The following is an outline of the talk Jim Shenwick will give to the New York Society of CPA's Small Firms Practice Committee on Monday, February 7, 2011.
Personal Bankruptcy: The Basics and Discharging Taxes in Bankruptcy
I. Introduction
Why do people file for bankruptcy today?
• Credit card debts
• Business reversals and job loss
• Falling real estate values
• High housing costs
• Student loans
• Divorce
• Medical bills and illness
• Guaranties of debt
II. Economic Conditions that are driving Personal Bankruptcy Filing
• 9.1% unemployment rate
• The effective unemployment rate is 17-18%
• The unemployment rate for recent college graduates is 20-21%
• $796.5 billion of revolving (credit card) debt as of November 2010
• The foreclosure rate is 11%
• 20-30% of homes are “underwater.”
III. What can a person with too much debt do?
A. Do nothing-“Hope and Pray”
B. Negotiate an “out of court” workout with creditors
Pros:
• Save the legal fees in filing a bankruptcy petition and the Bankruptcy Court filing fees.
• A workout may be a less “negative factor” on your credit report than filing for bankruptcy (“FICO Score”)
• Psychological relief in not filing for bankruptcy and “embarrassment or failure factor.”
Cons:
• You negotiate one creditor at a time-what if you can’t reach an agreement with all creditors-do you do the work?
• Who will do the negotiating-the debtor, a CPA or an attorney? (CPAs and attorneys will charge a fee for this work)
• The time and effort of drafting, revising and reviewing a Settlement Agreement, Release, Stipulation of Settlement or Stipulation of Discontinuance of litigation.
• Under § 108 of the Internal Revenue Code, debt relief is considered income and is taxable. This is “phantom income” (Creditor will have to file a Form 1099R with taxing authorities)
C. File Bankruptcy-Chapter 7, 11 and 13
IV. Overview of the three types of personal bankruptcy
A. Chapter 7-“Liquidation and Fresh Start”-the most common type of personal bankruptcy, this allows debtors to liquidate or discharge most (but not all) of their debts:
What debts are discharged in a Chapter 7 personal bankruptcy?
• Credit card debt
• Personal, business, automobile and real estate loans
• Lines of credit
• Medical bills
• Utility bills
• Personal and “good guy” guaranties-“good guy” guaranties are guaranties created for the leasing of commercial space.
• Of all of the solutions to too much debt, Chapter 7 bankruptcy will have the most negative impact on credit reports and will lower FICO score.
• Chapter 7 bankruptcy constitutes the vast majority of individual filings, and can be very helpful in dealing with many debtor/creditor problems that individuals have these days (90-95% of our bankruptcy filings are Chapter 7.
• Chapter 7 bankruptcy provides individuals who qualify to file under this chapter with a “discharge,” which can wipe out a significant amount of an individual’s debt.
• 1.6 million Americans filed for bankruptcy in 2010.
The Mechanics of a Chapter 7 Bankruptcy Filing
• Hire an attorney, provide data to attorney, bankruptcy petition is prepared, reviewed by client, filed with the Bankruptcy Court and Debtor attends § 341 meeting with attorney and Bankruptcy Trustee
B. Chapter 13- This type of personal bankruptcy provides for the reorganization of debts of an individual with regular income and allows them to retain real and personal property and business interests.
• Under BAPCPA, individuals must file for Chapter 13 bankruptcy if they earn too much and fail the means test.
• Corporations may not file Chapter 13 bankruptcy. Corporations may file Chapter 7 or Chapter 11 bankruptcy.
Chapter 13 bankruptcy is a good solution for individuals with:
• A lot of home equity
• Expensive cars
• A valuable lease
• A business they want to keep
• If a debtor’s income is greater than the median income for their state and household size, they will have to file a 5 year plan (rather than a 3 year plan).
• If a debtor has too much debt under § 109(g) of the Bankruptcy Code (noncontingent, liquidated, unsecured debts of more than $360,475 and noncontingent, liquidated, secured debts of more than $1,081,400), they do not qualify for Chapter 13.
• Chapter 13 bankruptcy will have an intermediate impact on credit reports and FICO score compared with Chapter 7 bankruptcy and an “out of court” workout.
The Mechanics of a Chapter 13 Bankruptcy Filing
• Hire an attorney, provide data to attorney, bankruptcy petition and Plan is prepared, reviewed by client and filed with the Bankruptcy Court, Debtor attends § 341 meeting with attorney and Chapter 13 Bankruptcy Trustee and attends hearing on Plan confirmation.
C. Chapter 11- Reorganization (for wealthy individuals or a corporation) or liquidation.
• The primary reason that individuals file for Chapter 11 is that they have too much income or assets or they have debts that fall outside the statutory limits for filing a Chapter 13 bankruptcy.
• The filing fee for Chapter 11 is $1,039 and legal fees are in excess of $10,000
V. “BAPCPA” and Personal Bankruptcy Basics
A. In 2005, Congress radically revised and amended Chapter 7 personal bankruptcy laws. These changes include median income and means testing, where if an individual (single, married or with children) has income that exceeds a certain dollar amount, then the bankruptcy filing is considered an abuse of the system and facially they are not permitted to file Chapter 7 bankruptcy.
B. Median Income. The first test under the revised code is whether a debtor exceeds the median income for their family size based on their state of residence. Pursuant to the 2005 amendments, a case where the debtor makes less than the median is presumed to be a non-abusive filing, and a below-median debtor may file for Chapter 7 bankruptcy.
Family size New York State Median Income (effective November 1, 2010)
1 $45,548
2 $56,845
3 $67,292
4 $82,587
• Add $7,500 for each individual in excess of four.
• Median income figures are periodically revised by the Census Bureau.
C. Means Test-However, all is not lost for a debtor who exceeds his or her state median income threshold. If an individual’s income exceeds the median income for their respective state and family size, they may still be allowed to file for Chapter 7 bankruptcy if they pass the so-called “Means Test,” i.e. the results show that the bankruptcy filing is not a presumption of abuse under § 707(b)(7) of the Bankruptcy Code. The Means Test (officially known as Form 22A, “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation”) is one of the most complicated calculations in the law. It consists of eight pages, and is similar to doing a 1040 tax return for an individual. The Means Test incorporates the debts that an individual has (both unsecured and secured (i.e. mortgages and car loans), taxes that they owe, and expenses specified by the IRS in its financial analysis standards–food, clothing, household supplies, personal care, out-of-pocket health care and miscellaneous (National Standards); housing and utilities (non-mortgage expenses), housing and utilities (mortgage/rental expense), with adjustments, transportation (vehicle operation/public transportation/transportation ownership or lease expenses)(you are entitled to an expense allowance in this category regardless of whether you pay the expenses of operating a vehicle and regardless of whether you use public transportation) (Local Standards)–as well as many other factors. It is similar to preparing an “offer in compromise.”
D. However, with proper planning, most individuals or couples whose income exceeds the median income can still pass the Means Test and will be allowed to file for Chapter 7 bankruptcy, notwithstanding the legislative intent of the changes under BAPCPA, which was to try and minimize the number of individuals who could file for Chapter 7 bankruptcy and force them to either not file for bankruptcy or to file for Chapter 13 bankruptcy.
• If an individual’s debts are primarily business debts, then the Means Test does not apply.
• The data that is used to calculate the Means Test is a six-month rolling look back at the debtor’s income and expenses. Accordingly, if a debtor is self-employed, an independent contractor or a salesperson, they may be able to earn less and therefore pass the Means Test.
• If a debtor is married and living with his or her spouse who is not filing for bankruptcy, the non-filing spouse’s income and expenses must be included in the Means Test.
• Failing the Means Test means that a Chapter 7 filing would be deemed presumptively abusive under § 707(b)(2)(A) of the Bankruptcy Code. However, a debtor can rebut the presumption of abuse by showing special circumstances.
• Similarly, if a debtor’s after tax income is greater then expenses, the debtor has monies to make some payment to creditors, and a Chapter 7 filing would be presumptively abusive under the “totality of the circumstances” test in §707(b)(3) of the Bankruptcy Code.
VI. Dischargeability of Taxes in Bankruptcy
A. Certain “old income taxes” may be dischargeable if:
i. The tax return was filed more than two years prior to the bankruptcy filing (note that a return prepared and filed by the IRS is not deemed to be a filed return);
ii. The taxes are more than three years old;
iii. The taxes were assessed more than 240 days before the filing of the petition;
iv. There was no attempt to avoid or evade the taxes.
• Various events can toll or delay the calculation of these time periods, including a bankruptcy filing, a pending offer in compromise, failure to file a return, filing an amended return and requesting an extension of time to file a return.
If all of these conditions are met, the taxes are dischargeable in bankruptcy. Tax account transcripts from the Internal Revenue Service and the New York State Department of Taxation and Finance are needed in order to determine if the taxes are dischargeable.
B. Bankruptcy Litigation/Adversary Proceeding- The Debtor or the taxing authority can file an adversary proceeding (bankruptcy litigation) to determine if the tax debts are dischargeable. The Debtor can also enter into a payment plan with the taxing authority.
C. “No Attempt to Avoid or Evade the Taxes” Standard-the IRS has heightened its scrutiny of the discharge of income taxes in bankruptcy, and their position (based on case law) is that if you spend too much money on luxury items, and/or pay other creditors ahead of the IRS, and/or make yourself judgment proof, then according to the IRS, those tax debts would not be dischargeable, and the IRS will commence an adversary proceeding (litigation in a bankruptcy case) to object to the discharge of these taxes. See Wright v. Internal Revenue Service, 191 B.R. 291 (S.D.N.Y. 1995); Haesloop v. U.S. (In re Haesloop), 2000 Bankr. LEXIS 1104, 2000 WL 1607316 (Bankr. E.D.N.Y. Aug. 30, 2000); Lynch v. United States, 299 B.R. 62 (Bankr. S.D.N.Y. 2003); Epstein v. United States, 303 B.R. 280 (Bankr. E.D.N.Y. 2004)
D. What taxes are not dischargeable?
• Recent taxes (2009 and 2010 tax years)
• Payroll, sales and other trust fund taxes (employee portion of FICA and FUTA, not the employer portion)
• Property taxes assessed within one year of filing
E. BAPCPA (2005) requirements for Personal Bankruptcy
i. Under BAPCPA, in addition to the list of creditors, schedules of assets, liabilities, income and expenses debtors must now provide:
a. A certificate of credit counseling;
b. Payment advices from employers received 60 days before filing (if any);
c. A statement of monthly net income and any anticipated increase in income or expenses after filing;
d. Tax returns or transcripts filed in the most recent tax year;
f. Photo ID; and
g. Social Security card
ii. Failure to provide the documents within 45 days after the petition has been filed (with a possibility of a 45-day extension) results in automatic dismissal of the case.
iii. Also new under BAPCPA, a debtor must have received pre-petition credit briefing (in person, by phone or internet) from an approved non-profit entity that outlined opportunities for credit counseling and assisted the Debtor in performing a personal budget analysis in the 180 days before filing a petition. Greenpath (http://www.greenpath.com), one of the approved credit counseling agencies, charges approximately $45. There are many other course providers besides greenpath, some with lower costs.
vi. Additionally, within 60 days after the first Meeting of Creditors, the debtor must also take a post-petition financial management course and file a certificate of completion with the Bankruptcy Court. The cost of this course from Greenpath is also approximately $45.
iv. The Bankruptcy Court may grant a waiver based on the Debtor’s sworn statement that they were unable to obtain the counseling services within five days of making the request and had to file immediately, but the waiver expires 30 days after the petition is filed.
v. The briefing is not required if the Bankruptcy Court determines that the Debtor is mentally incapacitated, physically disabled, or is an active member of the military in a combat zone.
F. What are the negatives of filing for Chapter 7 bankruptcy?
i. The filing stays on a person’s credit report for seven to ten years
ii. A debtor may only file for Chapter 7 bankruptcy every eight years (however, if a debtor files for Chapter 7, receives a discharge, and then gets into further financial trouble, they can file under Chapter 11 or 13 of the Bankruptcy Code).
VII. Chapter 13
A. What are the pros and cons?
i. Cons
a. The debtor is placed on an austerity budget and must pay their disposable income to the Chapter 13 Trustee on a monthly basis.
b. If the debtor is over the “median income,” then they must prepare a five year, 60 month plan. The shortest plans are generally three years.
c. The filing fee is $279 (which is $20 less then the filing fee for a Chapter 7 filing).
d. However, legal fees are greater than those for a Chapter 7 filing, since there are fees for preparing the plan, the hearing on plan confirmation, and the plan must be served on creditors and must be confirmable.
e. In the Southern District of New York, historically only 30% of Chapter 13 plans pay out over time.
f. Pursuant to §1322 of the Bankruptcy Code, first mortgages cannot be modified in Chapter 13. However, second mortgages can be modified and mortgages on investment properties and vacation homes can be modified.
g. The Chapter 13 Trustee receives a commission of 10% of the monies paid into a Chapter 13 plan.
h. With the increased New York State homestead exemption of $150,000 (for debtors residing in the New York metropolitan area), Chapter 7 can accomplish much of what can be accomplished with a Chapter 13 filing at a lesser cost to the Debtor.
ii. Pros
a. Chapter 13 allows the debtor to retain property that he or she would otherwise lose in a Chapter 7 liquidation (e.g. a car or a house with substantial equity)
b. A Chapter 13 debtor remains under bankruptcy court protection for the duration of the repayment plan (3-5 years)
c. Tax refunds are property of the bankruptcy estate and those monies must be transferred by the Debtor to the Chapter 13 Trustee
VIII. New York State Bankruptcy Exemptions
A. The most sweeping change in decades on what real and personal property is exempt from a debtor’s bankruptcy estate (the debtor’s property that can be distributed to creditors) in New York State took place last month. New York State Senate bill S.7034A and Assembly bill A. 8735A were signed into law by Governor Paterson on December 23, 2010. The new law became effective on January 22, 2011.
B. The scope of the bill is very broad, but a few of the major changes are:
i. The homestead exemption has increased 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; and $75,000 for the remaining counties in the state.
ii. The motor vehicle exemption has increased from $2,400 to $4,000. If the vehicle is equipped for a disabled person, the exemption is $10,000.
iii. The aggregate (combined) individual bankruptcy exemption for certain annuities and personal property under New York Debtor and Creditor Law § 5205(a) has increased from $5,000 to $10,000.
iv. The exemption for tools of trade (including professional instruments and library) has increased from $600 to $3,000.
v. The New York Banking Department will publish cost of living adjustments to exemption amounts every three years commencing April 1, 2012.
vi. Debtors are now 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-$1,150 plus up to $10,825 of any unused amount of the homestead exemption.
C. A debtor may also exempt:
i. An unlimited amount of rental or utility security deposits.
ii. 120 days of food.
iii. $7,500 of monies recovered for a personal injury.
iv. A qualified IRA up to $1,000,000.
A married couple filing jointly for bankruptcy can double the amount of the monetary exemptions listed above.
The full text of the new law can be found at:
http://www.nyeb.uscourts.gov/announcements/ExemptionsSummaryLaw.pdf
IX. Real Estate/Family Home and Personal Bankruptcy
Chapter 7 bankruptcy can be very effective for individuals with real estate in which they live that is “underwater” (where the fair market value of the property is less than the value of the mortgages to which the property is subject)
A. When we talk about real estate, we’re talking about houses, townhouses, co-ops and condos. In order to qualify for the homestead exemption, a debtor must reside in the property at the time the bankruptcy is filed.
