husband, who is still in college, and earns $13 an hour at a call center in Atlanta. They have a 6-month-old daughter.
She hasn't defaulted on her student loan. But she doesn't see much hope. Bankruptcy would not discharge her debt.
"I'm completely sour about the whole idea of going to college," she says. "My future is gone before I have a chance to make one. But if I could discharge this using bankruptcy, it would be better than winning the lottery."
There is little information about unregulated private student loan debt. But during an investor meeting, Sallie Mae, the USA's largest private student lender, recently projected that 40% of $6 billion in subprime private student loans will default, according to Student Lending Analytics, an independent research company. That means 360,000 to 540,000 borrowers are likely to default on their loans, SLA said.
The only way that people with private student loans can get help in bankruptcy is if they can prove undue hardship. And to do that they have to go through a separate trial, which is an extra cost, involves witnesses, legal assistance and extra expertise, says Deanne Loonin, staff attorney at the National Consumer Law Center. It is a huge barrier.
But in April, both the Senate and House introduced legislation to allow for private student loans to be dischargeable in bankruptcy. Before the bankruptcy law changed in 2005, only government-issued-or-guaranteed student loans were protected during bankruptcy.
"The high interest rates on private student loans have made them incredibly profitable for loan companies and saddled students with crushing debt," said Sen. Dick Durbin, D-Ill., who first introduced this legislation in June 2007.
Filers pay now or pay later
Only a fraction of those in serious financial distress are filing for bankruptcy, Porter says. In January, she and Ronald Mann, a professor of law at Columbia University, released a paper, "Saving up for Bankruptcy," that probed why that is happening.
For starters, it's simply expensive to file. Attorney and filing fees have risen, and under the new law additional forms, paperwork and attorney liability have added to the cost, Porter says. In the first two years after the law changed, the attorney fees for filing Chapter 7 bankruptcy rose from $712 to $1,078, according to a study by the U.S. Government Accountability Office. And the filing fees increased from $209 to $299.
Many debtors have no choice but to delay filing for bankruptcy. Some wait until they receive a tax refund, and others cash out their retirement savings to pay for a lawyer.
But postponing filing is not good for debtors. It's similar to delaying going to the doctor, because you'll just end up with more problems, says Lawless, professor of law at University of Illinois.
The system is not just more costly, it is more complex. It requires pre-bankruptcy credit counseling. It requires six months of income information and two years of tax returns. And if the debtor holds off filing, a lawyer has to continue to gather new information.
"The paper chase gets greater, and then the fee goes up," says William Brewer, a bankruptcy lawyer in Raleigh, N.C.
Hanging onto their homes
Another reason: Many Americans who are trying to save their homes do not file for bankruptcy. Under the bankruptcy law, filers can protect their summer home and yacht, but they can't protect their primary residence, says John Taylor, president of the National Community Reinvestment Coalition, a non-profit organization.
That wasn't such a big issue when home values were rising. But during the recession, many homeowners are seeing values plummeting and their mortgage payments rising.
Home foreclosure filings have outstripped bankruptcy filings, Porter says. And foreclosure shows no sign of slowing down. In the first quarter of the year, foreclosure filings were 16% higher than the same quarter in 2009, according to RealtyTrac. And March was the highest month since RealtyTrac began issuing reports.
Cordell Brooks, 47, who lives in Temple Hills, Md., may soon lose his home to foreclosure. During the recession he was laid off from his job as a graphics designer. Since then, he has worked as a substitute teacher and now is a contractor with Prince George's County Housing.
"I've gone from earning $40 an hour to $17.50," he says.
Brooks, who has owned his home since 1989, applied for a federal program known as Home Affordable Modification Program (HAMP) but was turned down. He has few options. He doesn't want to file for bankruptcy. But even if he did, it wouldn't help him save his home.
"Bankruptcy is not very useful at solving this particular type of financial distress," Porter says.
Homeowners who applied for loan modifications could have been turned down if they also have filed for bankruptcy. But as of this month, a debtor who requests loan modification cannot be discriminated against because they have filed for bankruptcy, says John Rao, an attorney at the National Consumer Law Center, which specializes in consumer credit and bankruptcy issues. And that will help homeowners who are also overwhelmed by other debt.
Is it time for a change?
When the bankruptcy law changed in 2005, barriers were erected to prevent abuse. But it seems that many honest Americans who are in financial crisis are now running into obstacles. That raises questions about what can be done to prevent debtors from falling through the cracks.
Congress is considering legislation to help college graduates weighed down by private student loan debt. If passed, the legislation could roll back the bankruptcy law so that private student loans can be discharged.
The Treasury Department has agreed to revise the federal mortgage modification program so that people can't be turned down for HAMP just because they have filed for bankruptcy. But some say that this is just a Band-Aid. And now few homeowners are getting permanent mortgage modification.
The 2005 bankruptcy reform did not change mortgage debt. "Debt secured by a principal residence has not been dischargeable since 1978," says Philip Corwin, an outside bankruptcy counsel for the American Bankers Association.
Recent efforts to introduce legislation to allow bankruptcy judges to modify home mortgages have failed. "If Congress had had the wisdom to pass that three years ago we would have forced all the parties to the table to work out reasonable solutions," Taylor says.
The financial industry says that the bankruptcy law is not causing the shadow economy. People can still file for it, and if they can't afford the fees at least the court filing fees can be waived, says Scott Talbott, senior vice president of the Financial Services Roundtable. And people with student loans who have undue hardship are able to get financial relief.
But undue hardship is extremely hard and costly to navigate, says Lauren Asher, associate director of Project on Student Debt. There is no definition in the bankruptcy code of undue hardship, and the court decisions on it have been harsh, Corwin says.
Free legal services have been cut back during the recession and are not available for many debtors. It would help to roll back some of the changes that have increased legal paperwork and risk of personal liability, Lawless says.
The bankruptcy problems are not likely to go away anytime soon. If Gardiner's career is stymied because she can't afford to go on to graduate school and is burdened with student loan debt, doors may be closed to her.
"Not going on with her career and being stuck in a low-wage job hurts everyone and drags down the economy," Porter says. "It is not surprising that the bankruptcy code is not a fit for the problems of today. The 2005 amendment was a move in the wrong direction, and I think it's time to think about redesigning bankruptcy."
Copyright 2010 USA TODAY, a division of Gannett Co. Inc. All rights reserved.
