It sounds like a cliché, but here at Shenwick & Associates, every bankruptcy case really is different. Every debtor has their own unique story of how they got into debt, what type and amount of debt they have, their living conditions and many other factors, which we need to apply the law to so we can provide them with the relief they seek.
In one recent case, we had a young single man (let's call him "Doug") who lived in Brooklyn and earned a substantial income. He had filed for Chapter 7 bankruptcy a few years ago, but the case was dismissed because he was earning too much to qualify for Chapter 7 bankruptcy.
In 2005, Congress radically amended the bankruptcy laws through the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which introduced a new form, Form 22, the "Statement of Current Monthly Income." There are actually three different forms, depending upon whether the debtor is filing for relief under Chapter 7 ( Form B22A) (the "Means Test"), Chapter 11 ( Form B22B) or Chapter 13 ( Form B22C) of the Bankruptcy Code. For Chapter 7 debtors, Form B22A includes a means-test calculation, which is a complex six page calculation of expenses and disposable income that a debtor must complete if he or she is above the median income for their state and family size. If their disposable income is above $11,725 over a 60 month period, the presumption of abuse arises, which means that it would be presumptively abusive to allow them to liquidate their debts under Chapter 7 of the Bankruptcy Code. In this case, they must file for relief under Chapter 11 or Chapter 13 of the Bankruptcy Code. Form B22C includes calculations to determine the length of a Plan (36 or 60 months) and the amount of disposable income the debtor must pay into the Plan each month.
Doug came to us to determine what his disposable income would be in a Chapter 13 Plan. Although he had a condo, it was "underwater" (the liens on the condo exceeded the fair market value of the apartment), so he was going to have to surrender the unit to his secured creditors and rent an apartment. However, the rents he was being quoted by brokers far exceeded the IRS mortgage/rent standard for one person living in Brooklyn ($1,297). The question was-could we also deduct the differenhttp://www.blogger.com/img/blank.gifce between the actual rent he was going to have to pay and the mortgage/rent standard?
There is very scant case law on this question, and no appellate courts appear to have considered the issue yet, but according to the Bankruptcy Court in the Eastern District of Kentucky, the answer is no, not without special circumstances. In , 382 B.R. 85 (2008), the debtors filed a joint Chapter 7 bankruptcy petition that reported annualized current monthly income of $83,022.36 on their Means Test. The applicable median family income for 2 persons in Kentucky was $41,560. The allowable mortgage/rent standard for 1 or 2 persons living in Boone County, KY was $842/month, but the Shinkles' actual rent was $1,500/month.
So, the Shinkles claimed an adjustment of $658 on Line 21 of their Means Test, which allows debtors to claim an additional expense if they contend that the process set out in Line 20 of the Means Test does not accurately compute the amount they are due under IRS Standards. Without this adjustment, their Chapter 7 case would have been presumptively abusive. The legal issue before the Court was if the Shinkles should be entitled to claim their actual rental expenses on the Means Test, in excess of the IRS standards.
In its discussion, the Court looked to the plain language of § 7070(b)(2)(B) of the Bankruptcy Code, which provides:
"In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative. In order to establish special circumstances, the debtor shall be required to itemize each additional expense or adjustment of income and to provide - documentation for such expense or adjustment to income; and a detailed explanation of the special circumstances that make such expenses or adjustment to income necessary and reasonable."
The United States Trustee contended that the Shinkles had not demonstrated such special circumstances. The Shinkles argued that allowed amounts for rent or mortgage expenses are guidelines and not "set in stone," that a condition of Mrs. Shinkle's employment was that she reside in Boone County, and that any slight reduction in rent they could derive from moving would be offset by the costs of moving and forfeiting their opportunity to own the house they were renting.
The Court cited two cases where special circumstances were found–In re Scarafiotti, 365 B.R. 618,631 (Bankr. D.Colo. 2007) (debtors' son needed to be in a specific school to address mental and emotional difficulties, which justified a modest increase in the debtors' housing allowance) and In re Graham, 363 B.R. 844,847 (Bankr. S.D. Ohio 2007 (the debtor husband had to move 800 miles from his wife and her two children from a previous marriage in order to find gainful employment, but the debtor wife could not join her husband because of the constraints of her shared custody agreement. These debtors were allowed to claim a second set of housing expenses for the husband). The Court found no such special circumstances in the Shinkles' case.
For more information about the Means Test in Chapter 7, disposable income to fund a Plan in chapter 13 and getting relief through the bankruptcy process, please contact Jim Shenwick.
Monday, October 03, 2011
NYT: The Case for Hiring a Lawyer
By JOSEPH PLAMBECK
First-time buyers in New York City confront a series of choices: co-op or condo, high-rise or walk-up, a second bathroom or just steps from the subway? But there seems to be consensus on at least one decision — whether to hire a real estate lawyer.
In New York, unlike most places in the United States, it is customary for buyers to seek the representation of a lawyer throughout the purchasing process. Although this is not a legal requirement, some longtime real estate agents say they have never witnessed a deal completed without the buyer’s having a lawyer on hand.
“I would never, never have a situation where a buyer did not have an attorney,” said Deanna Kory, a senior vice president of the Corcoran Group. “Without question, there is too much to understand. You can’t understand it on the fly.”
Buyers in New York City rely upon lawyers because real estate transactions can be extraordinarily complicated. In addition to the usual concerns about contracts, liens and titles, New York’s numerous co-ops have financial statements and meeting minutes that require scrutiny. Buying a condo, and even a single-family home, can be equally knotty. Not to mention that the sellers on the other side of the table usually come armed with their own lawyer.
And then, of course, there is the simple fact that real estate in New York is expensive. Making a bad deal can jeopardize huge amounts of money.
“You’re signing the largest check you’ve ever signed,” said Gary L. Malin, the president of the brokerage Citi Habitats, “and you want to make sure that you’re not missing something. To not engage an attorney — you’d feel naked in the process.”
Lawyers also provide a necessary buffer in what can be an emotional process. Peter Graubard, a real estate lawyer since 1994, said lawyers were able to provide an objective assessment even while advocating for buyers.
“I’m really the only involved party whose fee doesn’t depend on the deal closing,” Mr. Graubard said. “I get paid for my lack of a conflict of interest.”
Mr. Malin, who worked for a short time as a real estate lawyer before joining Citi Habitats, says it is especially important for first-time buyers to have a lawyer on their side. A real estate agent can help with some aspects of the process, but a lawyer is the one who performs crucial due diligence and helps finish the deal.
At the start of the buying process, the lawyer helps negotiate the contract. Michael P. Kozek, a lawyer at Jeffrey S. Ween & Associates, says that most of the drafting is done by the seller’s lawyer, but that there should be a chance to review the terms and try to adjust them.
The buyer’s lawyer will also dig into the information available about a property, looking at a co-op’s finances and the minutes of its board meetings. Some buyers with a background in finance believe they can handle this part by themselves. But, Ms. Kory said, they may not know the customary tax breaks and accounting methods used by co-ops, which can lead to serious misunderstandings.
Michael W. Goldstein, a lawyer who has handled residential real estate deals for more than 20 years, says an experienced lawyer is also easily able to spot in the board’s minutes any issues that may percolate into problems. Perhaps there is talk about a loud resident who is to be the buyer’s neighbor, or discussion of a balky boiler that may need expensive repairs not accounted for in the building’s capital improvement plan.
Because experienced real estate lawyers see a lot of contracts and know the customs, they can also help cut through roadblocks. For that reason, Ms. Kory said, it is usually a mistake to hire a lawyer who does not have extensive familiarity with residential deals.
Lawyers and real estate agents both say that the best way to find a lawyer is through word of mouth, in the best case from a friend or a family member. But if that option is not available, real estate agents are often happy to refer someone with whom they have worked.
Ms. Kory says she often advises clients to talk to two or three lawyers, and then choose one, before making any offer on a home. That might seem premature, she said, but having good representation lined up can help ensure that you get the home you really want.