As I mentioned earlier, last month New York State increased the homestead exemption to $75,000, $125,000 and $150,000 per Debtor (varying exemptions for different regions of the state), so a married couple under New York law can exempt $150,000, $250,000 or $300,000 of equity in a residence. Let’s look at a few examples of how residential real estate issues play out in a Chapter 7 bankruptcy filing.
Real Estate Scenarios:
For example, let’s take a look at a married couple considering filing for bankruptcy and the value of their property and mortgage(s) on their property.
FMV $600,000
Mortgage ($500,000)
Equity $100,000
In this scenario, the couple could file for Chapter 7 bankruptcy, discharge their unsecured debts, and keep their house, provided that they continue to make mortgage payments.
FMV $700,000
Mortgage ($500,000)
Equity $200,000
NYS Homestead Exemption ($150,000)
Non-Exempt Equity $50,000
In this scenario in a Chapter 7 bankruptcy, the Chapter 7 Trustee would sell the house and receive $50,000 for the equity above the homestead exemption (less costs and expenses), and that money would be used to pay the couple’s creditors. The Trustee would pay $150,000 to the Debtors at the end of their case as a result of their homestead exemption. Alternatively, the debtors could repurchase the house from the Trustee by buying the equity from the Trustee (redemption).
FMV $400,000
Mortgage ($500,000)
Negative Equity ($100,000)
In this scenario, the house has a negative equity of $100,000 and is “underwater” and would not be sold by the Chapter 7 Trustee. However, in order to keep the house, the debtor must reaffirm the debt to the mortgagee before the case is discharged and continue to make the payments on the mortgage, notwithstanding the fact that the value of the house is less than the amount of the mortgage.
Reaffirmation is governed by section 524(c) of the Bankruptcy Code, and requires that the debtor file an agreement with the court stating that he or she agrees to be legally bound to repay the otherwise dischargeable debt. The reaffirmation agreement must be filed 60 days after the meeting of creditors. The debtor’s attorney must file an affidavit stating that such an agreement will not be a hardship for the debtor. In the case of a pro se debtor, the bankruptcy judge will interview the debtor to ensure the agreement is voluntary and that it does not present a hardship for the debtor. In any event, the debtor may rescind the agreement up to 60 days after the agreement is filed with the court, or the case is discharged, whichever is later.
Here’s a question for all of you-Under these circumstances why would the couple want to retain the house?
Wouldn’t they be better off economically to file for Chapter 7 bankruptcy and let the bank make a motion for relief from the automatic stay so they can foreclose and obtain title to the house? This a personal decision for the debtors would have to make, which may include non-economic considerations that would lead them to want to keep a house that is $100,000 “underwater.”
Scenario: One spouse files for bankruptcy, the other spouse does not and the house has equity.
In a Chapter 7 bankruptcy, the Trustee may be able to sell the house. However, under New York State law due to “tenancy-by-the-entirety” protection, the house cannot be sold. The creditor can docket a judgment against the property, which is good for 20 years, and the home cannot be sold or refinanced.
Under this scenario, NYS law may provide more protection to the non-filing spouse than bankruptcy law. See §§ 363(h), (i), and (j) of the Bankruptcy Code when dealing with a scenario where one spouse files for bankruptcy, the other spouse does not and the house has equity.
Note that if the home is transferred from one spouse to the other, this a fraudulent conveyance.
Planning opportunity: If the couple divorces, the house may be transferred from one spouse to the other for no consideration, pursuant to New York State equitable distribution law.
In Chapter 7 bankruptcy, the factors to be considered as to whether the Chapter 7 bankruptcy trustee can sell the house are: (i) the equity in the property; (ii) the respective ages of the debtor and the spouse; and (iii) the burden to the non-filing spouse of having to leave the house (i.e. the impact on minor children).
Section 363(h) of the Bankruptcy Code deals with the conditions which must be met for a Trustee to sell a co-owner’s interest in property (whether owned as tenants in common, joint tenants or tenants by the entirety), which include:
1. Partition of the property between the bankruptcy estate and the co-owners is impracticable;
2. Sale of the bankruptcy estate’s undivided interest in the property would realize significantly less for the estate than the sale of the property free of the interests of the co-owners;
3. The benefit to the bankruptcy estate of a sale of the property free of the interests of the co-owners outweighs the detriment, if any, to the co-owners.
In Community Natl. Bank and Trust Co. of New York v. Persky (In re Persky), 893 F.2d 15 (2d. Cir. 1989), the Second Circuit Court of Appeals reviewed a bankruptcy filing in which only one of the co-owners was indebted to the bank and filed for bankruptcy relief. The Court found that:
• The Bankruptcy Court had the power to review the Trustee’s discretion to sell the property.
• The benefit to the bankruptcy estate should be analyzed from the standpoint of the sale of the nondebtor spouse’s entire interest in the property, including their possessory and survivorship interests, in determining whether the property should be sold.
• Noneconomic factors should be considered when analyzing the detriment to the nondebtor spouse of a sale of the property.
Section 363(i) of the Bankruptcy Code provides that in a Chapter 7 bankruptcy, if the property is to be sold, the debtor’s spouse may purchase the estate’s share of the property.
Pursuant to §363(j) of the Bankruptcy Code, the Chapter 7 Trustee must distribute to the debtor’s spouse the proceeds of the sale (less costs and expenses), but not including any compensation of the Trustee, in accordance with the ownership interests of the non-filing spouse and the bankruptcy estate.
Pursuant to § 363(k) of the Bankruptcy Code, the mortgagee may also bid on the house and, if they’re successful, they may offset their secured claim against the purchase price of the house.
Mortgage Arrears and Chapter 7 Bankruptcy
The above scenarios assume that the debtors are current on their mortgage. If the debtors were not current, then the mortgage arrears would need to be cured in order to keep the house during Chapter 7 bankruptcy.
A. How does a debtor deal with mortgage arrears?
i. Negotiate with the lender prior to the bankruptcy filing.
ii. Negotiate with the lender after the bankruptcy filing for payment plan for the arrears. Pursuant to Bankruptcy Code § 524, a debtor must reaffirm within 60 days from the date of the first scheduled meeting of creditors. Once the reaffirmation is executed, unless the agreement is rescinded, the debtor is liable; if they default on the mortgage in the future after reaffirmation, the mortgage debt is not dischargeable.
iii. Loss mitigation in the Southern District of New York (see Section IX below)
iv. Conversion of a Chapter 7 case to a Chapter 13 case, pursuant to Bankruptcy Code § 706.
v. Abandon the house to the mortgagee pursuant to the Chapter 7 filing, if you can’t work out a payment plan with the lender.
X. The Southern District of New York’s Loss-Mitigation Program
A. In response to a growing number of mortgage defaults and foreclosures, the U.S. Bankruptcy Court for the Southern District of New York (NYSB) adopted Loss Mitigation Program Procedures in January 2009, which were revised in December 2010. A full description of the program is at: http://www.nysb.uscourts.gov/pdf/lossmit/RevisedLossMitigationProcedures.pdf
B. “Loss mitigation” includes the full range of solutions that can prevent either the loss of a Debtor’s property to foreclosure, increased costs to the lender, or both. Loss mitigation commonly consists of the following general types of agreements, or a combination of them: loan modification, loan refinance, forbearance, short sale, or surrender of the property in full satisfaction of the mortgage.
C. Use of the NYSB Loss Mitigation Program Procedures requires that: (1) the individual must reside in the Southern District of New York (which includes the counties of New York, Bronx, Westchester, Rockland, Putnam, Orange, Dutchess, and Sullivan) and (2) loss mitigation can only be requested for an individual’s primary residence. Loss Mitigation is available for cases assigned to select judges in the U.S. Bankruptcy Court for the Eastern District of New York (which includes the counties of Kings, Queens, Richmond, Nassau and Suffolk).
D. Parties are encouraged to request loss mitigation as early in the case as possible, but loss mitigation may be initiated at any time.
Conclusion:
• Fortunately, in this environment where many people have lost their jobs, have too much debt or own real estate that has depreciated in value have options-generally an “out of court” workout or a bankruptcy filing.
• Pre-bankruptcy planning is often times necessary and clients should consult with their CPA and an experienced bankruptcy attorney as soon as possible.
Jim Shenwick
Visit the Shenwick & Associates website: jshenwick.googlepages.com, which has detailed information regarding personal bankruptcy.
Please call or e-mail Jim Shenwick with any questions at (212) 541-6224 or jshenwick@gmail.com
Friday, February 04, 2011
Thursday, February 03, 2011
Jim Shenwick to speak on "Personal Bankruptcy: The Basics and Discharging Taxes in Bankruptcy" on 2/7
Jim Shenwick will be speaking on "Personal Bankruptcy: The Basics and Discharging Taxes in Bankruptcy" to the New York State Society of CPA's Small Firms Practice Committee on Monday, February 7th. The meeting is from 8:45 - 10:00 am at 3 Park Ave., 18th Floor(the receptionist will have the room assignment). For further information or registration, please call (212) 719-8300.
Monday, January 24, 2011
NYT: For Vallejo, Bankruptcy Isn't Exactly a Fresh Start
By JONATHAN WEBER
Vallejo, which delivered a wake-up call to municipalities around the country when it filed for bankruptcy protection in 2008, outlined in court papers last week how it plans to get back on its feet, financially speaking. For residents, the plan makes for grim reading. And if you’re a public official or taxpayer who’s hoping that bankruptcy might be a way to solve your city’s financial problems, it will surely prompt you to think twice.
People think of bankruptcy as a way to wipe the slate clean of old obligations, but that’s only half true. Yes, it’s sometimes possible for businesses, individuals and governments to eliminate some — even most — debts through bankruptcy. But as Vallejo’s case underscores, the real point of bankruptcy isn’t to let a debtor walk away but rather to force a negotiation between debtors and creditors.
Those negotiations, and the litigation that often goes with them, are now mostly concluded in the Vallejo case, and the city hopes that the formal restructuring plan it just submitted will let it emerge from bankruptcy by summer.
Municipal bankruptcy — and, as The New York Times reported on Friday, a Republican-led effort in Washington to allow states to file some kind of bankruptcy — is increasingly on politicians’ radar as a way to break what are perceived as sweetheart contracts with public employee unions and cancel sometimes-lavish pension deals.
But Chapter 9 of the bankruptcy code, which covers municipal bankruptcy, is rarely used, and it’s not entirely clear what it does and doesn’t allow. (Many states don’t even allow municipalities to file.)
In Vallejo, the four unions representing city employees claimed that California law protected their contracts, but the bankruptcy court ultimately ruled that the city could cancel its collective bargaining agreements. That, in turn, forced the unions to agree to deals that they would not have accepted otherwise.
The city has cut retiree health benefits from $1,500 to $300 a month and stopped making payouts on accrued leave time.
But pension plans for retirees and current city employees, including one that allows police officers to retire at 50 with as much as 90 percent of their pay, remain untouched. The city chose not to test whether messing with pensions would be allowed even in bankruptcy, and so remains on the hook for some $195 million in unfinanced pension liabilities.
Meanwhile, much of the savings in the renegotiated union contracts come from severe work-force reductions: the police department is down to 90 sworn officers from 155 in 2003, and the fire department was slashed from 122 people and 8 firehouses to 70 people and 5 firehouses.
When voters complain about bloated government payrolls, I’d wager that taking an ax to the police and fire departments is not the solution they have in mind.
Now consider the $225 million in debt currently on Vallejo’s books. The bulk is owed by special districts, mainly the water authority, and is unaffected by the bankruptcy case. Only about $50 million in city obligations, mainly lease payments on buildings, will actually be restructured, with a net “present value” savings of around 40 percent.
Meanwhile, even a cursory look at the city’s finances makes it clear that a huge part of the problem has nothing to do with payrolls or pensions or bond debt. Rather, it has to do with revenue: city tax collections plummeted from $83 million in 2007-08 to $65 million in the most recent fiscal year, a result of the recession and the housing bust. Housing values have fallen an astonishing 67 percent.
So Vallejo stumbles forward: with minimal public safety services, a skeleton crew for road repairs, deferred maintenance on everything, and no money for “extras” like parks, libraries and senior centers. That will change only when — if? — revenues begin to climb.
Assuming the bankruptcy plan is approved, the city will have saved some money and shed some long-term obligations. But when you consider the $8 million and counting in legal fees, three years of angry litigation and uncertainty, the millions that contractors, city employees and retirees will lose (they stand to collect only 5 to 20 cents on the dollar for their claims), and the hit to the city’s reputation that will likely impair business growth (and tax collections) for years, it hardly looks like a victory.
Thinking about bankruptcy as a solution to your city’s financial troubles? There has to be a better way.
Jonathan Weber is the editor in chief of The Bay Citizen.
jweber@baycitizen.org
Copyright 2011 The New York Times Company. All rights reserved.
Vallejo, which delivered a wake-up call to municipalities around the country when it filed for bankruptcy protection in 2008, outlined in court papers last week how it plans to get back on its feet, financially speaking. For residents, the plan makes for grim reading. And if you’re a public official or taxpayer who’s hoping that bankruptcy might be a way to solve your city’s financial problems, it will surely prompt you to think twice.
People think of bankruptcy as a way to wipe the slate clean of old obligations, but that’s only half true. Yes, it’s sometimes possible for businesses, individuals and governments to eliminate some — even most — debts through bankruptcy. But as Vallejo’s case underscores, the real point of bankruptcy isn’t to let a debtor walk away but rather to force a negotiation between debtors and creditors.
Those negotiations, and the litigation that often goes with them, are now mostly concluded in the Vallejo case, and the city hopes that the formal restructuring plan it just submitted will let it emerge from bankruptcy by summer.
Municipal bankruptcy — and, as The New York Times reported on Friday, a Republican-led effort in Washington to allow states to file some kind of bankruptcy — is increasingly on politicians’ radar as a way to break what are perceived as sweetheart contracts with public employee unions and cancel sometimes-lavish pension deals.
But Chapter 9 of the bankruptcy code, which covers municipal bankruptcy, is rarely used, and it’s not entirely clear what it does and doesn’t allow. (Many states don’t even allow municipalities to file.)
In Vallejo, the four unions representing city employees claimed that California law protected their contracts, but the bankruptcy court ultimately ruled that the city could cancel its collective bargaining agreements. That, in turn, forced the unions to agree to deals that they would not have accepted otherwise.
The city has cut retiree health benefits from $1,500 to $300 a month and stopped making payouts on accrued leave time.
But pension plans for retirees and current city employees, including one that allows police officers to retire at 50 with as much as 90 percent of their pay, remain untouched. The city chose not to test whether messing with pensions would be allowed even in bankruptcy, and so remains on the hook for some $195 million in unfinanced pension liabilities.
Meanwhile, much of the savings in the renegotiated union contracts come from severe work-force reductions: the police department is down to 90 sworn officers from 155 in 2003, and the fire department was slashed from 122 people and 8 firehouses to 70 people and 5 firehouses.
When voters complain about bloated government payrolls, I’d wager that taking an ax to the police and fire departments is not the solution they have in mind.
Now consider the $225 million in debt currently on Vallejo’s books. The bulk is owed by special districts, mainly the water authority, and is unaffected by the bankruptcy case. Only about $50 million in city obligations, mainly lease payments on buildings, will actually be restructured, with a net “present value” savings of around 40 percent.
Meanwhile, even a cursory look at the city’s finances makes it clear that a huge part of the problem has nothing to do with payrolls or pensions or bond debt. Rather, it has to do with revenue: city tax collections plummeted from $83 million in 2007-08 to $65 million in the most recent fiscal year, a result of the recession and the housing bust. Housing values have fallen an astonishing 67 percent.