Thursday, May 27, 2010
Means Test and college tuition
Here at Shenwick & Associates, we are getting many calls about the means test and college tuition; specifically, whether the high cost of college tuition is a deductible expense on the means test. As many of you know, in 2005, Congress radically changed the personal bankruptcy law and instituted median income and means testing to limit the number of individuals who would be able to file for Chapter 7 bankruptcy. Chapter 7 bankruptcy is a liquidation or "fresh start," in which debtors can liquidate or discharge most of their debts. To limit the number of filers, Congress provided that if a debtor exceeded the median income in their state, then there is a presumption that they are not entitled to file for Chapter 7 bankruptcy unless they pass the means test. The median income is adjusted periodically. For bankruptcy cases filed on or after March 15, 2010, the median income in New York State is $46,320 for a family of one, $57,902 for a family of two, $69,174 for a family of three and $82,164 for a family of four (add $7,500 for each individual in excess of four),.
The means test is an extremely complicated calculation (it is a six page calculation, similar to a 1040 tax return for an individual) that is based on a debtor's income and expenses. The expenses are, in general, pegged to the allowable expenses in an offer of compromise with the IRS.
The questions that arises is whether the cost of college tuition (at a private college or a public university) is deductible for the purposes of the means test calculation. Unfortunately, the majority of cases hold that college tuition is, in fact, not deductible, because Congress failed to allow college tuition as a deduction in the means test. A number of Bankruptcy Courts have reviewed this issue, and have held that college tuition is not deductible.
For example, in In re Saffrin, 380 B.R. 191 (Bankr. N.D. Ill 2007), the Bankruptcy Court held that the debtors could not deduct their daughter's college expenses on the means test because the Bankruptcy Code only allows elementary or secondary educational expenses for dependent children under 18.
Similarly, in In re Boyd, 378 B.R. 81 (Bankr. M.D. Pa. 2007), the Bankruptcy Court found that the debtors could not deduct their adult daughter's college education on the means test because the Bankruptcy Code does not expressly provide such deduction, and college tuition does not qualify to be included on line 59 of the means test under "Other Necessary Expenses."
However, notwithstanding the fact that college tuition is not deductible for the means test, debtors may have other expenses that will be sufficient for them to pass the means test and file for Chapter 7 bankruptcy.
Any individuals having questions about Chapter 7 bankruptcy or the means test are encouraged to contact Jim Shenwick.
The means test is an extremely complicated calculation (it is a six page calculation, similar to a 1040 tax return for an individual) that is based on a debtor's income and expenses. The expenses are, in general, pegged to the allowable expenses in an offer of compromise with the IRS.
The questions that arises is whether the cost of college tuition (at a private college or a public university) is deductible for the purposes of the means test calculation. Unfortunately, the majority of cases hold that college tuition is, in fact, not deductible, because Congress failed to allow college tuition as a deduction in the means test. A number of Bankruptcy Courts have reviewed this issue, and have held that college tuition is not deductible.
For example, in In re Saffrin, 380 B.R. 191 (Bankr. N.D. Ill 2007), the Bankruptcy Court held that the debtors could not deduct their daughter's college expenses on the means test because the Bankruptcy Code only allows elementary or secondary educational expenses for dependent children under 18.
Similarly, in In re Boyd, 378 B.R. 81 (Bankr. M.D. Pa. 2007), the Bankruptcy Court found that the debtors could not deduct their adult daughter's college education on the means test because the Bankruptcy Code does not expressly provide such deduction, and college tuition does not qualify to be included on line 59 of the means test under "Other Necessary Expenses."
However, notwithstanding the fact that college tuition is not deductible for the means test, debtors may have other expenses that will be sufficient for them to pass the means test and file for Chapter 7 bankruptcy.
Any individuals having questions about Chapter 7 bankruptcy or the means test are encouraged to contact Jim Shenwick.
Friday, May 21, 2010
AP: Millions of jobs are gone forever
By CHRISTOPHER S. RUGABER (AP) – May 13, 2010
WASHINGTON — Fewer construction workers will be needed. Don't expect as many interior designers or advertising copywriters, either. Retailers will get by with leaner staffs.
The economy is strengthening. But millions of jobs lost in the recession could be gone for good.
And unlike in past recessions, jobs in the beleaguered manufacturing sector aren't the only ones likely lost forever. What sets the Great Recession apart is the variety of jobs that may not return.
That helps explain why economists think it will take at least five years for the economy to regain the 8.2 million jobs wiped out by the recession — longer than in any other recovery since World War II.
It means that even as the economy strengthens, more Americans could face years out of work. Already, the percentage of the labor force unemployed for six months or longer is 4.3 percent. That's the highest rate on records dating to 1948.
Behind the trend are the cutbacks businesses made in the recession to make up for a loss of customers. To sustain earnings, they became more productive: They found ways to produce the same level of goods or services with fewer workers. Automation, global competition and technological efficiencies helped solidify the trend.
Diminished home equity and investment accounts have made shoppers more cautious, too. And their frugality could endure well into the recovery. That's why fewer retail workers, among others, will likely be needed.
Among those whose former jobs may be gone for good are:
_ Julie Weber of Milwaukee, who designed office cubicles for nearly seven years. She lost her job about a year ago. Since then, she's been able to find only part-time work outside her field. Interior design was hammered by the real estate downturn. "My hope for getting back into the industry is not very high," says Weber, 29.
_ Erik Proulx, 38, a former advertising copywriter in Boston, who finds more companies are turning to social media and viral marketing and are less drawn to agencies that focus on traditional TV and print ad campaigns. Proulx was laid off in October 2008 — the third time an employer had cut his position or had closed. He no longer wants to rejoin the industry. Proulx has started a blog to help other unemployed ad professionals network.
_ Louis DiFilippo, 30, who decided to study information technology after losing his job managing a gourmet food store in Washington, D.C. After six months of unemployment, he embraced a career with more stability. He now works on computer network security for the Navy. "I'm much happier now," he said.
More than one-third of chief financial officers at 620 big companies surveyed in March by Duke University and CFO magazine said they didn't expect to restore their payrolls to pre-recession levels for at least three years. Nearly all cited higher productivity and tepid consumer spending.
"Companies have just figured out, 'We didn't want to fire people ... but now that they're gone, we've realized that we can get by without them,'" said John Graham, a Duke finance professor who directed the survey.
Productivity grew at an annual rate of 6.3 percent in the year ending in March, the Labor Department said this month. It was the largest increase in 48 years, though most economists think that pace isn't sustainable.
In the long run, more productive workers raise standards of living: Companies can pay more without inflating prices. But in the short run, high productivity delays hiring.
U.S. employers did add 290,000 jobs in April. The unemployment rate rose to 9.9 percent, though, because 805,000 people without jobs poured into the labor force to seek work.
Three industries, in particular, where many jobs may not be coming back are retailing, manufacturing and advertising.
Retailers have lost 1.2 million, or 7.5 percent, of jobs that existed before the recession, according to Labor Department data. Circuit City and Linens & Things have collapsed. Starbucks closed nearly 800 U.S. stores. Robert Yerex, an economist at Kronos, a work force management company, estimates 20 percent of those jobs are never coming back.