“Having a lawyer makes you look more capable of following through on the deal,” Ms. Kory said. “Even if you are the only one bidding, you will come across stronger if you have all your ducks in a row.”
Buyers should have a few simple questions ready for prospective lawyers. First, ask about residential real estate experience — generally, more is better. Find out about experience with closings for homes similar to yours, or even in the building you are considering. Then find out how much of the work would be done by the lawyer personally, and how much (and which parts) would be handled by a paralegal.
And ask if the charge will be a flat fee or based on an hourly rate. In general, residential real estate lawyers in New York charge a fee, often between $1,500 and $2,500. More complicated or expensive deals, like buying a multifamily brownstone, for example, can take the tab closer to $5,000.
In most cases, that fee will cover a few hours of face time with the lawyer, his or her presence at the closing and a few conversations over the phone. The lawyer will spend several additional hours examining the paperwork and performing due diligence. The buyer also receives something else: more peace of mind.
“The reality is that most people are not well versed in real estate law,” said Mr. Malin of Citi Habitats. “There are a lot of things that could potentially go wrong in the process. And you could very likely regret not spending the money.”
Copyright 2011 The New York Times Company. All rights reserved.
First-time buyers in New York City confront a series of choices: co-op or condo, high-rise or walk-up, a second bathroom or just steps from the subway? But there seems to be consensus on at least one decision — whether to hire a real estate lawyer.
In New York, unlike most places in the United States, it is customary for buyers to seek the representation of a lawyer throughout the purchasing process. Although this is not a legal requirement, some longtime real estate agents say they have never witnessed a deal completed without the buyer’s having a lawyer on hand.
“I would never, never have a situation where a buyer did not have an attorney,” said Deanna Kory, a senior vice president of the Corcoran Group. “Without question, there is too much to understand. You can’t understand it on the fly.”
Buyers in New York City rely upon lawyers because real estate transactions can be extraordinarily complicated. In addition to the usual concerns about contracts, liens and titles, New York’s numerous co-ops have financial statements and meeting minutes that require scrutiny. Buying a condo, and even a single-family home, can be equally knotty. Not to mention that the sellers on the other side of the table usually come armed with their own lawyer.
And then, of course, there is the simple fact that real estate in New York is expensive. Making a bad deal can jeopardize huge amounts of money.
“You’re signing the largest check you’ve ever signed,” said Gary L. Malin, the president of the brokerage Citi Habitats, “and you want to make sure that you’re not missing something. To not engage an attorney — you’d feel naked in the process.”
Lawyers also provide a necessary buffer in what can be an emotional process. Peter Graubard, a real estate lawyer since 1994, said lawyers were able to provide an objective assessment even while advocating for buyers.
“I’m really the only involved party whose fee doesn’t depend on the deal closing,” Mr. Graubard said. “I get paid for my lack of a conflict of interest.”
Mr. Malin, who worked for a short time as a real estate lawyer before joining Citi Habitats, says it is especially important for first-time buyers to have a lawyer on their side. A real estate agent can help with some aspects of the process, but a lawyer is the one who performs crucial due diligence and helps finish the deal.
At the start of the buying process, the lawyer helps negotiate the contract. Michael P. Kozek, a lawyer at Jeffrey S. Ween & Associates, says that most of the drafting is done by the seller’s lawyer, but that there should be a chance to review the terms and try to adjust them.
The buyer’s lawyer will also dig into the information available about a property, looking at a co-op’s finances and the minutes of its board meetings. Some buyers with a background in finance believe they can handle this part by themselves. But, Ms. Kory said, they may not know the customary tax breaks and accounting methods used by co-ops, which can lead to serious misunderstandings.
Michael W. Goldstein, a lawyer who has handled residential real estate deals for more than 20 years, says an experienced lawyer is also easily able to spot in the board’s minutes any issues that may percolate into problems. Perhaps there is talk about a loud resident who is to be the buyer’s neighbor, or discussion of a balky boiler that may need expensive repairs not accounted for in the building’s capital improvement plan.
Because experienced real estate lawyers see a lot of contracts and know the customs, they can also help cut through roadblocks. For that reason, Ms. Kory said, it is usually a mistake to hire a lawyer who does not have extensive familiarity with residential deals.
Lawyers and real estate agents both say that the best way to find a lawyer is through word of mouth, in the best case from a friend or a family member. But if that option is not available, real estate agents are often happy to refer someone with whom they have worked.
Ms. Kory says she often advises clients to talk to two or three lawyers, and then choose one, before making any offer on a home. That might seem premature, she said, but having good representation lined up can help ensure that you get the home you really want.
“Having a lawyer makes you look more capable of following through on the deal,” Ms. Kory said. “Even if you are the only one bidding, you will come across stronger if you have all your ducks in a row.”
Buyers should have a few simple questions ready for prospective lawyers. First, ask about residential real estate experience — generally, more is better. Find out about experience with closings for homes similar to yours, or even in the building you are considering. Then find out how much of the work would be done by the lawyer personally, and how much (and which parts) would be handled by a paralegal.
And ask if the charge will be a flat fee or based on an hourly rate. In general, residential real estate lawyers in New York charge a fee, often between $1,500 and $2,500. More complicated or expensive deals, like buying a multifamily brownstone, for example, can take the tab closer to $5,000.
In most cases, that fee will cover a few hours of face time with the lawyer, his or her presence at the closing and a few conversations over the phone. The lawyer will spend several additional hours examining the paperwork and performing due diligence. The buyer also receives something else: more peace of mind.
“The reality is that most people are not well versed in real estate law,” said Mr. Malin of Citi Habitats. “There are a lot of things that could potentially go wrong in the process. And you could very likely regret not spending the money.”
Copyright 2011 The New York Times Company. All rights reserved.
Tuesday, August 30, 2011
Altneratives to bankruptcy
Here at Shenwick & Associates, we keep a close eye on the news related to bankruptcy, and one news story that caught our eye was about the recent drop in bankruptcy filings. In New York and New Jersey, bankruptcy filings were down by 5 percent from May 2011 to June 2011.
Although filing for Chapter 7 or Chapter 13 bankruptcy is usually the best solution for our clients, there are two alternatives to bankruptcy for debtors:
1. Do nothing. Although this isn’t really a viable solution, it’s a path commonly taken by debtors who think that inaction and time will make their debt magically disappear. In actuality, what will likely happen is that the creditor will commence an action against the debtor in civil court. If the action is not answered, a default judgment will be entered against the debtor. In New York State, a judgment is valid for 10 years (which can be renewed once for another 10 years), and can be enforced against a judgment debtor’s income and assets.
2. An out–of–court workout with the creditor. An out–of–court workout is a voluntary or consensual negotiation with the creditor to reduce the amount of debt the debtor owes to the creditor. In our experience, the biggest discounts can be gained by agreeing to pay the creditor a lump sum, rather than making monthly payments over a year to 18 months. The agreement between the creditor and the debtor should always be memorialized in writing, and should always provide fixed terms for payments (i.e. twelve payments of $500 made each month by the debtor to the creditor), rather than requiring payments in perpetuity from the debtor to the creditor.
There are a number of pros and cons to attempting an out–of–court workout:
Pros:
• The debtor can save the legal fees in filing a bankruptcy petition (which could range from $2,000-$4,000) and the Bankruptcy Court filing fees ($299 for a Chapter 7 case).
• A workout may be a less negative factor on the debtor’s credit report and lower their FICO score less than filing for bankruptcy would.
• A workout provides psychological relief to the debtor in not filing for bankruptcy and lessens the “embarrassment or failure” factor.
Cons:
• Bankruptcy provides a solution for all of a debtor’s creditors, but in an out–of–court workout, each creditor has to be negotiated with individually-what if an agreement can’t be reached with all creditors?