So Vallejo stumbles forward: with minimal public safety services, a skeleton crew for road repairs, deferred maintenance on everything, and no money for “extras” like parks, libraries and senior centers. That will change only when — if? — revenues begin to climb.
Assuming the bankruptcy plan is approved, the city will have saved some money and shed some long-term obligations. But when you consider the $8 million and counting in legal fees, three years of angry litigation and uncertainty, the millions that contractors, city employees and retirees will lose (they stand to collect only 5 to 20 cents on the dollar for their claims), and the hit to the city’s reputation that will likely impair business growth (and tax collections) for years, it hardly looks like a victory.
Thinking about bankruptcy as a solution to your city’s financial troubles? There has to be a better way.
Jonathan Weber is the editor in chief of The Bay Citizen.
jweber@baycitizen.org
Copyright 2011 The New York Times Company. All rights reserved.
Friday, January 21, 2011
NYT: State Bankruptcy Option Is Sought, Quietly
By MARY WILLIAMS WALSH
Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.
Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.
But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.
Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.
Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.
“All of a sudden, there’s a whole new risk factor,” said Paul S. Maco, a partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission’s Office of Municipal Securities during the Clinton administration.
For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.
House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.
Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975.
Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.
“They are readying a massive assault on us,” said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. “We’re taking this very seriously.”
Mr. Loveless said he was meeting with potential allies on Capitol Hill, making the point that certain states might indeed have financial problems, but public employees and their benefits were not the cause. The Center on Budget and Policy Priorities released a report on Thursday warning against a tendency to confuse the states’ immediate budget gaps with their long-term structural deficits.
“States have adequate tools and means to meet their obligations,” the report stated.
No state is known to want to declare bankruptcy, and some question the wisdom of offering them the ability to do so now, given the jitters in the normally staid municipal bond market.
Slightly more than $25 billion has flowed out of mutual funds that invest in muni bonds in the last two months, according to the Investment Company Institute. Many analysts say they consider a bond default by any state extremely unlikely, but they also say that when politicians take an interest in the bond market, surprises are apt to follow.
Mr. Maco said the mere introduction of a state bankruptcy bill could lead to “some kind of market penalty,” even if it never passed. That “penalty” might be higher borrowing costs for a state and downward pressure on the value of its bonds. Individual bondholders would not realize any losses unless they sold.
But institutional investors in municipal bonds, like insurance companies, are required to keep certain levels of capital. And they might retreat from additional investments. A deeply troubled state could eventually be priced out of the capital markets.
“The precipitating event at G.M. was they were out of cash and had no ability to raise the capital they needed,” said Harry J. Wilson, the lone Republican on President Obama’s special auto task force, which led G.M. and Chrysler through an unusual restructuring in bankruptcy, financed by the federal government.
Mr. Wilson, who ran an unsuccessful campaign for New York State comptroller last year, has said he believes that New York and some other states need some type of a financial restructuring.
He noted that G.M. was salvaged only through an administration-led effort that Congress initially resisted, with legislators voting against financial assistance to G.M. in late 2008.
“Now Congress is much more conservative,” he said. “A state shows up and wants cash, Congress says no, and it will probably be at the last minute and it’s a real problem. That’s what I’m concerned about.”
Discussion of a new bankruptcy option for the states appears to have taken off in November, after Mr. Gingrich gave a speech about the country’s big challenges, including government debt and an uncompetitive labor market.
“We just have to be honest and clear about this, and I also hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy,” he said.
A few weeks later, David A. Skeel, a law professor at the University of Pennsylvania, published an article, “Give States a Way to Go Bankrupt,” in The Weekly Standard. It said thorny constitutional questions were “easily addressed” by making sure states could not be forced into bankruptcy or that federal judges could usurp states’ lawmaking powers.
“I have never had anything I’ve written get as much attention as that piece,” said Mr. Skeel, who said he had since been contacted by Republicans and Democrats whom he declined to name.
Mr. Skeel said it was possible to envision how bankruptcy for states might work by looking at the existing law for local governments. Called Chapter 9, it gives distressed municipalities a period of debt-collection relief, which they can use to restructure their obligations with the help of a bankruptcy judge.
Unfunded pensions become unsecured debts in municipal bankruptcy and may be reduced. And the law makes it easier for a bankrupt city to tear up its labor contracts than for a bankrupt company, said James E. Spiotto, head of the bankruptcy practice at Chapman & Cutler in Chicago.
The biggest surprise may await the holders of a state’s general obligation bonds. Though widely considered the strongest credit of any government, they can be treated as unsecured credits, subject to reduction, under Chapter 9.
Mr. Spiotto said he thought bankruptcy court was not a good avenue for troubled states, and he has designed an alternative called the Public Pension Funding Authority. It would have mandatory jurisdiction over states that failed to provide sufficient funding to their workers’ pensions or that were diverting money from essential public services.
“I’ve talked to some people from Congress, and I’m going to talk to some more,” he said. “This effort to talk about Chapter 9, I’m worried about it. I don’t want the states to have to pay higher borrowing costs because of a panic that they might go bankrupt. I don’t think it’s the right thing at all. But it’s the beginning of a dialog.”
Copyright 2011 The New York Times Company. All rights reserved.
Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.
Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.
But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.
Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.
Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.
“All of a sudden, there’s a whole new risk factor,” said Paul S. Maco, a partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission’s Office of Municipal Securities during the Clinton administration.
For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.
House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.
Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975.
Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.
“They are readying a massive assault on us,” said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. “We’re taking this very seriously.”
Mr. Loveless said he was meeting with potential allies on Capitol Hill, making the point that certain states might indeed have financial problems, but public employees and their benefits were not the cause. The Center on Budget and Policy Priorities released a report on Thursday warning against a tendency to confuse the states’ immediate budget gaps with their long-term structural deficits.
“States have adequate tools and means to meet their obligations,” the report stated.
No state is known to want to declare bankruptcy, and some question the wisdom of offering them the ability to do so now, given the jitters in the normally staid municipal bond market.
Slightly more than $25 billion has flowed out of mutual funds that invest in muni bonds in the last two months, according to the Investment Company Institute. Many analysts say they consider a bond default by any state extremely unlikely, but they also say that when politicians take an interest in the bond market, surprises are apt to follow.
Mr. Maco said the mere introduction of a state bankruptcy bill could lead to “some kind of market penalty,” even if it never passed. That “penalty” might be higher borrowing costs for a state and downward pressure on the value of its bonds. Individual bondholders would not realize any losses unless they sold.
But institutional investors in municipal bonds, like insurance companies, are required to keep certain levels of capital. And they might retreat from additional investments. A deeply troubled state could eventually be priced out of the capital markets.
“The precipitating event at G.M. was they were out of cash and had no ability to raise the capital they needed,” said Harry J. Wilson, the lone Republican on President Obama’s special auto task force, which led G.M. and Chrysler through an unusual restructuring in bankruptcy, financed by the federal government.
Mr. Wilson, who ran an unsuccessful campaign for New York State comptroller last year, has said he believes that New York and some other states need some type of a financial restructuring.
He noted that G.M. was salvaged only through an administration-led effort that Congress initially resisted, with legislators voting against financial assistance to G.M. in late 2008.
“Now Congress is much more conservative,” he said. “A state shows up and wants cash, Congress says no, and it will probably be at the last minute and it’s a real problem. That’s what I’m concerned about.”
Discussion of a new bankruptcy option for the states appears to have taken off in November, after Mr. Gingrich gave a speech about the country’s big challenges, including government debt and an uncompetitive labor market.
“We just have to be honest and clear about this, and I also hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy,” he said.
A few weeks later, David A. Skeel, a law professor at the University of Pennsylvania, published an article, “Give States a Way to Go Bankrupt,” in The Weekly Standard. It said thorny constitutional questions were “easily addressed” by making sure states could not be forced into bankruptcy or that federal judges could usurp states’ lawmaking powers.
“I have never had anything I’ve written get as much attention as that piece,” said Mr. Skeel, who said he had since been contacted by Republicans and Democrats whom he declined to name.
Mr. Skeel said it was possible to envision how bankruptcy for states might work by looking at the existing law for local governments. Called Chapter 9, it gives distressed municipalities a period of debt-collection relief, which they can use to restructure their obligations with the help of a bankruptcy judge.
Unfunded pensions become unsecured debts in municipal bankruptcy and may be reduced. And the law makes it easier for a bankrupt city to tear up its labor contracts than for a bankrupt company, said James E. Spiotto, head of the bankruptcy practice at Chapman & Cutler in Chicago.
The biggest surprise may await the holders of a state’s general obligation bonds. Though widely considered the strongest credit of any government, they can be treated as unsecured credits, subject to reduction, under Chapter 9.
Mr. Spiotto said he thought bankruptcy court was not a good avenue for troubled states, and he has designed an alternative called the Public Pension Funding Authority. It would have mandatory jurisdiction over states that failed to provide sufficient funding to their workers’ pensions or that were diverting money from essential public services.
“I’ve talked to some people from Congress, and I’m going to talk to some more,” he said. “This effort to talk about Chapter 9, I’m worried about it. I don’t want the states to have to pay higher borrowing costs because of a panic that they might go bankrupt. I don’t think it’s the right thing at all. But it’s the beginning of a dialog.”
Copyright 2011 The New York Times Company. All rights reserved.
Thursday, January 13, 2011
NYT: Court Rules on Debtors and Doctors in Training
By ADAM LIPTAK
WASHINGTON — Medical residents must pay Social Security taxes, the Supreme Court ruled on Tuesday.
In a second decision, this one featuring the first opinion from Justice Elena Kagan, the court ruled that some bankrupt debtors who own their cars outright are not entitled to shield a standard monthly amount for the “ownership costs” of their vehicles.
The case concerning medical residents considered a federal law that exempts students from paying Social Security taxes. Allowing residents to take the exemption would cost the federal government $700 million a year, the Justice Department said.
In announcing the decision, Chief Justice John G. Roberts Jr. said the question it presented boiled down to whether residents were “workers who study or students who work.”
Residents often work 50 to 80 hours a week, the chief justice wrote. They can make $50,000, and they often receive health insurance and paid vacations. But they work under the supervision of more senior doctors who also instruct them, and they attend lectures and take exams.
Chief Justice Roberts, writing for a unanimous eight-member court, said the law itself did not clearly answer whether residents were mainly workers or students. But he said a 2004 Treasury Department regulation had drawn a reasonable line.
The regulation says that students who would otherwise qualify for the exemption lose it if they work more than 40 hours per week, even if they learn from what they do.
“Regulation, like legislation, often requires drawing lines,” the chief justice wrote. “Focusing on the hours an individual works and the hours he spends in studies is a perfectly sensible way,” he went on, of drawing the line between students and workers.
Justice Kagan recused herself from the case, Mayo Foundation v. United States, No. 09-837, because she had worked on it as United States solicitor general.
But she wrote the majority opinion in the day’s second decision, Ransom v. FIA Card Services, No. 09-907, and she announced it from the bench in a crisp and conversational style.
The dispute in that case also concerned the meaning of a federal law, this one allowing some debtors a standard monthly allowance for car-ownership costs.
Jason M. Ransom, a Nevada man, claimed the applicable $471 allowance for a 2004 Toyota he owned outright. A credit card company seeking repayment objected, saying that only people making loan or lease payments should qualify for the deduction.
Over the course of his five-year repayment plan, the deduction would have allowed Mr. Ransom to shield $28,000 from creditors.
Justice Kagan, writing for the eight-justice majority, said “a debtor who does not make loan or lease payments may not take the car-ownership deduction.”
She acknowledged that the ruling could give rise to occasional curious outcomes. For instance, a debtor with only a single loan payment remaining would be entitled to the entire deduction.
“But this kind of oddity,” she wrote, “is the inevitable result of a standardized formula.”
She added that allowing Mr. Ransom to take advantage of the deduction could produce even odder results. “On Ransom’s view, for example, a debtor entering bankruptcy might purchase for a song a junkyard car” to take advantage of the deduction, Justice Kagan wrote.
Justice Antonin Scalia dissented, saying his colleagues had misread the law and misunderstood their own roles. “The point of the statutory language is to entitle debtors who own cars to an ownership deduction,” he wrote.
He was scornful of the majority’s effort to avoid odd practical results. “Our job, it seems to me, is not to eliminate or reduce those oddities,” he wrote, “but to give the formula Congress adopted its fairest meaning.”
And he countered what he called the “imagined horrible” of a wreck bought just to take advantage of the ownership deduction with one of his own.
“A debtor entering bankruptcy might purchase a junkyard car for a song plus a $10 promissory note payable over several years,” Justice Scalia wrote. “He would get the full ownership expense deduction.”
Copyright 2011 The New York Times Company. All rights reserved.
WASHINGTON — Medical residents must pay Social Security taxes, the Supreme Court ruled on Tuesday.
In a second decision, this one featuring the first opinion from Justice Elena Kagan, the court ruled that some bankrupt debtors who own their cars outright are not entitled to shield a standard monthly amount for the “ownership costs” of their vehicles.
The case concerning medical residents considered a federal law that exempts students from paying Social Security taxes. Allowing residents to take the exemption would cost the federal government $700 million a year, the Justice Department said.
In announcing the decision, Chief Justice John G. Roberts Jr. said the question it presented boiled down to whether residents were “workers who study or students who work.”
Residents often work 50 to 80 hours a week, the chief justice wrote. They can make $50,000, and they often receive health insurance and paid vacations. But they work under the supervision of more senior doctors who also instruct them, and they attend lectures and take exams.
Chief Justice Roberts, writing for a unanimous eight-member court, said the law itself did not clearly answer whether residents were mainly workers or students. But he said a 2004 Treasury Department regulation had drawn a reasonable line.
The regulation says that students who would otherwise qualify for the exemption lose it if they work more than 40 hours per week, even if they learn from what they do.
“Regulation, like legislation, often requires drawing lines,” the chief justice wrote. “Focusing on the hours an individual works and the hours he spends in studies is a perfectly sensible way,” he went on, of drawing the line between students and workers.
Justice Kagan recused herself from the case, Mayo Foundation v. United States, No. 09-837, because she had worked on it as United States solicitor general.
But she wrote the majority opinion in the day’s second decision, Ransom v. FIA Card Services, No. 09-907, and she announced it from the bench in a crisp and conversational style.
The dispute in that case also concerned the meaning of a federal law, this one allowing some debtors a standard monthly allowance for car-ownership costs.
Jason M. Ransom, a Nevada man, claimed the applicable $471 allowance for a 2004 Toyota he owned outright. A credit card company seeking repayment objected, saying that only people making loan or lease payments should qualify for the deduction.
Over the course of his five-year repayment plan, the deduction would have allowed Mr. Ransom to shield $28,000 from creditors.
Justice Kagan, writing for the eight-justice majority, said “a debtor who does not make loan or lease payments may not take the car-ownership deduction.”
She acknowledged that the ruling could give rise to occasional curious outcomes. For instance, a debtor with only a single loan payment remaining would be entitled to the entire deduction.
“But this kind of oddity,” she wrote, “is the inevitable result of a standardized formula.”
She added that allowing Mr. Ransom to take advantage of the deduction could produce even odder results. “On Ransom’s view, for example, a debtor entering bankruptcy might purchase for a song a junkyard car” to take advantage of the deduction, Justice Kagan wrote.
Justice Antonin Scalia dissented, saying his colleagues had misread the law and misunderstood their own roles. “The point of the statutory language is to entitle debtors who own cars to an ownership deduction,” he wrote.