Manufacturing has shed 2.1 million jobs, or 16 percent of its total, since the recession began. Goodyear Tire & Rubber and Boeing Co. laid off a combined 15,700 people during the recession. General Motors eliminated 65,000 through buyouts and layoffs. And as Americans buy fewer cars and homes, more than 1 million jobs in the auto, steel, furniture and other manufacturing industries won't return, according to estimates by Moody's Analytics.
Advertising and PR agencies have lost 65,000 jobs, or about 14 percent of the pre-recession total. Moody's Analytics estimates those industries will lose even more within five years.
In addition, a consolidated airline industry has shed layers of jobs that won't likely return. Delta Air Lines earlier this year spread out departure times for flights from its Cincinnati hub, rather than bunching them at peak travel times. That way, it could operate from one concourse rather than two, said Kent Landers, a spokesman. The change allowed a Delta subsidiary, Regional Elite Airline Services, to cut more than 700 baggage handling and other ground services jobs.
More than half the 15.3 million people out of work in April said they regard their layoff as permanent, the Labor Department said. That's the highest proportion on records dating to 1967. In previous recessions, workers often endured only temporary layoffs: Their employers would recall them once business picked up.
Caterpillar Inc. has resumed hiring after laying off 19,000 full-time workers during the recession, thanks to rising demand for its construction and mining equipment. But most of the new jobs will be overseas. Of the 9,000 hires CEO Jim Owens said Caterpillar plans to make this year, only 3,000 will be in the U.S.
Many economists say eventually, companies won't be able to squeeze any more work out of their employees. That would force employers to step up hiring.
But Janet Yellen, president of the Federal Reserve Bank of San Francisco, cautions that this won't happen anytime soon. She believes corporate America remains in the early stages of a drive for greater efficiencies.
"We may be in store for ... high productivity growth for some time," she said in a speech this year. "If so, the rate of job creation will be frustratingly slow."
Copyright © 2010 The Associated Press. All rights reserved.
WASHINGTON — Fewer construction workers will be needed. Don't expect as many interior designers or advertising copywriters, either. Retailers will get by with leaner staffs.
The economy is strengthening. But millions of jobs lost in the recession could be gone for good.
And unlike in past recessions, jobs in the beleaguered manufacturing sector aren't the only ones likely lost forever. What sets the Great Recession apart is the variety of jobs that may not return.
That helps explain why economists think it will take at least five years for the economy to regain the 8.2 million jobs wiped out by the recession — longer than in any other recovery since World War II.
It means that even as the economy strengthens, more Americans could face years out of work. Already, the percentage of the labor force unemployed for six months or longer is 4.3 percent. That's the highest rate on records dating to 1948.
Behind the trend are the cutbacks businesses made in the recession to make up for a loss of customers. To sustain earnings, they became more productive: They found ways to produce the same level of goods or services with fewer workers. Automation, global competition and technological efficiencies helped solidify the trend.
Diminished home equity and investment accounts have made shoppers more cautious, too. And their frugality could endure well into the recovery. That's why fewer retail workers, among others, will likely be needed.
Among those whose former jobs may be gone for good are:
_ Julie Weber of Milwaukee, who designed office cubicles for nearly seven years. She lost her job about a year ago. Since then, she's been able to find only part-time work outside her field. Interior design was hammered by the real estate downturn. "My hope for getting back into the industry is not very high," says Weber, 29.
_ Erik Proulx, 38, a former advertising copywriter in Boston, who finds more companies are turning to social media and viral marketing and are less drawn to agencies that focus on traditional TV and print ad campaigns. Proulx was laid off in October 2008 — the third time an employer had cut his position or had closed. He no longer wants to rejoin the industry. Proulx has started a blog to help other unemployed ad professionals network.
_ Louis DiFilippo, 30, who decided to study information technology after losing his job managing a gourmet food store in Washington, D.C. After six months of unemployment, he embraced a career with more stability. He now works on computer network security for the Navy. "I'm much happier now," he said.
More than one-third of chief financial officers at 620 big companies surveyed in March by Duke University and CFO magazine said they didn't expect to restore their payrolls to pre-recession levels for at least three years. Nearly all cited higher productivity and tepid consumer spending.
"Companies have just figured out, 'We didn't want to fire people ... but now that they're gone, we've realized that we can get by without them,'" said John Graham, a Duke finance professor who directed the survey.
Productivity grew at an annual rate of 6.3 percent in the year ending in March, the Labor Department said this month. It was the largest increase in 48 years, though most economists think that pace isn't sustainable.
In the long run, more productive workers raise standards of living: Companies can pay more without inflating prices. But in the short run, high productivity delays hiring.
U.S. employers did add 290,000 jobs in April. The unemployment rate rose to 9.9 percent, though, because 805,000 people without jobs poured into the labor force to seek work.
Three industries, in particular, where many jobs may not be coming back are retailing, manufacturing and advertising.
Retailers have lost 1.2 million, or 7.5 percent, of jobs that existed before the recession, according to Labor Department data. Circuit City and Linens & Things have collapsed. Starbucks closed nearly 800 U.S. stores. Robert Yerex, an economist at Kronos, a work force management company, estimates 20 percent of those jobs are never coming back.
Manufacturing has shed 2.1 million jobs, or 16 percent of its total, since the recession began. Goodyear Tire & Rubber and Boeing Co. laid off a combined 15,700 people during the recession. General Motors eliminated 65,000 through buyouts and layoffs. And as Americans buy fewer cars and homes, more than 1 million jobs in the auto, steel, furniture and other manufacturing industries won't return, according to estimates by Moody's Analytics.
Advertising and PR agencies have lost 65,000 jobs, or about 14 percent of the pre-recession total. Moody's Analytics estimates those industries will lose even more within five years.
In addition, a consolidated airline industry has shed layers of jobs that won't likely return. Delta Air Lines earlier this year spread out departure times for flights from its Cincinnati hub, rather than bunching them at peak travel times. That way, it could operate from one concourse rather than two, said Kent Landers, a spokesman. The change allowed a Delta subsidiary, Regional Elite Airline Services, to cut more than 700 baggage handling and other ground services jobs.
More than half the 15.3 million people out of work in April said they regard their layoff as permanent, the Labor Department said. That's the highest proportion on records dating to 1967. In previous recessions, workers often endured only temporary layoffs: Their employers would recall them once business picked up.
Caterpillar Inc. has resumed hiring after laying off 19,000 full-time workers during the recession, thanks to rising demand for its construction and mining equipment. But most of the new jobs will be overseas. Of the 9,000 hires CEO Jim Owens said Caterpillar plans to make this year, only 3,000 will be in the U.S.