• Who will do the negotiating with the creditor-the debtor, a CPA or an attorney? (CPAs and attorneys will charge a fee for this work)
• It takes substantial time and effort to draft, review and revise and file the documents needed to expedite a workout: a settlement agreement, a release, a satisfaction of judgment and a stipulation of settlement or stipulation of discontinuance of the action (if the creditor has commenced litigation).
• Under § 108 of the Internal Revenue Code, debt relief is considered income and is taxable. This is “phantom income,” for which the creditor will have to file a Form 1099-R with taxing authorities. For example, if a debtor owes $10,000, and reaches an out–of–court workout with a creditor for $4,000. The $6,000 difference between the original debt and the settlement is taxable debt relief income, which must be included in the Debtor’s tax return for the year in question.
To discuss the best strategies for dealing with your personal and business debt and to avoid judgments that will encumber your income and assets, please contact Jim Shenwick.
Although filing for Chapter 7 or Chapter 13 bankruptcy is usually the best solution for our clients, there are two alternatives to bankruptcy for debtors:
1. Do nothing. Although this isn’t really a viable solution, it’s a path commonly taken by debtors who think that inaction and time will make their debt magically disappear. In actuality, what will likely happen is that the creditor will commence an action against the debtor in civil court. If the action is not answered, a default judgment will be entered against the debtor. In New York State, a judgment is valid for 10 years (which can be renewed once for another 10 years), and can be enforced against a judgment debtor’s income and assets.
2. An out–of–court workout with the creditor. An out–of–court workout is a voluntary or consensual negotiation with the creditor to reduce the amount of debt the debtor owes to the creditor. In our experience, the biggest discounts can be gained by agreeing to pay the creditor a lump sum, rather than making monthly payments over a year to 18 months. The agreement between the creditor and the debtor should always be memorialized in writing, and should always provide fixed terms for payments (i.e. twelve payments of $500 made each month by the debtor to the creditor), rather than requiring payments in perpetuity from the debtor to the creditor.
There are a number of pros and cons to attempting an out–of–court workout:
Pros:
• The debtor can save the legal fees in filing a bankruptcy petition (which could range from $2,000-$4,000) and the Bankruptcy Court filing fees ($299 for a Chapter 7 case).
• A workout may be a less negative factor on the debtor’s credit report and lower their FICO score less than filing for bankruptcy would.
• A workout provides psychological relief to the debtor in not filing for bankruptcy and lessens the “embarrassment or failure” factor.
Cons:
• Bankruptcy provides a solution for all of a debtor’s creditors, but in an out–of–court workout, each creditor has to be negotiated with individually-what if an agreement can’t be reached with all creditors?
• Who will do the negotiating with the creditor-the debtor, a CPA or an attorney? (CPAs and attorneys will charge a fee for this work)
• It takes substantial time and effort to draft, review and revise and file the documents needed to expedite a workout: a settlement agreement, a release, a satisfaction of judgment and a stipulation of settlement or stipulation of discontinuance of the action (if the creditor has commenced litigation).
• Under § 108 of the Internal Revenue Code, debt relief is considered income and is taxable. This is “phantom income,” for which the creditor will have to file a Form 1099-R with taxing authorities. For example, if a debtor owes $10,000, and reaches an out–of–court workout with a creditor for $4,000. The $6,000 difference between the original debt and the settlement is taxable debt relief income, which must be included in the Debtor’s tax return for the year in question.
To discuss the best strategies for dealing with your personal and business debt and to avoid judgments that will encumber your income and assets, please contact Jim Shenwick.
Thursday, July 28, 2011
NYT: Saving on Real Estate In a Down Economy
By EILENE ZIMMERMAN
From 2009 to 2010, the commercial real estate market in the United States seemed bottomless. Whether seeking manufacturing, office or retail space, those looking to lease or buy were in the driver’s seat, said Fred Schmidt, president and chief operating officer for Coldwell Banker Commercial in Parsippany, N.J. After the supply of space hit a peak in the fourth quarter of 2010, he said, the market began a slow recovery — “but it’s definitely still a tenant’s and buyer’s market.”
Many small businesses have taken advantage of the market to negotiate more favorable lease terms or lower rents or to move to better space. Some were able to buy a building, a pipe dream for many in the prerecession real estate market. Still, putting together a deal requires timing, cash and market savvy. The best deals take time and tenacity, so start looking long before your lease expires, said Brian Netzky, president of Interstate Tenant Advisors in Lincolnwood, Ill. “Don’t be reactive, because then no matter what the economy is like, you’re in the worst position.”
Below are several examples of small-business owners who have taken advantage of one bright spot in a dark economy.
PAYING CASH UPFRONT Tired of paying rent for office space, Andrew E. Samalin called a broker last year and started looking for a building to buy. At the time, Mr. Samalin, a principal in an investment firm, Samalin Investment Counsel, was paying a high $4,500 a month for 700 square feet in suburban Mount Kisco, N.Y. In March 2010, he found a building in nearby Chappaqua that had been built in 1865 and needed work. The previous time it had been up for sale — at the height of the market — the asking price was $1.3 million. This time, Mr. Samalin saw an opportunity.
The seller would take only cash, so Mr. Samalin offered $600,000. After his offer was accepted, he put up $250,000 in cash for renovations. “I knew I could get the mortgage financing in place later,” he said, “but if I offered the cash upfront, I could get a really good price for the building.” The mortgage came after renovations were complete, because then it was less risky for the bank.
Mr. Samalin’s mortgage payment is now $3,500 a month. But he had enough extra room to take in a tenant, who pays $2,400 a month, reducing Mr. Samalin’s portion to $1,100. Because of the Small Business Jobs Act of 2010, the entire cost of the renovations was tax deductible. Mr. Samalin said he feels pride in owning a restored historical building, and his staff and clients love the space. “I consider this one of the greatest deals of my life,” he said.
NEGOTIATING AGGRESSIVELY Mark Censits, owner of an upscale wine, beer and spirits shop, CoolVines, wanted to move his Princeton, N.J., location — 350 square feet on the outskirts of town — to a bigger, better location. In 2007, when the market was still strong, he found 1,500 square feet in the center of town. The building’s opening was delayed for three years and by the time it was ready for tenants last fall, the market was tanking. “I was able to reopen discussions twice, each time negotiating more aggressively,” he said.
Because there were few creditworthy tenants bidding, Mr. Censits used CoolVines’ record of success — and the expectation that it would bring foot traffic — to persuade the landlord to lower the price from about $41 a square foot to $35.
The soft market also prompted Mr. Censits to move another location, this one in Westfield, N.J. “I knew if we were ever going to expand, this was the time to do it,” he said. The original Westfield store was 750 square feet and cost about $54 a square foot. Mr. Censits found a new location that offered 2,400 square feet downtown with parking, and is located between Williams-Sonoma and Banana Republic stores.
Feeling confident after the success of his Princeton negotiations, Mr. Censits started with a lowball offer of $33 a square foot; he got the space for $37, and the landlord agreed to freeze the rent for three years. After that, increases are limited to 2 percent annually for the seven years. “I also got him to do a significant amount of demolition to the place — probably $50,000 worth — so we could build it out the way we wanted,” Mr. Censits said.
PAYING LESS FOR MORE Three years ago, when the lease on his manufacturing facility was ending, Scott Pievac thought he was ready to buy new space for the Sam Pievac Company, which makes retail displays and fixtures and was founded by Mr. Pievac’s father. At the time, however, prices were high and inventory low, so he continued to rent in Santa Fe Springs, Calif.
This year, when he started shopping around again, he found few people wanted to sell in the middle of a downturn. But with the help of a broker, he located an old Firestone tire storage plant for sale in Chino, about 25 miles away. The price was $65 a square foot, a great deal, he said. “That building would have been $100 a square foot five years ago. It had been on the market a week, and they had five offers.”
Several factors converged in Mr. Pievac’s favor. His broker introduced him to the broker representing the sellers, and they found they had mutual friends. The Sam Pievac Company had been in business 50 years and was financially stable, making it an attractive candidate.