He was scornful of the majority’s effort to avoid odd practical results. “Our job, it seems to me, is not to eliminate or reduce those oddities,” he wrote, “but to give the formula Congress adopted its fairest meaning.”
And he countered what he called the “imagined horrible” of a wreck bought just to take advantage of the ownership deduction with one of his own.
“A debtor entering bankruptcy might purchase a junkyard car for a song plus a $10 promissory note payable over several years,” Justice Scalia wrote. “He would get the full ownership expense deduction.”
Copyright 2011 The New York Times Company. All rights reserved.
Thursday, December 23, 2010
A Christmas present for debtors with homes in New York State
Today, New York State Governor David Paterson signed into law S.7034-A/A.8735-A, which will increase the amount of exemptions in bankruptcy proceedings and money judgments and provide a choice between State and Federal exemptions. The new law will be effective on January 22, 2011. Our previous coverage of these bills can be found here. Happy holidays indeed!
Tuesday, December 21, 2010
NYT: Homes at Risk, and No Help From Lawyers
By DAVID STREITFELD
In California, where foreclosures are more abundant than in any other state, homeowners trying to win a loan modification have always had a tough time.
Now they face yet another obstacle: hiring a lawyer.
Sharon Bell, a retiree who lives in Laguna Niguel, southeast of Los Angeles, needs a modification to keep her home. She says she is scared of her bank and its plentiful resources, so much so that she cannot even open its certified letters inquiring where her mortgage payments may be. Yet the half-dozen lawyers she has called have refused to represent her.
“They said they couldn’t help,” said Ms. Bell, 63. “But I’ve got to find help, because I’m dying every day.”
Lawyers throughout California say they have no choice but to reject clients like Ms. Bell because of a new state law that sharply restricts how they can be paid. Under the measure, passed overwhelmingly by the State Legislature and backed by the state bar association, lawyers who work on loan modifications cannot receive any money until the work is complete. The bar association says that under the law, clients cannot put retainers in trust accounts.
The law, which has few parallels in other states, was devised to eliminate swindles in which modification firms made promises about what their lawyers could do, charged hefty fees and then disappeared. But foreclosure specialists say there has been an unintended consequence: the honest lawyers can no longer afford to assist Ms. Bell and all the others who feel helpless before lenders that they see as elusive, unyielding and skilled at losing paperwork.
The revelations three months ago that large banks were sloppy and negligent in preparing foreclosure documents underscore just how important it is for distressed homeowners to have representation, lawyers and consumer advocates say. Homeowners whose cases were handled improperly have little way of knowing it. Even if they found out, they would be hard-pressed to challenge a lender without a lawyer.
“Consumers just don’t know what is going on,” said Walter Hackett, a former banker who is now a lawyer for a nonprofit service in Riverside. “They get a piece of paper saying they are going to lose their homes and they freak out.”
The problem for lawyers is that even a simple modification, in which the loan is restructured so the borrower can afford the monthly payments, is a marathon, putting off their payday for months if not years. If the bank refuses to come to terms, the client may file for bankruptcy. Then the lawyer will never be paid.
Alice M. Graham, a lawyer in Marina del Rey, said a homeowner in default recently tried to hire her. When Ms. Graham declined, the despairing owner begged her in vain to accept payments under the table.
“The banks have all the lawyers they want, and the consumers are helpless,” Ms. Graham said.
In some states, including New York and Florida, foreclosure proceedings are overseen by courts. In California, the process is more of a private matter between the bank and the homeowner. Through Sept. 30, lenders filed notices of default on 229,843 homes in California this year, according to the research firm MDA DataQuick.
The length of time California households spend in foreclosure, which was rising as owners pursued modifications, fell in the third quarter to 8.7 months, from 9.1 months in the second quarter. That could indicate that the absence of defense lawyers is beginning to accelerate the process.
While lawyers for nonprofits like Mr. Hackett continue to represent clients, they are too overwhelmed to help everyone. “A homeowner in California is going to have an extraordinarily difficult time finding an attorney,” he said.
That group includes Ms. Bell, who owned two properties free and clear and then gave in to a friend’s urging to “put your money to work.” That friend was an agent, and soon Ms. Bell owned two more properties and was making unsecured loans.
The loans went bad, the investments went bust, and Ms. Bell is trying to salvage her home. She wants an advocate but is reluctant to respond to any of the solicitations that fill her mailbox. “I know better,” she said.
Many people did not. Defaulting owners saw television commercials or heard radio ads where a lawyer promised relief. They handed over a few thousand dollars and heard no more.
Two years ago, the state bar association had seven complaints of misconduct in loan modifications. By March 2009, there were more than 100 complaints, and a task force was formed to deal with the problem. Soon, there were thousands of complaints.
It was a public relations disaster. The president of the bar association wrote in a column last year that “hundreds, and perhaps thousands, of California lawyers” were victimizing people “at the most vulnerable point in their lives.”
Politicians heard complaints, too. Ron Calderon, a state senator who represents several communities east of Los Angeles, sponsored a bill that prohibits advance payments for modifications and required lawyers to warn clients that they could do the job themselves without professional assistance. Lenders were supportive of the bill, Senator Calderon said.
It passed 36 to 4 in September 2009. The maximum punishment is a $10,000 fine and a year in jail.
The law is working well, Senator Calderon said. “You do not need a lawyer,” he said.
Mark Stone, a 56-year-old general contractor in Sierra Madre, feels differently. A few years ago, he got sick with hepatitis C. Unable to work full time, he began to miss mortgage payments. The drugs he was taking left him “a little confused,” he said.
Mr. Stone knew that his condition put him at a disadvantage in negotiations with his bank. So he hired Gregory Royston, a real estate lawyer in Redondo Beach. It took Mr. Royston nearly a year, but he restructured the loan.
Without the lawyer, Mr. Stone said, “I’d be living under a bridge.”
The legal bill, paid in advance, was $3,500. “Worth every penny,” said Mr. Stone, who is now back at work.
Mr. Royston said winning modifications was never easy and often impossible. “The banks stymie the borrower, and they really stymie any third party who works on behalf of the borrower,” he said.
A spokesman for the Mortgage Bankers Association said it simply wanted to protect homeowners from fraud. “Be very careful about anyone who wants you to pay them to help you get a loan modification,” said the spokesman, John Mechem.
That advice has never been more true. If any honest lawyers still do modifications, they are lost in a sea of swindles. “This law,” Mr. Royston said, “took the wrong people out of the game.”
Suzan Anderson, supervising trial counsel of the California bar’s special team on loan modification, defended the law, saying that in other types of cases, including personal injury and medical malpractice, the lawyers do not get paid until the end. She acknowledged, however, it was “a very problematical situation.”
As for the swindlers singled out by the law, they appear unfazed. The state bar is investigating 2,000 complaints of modification fraud.
“I wish the law had worked,” Ms. Anderson said.
Wells Fargo to Modify Mortgages
LOS ANGELES (AP) — Wells Fargo agreed to modify about 14,900 adjustable-rate loans made by banks it acquired, according to filings released on Monday.
The agreement with the state attorney general will result in more than $2 billion in principal write-downs, interest-rate reductions and other concessions through June 2013, said Franklin Codel, chief financial officer of Wells Fargo Home Mortgage.
The deal applies to mortgages marketed as “pick-a-payment” loans by Wachovia and World Savings Bank, a subsidiary of the Golden West Financial Corporation.
Wachovia bought World Savings in 2006, and Wells Fargo bought Wachovia in 2008.
The mortgages were so named because their terms allowed borrowers to make payments at various levels each month, including a payment option that increased the loan’s principal by covering less than the monthly interest owed.
Copyright 2010 The New York Times Company. All rights reserved.
In California, where foreclosures are more abundant than in any other state, homeowners trying to win a loan modification have always had a tough time.
Now they face yet another obstacle: hiring a lawyer.
Sharon Bell, a retiree who lives in Laguna Niguel, southeast of Los Angeles, needs a modification to keep her home. She says she is scared of her bank and its plentiful resources, so much so that she cannot even open its certified letters inquiring where her mortgage payments may be. Yet the half-dozen lawyers she has called have refused to represent her.
“They said they couldn’t help,” said Ms. Bell, 63. “But I’ve got to find help, because I’m dying every day.”
Lawyers throughout California say they have no choice but to reject clients like Ms. Bell because of a new state law that sharply restricts how they can be paid. Under the measure, passed overwhelmingly by the State Legislature and backed by the state bar association, lawyers who work on loan modifications cannot receive any money until the work is complete. The bar association says that under the law, clients cannot put retainers in trust accounts.
The law, which has few parallels in other states, was devised to eliminate swindles in which modification firms made promises about what their lawyers could do, charged hefty fees and then disappeared. But foreclosure specialists say there has been an unintended consequence: the honest lawyers can no longer afford to assist Ms. Bell and all the others who feel helpless before lenders that they see as elusive, unyielding and skilled at losing paperwork.
The revelations three months ago that large banks were sloppy and negligent in preparing foreclosure documents underscore just how important it is for distressed homeowners to have representation, lawyers and consumer advocates say. Homeowners whose cases were handled improperly have little way of knowing it. Even if they found out, they would be hard-pressed to challenge a lender without a lawyer.
“Consumers just don’t know what is going on,” said Walter Hackett, a former banker who is now a lawyer for a nonprofit service in Riverside. “They get a piece of paper saying they are going to lose their homes and they freak out.”
The problem for lawyers is that even a simple modification, in which the loan is restructured so the borrower can afford the monthly payments, is a marathon, putting off their payday for months if not years. If the bank refuses to come to terms, the client may file for bankruptcy. Then the lawyer will never be paid.
Alice M. Graham, a lawyer in Marina del Rey, said a homeowner in default recently tried to hire her. When Ms. Graham declined, the despairing owner begged her in vain to accept payments under the table.
“The banks have all the lawyers they want, and the consumers are helpless,” Ms. Graham said.
In some states, including New York and Florida, foreclosure proceedings are overseen by courts. In California, the process is more of a private matter between the bank and the homeowner. Through Sept. 30, lenders filed notices of default on 229,843 homes in California this year, according to the research firm MDA DataQuick.
The length of time California households spend in foreclosure, which was rising as owners pursued modifications, fell in the third quarter to 8.7 months, from 9.1 months in the second quarter. That could indicate that the absence of defense lawyers is beginning to accelerate the process.
While lawyers for nonprofits like Mr. Hackett continue to represent clients, they are too overwhelmed to help everyone. “A homeowner in California is going to have an extraordinarily difficult time finding an attorney,” he said.
That group includes Ms. Bell, who owned two properties free and clear and then gave in to a friend’s urging to “put your money to work.” That friend was an agent, and soon Ms. Bell owned two more properties and was making unsecured loans.
The loans went bad, the investments went bust, and Ms. Bell is trying to salvage her home. She wants an advocate but is reluctant to respond to any of the solicitations that fill her mailbox. “I know better,” she said.
Many people did not. Defaulting owners saw television commercials or heard radio ads where a lawyer promised relief. They handed over a few thousand dollars and heard no more.
Two years ago, the state bar association had seven complaints of misconduct in loan modifications. By March 2009, there were more than 100 complaints, and a task force was formed to deal with the problem. Soon, there were thousands of complaints.
It was a public relations disaster. The president of the bar association wrote in a column last year that “hundreds, and perhaps thousands, of California lawyers” were victimizing people “at the most vulnerable point in their lives.”
Politicians heard complaints, too. Ron Calderon, a state senator who represents several communities east of Los Angeles, sponsored a bill that prohibits advance payments for modifications and required lawyers to warn clients that they could do the job themselves without professional assistance. Lenders were supportive of the bill, Senator Calderon said.
It passed 36 to 4 in September 2009. The maximum punishment is a $10,000 fine and a year in jail.
The law is working well, Senator Calderon said. “You do not need a lawyer,” he said.
Mark Stone, a 56-year-old general contractor in Sierra Madre, feels differently. A few years ago, he got sick with hepatitis C. Unable to work full time, he began to miss mortgage payments. The drugs he was taking left him “a little confused,” he said.
Mr. Stone knew that his condition put him at a disadvantage in negotiations with his bank. So he hired Gregory Royston, a real estate lawyer in Redondo Beach. It took Mr. Royston nearly a year, but he restructured the loan.
Without the lawyer, Mr. Stone said, “I’d be living under a bridge.”
The legal bill, paid in advance, was $3,500. “Worth every penny,” said Mr. Stone, who is now back at work.
Mr. Royston said winning modifications was never easy and often impossible. “The banks stymie the borrower, and they really stymie any third party who works on behalf of the borrower,” he said.
A spokesman for the Mortgage Bankers Association said it simply wanted to protect homeowners from fraud. “Be very careful about anyone who wants you to pay them to help you get a loan modification,” said the spokesman, John Mechem.
That advice has never been more true. If any honest lawyers still do modifications, they are lost in a sea of swindles. “This law,” Mr. Royston said, “took the wrong people out of the game.”
Suzan Anderson, supervising trial counsel of the California bar’s special team on loan modification, defended the law, saying that in other types of cases, including personal injury and medical malpractice, the lawyers do not get paid until the end. She acknowledged, however, it was “a very problematical situation.”
As for the swindlers singled out by the law, they appear unfazed. The state bar is investigating 2,000 complaints of modification fraud.
“I wish the law had worked,” Ms. Anderson said.
Wells Fargo to Modify Mortgages
LOS ANGELES (AP) — Wells Fargo agreed to modify about 14,900 adjustable-rate loans made by banks it acquired, according to filings released on Monday.
The agreement with the state attorney general will result in more than $2 billion in principal write-downs, interest-rate reductions and other concessions through June 2013, said Franklin Codel, chief financial officer of Wells Fargo Home Mortgage.
The deal applies to mortgages marketed as “pick-a-payment” loans by Wachovia and World Savings Bank, a subsidiary of the Golden West Financial Corporation.
Wachovia bought World Savings in 2006, and Wells Fargo bought Wachovia in 2008.
The mortgages were so named because their terms allowed borrowers to make payments at various levels each month, including a payment option that increased the loan’s principal by covering less than the monthly interest owed.
Copyright 2010 The New York Times Company. All rights reserved.
Wednesday, November 24, 2010
Dischargeability of taxes in bankruptcy
In these troubled economic times, we're getting calls from many potential clients who owe money to the IRS and other taxing authorities. They're seeking our counsel about whether their taxes are dischargeable in bankruptcy or a strategy for dealing with their tax liabilities. Some advice and strategies for the discharge of taxes in bankruptcy are provided below.
1. Trust fund taxes (money withheld from an employee's wages (income tax, social security, and Medicare taxes) by an employer and held in trust until paid to the Treasury) and sales taxes are not dischargeable in bankruptcy.
2. So called "old income taxes" for which (i) the tax return was filed more than two years before the bankruptcy filing, (ii) the tax was due more than three years before the bankruptcy filing and (iii) the tax was assessed more than 240 days before the filing of the bankruptcy petition can be discharged in bankruptcy.
3. Taxpayers should file their income tax returns on a timely basis, whether or not they can pay the tax that is due.
4. Never file a fraudulent tax return-fraudulently filed tax returns aren't dischargeable in bankruptcy.
5. If a taxpayer didn't timely file income tax returns for several years and then did a "batch filing" of returns for multiple years, the IRS or other taxing authorities can argue that these batch filings were "an attempt to evade or defeat the tax" and taxes for those years may not be dischargeable, according to both the Bankruptcy Code and case law.
6. A determination of what taxes may be dischargeable in bankruptcy begins with a review of a taxpayer's tax transcript, the types of taxes that are due and the dates the taxes were assessed.