Many economists say eventually, companies won't be able to squeeze any more work out of their employees. That would force employers to step up hiring.
But Janet Yellen, president of the Federal Reserve Bank of San Francisco, cautions that this won't happen anytime soon. She believes corporate America remains in the early stages of a drive for greater efficiencies.
"We may be in store for ... high productivity growth for some time," she said in a speech this year. "If so, the rate of job creation will be frustratingly slow."
Copyright © 2010 The Associated Press. All rights reserved.
Monday, May 10, 2010
NYT: In New York, Some Judges Are Now Skeptical About Debt Collectors’ Claims
By WILLIAM GLABERSON
As New Yorkers have tumbled into credit card debt in large numbers during the great recession, bill collectors have inundated the courts to get what they say is due. In turn, the courts have issued hundreds of thousands of orders against residents. Some consumer groups argue that by doing so, the courts have become little more than an arm of the debt collection industry.
Now, a few judges in New York State are suggesting that they agree, at least in part, with the consumer groups. They have fumed at debt collectors and their lawyers, scolding them for interest as high as 30 percent a year and berating them for false statements and abusive practices.
Some of the rulings have even been sarcastic or incredulous. In December, a Staten Island judge said debt collectors seemed to think their lawsuits were taking place in a legal Land of Oz, where everyone was supposed to follow anticonsumer rules invented by some unseen debt-collection wizard.
Last month, a Manhattan appeals court threw out a credit card case, saying a debt collection company had sued the wrong person but pursued the case anyway.
“I think these judges are outraged at the status quo, and they’re trying to change it,” said Janet Ray Kalson, a Manhattan lawyer who is the chairwoman of a City Bar Association committee that has studied the deluge of credit card cases.
Debt-buyer businesses purchase debts — along with lists of names and amounts supposedly due — for pennies on the dollar from credit card companies and sometimes have no real evidence about whom they are suing or why. They then file tens of thousands of suits, often with little to back up their claims.
A Nassau County District Court judge said recently, for example, that one of New York City’s high-volume debt collection law firms, which has close ties to a debt-buying company, did not provide “a scintilla of evidence” that there was even a debt in a case against a Long Island woman.
The suit received an unusual amount of attention. The judge, Michael A. Ciaffa, said that it “regrettably, involves a veritable ‘perfect storm’ of mistakes, errors, misdeeds and improper litigation practices.” Judge Ciaffa said the law firm, Eltman, Eltman & Cooper, ignored court orders, made a “demonstrably false” assertion and harassed the woman for payment even after its suit was dismissed.
The case before Judge Ciaffa ended with an order that is far from typical in a credit card suit. The woman who had been sued, Patricia Bohnet, a bookkeeper and single mother, did not have to pay anything. But Eltman, Eltman & Cooper had to pay $14,800 in sanctions for violating ethical rules at least 18 times. Under the judge’s order, $4,800 is to go to Ms. Bohnet and the remainder to a state fund that works to reimburse clients for dishonest conduct by lawyers.
“They don’t care if you’re sick; they don’t care if you’re poor,” Ms. Bohnet said in an interview at her job in Woodmere. “Their only job is to collect money, and they’ll do it in any way possible.”
In response to questions, the law firm said in a written statement that Judge Ciaffa had not had all the facts but that the firm would not appeal. “As with any firm or business that handles this type of volume,” it added, “there exists a potential for errors or omissions in the normal course of business.”
Eltman, Eltman & Cooper was one of 35 law firms sued last July by the state, which claimed that they had improperly obtained more than 100,000 judgments in consumer-debt cases. Separate files in Federal District Court in Brooklyn show that without admitting fault, the Eltman law firm settled a class-action suit in 2006 that claimed it used “false, misleading and deceptive means” to collect debts.
Privately, some judges say they are embarrassed that in many New York courts, debt-collection lawyers have grown so comfortable that they give the impression they are in charge of the proceedings and do not need prove their claims with strong evidence.
In the recent pro-consumer rulings, skepticism of the debt collectors’ claims has been obvious. A Civil Court judge in Brooklyn, Noach Dear, has written decisions that come close to saying that the collection cases are sometimes based on falsehoods.
In a case in August, Judge Dear observed that there was nothing to substantiate a lawyer’s claim that she somehow remembered mailing a document to the credit card holder that was the foundation of the collection suit. The document, Judge Dear noted archly, had been mailed three and a half years earlier.
Behind the legalese of the credit card suits, some judges have suggested, there is often a disorganized jumble of documentation. A Mount Vernon City Court judge noted that one case was based on little more than “a self-serving computer printout.” A Manhattan judge said one company that bought debt claims from credit card companies had filed suit against a cardholder although it did not own that particular debt.
In the Staten Island case, the judge, Philip S. Straniere, said a credit card company was claiming interest of 28 percent on the balance due, which would be illegal as usury under New York law. The company argued that the credit card issued to a New Yorker that seemed to be from a national company had actually been issued by a one-branch bank in Utah, which had no usury law.
“Like the Land of Oz, run by a Wizard who no one has ever seen,” Judge Straniere wrote, “the Land of Credit Cards permits consumers to be bound by agreements they never sign, agreements they may never have received, subject to change without notice and the laws of a state other than those existing where they reside.”
The judge ruled that the supposed agreement allowing unlimited interest charges was not enforceable in New York.
Industry officials said that tales of abusive collection cases were misleading. “There are certainly colorful stories,” said Joann Needleman, an officer of the National Association of Retail Collection Attorneys. “People think that handful is the rule, not the exception, but it’s not.”
But Ms. Bohnet, the Long Island woman who was sued by a New York law firm, said just one case could be harrowing. When she received a call last year at the charity where she keeps the books for $39,000 a year, the voice on the other end told her the debt collectors had a five-year-old court judgment against her for a $4,861 debt. She had to pay, or they would start taking money out of her salary, she said she was told.
The address of the debt-collection firm and its lawyers at Eltman, Eltman & Cooper seemed to be the same, she noticed.
Ms. Bohnet did not know she had ever been sued. She started to cry, she said, worried that with a chunk of money taken every month, she might lose the modest apartment she needed to share custody of her teenage daughter.
“I was in all-out fear,” she said, adding, “After I got off the phone, I realized I didn’t even know what the debt was for.” She might have had an old credit card debt, but she had had some years of problems with alcohol and drugs and tangled financial problems. In recovery, she said, she had worked to clean up her financial affairs.
The next time the collectors called, she said, she told them that she was willing to pay if she owed any money but that she needed to see some proof that they had the right person. Then, without a lawyer, she went to the court, in Hempstead, to check into the order the debt collectors said they had against her.