In addition, the Small Business Administration increased its lending limit on loans for the acquisition of fixed assets in 2011 to $5 million, which helped Mr. Pievac arrange the financing he needed. The total cost of the building with improvements was $7.2 million. The company moved into the new warehouse space in April, and the office space will be ready this week.
Mr. Pievac’s rent used to be $42,000 a month; now, he has more space, owns the building and pays $40,000 a month.
FINDING COMFORTABLE SPACE In early 2010, the employees of M. Studio, a design and branding agency, were spilling out of their northern New Jersey offices. Jenna Zilincar, a founder and creative director, said four people were crammed into 800 square feet that they called “the hamster cage.”
Ms. Zilincar wanted to move closer to her clients and was able to find several affordable options in Asbury Park that had not been available a year earlier. One space was triple the size of M Studio’s previous office. The space needed modifying, Ms. Zilincar said, but she got the landlord to put up walls and take out doors, creating offices and a conference room. Ms. Zilincar was also able to sublease two small offices she did not need, substantially reducing her monthly costs.
Now, M Studio has five people working full-time in an open space. The office has a waiting area, a conference room and a kitchen. Ms. Zilincar also got the landlord to put in hardwood floors, outside lighting, air-conditioning and baseboard heating. She and her broker negotiated a slightly lower rent than the asking price, no increases for a year and a half and a $50 increase for the 18 months after that. If she renews for another three years, the increase will be 5 percent.
Ms. Zilincar believes the new space has helped her close deals. “People’s level of comfort went up because this space is more legitimate,” she said. “We don’t have to meet clients in coffee shops anymore.”
Copyright 2011 The New York Times Company. All rights reserved.
From 2009 to 2010, the commercial real estate market in the United States seemed bottomless. Whether seeking manufacturing, office or retail space, those looking to lease or buy were in the driver’s seat, said Fred Schmidt, president and chief operating officer for Coldwell Banker Commercial in Parsippany, N.J. After the supply of space hit a peak in the fourth quarter of 2010, he said, the market began a slow recovery — “but it’s definitely still a tenant’s and buyer’s market.”
Many small businesses have taken advantage of the market to negotiate more favorable lease terms or lower rents or to move to better space. Some were able to buy a building, a pipe dream for many in the prerecession real estate market. Still, putting together a deal requires timing, cash and market savvy. The best deals take time and tenacity, so start looking long before your lease expires, said Brian Netzky, president of Interstate Tenant Advisors in Lincolnwood, Ill. “Don’t be reactive, because then no matter what the economy is like, you’re in the worst position.”
Below are several examples of small-business owners who have taken advantage of one bright spot in a dark economy.
PAYING CASH UPFRONT Tired of paying rent for office space, Andrew E. Samalin called a broker last year and started looking for a building to buy. At the time, Mr. Samalin, a principal in an investment firm, Samalin Investment Counsel, was paying a high $4,500 a month for 700 square feet in suburban Mount Kisco, N.Y. In March 2010, he found a building in nearby Chappaqua that had been built in 1865 and needed work. The previous time it had been up for sale — at the height of the market — the asking price was $1.3 million. This time, Mr. Samalin saw an opportunity.
The seller would take only cash, so Mr. Samalin offered $600,000. After his offer was accepted, he put up $250,000 in cash for renovations. “I knew I could get the mortgage financing in place later,” he said, “but if I offered the cash upfront, I could get a really good price for the building.” The mortgage came after renovations were complete, because then it was less risky for the bank.
Mr. Samalin’s mortgage payment is now $3,500 a month. But he had enough extra room to take in a tenant, who pays $2,400 a month, reducing Mr. Samalin’s portion to $1,100. Because of the Small Business Jobs Act of 2010, the entire cost of the renovations was tax deductible. Mr. Samalin said he feels pride in owning a restored historical building, and his staff and clients love the space. “I consider this one of the greatest deals of my life,” he said.
NEGOTIATING AGGRESSIVELY Mark Censits, owner of an upscale wine, beer and spirits shop, CoolVines, wanted to move his Princeton, N.J., location — 350 square feet on the outskirts of town — to a bigger, better location. In 2007, when the market was still strong, he found 1,500 square feet in the center of town. The building’s opening was delayed for three years and by the time it was ready for tenants last fall, the market was tanking. “I was able to reopen discussions twice, each time negotiating more aggressively,” he said.
Because there were few creditworthy tenants bidding, Mr. Censits used CoolVines’ record of success — and the expectation that it would bring foot traffic — to persuade the landlord to lower the price from about $41 a square foot to $35.
The soft market also prompted Mr. Censits to move another location, this one in Westfield, N.J. “I knew if we were ever going to expand, this was the time to do it,” he said. The original Westfield store was 750 square feet and cost about $54 a square foot. Mr. Censits found a new location that offered 2,400 square feet downtown with parking, and is located between Williams-Sonoma and Banana Republic stores.
Feeling confident after the success of his Princeton negotiations, Mr. Censits started with a lowball offer of $33 a square foot; he got the space for $37, and the landlord agreed to freeze the rent for three years. After that, increases are limited to 2 percent annually for the seven years. “I also got him to do a significant amount of demolition to the place — probably $50,000 worth — so we could build it out the way we wanted,” Mr. Censits said.
PAYING LESS FOR MORE Three years ago, when the lease on his manufacturing facility was ending, Scott Pievac thought he was ready to buy new space for the Sam Pievac Company, which makes retail displays and fixtures and was founded by Mr. Pievac’s father. At the time, however, prices were high and inventory low, so he continued to rent in Santa Fe Springs, Calif.
This year, when he started shopping around again, he found few people wanted to sell in the middle of a downturn. But with the help of a broker, he located an old Firestone tire storage plant for sale in Chino, about 25 miles away. The price was $65 a square foot, a great deal, he said. “That building would have been $100 a square foot five years ago. It had been on the market a week, and they had five offers.”
Several factors converged in Mr. Pievac’s favor. His broker introduced him to the broker representing the sellers, and they found they had mutual friends. The Sam Pievac Company had been in business 50 years and was financially stable, making it an attractive candidate.
In addition, the Small Business Administration increased its lending limit on loans for the acquisition of fixed assets in 2011 to $5 million, which helped Mr. Pievac arrange the financing he needed. The total cost of the building with improvements was $7.2 million. The company moved into the new warehouse space in April, and the office space will be ready this week.
Mr. Pievac’s rent used to be $42,000 a month; now, he has more space, owns the building and pays $40,000 a month.
FINDING COMFORTABLE SPACE In early 2010, the employees of M. Studio, a design and branding agency, were spilling out of their northern New Jersey offices. Jenna Zilincar, a founder and creative director, said four people were crammed into 800 square feet that they called “the hamster cage.”
Ms. Zilincar wanted to move closer to her clients and was able to find several affordable options in Asbury Park that had not been available a year earlier. One space was triple the size of M Studio’s previous office. The space needed modifying, Ms. Zilincar said, but she got the landlord to put up walls and take out doors, creating offices and a conference room. Ms. Zilincar was also able to sublease two small offices she did not need, substantially reducing her monthly costs.
Now, M Studio has five people working full-time in an open space. The office has a waiting area, a conference room and a kitchen. Ms. Zilincar also got the landlord to put in hardwood floors, outside lighting, air-conditioning and baseboard heating. She and her broker negotiated a slightly lower rent than the asking price, no increases for a year and a half and a $50 increase for the 18 months after that. If she renews for another three years, the increase will be 5 percent.
Ms. Zilincar believes the new space has helped her close deals. “People’s level of comfort went up because this space is more legitimate,” she said. “We don’t have to meet clients in coffee shops anymore.”
Copyright 2011 The New York Times Company. All rights reserved.