Please note that the interrelationship of taxes and bankruptcy law is quite complex and requires experienced counsel. The general guidelines listed above should not be construed as legal advice for your particular circumstances. Anyone who has questions concerning the dischargeability of taxes in bankruptcy should contact Jim Shenwick.
1. Trust fund taxes (money withheld from an employee's wages (income tax, social security, and Medicare taxes) by an employer and held in trust until paid to the Treasury) and sales taxes are not dischargeable in bankruptcy.
2. So called "old income taxes" for which (i) the tax return was filed more than two years before the bankruptcy filing, (ii) the tax was due more than three years before the bankruptcy filing and (iii) the tax was assessed more than 240 days before the filing of the bankruptcy petition can be discharged in bankruptcy.
3. Taxpayers should file their income tax returns on a timely basis, whether or not they can pay the tax that is due.
4. Never file a fraudulent tax return-fraudulently filed tax returns aren't dischargeable in bankruptcy.
5. If a taxpayer didn't timely file income tax returns for several years and then did a "batch filing" of returns for multiple years, the IRS or other taxing authorities can argue that these batch filings were "an attempt to evade or defeat the tax" and taxes for those years may not be dischargeable, according to both the Bankruptcy Code and case law.
6. A determination of what taxes may be dischargeable in bankruptcy begins with a review of a taxpayer's tax transcript, the types of taxes that are due and the dates the taxes were assessed.
Please note that the interrelationship of taxes and bankruptcy law is quite complex and requires experienced counsel. The general guidelines listed above should not be construed as legal advice for your particular circumstances. Anyone who has questions concerning the dischargeability of taxes in bankruptcy should contact Jim Shenwick.
Thursday, November 18, 2010
NYT: Deal Over Foreclosures Statys Out of Reach
By DAVID STREITFELD and NELSON D. SCHWARTZ
Changing the face of foreclosure in America will take some time, several state attorneys general said Wednesday, cautioning that an agreement with major lenders over revamped foreclosure practices was not imminent.
“We want to move as quickly as possibly but it has to be done right,” said Roy Cooper, the attorney general of North Carolina. “We have plowed this ground before.”
Ever since the law enforcement officials from all 50 states signed on last month to a highly publicized investigation of big mortgage lenders, there has been a public tug of war.
The banks, who have been subjected to bad publicity, have played down the investigation and want to see it end as quickly as possible. The state attorneys general, however, say that there is an opportunity to fundamentally change the way banks deal with defaulting borrowers so that more people can stay in their homes by modifying their mortgages, and that they will take the time needed.
“The large banks say they are doing everything they can to avoid foreclosure, but that is not the reality on the ground,” said Patrick Madigan, an assistant attorney general in Iowa who is a lead figure in the investigation. “The question is, Why?”
Mr. Madigan mentioned some theories, saying any or all could be true: “Is it the fact that the current servicing system was not designed to do large numbers of loan modifications, is it being understaffed, incompetence or the servicers having the wrong financial incentives?”
The major lenders are scheduled to appear on Capitol Hill on Thursday for the second hearing this week on their foreclosure procedures. The pressure to reach a settlement with the attorneys general will likely intensify after the hearing, which will be led by Representative Maxine Waters, a Democrat from California and outspoken critic of the mortgage lending industry.
But quick fixes are not likely, the attorneys general said. Richard Cordray, the Ohio attorney general who lost his bid for re-election this month, was hesitant to predict a significant outcome.
“Something will come of this, no question,” Mr. Cordray said of the inquiry. “The question is whether it will be a meaningful resolution that will make a real difference or a missed opportunity. It’s not entirely clear at this point.”
Some experts were willing to go even further, saying the lenders were impervious to change. For 18 months, the Obama administration has promoted modifications that would keep families in their homes over foreclosures that would kick them out. The programs have had some success but ultimately have done little to stem the tide.
“The banks’ act was to put their tail between their legs, act contrite before Congress and change nothing,” said Adam Levitin, an associate profesor of law at Georgetown University who testified before Congress on Tuesday and will testify again on Thursday.
The banks hope to buy off the attorneys general with money, perhaps to establish a compensation fund for victims, Mr. Levitin said. That, he said, would prevent attorneys general from “digging deeper and uncovering more rot in the mortgage system. My fear is that the banks’ calculus is correct.”
There were fresh reports on Wednesday that the foreclosure situation was deteriorating. Another 35,000 households entered foreclosure in October, the data company Lender Processing Service said, despite freezes instituted by lenders as they reviewed their practices. About 4.3 million households are either in serious default or in foreclosure.
The housing market also showed fresh signs of trouble. CoreLogic, a data company, said Wednesday that home prices fell 2.8 percent in the last year. Earlier this week, another information company, DataQuick, said sales in the Southern California market had dropped 24 percent in October from last year.
“We agree with the attorneys general that a housing market recovery is vital to restoring economic growth, and the sooner we resolve the outstanding issues, the better,” said Lawrence Di Rita, a Bank of America spokesman.
For the banks, the immediate cost of halting foreclosure is not significant. Brian Moynihan, the chief executive of Bank of America, said it totaled $10 million to $20 million a month. Bank of America has frozen foreclosures in 27 states.
A far greater threat to the broader financial system is the possibility that investors will force financial institutions to buy back hundreds of billions of dollars in soured mortgages, according to a Congressional Research Service report prepared for Thursday’s hearing and obtained by The New York Times.
Loan buybacks could shift $425 billion in losses on mortgage-backed securities from the investors that owned them to the banks that helped originate or assemble the securities, according to the report, far more than most estimates floated on Wall Street.
“Loan buybacks have the potential to cause the banking system to become undercapitalized once again or to cause individual large banks to fail,” the report says, “even if that outcome is unlikely.”
While bank officials agree that a settlement with the attorneys general is not in the making anytime soon, they remain eager to put the controversy behind them. Bank of America’s reputation, in particular, was hammered last month as the uproar grew over claims that the industry had pursued foreclosures in cases where documents were lost, missing or barely reviewed before they were signed by bank officials, a practice known as robo-signing.
What is more, as the nation’s largest mortgage servicer — it handles roughly 14 million home loans, or one in five American mortgages — it has more to lose as the investigation drags on. The majority of its troubled portfolio was picked up in 2008 when it bought Countrywide, whose aggressive subprime lending practices made it a symbol of industry excess.
“What makes it a little more pressing for Bank of America is their level of exposure,” said Guy Cecala, publisher of Inside Mortgage Finance. “Whatever the issue is, Bank of America seems to have a target on its back from people looking to be compensated for losses.”
As the beneficiary of two government bailouts, both repaid, it has been eager to maintain good relations with regulators.
Representatives from Bank of America and the other main players in the mortgage servicing industry — Ally Financial, JPMorgan Chase, Wells Fargo and Citigroup — will testify at Thursday’s hearing. A top mortgage executive at Citi plans to testify that the company identified 14,000 foreclosure cases where errors may have been made, including 4,000 where a notary may have been absent when they were signed. The bank, which until now has defended its processes, still insists that in each case the original decision to foreclose was correct and that the paperwork will be refiled.
Mr. Levitin, the Georgetown professor, will argue in Thursday’s testimony that the business model at servicing giants like Bank of America and Wells Fargo “encourages them to cut cut costs wherever possible, even if this involves cutting corners on legal requirements, and to lard on junk fees and in-sourced expenses at inflated prices.” That results in foreclosure, rather than modification, being a better bet for servicers.
In removing such incentives, the attorneys general have the task of encouraging a new system that changes behavior. “We are trying to create a paradigm shift in the way foreclosures are handled,” said Mr. Madigan, the assistant Iowa attorney general.
Copyright 2010 The New York Times Company. All rights reserved.
Changing the face of foreclosure in America will take some time, several state attorneys general said Wednesday, cautioning that an agreement with major lenders over revamped foreclosure practices was not imminent.
“We want to move as quickly as possibly but it has to be done right,” said Roy Cooper, the attorney general of North Carolina. “We have plowed this ground before.”
Ever since the law enforcement officials from all 50 states signed on last month to a highly publicized investigation of big mortgage lenders, there has been a public tug of war.
The banks, who have been subjected to bad publicity, have played down the investigation and want to see it end as quickly as possible. The state attorneys general, however, say that there is an opportunity to fundamentally change the way banks deal with defaulting borrowers so that more people can stay in their homes by modifying their mortgages, and that they will take the time needed.
“The large banks say they are doing everything they can to avoid foreclosure, but that is not the reality on the ground,” said Patrick Madigan, an assistant attorney general in Iowa who is a lead figure in the investigation. “The question is, Why?”
Mr. Madigan mentioned some theories, saying any or all could be true: “Is it the fact that the current servicing system was not designed to do large numbers of loan modifications, is it being understaffed, incompetence or the servicers having the wrong financial incentives?”
The major lenders are scheduled to appear on Capitol Hill on Thursday for the second hearing this week on their foreclosure procedures. The pressure to reach a settlement with the attorneys general will likely intensify after the hearing, which will be led by Representative Maxine Waters, a Democrat from California and outspoken critic of the mortgage lending industry.
But quick fixes are not likely, the attorneys general said. Richard Cordray, the Ohio attorney general who lost his bid for re-election this month, was hesitant to predict a significant outcome.
“Something will come of this, no question,” Mr. Cordray said of the inquiry. “The question is whether it will be a meaningful resolution that will make a real difference or a missed opportunity. It’s not entirely clear at this point.”
Some experts were willing to go even further, saying the lenders were impervious to change. For 18 months, the Obama administration has promoted modifications that would keep families in their homes over foreclosures that would kick them out. The programs have had some success but ultimately have done little to stem the tide.
“The banks’ act was to put their tail between their legs, act contrite before Congress and change nothing,” said Adam Levitin, an associate profesor of law at Georgetown University who testified before Congress on Tuesday and will testify again on Thursday.
The banks hope to buy off the attorneys general with money, perhaps to establish a compensation fund for victims, Mr. Levitin said. That, he said, would prevent attorneys general from “digging deeper and uncovering more rot in the mortgage system. My fear is that the banks’ calculus is correct.”
There were fresh reports on Wednesday that the foreclosure situation was deteriorating. Another 35,000 households entered foreclosure in October, the data company Lender Processing Service said, despite freezes instituted by lenders as they reviewed their practices. About 4.3 million households are either in serious default or in foreclosure.
The housing market also showed fresh signs of trouble. CoreLogic, a data company, said Wednesday that home prices fell 2.8 percent in the last year. Earlier this week, another information company, DataQuick, said sales in the Southern California market had dropped 24 percent in October from last year.
“We agree with the attorneys general that a housing market recovery is vital to restoring economic growth, and the sooner we resolve the outstanding issues, the better,” said Lawrence Di Rita, a Bank of America spokesman.
For the banks, the immediate cost of halting foreclosure is not significant. Brian Moynihan, the chief executive of Bank of America, said it totaled $10 million to $20 million a month. Bank of America has frozen foreclosures in 27 states.
A far greater threat to the broader financial system is the possibility that investors will force financial institutions to buy back hundreds of billions of dollars in soured mortgages, according to a Congressional Research Service report prepared for Thursday’s hearing and obtained by The New York Times.
Loan buybacks could shift $425 billion in losses on mortgage-backed securities from the investors that owned them to the banks that helped originate or assemble the securities, according to the report, far more than most estimates floated on Wall Street.
“Loan buybacks have the potential to cause the banking system to become undercapitalized once again or to cause individual large banks to fail,” the report says, “even if that outcome is unlikely.”
While bank officials agree that a settlement with the attorneys general is not in the making anytime soon, they remain eager to put the controversy behind them. Bank of America’s reputation, in particular, was hammered last month as the uproar grew over claims that the industry had pursued foreclosures in cases where documents were lost, missing or barely reviewed before they were signed by bank officials, a practice known as robo-signing.
What is more, as the nation’s largest mortgage servicer — it handles roughly 14 million home loans, or one in five American mortgages — it has more to lose as the investigation drags on. The majority of its troubled portfolio was picked up in 2008 when it bought Countrywide, whose aggressive subprime lending practices made it a symbol of industry excess.
“What makes it a little more pressing for Bank of America is their level of exposure,” said Guy Cecala, publisher of Inside Mortgage Finance. “Whatever the issue is, Bank of America seems to have a target on its back from people looking to be compensated for losses.”
As the beneficiary of two government bailouts, both repaid, it has been eager to maintain good relations with regulators.
Representatives from Bank of America and the other main players in the mortgage servicing industry — Ally Financial, JPMorgan Chase, Wells Fargo and Citigroup — will testify at Thursday’s hearing. A top mortgage executive at Citi plans to testify that the company identified 14,000 foreclosure cases where errors may have been made, including 4,000 where a notary may have been absent when they were signed. The bank, which until now has defended its processes, still insists that in each case the original decision to foreclose was correct and that the paperwork will be refiled.
Mr. Levitin, the Georgetown professor, will argue in Thursday’s testimony that the business model at servicing giants like Bank of America and Wells Fargo “encourages them to cut cut costs wherever possible, even if this involves cutting corners on legal requirements, and to lard on junk fees and in-sourced expenses at inflated prices.” That results in foreclosure, rather than modification, being a better bet for servicers.
In removing such incentives, the attorneys general have the task of encouraging a new system that changes behavior. “We are trying to create a paradigm shift in the way foreclosures are handled,” said Mr. Madigan, the assistant Iowa attorney general.
Copyright 2010 The New York Times Company. All rights reserved.
Friday, November 12, 2010
Personal Bankruptcy in The Year 2010
The following is a talk on this topic given by James H. Shenwick, Esq. at the Douglaston Club on November 10, 2010.
I. Three types of personal bankruptcy
a. Chapter 11-This is the same kind of bankruptcy used by major corporations to reorganize. The primary reason that individuals file for Chapter 11 is that they have too much income and assets or they have debts that fall outside the statutory limits for filing a Chapter 13 bankruptcy.
b. Chapter 13-This is usually the type of bankruptcy individuals file when they want to reorganize their debts, if (for example), they have too much equity in their house. However, this means that the debtor will have to repay a portion of their debts, and their are limits on the amount of debt you can have to qualify for this type of bankruptcy (more on that later).
c. Chapter 7-the most common type of personal bankruptcy, this allows debtors to liquidate or discharge most (but not all) of their debts (again, more on what debts are dischargeable in Chapter 7 bankruptcy later).
II. Today’s market
a. The nominal unemployment rate is close to 10% [9.6% in September], while the real unemployment rate is closer to 18-19%.
b. The unemployment rate for recent college graduate is 20-21%.
c. We are seeing a record number of foreclosures–most of our personal bankruptcy clients who have purchased a home in the last three to four years are “underwater” (the owner owes more on the mortgages(s) then the home is worth).
d. 41.8 million Americans are on food stamps, and the White House estimates that number will soon rise to 43 million.
e. Are we in a “W” shaped economic pattern? If so, are we on a upward leg or a downward leg of the “W?”