After some digging, she found the case. The debt-buyer’s lawyers had filed a sworn statement that they said was proof she had been given notice of the suit. A process server for Eltman, Eltman & Cooper claimed she had been given a copy of the suit personally on July 30, 2004.
Judge Ciaffa doubted that. Ms. Bohnet, he wrote, “hadn’t lived at that address since 1998.”
Copyright 2010 The New York Times Company. All rights reserved.
As New Yorkers have tumbled into credit card debt in large numbers during the great recession, bill collectors have inundated the courts to get what they say is due. In turn, the courts have issued hundreds of thousands of orders against residents. Some consumer groups argue that by doing so, the courts have become little more than an arm of the debt collection industry.
Now, a few judges in New York State are suggesting that they agree, at least in part, with the consumer groups. They have fumed at debt collectors and their lawyers, scolding them for interest as high as 30 percent a year and berating them for false statements and abusive practices.
Some of the rulings have even been sarcastic or incredulous. In December, a Staten Island judge said debt collectors seemed to think their lawsuits were taking place in a legal Land of Oz, where everyone was supposed to follow anticonsumer rules invented by some unseen debt-collection wizard.
Last month, a Manhattan appeals court threw out a credit card case, saying a debt collection company had sued the wrong person but pursued the case anyway.
“I think these judges are outraged at the status quo, and they’re trying to change it,” said Janet Ray Kalson, a Manhattan lawyer who is the chairwoman of a City Bar Association committee that has studied the deluge of credit card cases.
Debt-buyer businesses purchase debts — along with lists of names and amounts supposedly due — for pennies on the dollar from credit card companies and sometimes have no real evidence about whom they are suing or why. They then file tens of thousands of suits, often with little to back up their claims.
A Nassau County District Court judge said recently, for example, that one of New York City’s high-volume debt collection law firms, which has close ties to a debt-buying company, did not provide “a scintilla of evidence” that there was even a debt in a case against a Long Island woman.
The suit received an unusual amount of attention. The judge, Michael A. Ciaffa, said that it “regrettably, involves a veritable ‘perfect storm’ of mistakes, errors, misdeeds and improper litigation practices.” Judge Ciaffa said the law firm, Eltman, Eltman & Cooper, ignored court orders, made a “demonstrably false” assertion and harassed the woman for payment even after its suit was dismissed.
The case before Judge Ciaffa ended with an order that is far from typical in a credit card suit. The woman who had been sued, Patricia Bohnet, a bookkeeper and single mother, did not have to pay anything. But Eltman, Eltman & Cooper had to pay $14,800 in sanctions for violating ethical rules at least 18 times. Under the judge’s order, $4,800 is to go to Ms. Bohnet and the remainder to a state fund that works to reimburse clients for dishonest conduct by lawyers.
“They don’t care if you’re sick; they don’t care if you’re poor,” Ms. Bohnet said in an interview at her job in Woodmere. “Their only job is to collect money, and they’ll do it in any way possible.”
In response to questions, the law firm said in a written statement that Judge Ciaffa had not had all the facts but that the firm would not appeal. “As with any firm or business that handles this type of volume,” it added, “there exists a potential for errors or omissions in the normal course of business.”
Eltman, Eltman & Cooper was one of 35 law firms sued last July by the state, which claimed that they had improperly obtained more than 100,000 judgments in consumer-debt cases. Separate files in Federal District Court in Brooklyn show that without admitting fault, the Eltman law firm settled a class-action suit in 2006 that claimed it used “false, misleading and deceptive means” to collect debts.
Privately, some judges say they are embarrassed that in many New York courts, debt-collection lawyers have grown so comfortable that they give the impression they are in charge of the proceedings and do not need prove their claims with strong evidence.
In the recent pro-consumer rulings, skepticism of the debt collectors’ claims has been obvious. A Civil Court judge in Brooklyn, Noach Dear, has written decisions that come close to saying that the collection cases are sometimes based on falsehoods.
In a case in August, Judge Dear observed that there was nothing to substantiate a lawyer’s claim that she somehow remembered mailing a document to the credit card holder that was the foundation of the collection suit. The document, Judge Dear noted archly, had been mailed three and a half years earlier.
Behind the legalese of the credit card suits, some judges have suggested, there is often a disorganized jumble of documentation. A Mount Vernon City Court judge noted that one case was based on little more than “a self-serving computer printout.” A Manhattan judge said one company that bought debt claims from credit card companies had filed suit against a cardholder although it did not own that particular debt.
In the Staten Island case, the judge, Philip S. Straniere, said a credit card company was claiming interest of 28 percent on the balance due, which would be illegal as usury under New York law. The company argued that the credit card issued to a New Yorker that seemed to be from a national company had actually been issued by a one-branch bank in Utah, which had no usury law.
“Like the Land of Oz, run by a Wizard who no one has ever seen,” Judge Straniere wrote, “the Land of Credit Cards permits consumers to be bound by agreements they never sign, agreements they may never have received, subject to change without notice and the laws of a state other than those existing where they reside.”
The judge ruled that the supposed agreement allowing unlimited interest charges was not enforceable in New York.
Industry officials said that tales of abusive collection cases were misleading. “There are certainly colorful stories,” said Joann Needleman, an officer of the National Association of Retail Collection Attorneys. “People think that handful is the rule, not the exception, but it’s not.”
But Ms. Bohnet, the Long Island woman who was sued by a New York law firm, said just one case could be harrowing. When she received a call last year at the charity where she keeps the books for $39,000 a year, the voice on the other end told her the debt collectors had a five-year-old court judgment against her for a $4,861 debt. She had to pay, or they would start taking money out of her salary, she said she was told.
The address of the debt-collection firm and its lawyers at Eltman, Eltman & Cooper seemed to be the same, she noticed.
Ms. Bohnet did not know she had ever been sued. She started to cry, she said, worried that with a chunk of money taken every month, she might lose the modest apartment she needed to share custody of her teenage daughter.
“I was in all-out fear,” she said, adding, “After I got off the phone, I realized I didn’t even know what the debt was for.” She might have had an old credit card debt, but she had had some years of problems with alcohol and drugs and tangled financial problems. In recovery, she said, she had worked to clean up her financial affairs.
The next time the collectors called, she said, she told them that she was willing to pay if she owed any money but that she needed to see some proof that they had the right person. Then, without a lawyer, she went to the court, in Hempstead, to check into the order the debt collectors said they had against her.
After some digging, she found the case. The debt-buyer’s lawyers had filed a sworn statement that they said was proof she had been given notice of the suit. A process server for Eltman, Eltman & Cooper claimed she had been given a copy of the suit personally on July 30, 2004.
Judge Ciaffa doubted that. Ms. Bohnet, he wrote, “hadn’t lived at that address since 1998.”