Wednesday, July 27, 2011
Same-sex marriage, real estate and bankruptcy
Here at Shenwick & Associates, we have been following last month's passage by the New York Legislature and signing into law by Governor Cuomo of the Marriage Equality Act ("the Act"), which became effective on July 24, 2011. This law formally recognizes otherwise-valid marriages without regard to whether the parties to the marriage are of the same or different sex.
Besides simply allowing same-sex couples to marry, we are studying the impact of the Act on our twin practices of real estate and bankruptcy:
1. Under New York law, married couples are allowed to own real property as tenants by the entirety. Tenants by the entirety is a special type of joint tenancy with rights of survivorship (which means that when one owner dies, then the surviving owner or owners will continue to own the asset and the estate and heirs of the deceased owner will receive nothing). Real property owned as tenants by the entirety receives extra protection from creditors. As a leading case describes it:
"[t]he law in New York clearly permits a [spouse]'s interest in a
tenancy by the entirety to be sold under execution upon a judgment against him [or her]. The purchaser at such sale becomes a tenant in common with the debtor's [spouse], subject to [his or] her right of survivorship and is entitled to share in the rents and profits, but not the occupancy." In re Weiss, 4 B.R. 327, 330 (S.D.N.Y. 1980) (citations omitted).
So a creditor can execute a judgment against a debtor spouse's interest in real property, but cannot foreclose on or take occupancy of that debtor spouse's interest.
Presumably same-sex couples who wed in New York (or who have already entered into same-sex marriages in other states that allow it) after the Act becomes effective and take ownership to property will be able to take ownership as tenants by the entirety rather than as tenants in common. Also, same-sex couples who had acquired property as tenants in common could then convey the property to each other as tenants by the entirety after their marriage. Although there is no specific language to this effect, Section 2 of the Act clearly states:
"It is the intent of the legislature that the marriages of same-sex and different-sex couples be treated equally in all respects under the law. The omission from this act of changes to other provisions of law shall not be construed as a legislative intent to preserve any legal distinction between same-sex couples and different-sex couples with respect to marriage."
2. Under federal bankruptcy law and the New York Civil Practice Law and Rules and Debtor and Creditor Law, married debtors can file a joint bankruptcy petition.
Section 302(a) of the Bankruptcy Code provides that "[a} joint case under a chapter of this title is commenced by the filing with the bankruptcy court of a single petition under such chapter by an individual that may be a debtor under such chapter and such individual's spouse." And although New York law does not specifically mention joint debts, all exemptions in personal bankruptcy and from money judgments are "per person."
However, the federal Defense of Marriage Act ("DOMA"), enacted in 1996, defines marriage as a legal union between one man and one woman. Section 3 of DOMA prevents the federal government from recognizing the validity of same-sex marriages.
Although the constitutionality of DOMA is being challenged in federal court and President Obama is supporting a bill to repeal DOMA, for now it is still valid law. But last month, in In re Balas, the Bankruptcy Court for the Central District of California denied the United States Trustee ("UST")'s motion to dismiss the joint Chapter 13 petition of two males who were lawfully married under California law when they filed their joint petition. In denying the UST's motion to dismiss, the Court stated "[i]n this court's judgment, no legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple."
Although this holding is specific to the parties to the case, it's significant that the House Bipartisan Legal Advisory Group, which is leading Congressional efforts to defend DOMA, stated that they would not appeal the ruling to the 9th Circuit Court of Appeals. While it cannot be used as mandatory authority by same-sex couples who are lawfully wed under state law and seeking to file joint bankruptcy petitions, it can certainly be used as persuasive authority to do so.
For more information about the complex intersection of bankruptcy, real estate and same-sex marriage rights, please contact Jim Shenwick.
Besides simply allowing same-sex couples to marry, we are studying the impact of the Act on our twin practices of real estate and bankruptcy:
1. Under New York law, married couples are allowed to own real property as tenants by the entirety. Tenants by the entirety is a special type of joint tenancy with rights of survivorship (which means that when one owner dies, then the surviving owner or owners will continue to own the asset and the estate and heirs of the deceased owner will receive nothing). Real property owned as tenants by the entirety receives extra protection from creditors. As a leading case describes it:
"[t]he law in New York clearly permits a [spouse]'s interest in a
tenancy by the entirety to be sold under execution upon a judgment against him [or her]. The purchaser at such sale becomes a tenant in common with the debtor's [spouse], subject to [his or] her right of survivorship and is entitled to share in the rents and profits, but not the occupancy." In re Weiss, 4 B.R. 327, 330 (S.D.N.Y. 1980) (citations omitted).
So a creditor can execute a judgment against a debtor spouse's interest in real property, but cannot foreclose on or take occupancy of that debtor spouse's interest.
Presumably same-sex couples who wed in New York (or who have already entered into same-sex marriages in other states that allow it) after the Act becomes effective and take ownership to property will be able to take ownership as tenants by the entirety rather than as tenants in common. Also, same-sex couples who had acquired property as tenants in common could then convey the property to each other as tenants by the entirety after their marriage. Although there is no specific language to this effect, Section 2 of the Act clearly states:
"It is the intent of the legislature that the marriages of same-sex and different-sex couples be treated equally in all respects under the law. The omission from this act of changes to other provisions of law shall not be construed as a legislative intent to preserve any legal distinction between same-sex couples and different-sex couples with respect to marriage."
2. Under federal bankruptcy law and the New York Civil Practice Law and Rules and Debtor and Creditor Law, married debtors can file a joint bankruptcy petition.
Section 302(a) of the Bankruptcy Code provides that "[a} joint case under a chapter of this title is commenced by the filing with the bankruptcy court of a single petition under such chapter by an individual that may be a debtor under such chapter and such individual's spouse." And although New York law does not specifically mention joint debts, all exemptions in personal bankruptcy and from money judgments are "per person."
However, the federal Defense of Marriage Act ("DOMA"), enacted in 1996, defines marriage as a legal union between one man and one woman. Section 3 of DOMA prevents the federal government from recognizing the validity of same-sex marriages.
Although the constitutionality of DOMA is being challenged in federal court and President Obama is supporting a bill to repeal DOMA, for now it is still valid law. But last month, in In re Balas, the Bankruptcy Court for the Central District of California denied the United States Trustee ("UST")'s motion to dismiss the joint Chapter 13 petition of two males who were lawfully married under California law when they filed their joint petition. In denying the UST's motion to dismiss, the Court stated "[i]n this court's judgment, no legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple."
Although this holding is specific to the parties to the case, it's significant that the House Bipartisan Legal Advisory Group, which is leading Congressional efforts to defend DOMA, stated that they would not appeal the ruling to the 9th Circuit Court of Appeals. While it cannot be used as mandatory authority by same-sex couples who are lawfully wed under state law and seeking to file joint bankruptcy petitions, it can certainly be used as persuasive authority to do so.
For more information about the complex intersection of bankruptcy, real estate and same-sex marriage rights, please contact Jim Shenwick.
Tuesday, July 12, 2011
NYT: Bank's Deal Means More Will Lose Their Homes
By NELSON D. SCHWARTZ
Tens of thousands of Bank of America’s most distressed borrowers could be evicted and lose their homes more quickly as a result of a proposed settlement between the bank, which is the country’s largest mortgage servicer, and investors in its troubled mortgage securities.
For struggling borrowers in better financial shape, the outcome could be more positive: the deal would include incentives for mortgage servicers to help homeowners who have fallen behind on their payments and whose homes are worth less than they borrowed.
“The goal is to reinstate as many borrowers in a modification that performs well,” said Tony Meola, a servicing executive with Bank of America. “It also is likely to lead to faster resolution in those unfortunate situations where foreclosure is inevitable. While not a desirable outcome, the recovery of the housing markets depends on moving through the foreclosure process as quickly and fairly as possible.”
While powerful investors stand to benefit from the $8.5 billion settlement over the bank’s bundling of shoddy mortgages as securities, the fallout for the nearly 275,000 borrowers who took out those loans depends greatly on how deep they are in the foreclosure process and whether they earn enough money to dig themselves out.