III. How can personal bankruptcy be of use?
a. 98% to 99% of our personal bankruptcy clients wind up filing for Chapter 7 bankruptcy for the “fresh start” of liquidating most of their debts.
b. In 2005, the New York State legislature increased the homestead exemption from the bankruptcy estate (the assets available to pay their creditors) to $50,000 per spouse. Most of our Chapter 7 clients can reaffirm their mortgages and keep their houses. And the homestead exemption may be increasing soon (more on that later in my talk).
c. Debtors can also reject unfavorable leases and guarantees through a Chapter 7 filing.
d. Congress radically revised and amended Chapter 7 personal bankruptcy laws by enacting the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). These changes include median income and means testing, where if an individual (single, married or with children) has income that exceeds a certain dollar amount, then the bankruptcy filing is considered an abuse of the system and facially they are not permitted to file Chapter 7 bankruptcy.
e. The first test under the revised code is whether a debtor exceeds the median income for their family size based on their state of residence. Pursuant to the 2005 amendments, a case where the debtor makes less than the median is presumed to be a non-abusive filing, and a below-median debtor may file for Chapter 7 bankruptcy. Effective March 15, 2010, the median income of a single person in New York State is $46,320. For a family of two, the income threshold for the Median Income Test is $57,902, for a family of three it is $69,174 and for a family of four it is $82,164. Add $7,500 for each individual in excess of four. Median income figures are periodically revised by the Census Bureau.
f. However, all is not lost for a debtor who exceeds his or her state median income threshold. If an individual’s income exceeds the median income for their respective state and family size, they may still be allowed to file for Chapter 7 bankruptcy if they pass the so-called “Means Test,” i.e. the results show that the bankruptcy filing is not a presumption of abuse under § 707(b)(7) of the Bankruptcy Code. The Means Test (officially known as Form 22A, “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation”) is one of the most complicated calculations in the law. It consists of eight pages, and is similar to doing a 1040 tax return for an individual. The Means Test incorporates the debts that an individual has (both unsecured and secured (i.e. mortgages and car loans), taxes that they owe, and expenses specified by the IRS in its financial analysis standards–food, clothing, household supplies, personal care, out-of-pocket health care and miscellaneous (National Standards); housing and utilities (non-mortgage expenses), housing and utilities (mortgage/rental expense), with adjustments, transportation (vehicle operation/public transportation/transportation ownership or lease expenses)(you are entitled to an expense allowance in this category regardless of whether you pay the expenses of operating a vehicle and regardless of whether you use public transportation)–as well as many other factors.
g. Another requirement to file for Chapter 7 bankruptcy is that the Debtor’s monthly net income (their average monthly income less their average monthly expenses) must be zero or a negative amount.
h. Chapter 13 bankruptcy can useful for debtors who have unincorporated businesses that they want to keep. Like Chapter 7 debtors, Chapter 13 debtors can also exempt up to $2,400 in equity in a motor vehicle and $50,000 in equity in a principal residence from their bankruptcy estate.
i. However, § 109(e) of the Bankruptcy Code places limits who can qualify to be a debtor under Chapter 13. To qualify, a debtor must have regular income and noncontingent, liquidated, unsecured debts of less than $360,475 and noncontingent, liquidated, secured debts of less than $1,081,400.
IV. New developments.
a. New York bankruptcy exemptions may be 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.
b. Student loans are not usually dischargeable in bankruptcy, but the House of Representatives is currently considering H.R. 5043, the “Private Student Loan Bankruptcy Fairness Act of 2010,” which would allow debt from private loans issued by for-profit lenders to be dischargeable in bankruptcy. H.R. 5043 is currently in the House Judiciary Committee. A similar bill, S. 3219, the “Fairness for Struggling Students Act of 2010,” is currently under consideration in the Senate’s Judiciary Committee.
I. Three types of personal bankruptcy
a. Chapter 11-This is the same kind of bankruptcy used by major corporations to reorganize. The primary reason that individuals file for Chapter 11 is that they have too much income and assets or they have debts that fall outside the statutory limits for filing a Chapter 13 bankruptcy.
b. Chapter 13-This is usually the type of bankruptcy individuals file when they want to reorganize their debts, if (for example), they have too much equity in their house. However, this means that the debtor will have to repay a portion of their debts, and their are limits on the amount of debt you can have to qualify for this type of bankruptcy (more on that later).
c. Chapter 7-the most common type of personal bankruptcy, this allows debtors to liquidate or discharge most (but not all) of their debts (again, more on what debts are dischargeable in Chapter 7 bankruptcy later).
II. Today’s market
a. The nominal unemployment rate is close to 10% [9.6% in September], while the real unemployment rate is closer to 18-19%.
b. The unemployment rate for recent college graduate is 20-21%.
c. We are seeing a record number of foreclosures–most of our personal bankruptcy clients who have purchased a home in the last three to four years are “underwater” (the owner owes more on the mortgages(s) then the home is worth).
d. 41.8 million Americans are on food stamps, and the White House estimates that number will soon rise to 43 million.
e. Are we in a “W” shaped economic pattern? If so, are we on a upward leg or a downward leg of the “W?”
III. How can personal bankruptcy be of use?
a. 98% to 99% of our personal bankruptcy clients wind up filing for Chapter 7 bankruptcy for the “fresh start” of liquidating most of their debts.
b. In 2005, the New York State legislature increased the homestead exemption from the bankruptcy estate (the assets available to pay their creditors) to $50,000 per spouse. Most of our Chapter 7 clients can reaffirm their mortgages and keep their houses. And the homestead exemption may be increasing soon (more on that later in my talk).
c. Debtors can also reject unfavorable leases and guarantees through a Chapter 7 filing.
d. Congress radically revised and amended Chapter 7 personal bankruptcy laws by enacting the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). These changes include median income and means testing, where if an individual (single, married or with children) has income that exceeds a certain dollar amount, then the bankruptcy filing is considered an abuse of the system and facially they are not permitted to file Chapter 7 bankruptcy.
e. The first test under the revised code is whether a debtor exceeds the median income for their family size based on their state of residence. Pursuant to the 2005 amendments, a case where the debtor makes less than the median is presumed to be a non-abusive filing, and a below-median debtor may file for Chapter 7 bankruptcy. Effective March 15, 2010, the median income of a single person in New York State is $46,320. For a family of two, the income threshold for the Median Income Test is $57,902, for a family of three it is $69,174 and for a family of four it is $82,164. Add $7,500 for each individual in excess of four. Median income figures are periodically revised by the Census Bureau.
f. However, all is not lost for a debtor who exceeds his or her state median income threshold. If an individual’s income exceeds the median income for their respective state and family size, they may still be allowed to file for Chapter 7 bankruptcy if they pass the so-called “Means Test,” i.e. the results show that the bankruptcy filing is not a presumption of abuse under § 707(b)(7) of the Bankruptcy Code. The Means Test (officially known as Form 22A, “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation”) is one of the most complicated calculations in the law. It consists of eight pages, and is similar to doing a 1040 tax return for an individual. The Means Test incorporates the debts that an individual has (both unsecured and secured (i.e. mortgages and car loans), taxes that they owe, and expenses specified by the IRS in its financial analysis standards–food, clothing, household supplies, personal care, out-of-pocket health care and miscellaneous (National Standards); housing and utilities (non-mortgage expenses), housing and utilities (mortgage/rental expense), with adjustments, transportation (vehicle operation/public transportation/transportation ownership or lease expenses)(you are entitled to an expense allowance in this category regardless of whether you pay the expenses of operating a vehicle and regardless of whether you use public transportation)–as well as many other factors.
g. Another requirement to file for Chapter 7 bankruptcy is that the Debtor’s monthly net income (their average monthly income less their average monthly expenses) must be zero or a negative amount.
h. Chapter 13 bankruptcy can useful for debtors who have unincorporated businesses that they want to keep. Like Chapter 7 debtors, Chapter 13 debtors can also exempt up to $2,400 in equity in a motor vehicle and $50,000 in equity in a principal residence from their bankruptcy estate.
i. However, § 109(e) of the Bankruptcy Code places limits who can qualify to be a debtor under Chapter 13. To qualify, a debtor must have regular income and noncontingent, liquidated, unsecured debts of less than $360,475 and noncontingent, liquidated, secured debts of less than $1,081,400.
IV. New developments.
a. New York bankruptcy exemptions may be 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.
b. Student loans are not usually dischargeable in bankruptcy, but the House of Representatives is currently considering H.R. 5043, the “Private Student Loan Bankruptcy Fairness Act of 2010,” which would allow debt from private loans issued by for-profit lenders to be dischargeable in bankruptcy. H.R. 5043 is currently in the House Judiciary Committee. A similar bill, S. 3219, the “Fairness for Struggling Students Act of 2010,” is currently under consideration in the Senate’s Judiciary Committee.
Wednesday, November 10, 2010
Preference Actions
Here at Shenwick and Associates, we have noticed an uptick in preference actions. For those of you who are not familiar with bankruptcy jargon, a preference action is an adversary proceeding (litigation) commenced by a Chapter 7 bankruptcy trustee or a Chapter 11 debtor seeking the return of monies that were paid by the company to a creditor, generally within 90 days of the bankruptcy filing. If the creditor is an "insider" (i.e. a relative, or, in the case of a company, a director or officer), the look back period (also known as the "preference period") for a preference action is one year.
Many clients ask what strategies are available to avoid preference actions. Some potential strategies are as follows:
1. If a customer or client owes money, and those monies are past due, attempt to have the bill paid by a third party.
2.Attempt to have a third-party guarantee payment of the debt.
3. The ordinary course of business defense -- the more ordinary the payment, the less likely the payment will be considered a preferential transfer. Additionally, if the terms of an invoice are net 30 days, and the invoices are 90 or 120 days past due, have the customer or client pay more recent invoices and avoid payment of the 90 or 120 day invoice.
4. The small payments exception-Under §§ 547(c)(8) and (c)(9) of the Bankruptcy Code, which were added as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Trustees may not avoid a transfer: (1) in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600; or (2) in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $5,850 (as of April 1, 2010).
5. Attempt to shed your insider status prior to receiving payment if you will be deemed an "insider" under § 101(31) of the Bankruptcy Code.
6. Remember that if you ship goods to a debtor during the preference period and are not paid for those goods, those goods are deemed new value and decrease the amount of the preferential payments.
If you have questions regarding preference or fraudulent conveyance actions, please do not hesitate to contact Jim Shenwick.
Many clients ask what strategies are available to avoid preference actions. Some potential strategies are as follows:
1. If a customer or client owes money, and those monies are past due, attempt to have the bill paid by a third party.
2.Attempt to have a third-party guarantee payment of the debt.
3. The ordinary course of business defense -- the more ordinary the payment, the less likely the payment will be considered a preferential transfer. Additionally, if the terms of an invoice are net 30 days, and the invoices are 90 or 120 days past due, have the customer or client pay more recent invoices and avoid payment of the 90 or 120 day invoice.
4. The small payments exception-Under §§ 547(c)(8) and (c)(9) of the Bankruptcy Code, which were added as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Trustees may not avoid a transfer: (1) in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600; or (2) in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $5,850 (as of April 1, 2010).
5. Attempt to shed your insider status prior to receiving payment if you will be deemed an "insider" under § 101(31) of the Bankruptcy Code.
6. Remember that if you ship goods to a debtor during the preference period and are not paid for those goods, those goods are deemed new value and decrease the amount of the preferential payments.
If you have questions regarding preference or fraudulent conveyance actions, please do not hesitate to contact Jim Shenwick.
Monday, November 08, 2010
NYT: Robo-Signing at Companies That Buy Consumer Debts
By David Segal
When Michael Gazzarato took a job that required him to sign hundreds of affidavits in a single day, he had one demand for his employer: a much better pen.
“They tried to get me to do it with a Bic, and I wasn’t going — I wasn’t having it,” he said. “It was bad when I had to use the plastic Papermate-type pen. It was a nightmare.”
The complaint could have come from any of the autograph marathoners in the recent mortgage foreclosure mess. But Mr. Gazzarato was speaking at a deposition in a 2007 lawsuit against Asset Acceptance, a company that buys consumer debts and then tries to collect.
His job was to sign affidavits, swearing that he had personally reviewed and verified the records of debtors — a time-consuming task when done correctly.
Sound familiar?
Banks have been under siege in recent weeks for widespread corner-cutting in the rush to process delinquent mortgages. The accusations have stirred outrage and set off investigations by attorneys general across the country, prompting several leading banks to temporarily cease foreclosures.
But lawyers who defend consumers in debt-collection cases say the banks did not invent the headless, assembly-line approach to financial paperwork. Debt buyers, they say, have been doing it for years.
“The difference is that in the case of debt buyers, the abuses are much worse,” says Richard Rubin, a consumer lawyer in Santa Fe, N.M.
“At least when it comes to mortgages, the banks have the right address, everyone agrees about the interest rate. But with debt buyers, the debt has been passed through so many hands, often over so many years, that a lot of time, these companies are pursuing the wrong person, or the charges have no lawful basis.”
The debt in these cases — typically from credit cards, auto loans, utility bills and so on — is sold by finance companies and banks in a vast secondary market, bundled in huge portfolios, for pennies on the dollar. Debt buyers often hire collectors to commence a campaign of insistent letters and regular phone calls. Or, in a tactic that is becoming increasingly popular, they sue.
Nobody knows how many debt-collection affidavits are filed each year, but a report by the nonprofit Legal Aid Society found that in New York City alone more than 450,000 were filed by debt buyers, from January 2006 to July 2008, yielding more than $1.1 billion in judgments and settlements.
Problems with this torrent of litigation are legion, according to the Federal Trade Commission, led by Jon Leibowitz. The agency issued a report on the subject, “Repairing a Broken System,” in July. In some instances, banks are selling account information that is riddled with errors.
More often, essential background information simply is not acquired by debt buyers, in large part because that data adds to the price of each account. But court rules state that anyone submitting an affidavit to a court against a debtor must have proof of that claim — proper documentation of a debt’s origins, history and amount.
Without that information it is hard to imagine how any company could meet the legal standard of due diligence, particularly while churning out thousands and thousands of affidavits a week.
Analysts say that affidavit-signers at debt-buying companies appear to have little choice but to take at face value the few facts typically provided to them — often little more than basic account information on a computer screen.
That was made vividly clear during the deposition last year of Jay Mills, an employee of a subsidiary of SquareTwo Financial (then known as Collect America), a debt-buying company in Denver.
“So,” asked Dale Irwin, the plaintiff’s lawyer, using shorthand for Collect America, “if you see on the screen that the moon is made of green cheese, you trust that CACH has investigated that and has determined that in fact, the moon is made of green cheese?”
“Yes,” Mr. Mills replied.
Given the volume of affidavits, even perfunctory research seems impossible. Cherie Thomas, who works for Asta Funding, a debt buyer in Englewood Cliffs, N.J., said in a 2007 deposition that she had signed 2,000 affidavits a day. With a half-hour for lunch and two brief breaks, that’s roughly one affidavit every 13 seconds.
Executives at debt-buying firms say they have systems to ensure the accuracy of their affidavits. Robert Michel, chief financial officer at Asta Funding, says his company hires outside lawyers to read over affidavits, then has staff employees check their work.
“The people who work in this area are well trained, and they know that when they sign a statement they have to follow certain procedures,” he said. “They know what they are doing.”
He added that the pace of affidavits filed by Asta had dwindled since 2007 and was now closer to “several hundred” a day, rather than 2,000.
Even if debt buyers purchase the requisite information directly from a bank, it may be flawed. Linda Almonte oversaw a team of advisers, analysts and managers at JPMorgan Chase last year, when the company was preparing the sale of 23,000 delinquent accounts, with a face value of $200 million. With the debt sold at roughly 13 cents on the dollar, the sale was supposed to net $26 million.
As the date of the sale approached, Ms. Almonte and her employees started to notice mistakes and inconsistencies in the accounts.
“We found that with about 5,000 accounts there were incorrect balances, incorrect addresses,” she said. “There were even cases where a consumer had won a judgment against Chase, but it was still part of the package being sold.”