Copyright 2010 The New York Times Company. All rights reserved.
Friday, May 07, 2010
LoHud.com: Congress may extend bankruptcy relief to private student loans
By Diana Costello.
College graduates overwhelmed by private student
loans could see bankruptcy relief if proposed
legislation makes its way through Capitol Hill.
Bills recently introduced in the Senate and House
aim to treat private student loans more like credit
card and other consumer debts — meaning they
would be discharged if a borrower meets the court's
strict bankruptcy criteria.
Since 2005, bankruptcy law has prohibited private
student loans from being shed in all but the most
extreme cases. Other types of debt in this category
include overdue taxes and criminal fines.
Those who deal with bankruptcy proceedings say
the debate can be boiled down to a simple maxim:
"Where you sit depends on where you stand," White
Plains attorney Jeffery Binder says.
"If you believe ultimately it's the consumer's
responsibility to not take on more debt than you can
handle ... then you'll come down on the side of the
lender," Binder said. "If you believe that lenders
engage in practices that were predatory or
misleading ... then you'll come down on the side of
those who feel this is no different from any other
consumer loan and should be discharged in
bankruptcy."
The discussion comes as more students are turning
to private student loans to finance their college
ambitions — which themselves are growing ever
more expensive.
A more robust economic outlook and changes to
student lending enacted as part of the health-care
reform law are also thought to be encouraging
private lenders back into the market.
The average nonfederal debt per student was
$17,000 in 2007-08, The College Board says.
The volume of private student loans rose to $22.3
billion in 2007-08 from $15.1 billion in 2004-05,
according to The College Board's Trends in Student
Aid.
The credit crunch that froze financial markets,
however, also hit private student lending — pushing
down private borrowing by half during the 2008-09
school year to $11 billion.
Still, private student loans are growing more rapidly
than federal student loans, and if trends continue,
the volume of private loans would surpass that of
federal loans by 2025, according to FinAid.org, a
comprehensive website devoted to financial aid.
Supporters of the Private Student Loan Bankruptcy
Fairness Act of 2010 argue that private borrowers
lack important consumer protections that come with
federal loans — such as deferment plans and
income-based repayment options.
Under legislation enacted in 2007, borrowers who
work in public service jobs for at least 10 years can
qualify to have the balance of their student loans
forgiven.
Also, private loans typically carry variable interest
rates that are higher for those who can least afford
them, supporters say.
"Struggling borrowers have virtually no way to make
private loan debt more manageable because lenders
can simply refuse to negotiate affordable terms,"
said Lauren Asher, president of the Institute for
College Access and Success, which runs the Project
on Student Debt.
"People who borrowed for college and played by the
rules deserve basic consumer protections and fair
treatment when they hit hard times," Asher said.
Opponents, however, argue that such a change
could make it more difficult to secure private
funding for high education.
They also are concerned people would game the
system by running straight to bankruptcy court to
shed their debt obligation.
During a hearing on the plan earlier this month,
Rep. Trent Franks, R-Ariz., the House Judiciary
Committee's ranking minority member, said that
while reform is necessary, he is fearful about the
bill's potential consequences.
"If lenders are forced to scale back student lending
because private student loans are subject to
bankruptcy discharge, many students will be denied
access to higher education," Franks said.
Copyright 2010 The Journal News, a Gannett Co. Inc. newspaper serving Westchester, Rockland and Putnam counties in New York.
College graduates overwhelmed by private student
loans could see bankruptcy relief if proposed
legislation makes its way through Capitol Hill.
Bills recently introduced in the Senate and House
aim to treat private student loans more like credit
card and other consumer debts — meaning they
would be discharged if a borrower meets the court's
strict bankruptcy criteria.
Since 2005, bankruptcy law has prohibited private
student loans from being shed in all but the most
extreme cases. Other types of debt in this category
include overdue taxes and criminal fines.
Those who deal with bankruptcy proceedings say
the debate can be boiled down to a simple maxim:
"Where you sit depends on where you stand," White
Plains attorney Jeffery Binder says.
"If you believe ultimately it's the consumer's
responsibility to not take on more debt than you can
handle ... then you'll come down on the side of the
lender," Binder said. "If you believe that lenders
engage in practices that were predatory or
misleading ... then you'll come down on the side of
those who feel this is no different from any other
consumer loan and should be discharged in
bankruptcy."
The discussion comes as more students are turning
to private student loans to finance their college
ambitions — which themselves are growing ever
more expensive.
A more robust economic outlook and changes to
student lending enacted as part of the health-care
reform law are also thought to be encouraging
private lenders back into the market.
The average nonfederal debt per student was
$17,000 in 2007-08, The College Board says.
The volume of private student loans rose to $22.3
billion in 2007-08 from $15.1 billion in 2004-05,
according to The College Board's Trends in Student
Aid.
The credit crunch that froze financial markets,
however, also hit private student lending — pushing
down private borrowing by half during the 2008-09
school year to $11 billion.
Still, private student loans are growing more rapidly
than federal student loans, and if trends continue,
the volume of private loans would surpass that of
federal loans by 2025, according to FinAid.org, a
comprehensive website devoted to financial aid.
Supporters of the Private Student Loan Bankruptcy
Fairness Act of 2010 argue that private borrowers
lack important consumer protections that come with
federal loans — such as deferment plans and
income-based repayment options.
Under legislation enacted in 2007, borrowers who
work in public service jobs for at least 10 years can
qualify to have the balance of their student loans
forgiven.
Also, private loans typically carry variable interest
rates that are higher for those who can least afford
them, supporters say.
"Struggling borrowers have virtually no way to make
private loan debt more manageable because lenders
can simply refuse to negotiate affordable terms,"
said Lauren Asher, president of the Institute for
College Access and Success, which runs the Project
on Student Debt.
"People who borrowed for college and played by the
rules deserve basic consumer protections and fair
treatment when they hit hard times," Asher said.
Opponents, however, argue that such a change
could make it more difficult to secure private
funding for high education.
They also are concerned people would game the
system by running straight to bankruptcy court to
shed their debt obligation.
During a hearing on the plan earlier this month,
Rep. Trent Franks, R-Ariz., the House Judiciary
Committee's ranking minority member, said that
while reform is necessary, he is fearful about the
bill's potential consequences.
"If lenders are forced to scale back student lending
because private student loans are subject to
bankruptcy discharge, many students will be denied
access to higher education," Franks said.
Copyright 2010 The Journal News, a Gannett Co. Inc. newspaper serving Westchester, Rockland and Putnam counties in New York.
NYT: As Homeowners’ Dreams Die, He’s the Undertaker
By DAVID STREITFELD
LAKE VILLA, Ill. — If you see Joseph Laubinger on your doorstep, start packing. His courtly presence means you have exhausted all excuses, arguments and options for keeping your house.