While no exact income qualification has been set as part of the agreement, which was announced last month, many servicers use a formula in which borrowers can qualify for a modification as long as the new monthly payment does not exceed 31 percent of their monthly gross income. For borrowers who are unemployed or lack the income to cover even reduced mortgage payments, foreclosure and eviction could be much more immediate.
With 1.3 million borrowers at risk of foreclosure, Bank of America has been overwhelmed by the surge in defaults, and the accord has raised hopes that this logjam will finally begin to ease. But skeptics say that previous arrangements, like another multibillion-dollar settlement by Bank of America in 2008, have barely made a dent in the problem.
“The mortgage servicers have repeatedly promised to do things and then not done them,” said Michael S. Barr, a former assistant Treasury secretary who now teaches law at the University of Michigan. “I think it’s positive in general, but I don’t expect it to be transformative of what we’ve witnessed from the mortgage servicers over the last four years.”
Matthew Weidner, a Florida lawyer who represents borrowers facing foreclosure, said he was skeptical of promises by the deal’s architects that lower monthly payments would be easier to obtain.
“It’s like giving aspirin to someone with cancer,” he said of the proposed assistance. “You had all the big players at the top of the pyramid negotiating but nobody was speaking for the homeowners who have far more at stake at the ground level.”
Still, for some of the homeowners now facing foreclosure who took out loans with Countrywide, the subprime specialist bought by Bank of America in 2008, the deal could bring a few quick improvements.
Under the terms of the agreement, Bank of America must now start transferring these borrowers to 10 smaller outside servicers, even without the deal being approved in court, which is not expected before November. The architects of the settlement say these subservicers will be far more efficient than Bank of America’s giant payment processing operation.
For example, an analysis of data by RBS prepared as part of the settlement found that Bank of America provided fewer modifications as a percentage of unpaid principal than JPMorgan Chase, Wells Fargo, Litton and other servicers. In addition, borrowers defaulted again within six months in nearly one in five cases when modifications were made by Bank of America, a higher rate than other servicers that were studied.
Officials at Bank of America contend the company has made nearly 875,000 modifications since 2008, more than any other servicer.
Under the new proposal, subservicers will have to provide an answer to homeowner modification requests within 60 days of receiving paperwork, and will get up to 1.5 percent of the unpaid principal balance as an incentive fee for each successful permanent modification.
“We wanted smaller, high-touch servicers who would consider every modification option at once, not try this and that,” said Kathy D. Patrick, a Houston lawyer who represented the 22 private investors in the settlement. “Servicers get more in fees for successful modifications than for any other kind of workout, including foreclosure.”
The first homeowners should be transferred out of Bank of America by early fall, with each of the 10 subservicers taking up to 30,000 cases. Borrowers with mortgages 60 days past due who have been delinquent more than once in the last 12 months will receive priority in the switch, followed by homeowners who are 90 days past due but not in foreclosure.
Homeowners already in foreclosure or who have been declared bankrupt will go to the back of the line, although they will also eventually be transferred, Ms. Patrick said. More than 75 percent of the nearly 275,000 delinquent homeowners have not made a payment in more than 120 days or are already in foreclosure.
One unintended consequence of the problems at Bank of America and other large servicers is that many borrowers have managed to remain in their homes despite being in default, and without the income to qualify for a modification. At the time of foreclosure, the typical Bank of America borrower has not made a payment in 18 months.
What is more, according to the analysis of RBS data, it takes 30 months on average for a subprime borrower’s property to move from foreclosure to a final sale with Bank of America, nearly a year longer than Wells Fargo, and 10 months longer than SPS, a smaller subservicer likely to be among the 10 selected to take over the former Countrywide loans.
“Countrywide made a lot of bad loans and borrowers with no money can’t afford a modification,” said Peter Swire, a former special assistant for housing policy in the Obama administration who helped oversee earlier federal efforts to promote modifications. He is now a professor at Ohio State University. “One discouraging problem is that only a small fraction of Countrywide borrowers will likely qualify,” Professor Swire said.
Delores Gosha hopes she will be one of the lucky ones.
It has been more than a year since she last made a mortgage payment to Bank of America, raising the risk that her bungalow in the Cleveland suburbs will end up in foreclosure. The bank, she says, has given varying answers as to whether she qualifies for a modification, telling her she did not at one point last week only to reverse course days later and say it was still under consideration. Ms. Gosha said she had had to deal with a multitude of representatives and submit the same documents over and over.
While a new servicer might not give her the answer she has been praying for, she said, at least she will get an answer.
“I’ve been up and down,” said Ms. Gosha, who is a clerk at a Cleveland hospital. “Can’t somebody tell me something?”
Copyright 2011 The New York Times Company. All rights reserved.
Tens of thousands of Bank of America’s most distressed borrowers could be evicted and lose their homes more quickly as a result of a proposed settlement between the bank, which is the country’s largest mortgage servicer, and investors in its troubled mortgage securities.
For struggling borrowers in better financial shape, the outcome could be more positive: the deal would include incentives for mortgage servicers to help homeowners who have fallen behind on their payments and whose homes are worth less than they borrowed.
“The goal is to reinstate as many borrowers in a modification that performs well,” said Tony Meola, a servicing executive with Bank of America. “It also is likely to lead to faster resolution in those unfortunate situations where foreclosure is inevitable. While not a desirable outcome, the recovery of the housing markets depends on moving through the foreclosure process as quickly and fairly as possible.”
While powerful investors stand to benefit from the $8.5 billion settlement over the bank’s bundling of shoddy mortgages as securities, the fallout for the nearly 275,000 borrowers who took out those loans depends greatly on how deep they are in the foreclosure process and whether they earn enough money to dig themselves out.
While no exact income qualification has been set as part of the agreement, which was announced last month, many servicers use a formula in which borrowers can qualify for a modification as long as the new monthly payment does not exceed 31 percent of their monthly gross income. For borrowers who are unemployed or lack the income to cover even reduced mortgage payments, foreclosure and eviction could be much more immediate.
With 1.3 million borrowers at risk of foreclosure, Bank of America has been overwhelmed by the surge in defaults, and the accord has raised hopes that this logjam will finally begin to ease. But skeptics say that previous arrangements, like another multibillion-dollar settlement by Bank of America in 2008, have barely made a dent in the problem.
“The mortgage servicers have repeatedly promised to do things and then not done them,” said Michael S. Barr, a former assistant Treasury secretary who now teaches law at the University of Michigan. “I think it’s positive in general, but I don’t expect it to be transformative of what we’ve witnessed from the mortgage servicers over the last four years.”
Matthew Weidner, a Florida lawyer who represents borrowers facing foreclosure, said he was skeptical of promises by the deal’s architects that lower monthly payments would be easier to obtain.
“It’s like giving aspirin to someone with cancer,” he said of the proposed assistance. “You had all the big players at the top of the pyramid negotiating but nobody was speaking for the homeowners who have far more at stake at the ground level.”
Still, for some of the homeowners now facing foreclosure who took out loans with Countrywide, the subprime specialist bought by Bank of America in 2008, the deal could bring a few quick improvements.
Under the terms of the agreement, Bank of America must now start transferring these borrowers to 10 smaller outside servicers, even without the deal being approved in court, which is not expected before November. The architects of the settlement say these subservicers will be far more efficient than Bank of America’s giant payment processing operation.
For example, an analysis of data by RBS prepared as part of the settlement found that Bank of America provided fewer modifications as a percentage of unpaid principal than JPMorgan Chase, Wells Fargo, Litton and other servicers. In addition, borrowers defaulted again within six months in nearly one in five cases when modifications were made by Bank of America, a higher rate than other servicers that were studied.
Officials at Bank of America contend the company has made nearly 875,000 modifications since 2008, more than any other servicer.