Ms. Almonte flagged the defects with her manager, but he shrugged them off, she says, and he urged her and her colleagues to complete the deal in time for the company’s coming earnings report. Instead, she contacted senior legal counsel at the company. Within days, she was fired. She has since filed a wrongful termination suit against Chase.
A Chase spokesman declined to comment, citing the pending litigation.
The majority of lawsuits filed in debt collection cases go unanswered, which is why most end with default judgments — victories for creditors that allow them to use court officers or sheriffs to garnish wages or freeze bank accounts, among other remedies.
There is a persistent argument about why so few consumers respond in these cases. Consumers often know they owe the debt and conclude that fighting about it is pointless, said Barbara Sinsley, general counsel at DBA International, a trade group of debt buyers.
Lawyers for consumers, on the other hand, contend that few debtors ever learn about the legal action until it is too late, often because the process server charged with alerting them never actually delivered a notification. In those instances when a consumer hires a lawyer, the consumer often prevails.
“I’ve lost four and I’ve taken about 5,000 cases,” said Jerry Jarzombek, a consumer lawyer in Fort Worth. “If the case goes to trial, I say to the judge, ‘Your honor, imagine if someone came in here to give eyewitness testimony in a traffic accident case and they didn’t actually see the crash. They just read about it somewhere. Well, this is the same thing.’ The debt buyers don’t know anything about the debt. They just read about it.”
Every plaintiff’s lawyer and consumer advocate in this field has a theory about why there has been so much fury over mortgage paperwork abuses but so little about debt collections. The stakes in collections cases are smaller, and of course, debt buyers were never given a taxpayer bailout.
“But what people don’t realize,” said Daniel Edelman, a plaintiff’s lawyer in Chicago, “is that the mortgage issue and debt collections are intimately connected. The millions of default judgments out there — you better believe that’s one reason that homeowners can’t afford their homes.”
Andrew Martin contributed reporting.
Copyright 2010 The New York Times Company. All rights reserved.
When Michael Gazzarato took a job that required him to sign hundreds of affidavits in a single day, he had one demand for his employer: a much better pen.
“They tried to get me to do it with a Bic, and I wasn’t going — I wasn’t having it,” he said. “It was bad when I had to use the plastic Papermate-type pen. It was a nightmare.”
The complaint could have come from any of the autograph marathoners in the recent mortgage foreclosure mess. But Mr. Gazzarato was speaking at a deposition in a 2007 lawsuit against Asset Acceptance, a company that buys consumer debts and then tries to collect.
His job was to sign affidavits, swearing that he had personally reviewed and verified the records of debtors — a time-consuming task when done correctly.
Sound familiar?
Banks have been under siege in recent weeks for widespread corner-cutting in the rush to process delinquent mortgages. The accusations have stirred outrage and set off investigations by attorneys general across the country, prompting several leading banks to temporarily cease foreclosures.
But lawyers who defend consumers in debt-collection cases say the banks did not invent the headless, assembly-line approach to financial paperwork. Debt buyers, they say, have been doing it for years.
“The difference is that in the case of debt buyers, the abuses are much worse,” says Richard Rubin, a consumer lawyer in Santa Fe, N.M.
“At least when it comes to mortgages, the banks have the right address, everyone agrees about the interest rate. But with debt buyers, the debt has been passed through so many hands, often over so many years, that a lot of time, these companies are pursuing the wrong person, or the charges have no lawful basis.”
The debt in these cases — typically from credit cards, auto loans, utility bills and so on — is sold by finance companies and banks in a vast secondary market, bundled in huge portfolios, for pennies on the dollar. Debt buyers often hire collectors to commence a campaign of insistent letters and regular phone calls. Or, in a tactic that is becoming increasingly popular, they sue.
Nobody knows how many debt-collection affidavits are filed each year, but a report by the nonprofit Legal Aid Society found that in New York City alone more than 450,000 were filed by debt buyers, from January 2006 to July 2008, yielding more than $1.1 billion in judgments and settlements.
Problems with this torrent of litigation are legion, according to the Federal Trade Commission, led by Jon Leibowitz. The agency issued a report on the subject, “Repairing a Broken System,” in July. In some instances, banks are selling account information that is riddled with errors.
More often, essential background information simply is not acquired by debt buyers, in large part because that data adds to the price of each account. But court rules state that anyone submitting an affidavit to a court against a debtor must have proof of that claim — proper documentation of a debt’s origins, history and amount.
Without that information it is hard to imagine how any company could meet the legal standard of due diligence, particularly while churning out thousands and thousands of affidavits a week.
Analysts say that affidavit-signers at debt-buying companies appear to have little choice but to take at face value the few facts typically provided to them — often little more than basic account information on a computer screen.
That was made vividly clear during the deposition last year of Jay Mills, an employee of a subsidiary of SquareTwo Financial (then known as Collect America), a debt-buying company in Denver.
“So,” asked Dale Irwin, the plaintiff’s lawyer, using shorthand for Collect America, “if you see on the screen that the moon is made of green cheese, you trust that CACH has investigated that and has determined that in fact, the moon is made of green cheese?”
“Yes,” Mr. Mills replied.
Given the volume of affidavits, even perfunctory research seems impossible. Cherie Thomas, who works for Asta Funding, a debt buyer in Englewood Cliffs, N.J., said in a 2007 deposition that she had signed 2,000 affidavits a day. With a half-hour for lunch and two brief breaks, that’s roughly one affidavit every 13 seconds.
Executives at debt-buying firms say they have systems to ensure the accuracy of their affidavits. Robert Michel, chief financial officer at Asta Funding, says his company hires outside lawyers to read over affidavits, then has staff employees check their work.
“The people who work in this area are well trained, and they know that when they sign a statement they have to follow certain procedures,” he said. “They know what they are doing.”
He added that the pace of affidavits filed by Asta had dwindled since 2007 and was now closer to “several hundred” a day, rather than 2,000.
Even if debt buyers purchase the requisite information directly from a bank, it may be flawed. Linda Almonte oversaw a team of advisers, analysts and managers at JPMorgan Chase last year, when the company was preparing the sale of 23,000 delinquent accounts, with a face value of $200 million. With the debt sold at roughly 13 cents on the dollar, the sale was supposed to net $26 million.
As the date of the sale approached, Ms. Almonte and her employees started to notice mistakes and inconsistencies in the accounts.
“We found that with about 5,000 accounts there were incorrect balances, incorrect addresses,” she said. “There were even cases where a consumer had won a judgment against Chase, but it was still part of the package being sold.”
Ms. Almonte flagged the defects with her manager, but he shrugged them off, she says, and he urged her and her colleagues to complete the deal in time for the company’s coming earnings report. Instead, she contacted senior legal counsel at the company. Within days, she was fired. She has since filed a wrongful termination suit against Chase.
A Chase spokesman declined to comment, citing the pending litigation.
The majority of lawsuits filed in debt collection cases go unanswered, which is why most end with default judgments — victories for creditors that allow them to use court officers or sheriffs to garnish wages or freeze bank accounts, among other remedies.
There is a persistent argument about why so few consumers respond in these cases. Consumers often know they owe the debt and conclude that fighting about it is pointless, said Barbara Sinsley, general counsel at DBA International, a trade group of debt buyers.
Lawyers for consumers, on the other hand, contend that few debtors ever learn about the legal action until it is too late, often because the process server charged with alerting them never actually delivered a notification. In those instances when a consumer hires a lawyer, the consumer often prevails.
“I’ve lost four and I’ve taken about 5,000 cases,” said Jerry Jarzombek, a consumer lawyer in Fort Worth. “If the case goes to trial, I say to the judge, ‘Your honor, imagine if someone came in here to give eyewitness testimony in a traffic accident case and they didn’t actually see the crash. They just read about it somewhere. Well, this is the same thing.’ The debt buyers don’t know anything about the debt. They just read about it.”
Every plaintiff’s lawyer and consumer advocate in this field has a theory about why there has been so much fury over mortgage paperwork abuses but so little about debt collections. The stakes in collections cases are smaller, and of course, debt buyers were never given a taxpayer bailout.
“But what people don’t realize,” said Daniel Edelman, a plaintiff’s lawyer in Chicago, “is that the mortgage issue and debt collections are intimately connected. The millions of default judgments out there — you better believe that’s one reason that homeowners can’t afford their homes.”
Andrew Martin contributed reporting.
Copyright 2010 The New York Times Company. All rights reserved.
Tuesday, October 26, 2010
NYT: Owners Seek to Sell at a Loss, But Bankers Push Foreclosure
By MICHAEL POWELL
PHOENIX — Bank of America and GMAC are firing up their formidable foreclosure machines again today, after a brief pause.
But hard-pressed homeowners like Lydia Sweetland are asking why lenders often balk at a less disruptive solution: short sales, which allow owners to sell deeply devalued homes for less than what remains on their mortgage.
Ms. Sweetland, 47, tried such a sale this summer out of desperation. She had lost her high-paying job and drained her once-flush retirement savings, and her bank, GMAC, wouldn’t modify her mortgage. After seven months of being unable to pay her mortgage, she decided that a short sale would give her more time to move out of her Phoenix home and damage her credit rating less than a foreclosure.
She owes $206,000 and found a buyer who would pay $200,000. Last Friday, GMAC rejected that offer and said it would foreclose in seven days, even though, according to Ms. Sweetland’s broker, the bank estimates it will make $19,000 less on a foreclosure than on a short sale.
“I guess I could salute and say, ‘O.K., I’m walking, here’s the keys,’ ” says Ms. Sweetland, as she sits in a plastic Adirondack chair on her patio. “But I need a little time, and I don’t want to just leave the house vacant. I loved this neighborhood.”
GMAC declined to be interviewed about Ms. Sweetland’s case.
The halt in most foreclosures the last few weeks gave a hint of hope to homeowners like Ms. Sweetland, who found breathing room to pursue alternatives. Consumer advocates took the view that this might pressure banks to offer mortgage modifications on better terms and perhaps drive interest in short sales, which are rising sharply in many corners of the nation.
But some major lenders took a quick inventory of their foreclosure practices and insisted their processes were sound. They now seem intent on resuming foreclosures. And that could have a profound effect on many homeowners.
In Arizona, thousands of homeowners have turned to short sales to avoid foreclosures, and many end up running a daunting procedural gantlet. Several of the largest lenders have set up complicated and balky application systems.
Concerns about fraud are one of the reasons lenders are so careful about short sales. Sometimes well-off homeowners want to portray their finances as dire and cut their losses on a property. In other instances, distressed homeowners try to make a short sale to a relative, who would then sell it back to them (a practice that is illegal). A recent industry report estimates that short sale fraud occurs in at least 2 percent of sales and costs banks about $300 million annually.
Short sales are also hindered when homeowners fail to forward the proper papers, have tax liens or cannot find a buyer.
Because of such concerns, homeowners often are instructed that they must be delinquent and they must apply for a modification first, even if chances of approval are slim. The aversion to short sales also leads banks to take many months to process applications, and some lenders set unrealistically high sales prices — known as broker price opinions — and hire workers who say they are poorly trained.
As a result, quite a few homeowners seeking short sales — banks will not provide precise numbers — topple into foreclosure, sometimes, critics say, for reasons that are hard to understand. Ms. Sweetland and her broker say they are confounded by her foreclosure, because in Arizona’s depressed real estate market, foreclosed homes often sit vacant for many months before banks are able to resell them.
“Banks are historically reluctant to do short sales, fearing that somehow the homeowner is getting an advantage on them,” said Diane E. Thompson, of counsel to the National Consumer Law Center. “There’s this irrational belief that if you foreclose and hold on to the property for six months, somehow prices will rebound.”
Homeowners, advocates and realty agents offer particularly pointed criticism of Bank of America, the nation’s largest servicer of mortgages, and a recipient of billions of dollars in federal bailout aid. Its holdings account for 31 percent of the pending foreclosures in Maricopa County, which includes Phoenix and Scottsdale, according to an analysis for The Arizona Republic.
The bank instructs real estate agents to use its computer program to evaluate short sales. But in three cases observed by The New York Times in collaboration with two real estate agents, the bank’s system repeatedly asked for and lost the same information and generated inaccurate responses.
In half a dozen more cases examined by The New York Times, Bank of America rejected short sale offers, foreclosed and auctioned off houses at lower prices.
“When I hear that a client’s mortgage is held by Bank of America, I just sigh. Our chances of getting an approval for them just went from 90 percent to 50-50,” said Benjamin Toma, who has a family-run real estate agency in Phoenix.
Bank of America officials also declined interview requests. A Bank of America spokeswoman said in an e-mail that the bank had processed 61,000 short sales nationwide this year; she declined to provide numbers for Arizona or to discuss criticisms of the company’s processing.
Fannie Mae, the mortgage finance company with federal backing, gives cash incentives to encourage servicers, who are affiliated with banks and who oversee great bundles of delinquent mortgages, to approve short sales.
But less obvious financial incentives can push toward a foreclosure rather than a short sale. Servicers can reap high fees from foreclosures. And lenders can try to collect on private mortgage insurance.
Some advocates and real estate agents also point to an April 2009 regulatory change in an obscure federal accounting law. The change, in effect, allowed banks to foreclose on a home without having to write down a loss until that home was sold. By contrast, if a bank agrees to a short sale, it must mark the loss immediately.
Short sales, to be sure, are no free ride for homeowners. They take a hit to their credit ratings, although for three to five years rather than seven after a foreclosure. An owner seeking a short sale must satisfy a laundry list of conditions, including making a detailed disclosure of income, tax and credit liens. And owners must prove that they have no connection to the buyer.
Still, bank decision-making, at least from a homeowner’s perspective, often appears arbitrary. That is certainly the view of Nicholas Yannuzzi, who after 30 years in Arizona still talks with a Philadelphia rasp. Mr. Yannuzzi has owned five houses over time, without any financial problems. When his wife was diagnosed with bone cancer, he put 20 percent down and bought a ranch house in North Scottsdale so that she would not have to climb stairs.
In the last few years, his wife died, he lost his job and he used his retirement fund to pay his mortgage for five months. His bank, Wells Fargo, denied his mortgage modification request and then his request for a short sale.
The bank officer told him that Fannie Mae, which held the mortgage, would not take a discount. At the end of last week, he was waiting to be locked out of his home.
“I’m a proud man. I’ve worked since I was 20 years old,” he said. “But I’ve run out of my 79 weeks of unemployment, so that’s it.”
He shrugged. “I try to keep in the frame of mind that a lot of people have it worse than me.”
Back in Phoenix, Ms. Sweetland’s real estate agent, Sherry Rampy, appeared to receive good news last week. GMAC re-examined her client’s application and suggested it might be approved.
But the bank attached a condition: Ms. Sweetland must come up with $2,000 in closing costs or pay $100 a month for 50 months to the bank. Ms. Sweetland, however, is flat broke.
A late afternoon desert sun angles across her Pasadena neighborhood.
“After this, I’ll never buy again,” Ms. Sweetland says. “This is not the American dream. This is not my American dream.”
Copyright 2010 The New York Times Company. All rights reserved.
PHOENIX — Bank of America and GMAC are firing up their formidable foreclosure machines again today, after a brief pause.
But hard-pressed homeowners like Lydia Sweetland are asking why lenders often balk at a less disruptive solution: short sales, which allow owners to sell deeply devalued homes for less than what remains on their mortgage.
Ms. Sweetland, 47, tried such a sale this summer out of desperation. She had lost her high-paying job and drained her once-flush retirement savings, and her bank, GMAC, wouldn’t modify her mortgage. After seven months of being unable to pay her mortgage, she decided that a short sale would give her more time to move out of her Phoenix home and damage her credit rating less than a foreclosure.