“It’s like I’m a doctor,” said Mr. Laubinger, an agent here for big lenders. “People ask me how much time they have left.”
Hardly any. Legally, they have already lost ownership. If they do not respond to the carrot the lenders offer — as much as $5,000 in cash in exchange for leaving the house in good order — he employs the stick: the county sheriff, who evicts them.
Mr. Laubinger is having a busy spring. Nearly four million households nationwide are severely delinquent on their mortgages, the biggest backlog since the housing crisis began. As more and more of the homes edge toward repossession — a record quarter of a million were seized by lenders in the first three months of this year — agents like Mr. Laubinger are trying to coax people out.
Sometimes, the process is briskly efficient. The occupants have either abandoned the home or are methodically planning their departure well before Mr. Laubinger arrives bearing an incentive officially known as relocation assistance but always called cash for keys.
But the end game of foreclosure is typically neither smooth nor quick. Some people have nowhere to go, and others see no reason to go. The lenders need someone on the scene who can resolve the situation without escalating it, which is why Mr. Laubinger is getting an abundance of assignments from the country’s largest lenders as well as Fannie Mae, the government’s mortgage holding company.
The agent’s garage is stacked with desks and chairs, bought recently at a county government auction. “I’m expanding,” he said, with immediate plans to hire two more agents to join his four-person shop. He makes at most a small fee for getting the people out; his reward comes with the commission in selling the house.
Mr. Laubinger is 60, a onetime graphic artist who has been buying and selling real estate for himself and others for a quarter-century. When times were good, he spent as fast as he could. “I spun my wheels like a madman,” he said.
His territory is the northern edge of Illinois and the southernmost slice of Wisconsin — a 600-square-mile expanse that encompasses middle-class suburbs built in the last 10 years, resort homes that dot the region’s many lakes and decaying cottages bought by hard-scrabble immigrants.
People in all those places are hurting, which is good for Mr. Laubinger’s bottom line. Yet he shudders if anyone calls him a “repo man,” and is actually a soft touch. He is quick to grant extensions to the people who ask, even though this pushes the sale of the property, and his payday, further into the future.
In the debate over whether the foreclosed are deadbeats or victims, co-conspirators with the avaricious banks or merely collateral damage, the agent nearly always takes the benign view. The most critical thing he will say is, “Everyone got greedy, and now everyone is passing the buck.”
On a recent Saturday he had three houses to check up on, two in foreclosure and one trembling on the verge. Fannie Mae was sending him to examine one of the properties, where the owners had lost ownership in December but declined to decamp. A bank wanted him to snap photos of a second site, a high-end house whose defaulting owners were seeking a modification.
The occupants of the third house, Israel Lopez and Blanca Sanchez, had finally agreed to move out after months of negotiating. Mr. Laubinger had a check for $1,800 waiting for them.
Expecting a bustle of activity, the agent found the place quiet. Clearly, no one was going anywhere. Only a young boy was home. Mr. Laubinger left a message for the parents.
“They basically blew me off,” he said as he drove away. It’s a common problem: “People are staying longer because they’re not afraid.”
The house he was hired to photograph was in an upscale community, but the owners, who were either not home or not answering the door, were clearly suffering. The driveway was pocked with holes and the lawn full of weeds, a sharp contrast to the well-manicured neighbors.
Perhaps a modification would save them, but as Mr. Laubinger took his pictures, he said he had a bad feeling. “I’ll be coming back here, taking this to the next level,” he predicted.
His phone rang. It was Mrs. Sanchez. “We haven’t found anywhere to go,” she said. “We were wondering if any more extensions could be given.”
Mr. Laubinger was noncommittal but said she would not be evicted that weekend. That was all Mrs. Sanchez wanted to hear.
“They’re doing the math,” he said. “More time is better than the $1,800 I was going to give them to leave.” If he has to order a formal eviction with the sheriff, the paperwork and processing might take all summer.
The last house he visited that day was the one owned by Fannie Mae. Bajrak and Beata Lukasz, a Polish couple in their mid-30s, bought it for $190,000 in 2003 and then took $50,000 in cash out through refinancing and a home equity loan. That swelled their debt and made the house impossible to sell after the crash.
On Dec. 12, when Mr. Laubinger first visited, the couple had been in default for eight months but said they were getting a modification. Since then, Mr. Lukasz had not returned messages left on his cellphone. So after five months, Fannie Mae sent Mr. Laubinger again.
Mr. Lukasz finally emerged, saying his wife was ill with Crohn’s disease, a chronic inflammation of the intestines. Forced to choose between the mortgage and medicine, he said they had chosen the drugs. But he agreed to move out for $1,500 and provided a new cellphone number.
Back in his car, Mr. Laubinger stifled a sob. “That one hurts,” he said. “There’s an honest man, doing everything he can.”
Night fell as Mr. Laubinger pulled back into his own driveway here, about 90 minutes’ drive northwest of Chicago. He was not sure he had accomplished much. But a few days later, to his surprise, the Lopez-Sanchez family agreed to leave after all.
When the agent showed up at the appointed time with the check and a locksmith to rekey the doors, the couple was still carrying things out to their battered Ford Windstar: a big-screen TV, a huge teddy bear, a steaming pot of beef stew for the evening meal.
Mr. Lopez, 31, said he had lost his job early last year after the construction company he worked for went bankrupt. “I had been paying the mortgage every month, but I told my wife, ‘No more sense in that,’ ” he said.
The family’s fortunes may be on the mend. Mr. Lopez was hopeful that he would soon be starting work on a highway crew. Until the family can get back on its feet, their church agreed to give shelter to the couple and their four children.
Finally, the house was empty. Mr. Lopez signed the documents and then pocketed the check without looking at it. Mrs. Sanchez sniffled quietly. It was not emotion, she said, but allergies. The couple drove off in the overloaded Windstar without a backward look.
Mr. Laubinger surveyed the house. It needed paint, new carpet, repairs. He hoped to have it listed in a few weeks for $110,000.
If too many foreclosed properties hit the market at once, the housing market may take another dive. The agent said that was a necessary risk. “We have to get through this,” he said.
Easier said than done, perhaps. The Lukaszes have consulted a lawyer and intend to stay put as long as possible.
“The banks got so much from us, including a large down payment, I think it’s fair we’re not paying,” said Mr. Lukasz, who works the night shift in an envelope factory. “We’ll stay here until an hour before the sheriff.”
Mr. Laubinger will keep working on them, but he knows that they might be in their house for many months. “This crisis,” he said, “will serve me the rest of my career.”
Copyright 2010 The New York Times Company. All rights reserved.