Under the new proposal, subservicers will have to provide an answer to homeowner modification requests within 60 days of receiving paperwork, and will get up to 1.5 percent of the unpaid principal balance as an incentive fee for each successful permanent modification.
“We wanted smaller, high-touch servicers who would consider every modification option at once, not try this and that,” said Kathy D. Patrick, a Houston lawyer who represented the 22 private investors in the settlement. “Servicers get more in fees for successful modifications than for any other kind of workout, including foreclosure.”
The first homeowners should be transferred out of Bank of America by early fall, with each of the 10 subservicers taking up to 30,000 cases. Borrowers with mortgages 60 days past due who have been delinquent more than once in the last 12 months will receive priority in the switch, followed by homeowners who are 90 days past due but not in foreclosure.
Homeowners already in foreclosure or who have been declared bankrupt will go to the back of the line, although they will also eventually be transferred, Ms. Patrick said. More than 75 percent of the nearly 275,000 delinquent homeowners have not made a payment in more than 120 days or are already in foreclosure.
One unintended consequence of the problems at Bank of America and other large servicers is that many borrowers have managed to remain in their homes despite being in default, and without the income to qualify for a modification. At the time of foreclosure, the typical Bank of America borrower has not made a payment in 18 months.
What is more, according to the analysis of RBS data, it takes 30 months on average for a subprime borrower’s property to move from foreclosure to a final sale with Bank of America, nearly a year longer than Wells Fargo, and 10 months longer than SPS, a smaller subservicer likely to be among the 10 selected to take over the former Countrywide loans.
“Countrywide made a lot of bad loans and borrowers with no money can’t afford a modification,” said Peter Swire, a former special assistant for housing policy in the Obama administration who helped oversee earlier federal efforts to promote modifications. He is now a professor at Ohio State University. “One discouraging problem is that only a small fraction of Countrywide borrowers will likely qualify,” Professor Swire said.
Delores Gosha hopes she will be one of the lucky ones.
It has been more than a year since she last made a mortgage payment to Bank of America, raising the risk that her bungalow in the Cleveland suburbs will end up in foreclosure. The bank, she says, has given varying answers as to whether she qualifies for a modification, telling her she did not at one point last week only to reverse course days later and say it was still under consideration. Ms. Gosha said she had had to deal with a multitude of representatives and submit the same documents over and over.
While a new servicer might not give her the answer she has been praying for, she said, at least she will get an answer.
“I’ve been up and down,” said Ms. Gosha, who is a clerk at a Cleveland hospital. “Can’t somebody tell me something?”
Copyright 2011 The New York Times Company. All rights reserved.
Thursday, July 07, 2011
NYT: Fewer Americans File for Bankruptcy as Debt Woes Ease
By TARA SIEGEL BERNARD
After steadily climbing for several years, the number of Americans filing for bankruptcy is on the decline, though that is not necessarily an indicator of an improving economy.
The number of bankruptcy filings in June was 120,623, or an average of 5,483 a day, a drop of 6.2 percent from May, when filings totaled 122,775, or 5,846 a day, according to a report from Epiq Systems, which tracks bankruptcy filings. There was one additional day to file in June compared with May. Average daily filings are down nearly 10 percent from June of last year.
Though economic factors like foreclosures and unemployment play a role in bankruptcy, over the long run, the filing rate tends to be more closely tethered to the amount of outstanding consumer debt.
Access to credit, however, can influence the bankruptcy rate over the shorter term: as lenders tighten their standards, filings tend to rise because struggling consumers can no longer rely on credit cards or other loans to get them through a rough period. But when more new loans are being made, filings tend to fall — at least for a while.
“There is a lot of mythology about what drives bankruptcy rates,” said Robert M. Lawless, a professor at the University of Illinois College of Law who specializes in bankruptcy. “But consumer credit appears to be the most significant indicator.”
Over all, he said he expected filings to decline 5 to 10 percent this year, leveling off at about 1.46 million, largely because consumers have slightly more access to credit now than in recent years. But he also said that consumers had taken on less debt in the past three years, which means there is less debt to discharge and fewer incentives to file bankruptcy.
That estimate compares with about 1.56 million bankruptcy filings in 2010 and nearly 1.45 million in 2009. Filings surpassed two million in 2005, when many people rushed to declare bankruptcy before a new law went into effect that made it more difficult, and significantly more expensive, to file.
There have been 731,237 filings this year. “If they keep going the way they were,” Professor Lawless said, “bankruptcy filings will keep going down a little bit.”
So far this year, the vast majority of the bankruptcy cases — nearly 70 percent — were Chapter 7 filings, which provide individuals with the proverbial “fresh start” because their debts are forgiven. (To qualify, filers need to pass a means test to determine whether they are unable to repay their debts.)
In contrast, a Chapter 13 filing requires individuals to use their disposable income to pay back a portion of their debts through a three- or five-year repayment plan. Some people choose Chapter 13 because it allows them to save their primary homes from foreclosure, though they are required to catch up on their mortgage payments. Slightly more than 27 percent were Chapter 13 filings. (The remainder were mostly commercial filings.) The overall split between Chapter 7 and Chapter 13 filings is consistent with last year’s ratio.
While the overall number of bankruptcy filings was down last month, there were variations from state to state. For instance, filings in Georgia rose 13 percent and were up 33 percent in Delaware, compared with May. But filings in Wyoming fell 30 percent, in South Dakota 21 percent, in West Virginia 18 percent and in Wisconsin 17 percent.
In both New York and New Jersey, the number of bankruptcy cases dropped by 5 percent.
Copyright 2011 The New York Times Company. All rights reserved.
After steadily climbing for several years, the number of Americans filing for bankruptcy is on the decline, though that is not necessarily an indicator of an improving economy.
The number of bankruptcy filings in June was 120,623, or an average of 5,483 a day, a drop of 6.2 percent from May, when filings totaled 122,775, or 5,846 a day, according to a report from Epiq Systems, which tracks bankruptcy filings. There was one additional day to file in June compared with May. Average daily filings are down nearly 10 percent from June of last year.
Though economic factors like foreclosures and unemployment play a role in bankruptcy, over the long run, the filing rate tends to be more closely tethered to the amount of outstanding consumer debt.
Access to credit, however, can influence the bankruptcy rate over the shorter term: as lenders tighten their standards, filings tend to rise because struggling consumers can no longer rely on credit cards or other loans to get them through a rough period. But when more new loans are being made, filings tend to fall — at least for a while.
“There is a lot of mythology about what drives bankruptcy rates,” said Robert M. Lawless, a professor at the University of Illinois College of Law who specializes in bankruptcy. “But consumer credit appears to be the most significant indicator.”
Over all, he said he expected filings to decline 5 to 10 percent this year, leveling off at about 1.46 million, largely because consumers have slightly more access to credit now than in recent years. But he also said that consumers had taken on less debt in the past three years, which means there is less debt to discharge and fewer incentives to file bankruptcy.
That estimate compares with about 1.56 million bankruptcy filings in 2010 and nearly 1.45 million in 2009. Filings surpassed two million in 2005, when many people rushed to declare bankruptcy before a new law went into effect that made it more difficult, and significantly more expensive, to file.
There have been 731,237 filings this year. “If they keep going the way they were,” Professor Lawless said, “bankruptcy filings will keep going down a little bit.”
So far this year, the vast majority of the bankruptcy cases — nearly 70 percent — were Chapter 7 filings, which provide individuals with the proverbial “fresh start” because their debts are forgiven. (To qualify, filers need to pass a means test to determine whether they are unable to repay their debts.)
In contrast, a Chapter 13 filing requires individuals to use their disposable income to pay back a portion of their debts through a three- or five-year repayment plan. Some people choose Chapter 13 because it allows them to save their primary homes from foreclosure, though they are required to catch up on their mortgage payments. Slightly more than 27 percent were Chapter 13 filings. (The remainder were mostly commercial filings.) The overall split between Chapter 7 and Chapter 13 filings is consistent with last year’s ratio.