She owes $206,000 and found a buyer who would pay $200,000. Last Friday, GMAC rejected that offer and said it would foreclose in seven days, even though, according to Ms. Sweetland’s broker, the bank estimates it will make $19,000 less on a foreclosure than on a short sale.
“I guess I could salute and say, ‘O.K., I’m walking, here’s the keys,’ ” says Ms. Sweetland, as she sits in a plastic Adirondack chair on her patio. “But I need a little time, and I don’t want to just leave the house vacant. I loved this neighborhood.”
GMAC declined to be interviewed about Ms. Sweetland’s case.
The halt in most foreclosures the last few weeks gave a hint of hope to homeowners like Ms. Sweetland, who found breathing room to pursue alternatives. Consumer advocates took the view that this might pressure banks to offer mortgage modifications on better terms and perhaps drive interest in short sales, which are rising sharply in many corners of the nation.
But some major lenders took a quick inventory of their foreclosure practices and insisted their processes were sound. They now seem intent on resuming foreclosures. And that could have a profound effect on many homeowners.
In Arizona, thousands of homeowners have turned to short sales to avoid foreclosures, and many end up running a daunting procedural gantlet. Several of the largest lenders have set up complicated and balky application systems.
Concerns about fraud are one of the reasons lenders are so careful about short sales. Sometimes well-off homeowners want to portray their finances as dire and cut their losses on a property. In other instances, distressed homeowners try to make a short sale to a relative, who would then sell it back to them (a practice that is illegal). A recent industry report estimates that short sale fraud occurs in at least 2 percent of sales and costs banks about $300 million annually.
Short sales are also hindered when homeowners fail to forward the proper papers, have tax liens or cannot find a buyer.
Because of such concerns, homeowners often are instructed that they must be delinquent and they must apply for a modification first, even if chances of approval are slim. The aversion to short sales also leads banks to take many months to process applications, and some lenders set unrealistically high sales prices — known as broker price opinions — and hire workers who say they are poorly trained.
As a result, quite a few homeowners seeking short sales — banks will not provide precise numbers — topple into foreclosure, sometimes, critics say, for reasons that are hard to understand. Ms. Sweetland and her broker say they are confounded by her foreclosure, because in Arizona’s depressed real estate market, foreclosed homes often sit vacant for many months before banks are able to resell them.
“Banks are historically reluctant to do short sales, fearing that somehow the homeowner is getting an advantage on them,” said Diane E. Thompson, of counsel to the National Consumer Law Center. “There’s this irrational belief that if you foreclose and hold on to the property for six months, somehow prices will rebound.”
Homeowners, advocates and realty agents offer particularly pointed criticism of Bank of America, the nation’s largest servicer of mortgages, and a recipient of billions of dollars in federal bailout aid. Its holdings account for 31 percent of the pending foreclosures in Maricopa County, which includes Phoenix and Scottsdale, according to an analysis for The Arizona Republic.
The bank instructs real estate agents to use its computer program to evaluate short sales. But in three cases observed by The New York Times in collaboration with two real estate agents, the bank’s system repeatedly asked for and lost the same information and generated inaccurate responses.
In half a dozen more cases examined by The New York Times, Bank of America rejected short sale offers, foreclosed and auctioned off houses at lower prices.
“When I hear that a client’s mortgage is held by Bank of America, I just sigh. Our chances of getting an approval for them just went from 90 percent to 50-50,” said Benjamin Toma, who has a family-run real estate agency in Phoenix.
Bank of America officials also declined interview requests. A Bank of America spokeswoman said in an e-mail that the bank had processed 61,000 short sales nationwide this year; she declined to provide numbers for Arizona or to discuss criticisms of the company’s processing.
Fannie Mae, the mortgage finance company with federal backing, gives cash incentives to encourage servicers, who are affiliated with banks and who oversee great bundles of delinquent mortgages, to approve short sales.
But less obvious financial incentives can push toward a foreclosure rather than a short sale. Servicers can reap high fees from foreclosures. And lenders can try to collect on private mortgage insurance.
Some advocates and real estate agents also point to an April 2009 regulatory change in an obscure federal accounting law. The change, in effect, allowed banks to foreclose on a home without having to write down a loss until that home was sold. By contrast, if a bank agrees to a short sale, it must mark the loss immediately.
Short sales, to be sure, are no free ride for homeowners. They take a hit to their credit ratings, although for three to five years rather than seven after a foreclosure. An owner seeking a short sale must satisfy a laundry list of conditions, including making a detailed disclosure of income, tax and credit liens. And owners must prove that they have no connection to the buyer.
Still, bank decision-making, at least from a homeowner’s perspective, often appears arbitrary. That is certainly the view of Nicholas Yannuzzi, who after 30 years in Arizona still talks with a Philadelphia rasp. Mr. Yannuzzi has owned five houses over time, without any financial problems. When his wife was diagnosed with bone cancer, he put 20 percent down and bought a ranch house in North Scottsdale so that she would not have to climb stairs.
In the last few years, his wife died, he lost his job and he used his retirement fund to pay his mortgage for five months. His bank, Wells Fargo, denied his mortgage modification request and then his request for a short sale.
The bank officer told him that Fannie Mae, which held the mortgage, would not take a discount. At the end of last week, he was waiting to be locked out of his home.
“I’m a proud man. I’ve worked since I was 20 years old,” he said. “But I’ve run out of my 79 weeks of unemployment, so that’s it.”
He shrugged. “I try to keep in the frame of mind that a lot of people have it worse than me.”
Back in Phoenix, Ms. Sweetland’s real estate agent, Sherry Rampy, appeared to receive good news last week. GMAC re-examined her client’s application and suggested it might be approved.
But the bank attached a condition: Ms. Sweetland must come up with $2,000 in closing costs or pay $100 a month for 50 months to the bank. Ms. Sweetland, however, is flat broke.
A late afternoon desert sun angles across her Pasadena neighborhood.
“After this, I’ll never buy again,” Ms. Sweetland says. “This is not the American dream. This is not my American dream.”
Copyright 2010 The New York Times Company. All rights reserved.
Friday, October 22, 2010
Attorney Affirmations Now Required in New York State Residential Foreclosure Actions
The Chief Judge's announcement is here.
Thursday, October 07, 2010
New York Times: F.T.C. Accuses American Tax Relief of Fraud
By EDWARD WYATT
WASHINGTON — Who wouldn’t like to settle with the Internal Revenue Service for pennies on the dollar?
In recent years, some 20,000 people have turned to American Tax Relief of Beverly Hills, Calif., to do just that after seeing the company’s advertisements on television, the Internet or in print, where actors portraying clients say the company reduced their back taxes to say, $2,000 from $24,000 or $40,000 from $200,000.
But the Federal Trade Commission said Wednesday that despite collecting $60 million to $100 million in upfront fees from often-desperate clients in recent years, American Tax Relief rarely, if ever, delivered on its promises.
It did, however, according to the F.T.C., deliver $30 million in customers’ funds to the accounts of the company’s owners or their relatives — money that was spent on a $3.4 million house in Beverly Hills; a garage full of cars, including a Ferrari, a Rolls Royce, a Bentley, two Porsches and two Mercedes-Benzes; and other luxuries.
At the F.T.C.’s request, a federal district court judge in Chicago froze the assets of American Tax Relief and its owners on Sept. 24 and appointed a receiver to manage the company. The judge also approved a temporary restraining order prohibiting the company and its owners — Alexander Seung Hahn, who is on probation for an earlier marketing fraud case, and his wife, Joo Hyun Park, from making deceptive claims. The F.T.C. does not have criminal jurisdiction or the ability to assess fines.
“Everyone has seen these commercials and wondered, ‘Can I really get away with paying the I.R.S. only a fraction of what I owe?,’ ” C. Steven Baker, the director of the F.T.C.’s Midwest Regional office, said in an interview. “The short answer is no.”
Of the 20,000 clients that the F.T.C. says it believes that American Tax Relief signed up, “we have not been able to find a single one” that the company helped to reduce a tax burden, said David Vladek, the chief of the commission’s division of consumer protection.
Mr. Hahn and Ms. Park could not be reached for comment. Charles L. Kreindler, a Los Angeles lawyer who represents the company, said in a statement that it intended to fight the F.T.C. action, which “focused on a small handful of complaints and ignored the thousands of consumers who have been helped.”
In the last five months, Mr. Kreindler said, more than 60 tax abatement offers from American Tax Relief had been accepted by tax authorities, saving clients more than $2 million and reducing their taxes by 90 percent. “During that same time period, American Tax Relief has successfully eliminated debilitating penalties for dozens of other taxpayers and placed them on payment plans that they can live with,” he added.
Mr. Hahn has previously been in trouble with the law for marketing scams. In October 2006, he was sentenced to five years’ probation for a conviction of mail fraud related to a telemarketing scheme at a company he ran in Garden Grove, Calif.
According to an affidavit filed in United States District Court in Santa Ana, Calif., Mr. Hahn started American Tax Relief in 1999 after paying a secretary at the tax-relief firm where he worked to steal a copy of its client list.
From 2002 through 2008, 410 different consumers filed 497 complaints against American Tax Relief with the Better Business bureau, the F.T.C., or various law enforcement agencies. The complaints accused the company of failing to negotiate settlements with the I.R.S., resulting in penalties and additional interest charges for the customers, or making unauthorized charges to credit cards or withdrawals from bank accounts.
When customers complained to American Tax Relief that a debt was not settled, the company often blamed the clients for providing incorrect paperwork, missing deadlines or failing to pay all of the required fees, according to court papers.
Some of the $30 million that the F.T.C. says went to pay the personal expenses of Mr. Hahn and his wife were laundered through the accounts of his wife’s parents, Young Soon Park and Il Kon Park, according to the agency.
Mr. Baker of the F.T.C.’s Chicago office said that companies like American Tax Relief had created a widespread misimpression that anyone with an outstanding tax debt could settle with the I.R.S. for less than they owed.
While the I.R.S. does have programs of the type pitched by American Tax Relief — an “offer in compromise” settlement and a “penalty abatement” — the government is likely to accept less than it is owed only if the taxpayer makes an offer that is equal to or greater than the taxpayer’s ability to pay, including the value of all of the taxpayer’s property, cars, bank accounts and other assets.
An I.R.S. Web site specifically cautions: “Taxpayers should beware of promoters’ claims that tax debts can be settled through the offer in compromise program for ‘pennies on the dollar.’ ”
Most of the clients who received any service from American Tax Relief were eligible for no I.R.S. program other than an installment agreement, which usually requires the full amount of the debt to be paid over time. Installment agreements are easily arranged by individual taxpayers and rarely require expert assistance.
Mr. Vladek said that while the F.T.C. and other agencies determined that American Tax Relief took in about $60 million between January 2004 and October 2008, its continued business since then has probably pushed the total to more than $100 million.
Copyright 2010 The New York Times Company. All rights reserved.
WASHINGTON — Who wouldn’t like to settle with the Internal Revenue Service for pennies on the dollar?
In recent years, some 20,000 people have turned to American Tax Relief of Beverly Hills, Calif., to do just that after seeing the company’s advertisements on television, the Internet or in print, where actors portraying clients say the company reduced their back taxes to say, $2,000 from $24,000 or $40,000 from $200,000.
But the Federal Trade Commission said Wednesday that despite collecting $60 million to $100 million in upfront fees from often-desperate clients in recent years, American Tax Relief rarely, if ever, delivered on its promises.
It did, however, according to the F.T.C., deliver $30 million in customers’ funds to the accounts of the company’s owners or their relatives — money that was spent on a $3.4 million house in Beverly Hills; a garage full of cars, including a Ferrari, a Rolls Royce, a Bentley, two Porsches and two Mercedes-Benzes; and other luxuries.
At the F.T.C.’s request, a federal district court judge in Chicago froze the assets of American Tax Relief and its owners on Sept. 24 and appointed a receiver to manage the company. The judge also approved a temporary restraining order prohibiting the company and its owners — Alexander Seung Hahn, who is on probation for an earlier marketing fraud case, and his wife, Joo Hyun Park, from making deceptive claims. The F.T.C. does not have criminal jurisdiction or the ability to assess fines.
“Everyone has seen these commercials and wondered, ‘Can I really get away with paying the I.R.S. only a fraction of what I owe?,’ ” C. Steven Baker, the director of the F.T.C.’s Midwest Regional office, said in an interview. “The short answer is no.”
Of the 20,000 clients that the F.T.C. says it believes that American Tax Relief signed up, “we have not been able to find a single one” that the company helped to reduce a tax burden, said David Vladek, the chief of the commission’s division of consumer protection.
Mr. Hahn and Ms. Park could not be reached for comment. Charles L. Kreindler, a Los Angeles lawyer who represents the company, said in a statement that it intended to fight the F.T.C. action, which “focused on a small handful of complaints and ignored the thousands of consumers who have been helped.”
In the last five months, Mr. Kreindler said, more than 60 tax abatement offers from American Tax Relief had been accepted by tax authorities, saving clients more than $2 million and reducing their taxes by 90 percent. “During that same time period, American Tax Relief has successfully eliminated debilitating penalties for dozens of other taxpayers and placed them on payment plans that they can live with,” he added.
Mr. Hahn has previously been in trouble with the law for marketing scams. In October 2006, he was sentenced to five years’ probation for a conviction of mail fraud related to a telemarketing scheme at a company he ran in Garden Grove, Calif.
According to an affidavit filed in United States District Court in Santa Ana, Calif., Mr. Hahn started American Tax Relief in 1999 after paying a secretary at the tax-relief firm where he worked to steal a copy of its client list.
From 2002 through 2008, 410 different consumers filed 497 complaints against American Tax Relief with the Better Business bureau, the F.T.C., or various law enforcement agencies. The complaints accused the company of failing to negotiate settlements with the I.R.S., resulting in penalties and additional interest charges for the customers, or making unauthorized charges to credit cards or withdrawals from bank accounts.
When customers complained to American Tax Relief that a debt was not settled, the company often blamed the clients for providing incorrect paperwork, missing deadlines or failing to pay all of the required fees, according to court papers.
Some of the $30 million that the F.T.C. says went to pay the personal expenses of Mr. Hahn and his wife were laundered through the accounts of his wife’s parents, Young Soon Park and Il Kon Park, according to the agency.
Mr. Baker of the F.T.C.’s Chicago office said that companies like American Tax Relief had created a widespread misimpression that anyone with an outstanding tax debt could settle with the I.R.S. for less than they owed.
While the I.R.S. does have programs of the type pitched by American Tax Relief — an “offer in compromise” settlement and a “penalty abatement” — the government is likely to accept less than it is owed only if the taxpayer makes an offer that is equal to or greater than the taxpayer’s ability to pay, including the value of all of the taxpayer’s property, cars, bank accounts and other assets.
An I.R.S. Web site specifically cautions: “Taxpayers should beware of promoters’ claims that tax debts can be settled through the offer in compromise program for ‘pennies on the dollar.’ ”
Most of the clients who received any service from American Tax Relief were eligible for no I.R.S. program other than an installment agreement, which usually requires the full amount of the debt to be paid over time. Installment agreements are easily arranged by individual taxpayers and rarely require expert assistance.
Mr. Vladek said that while the F.T.C. and other agencies determined that American Tax Relief took in about $60 million between January 2004 and October 2008, its continued business since then has probably pushed the total to more than $100 million.
Copyright 2010 The New York Times Company. All rights reserved.
Monday, October 04, 2010
New York Times: Flawed Paperwork Aggravates a Foreclosure Crisis
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.
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.
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.
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