LAKE VILLA, Ill. — If you see Joseph Laubinger on your doorstep, start packing. His courtly presence means you have exhausted all excuses, arguments and options for keeping your house.
“It’s like I’m a doctor,” said Mr. Laubinger, an agent here for big lenders. “People ask me how much time they have left.”
Hardly any. Legally, they have already lost ownership. If they do not respond to the carrot the lenders offer — as much as $5,000 in cash in exchange for leaving the house in good order — he employs the stick: the county sheriff, who evicts them.
Mr. Laubinger is having a busy spring. Nearly four million households nationwide are severely delinquent on their mortgages, the biggest backlog since the housing crisis began. As more and more of the homes edge toward repossession — a record quarter of a million were seized by lenders in the first three months of this year — agents like Mr. Laubinger are trying to coax people out.
Sometimes, the process is briskly efficient. The occupants have either abandoned the home or are methodically planning their departure well before Mr. Laubinger arrives bearing an incentive officially known as relocation assistance but always called cash for keys.
But the end game of foreclosure is typically neither smooth nor quick. Some people have nowhere to go, and others see no reason to go. The lenders need someone on the scene who can resolve the situation without escalating it, which is why Mr. Laubinger is getting an abundance of assignments from the country’s largest lenders as well as Fannie Mae, the government’s mortgage holding company.
The agent’s garage is stacked with desks and chairs, bought recently at a county government auction. “I’m expanding,” he said, with immediate plans to hire two more agents to join his four-person shop. He makes at most a small fee for getting the people out; his reward comes with the commission in selling the house.
Mr. Laubinger is 60, a onetime graphic artist who has been buying and selling real estate for himself and others for a quarter-century. When times were good, he spent as fast as he could. “I spun my wheels like a madman,” he said.
His territory is the northern edge of Illinois and the southernmost slice of Wisconsin — a 600-square-mile expanse that encompasses middle-class suburbs built in the last 10 years, resort homes that dot the region’s many lakes and decaying cottages bought by hard-scrabble immigrants.
People in all those places are hurting, which is good for Mr. Laubinger’s bottom line. Yet he shudders if anyone calls him a “repo man,” and is actually a soft touch. He is quick to grant extensions to the people who ask, even though this pushes the sale of the property, and his payday, further into the future.
In the debate over whether the foreclosed are deadbeats or victims, co-conspirators with the avaricious banks or merely collateral damage, the agent nearly always takes the benign view. The most critical thing he will say is, “Everyone got greedy, and now everyone is passing the buck.”
On a recent Saturday he had three houses to check up on, two in foreclosure and one trembling on the verge. Fannie Mae was sending him to examine one of the properties, where the owners had lost ownership in December but declined to decamp. A bank wanted him to snap photos of a second site, a high-end house whose defaulting owners were seeking a modification.
The occupants of the third house, Israel Lopez and Blanca Sanchez, had finally agreed to move out after months of negotiating. Mr. Laubinger had a check for $1,800 waiting for them.
Expecting a bustle of activity, the agent found the place quiet. Clearly, no one was going anywhere. Only a young boy was home. Mr. Laubinger left a message for the parents.
“They basically blew me off,” he said as he drove away. It’s a common problem: “People are staying longer because they’re not afraid.”
The house he was hired to photograph was in an upscale community, but the owners, who were either not home or not answering the door, were clearly suffering. The driveway was pocked with holes and the lawn full of weeds, a sharp contrast to the well-manicured neighbors.
Perhaps a modification would save them, but as Mr. Laubinger took his pictures, he said he had a bad feeling. “I’ll be coming back here, taking this to the next level,” he predicted.
His phone rang. It was Mrs. Sanchez. “We haven’t found anywhere to go,” she said. “We were wondering if any more extensions could be given.”
Mr. Laubinger was noncommittal but said she would not be evicted that weekend. That was all Mrs. Sanchez wanted to hear.
“They’re doing the math,” he said. “More time is better than the $1,800 I was going to give them to leave.” If he has to order a formal eviction with the sheriff, the paperwork and processing might take all summer.
The last house he visited that day was the one owned by Fannie Mae. Bajrak and Beata Lukasz, a Polish couple in their mid-30s, bought it for $190,000 in 2003 and then took $50,000 in cash out through refinancing and a home equity loan. That swelled their debt and made the house impossible to sell after the crash.
On Dec. 12, when Mr. Laubinger first visited, the couple had been in default for eight months but said they were getting a modification. Since then, Mr. Lukasz had not returned messages left on his cellphone. So after five months, Fannie Mae sent Mr. Laubinger again.
Mr. Lukasz finally emerged, saying his wife was ill with Crohn’s disease, a chronic inflammation of the intestines. Forced to choose between the mortgage and medicine, he said they had chosen the drugs. But he agreed to move out for $1,500 and provided a new cellphone number.
Back in his car, Mr. Laubinger stifled a sob. “That one hurts,” he said. “There’s an honest man, doing everything he can.”
Night fell as Mr. Laubinger pulled back into his own driveway here, about 90 minutes’ drive northwest of Chicago. He was not sure he had accomplished much. But a few days later, to his surprise, the Lopez-Sanchez family agreed to leave after all.
When the agent showed up at the appointed time with the check and a locksmith to rekey the doors, the couple was still carrying things out to their battered Ford Windstar: a big-screen TV, a huge teddy bear, a steaming pot of beef stew for the evening meal.
Mr. Lopez, 31, said he had lost his job early last year after the construction company he worked for went bankrupt. “I had been paying the mortgage every month, but I told my wife, ‘No more sense in that,’ ” he said.
The family’s fortunes may be on the mend. Mr. Lopez was hopeful that he would soon be starting work on a highway crew. Until the family can get back on its feet, their church agreed to give shelter to the couple and their four children.
Finally, the house was empty. Mr. Lopez signed the documents and then pocketed the check without looking at it. Mrs. Sanchez sniffled quietly. It was not emotion, she said, but allergies. The couple drove off in the overloaded Windstar without a backward look.
Mr. Laubinger surveyed the house. It needed paint, new carpet, repairs. He hoped to have it listed in a few weeks for $110,000.
If too many foreclosed properties hit the market at once, the housing market may take another dive. The agent said that was a necessary risk. “We have to get through this,” he said.
Easier said than done, perhaps. The Lukaszes have consulted a lawyer and intend to stay put as long as possible.
“The banks got so much from us, including a large down payment, I think it’s fair we’re not paying,” said Mr. Lukasz, who works the night shift in an envelope factory. “We’ll stay here until an hour before the sheriff.”
Mr. Laubinger will keep working on them, but he knows that they might be in their house for many months. “This crisis,” he said, “will serve me the rest of my career.”
Copyright 2010 The New York Times Company. All rights reserved.
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