While the overall number of bankruptcy filings was down last month, there were variations from state to state. For instance, filings in Georgia rose 13 percent and were up 33 percent in Delaware, compared with May. But filings in Wyoming fell 30 percent, in South Dakota 21 percent, in West Virginia 18 percent and in Wisconsin 17 percent.
In both New York and New Jersey, the number of bankruptcy cases dropped by 5 percent.
Copyright 2011 The New York Times Company. All rights reserved.
Thursday, June 30, 2011
Possible implications of CFTC v. Walsh for divorced couples in bankruptcy
Here at Shenwick & Associates, clients with a variety of marital statuses seek our bankruptcy counsel–single, married, in the process of divorce, filing individually or jointly. Each variation requires the analysis and creativity of sophisticated bankruptcy counsel to avoid potential pitfalls in the process.
On June 23, 2011, in CFTC v. Walsh, the New York State Court of Appeals ruled that a woman could keep proceeds from a divorce agreement, even though those proceeds were the ill-gotten gains of a financial fraud perpetrated by her former husband. In February 2009, federal authorities arrested Stephen Walsh and his business partner Paul Greenwood. According to an article on the case in the New York Times, they were charged with defrauding investors of more than $550 million in a 13 year Ponzi scheme. Although the government did not accuse Ms. Schaberg (the wife of Mr. Walsh) of participating in a crime, they still sought to recover the money she received from her husband in her divorce settlement agreement.
The Court of Appeals ruled that ex-spouses have a reasonable expectation that once their marriage has been dissolved and their property divided, they will be free to move on with their lives. Ms. Schaberg's lawyer argued that once the couple had divided their marital property and signed a divorce settlement agreement, the government could not force her to disgorge what were her rightful proceeds.
Similar principles may also apply in personal bankruptcy and buttress the argument that marital property divided by a divorcing couple, pursuant to a divorce decree in New York State, would not be subject to fraudulent conveyance or other "clawback" actions by a Bankruptcy Trustee if a spouse filed for chapter 7 bankruptcy after the divorce proceeding.
Accordingly, let's assume that a couple with two young children were having marital problems, the husband has substantial debts, cash and stock and the couple owns a house that has appreciated in value. The couple decides that as part of their divorce, the husband will deed the house to his wife and transfer a substantial amount of the stock and cash to his wife pursuant to the divorce decree for support and maintenance. The husband then waits three months and files for Chapter 7 bankruptcy to liquidate his debts and obtain a discharge.
Following the Court of Appeals' holding in CFTC v. Walsh, a Bankruptcy Trustee should not be able to challenge the transfer of the house and assets to his ex-wife, thereby making those assets non-exempt or unreachable by the husband's creditors or the Bankruptcy Trustee. Clients with questions regarding bankruptcy and divorce should contact Jim Shenwick.
On June 23, 2011, in CFTC v. Walsh, the New York State Court of Appeals ruled that a woman could keep proceeds from a divorce agreement, even though those proceeds were the ill-gotten gains of a financial fraud perpetrated by her former husband. In February 2009, federal authorities arrested Stephen Walsh and his business partner Paul Greenwood. According to an article on the case in the New York Times, they were charged with defrauding investors of more than $550 million in a 13 year Ponzi scheme. Although the government did not accuse Ms. Schaberg (the wife of Mr. Walsh) of participating in a crime, they still sought to recover the money she received from her husband in her divorce settlement agreement.
The Court of Appeals ruled that ex-spouses have a reasonable expectation that once their marriage has been dissolved and their property divided, they will be free to move on with their lives. Ms. Schaberg's lawyer argued that once the couple had divided their marital property and signed a divorce settlement agreement, the government could not force her to disgorge what were her rightful proceeds.
Similar principles may also apply in personal bankruptcy and buttress the argument that marital property divided by a divorcing couple, pursuant to a divorce decree in New York State, would not be subject to fraudulent conveyance or other "clawback" actions by a Bankruptcy Trustee if a spouse filed for chapter 7 bankruptcy after the divorce proceeding.
Accordingly, let's assume that a couple with two young children were having marital problems, the husband has substantial debts, cash and stock and the couple owns a house that has appreciated in value. The couple decides that as part of their divorce, the husband will deed the house to his wife and transfer a substantial amount of the stock and cash to his wife pursuant to the divorce decree for support and maintenance. The husband then waits three months and files for Chapter 7 bankruptcy to liquidate his debts and obtain a discharge.
Following the Court of Appeals' holding in CFTC v. Walsh, a Bankruptcy Trustee should not be able to challenge the transfer of the house and assets to his ex-wife, thereby making those assets non-exempt or unreachable by the husband's creditors or the Bankruptcy Trustee. Clients with questions regarding bankruptcy and divorce should contact Jim Shenwick.
Wednesday, June 29, 2011
Friday, June 24, 2011
NYT: Court Says Ex-Wife May Retain Ponzi Scheme Money
By PETER LATTMAN
J.B. Nicholas/Bloomberg News
The Ponzi schemes that came to light during the depths of the financial crisis have spawned various lawsuits seeking to claw back money from divorce agreements.
The Ponzi schemes that came to light during the depths of the financial crisis have spawned various lawsuits seeking to claw back money from divorce agreements.
Now, in one case, a court has said: Hands off.
On Thursday, New York’s highest court ruled that a woman could keep proceeds from a divorce agreement, even if those proceeds were the ill-gotten gains of a financial fraud perpetrated by her former husband.
The decision is a blow to the federal government, which is seeking to force the woman to disgorge what it says are millions of dollars in stolen money.
“Ex-spouses have a reasonable expectation that, once their marriage has been dissolved and their property divided, they will be free to move on with their lives,” said Judge Victoria A. Graffeo, writing for the New York State Court of Appeals.
The federal appeals court in Manhattan, which had asked the New York State court for guidance on the case, is now expected to prevent the federal government from seizing the woman’s assets.
Thursday’s ruling could also affect other divorce cases, like some involving victims of Bernard L. Madoff’s huge Ponzi scheme.
The New York State Court of Appeals is hearing a case brought by a man seeking to rescind his divorce settlement with his ex-wife because a large chunk of the marital proceeds were in a Madoff account.
The husband, Steven Simkin, kept much of his money with Mr. Madoff after the divorce; his wife, Laura Blank, received cash. After losing the bulk of his assets in the Madoff fraud, Mr. Simkin now wants to rewrite their divorce agreement.
In Massachusetts, a Madoff victim has also sued his ex-wife to revise their separation pact. A family court judge dismissed the lawsuit this month, and the plaintiff’s lawyer has appealed.
Thursday’s ruling in New York involves Janet Schaberg, 55 years old, the former wife of Stephen Walsh, a former executive at WG Trading, a commodities firm in Greenwich, Conn.
In February 2009, federal authorities arrested Mr. Walsh and his business partner, Paul Greenwood, on charges that they had defrauded investors of more than $550 million in a 13-year Ponzi scheme.
Mr. Greenwood pleaded guilty last year; Mr. Walsh is fighting the case.
Although the government did not accuse Ms. Schaberg of having any knowledge or participation in the scheme, lawyers at the Securities and Exchange Commission and the Commodity Futures Trading Commission went after her money, saying that much of it was ill-gotten proceeds from her former husband’s fraud.
In August 2009, a federal judge agreed with the government, freezing most of Ms. Schaberg’s assets, including $7.6 million in cash.
Ms. Schaberg, who divorced Mr. Walsh in 2007 after 25 years of marriage, appealed the judge’s order.
Her lawyer, Steven Kessler, argued that once she and Mr. Walsh had divided their marital property and signed a divorce settlement agreement, the government could not force her to disgorge what were her rightful proceeds.
In an unusual request, the federal appeals court asked New York state’s highest court for guidance on the divorce-law issues instead of a ruling.
The case, Judge Graffeo wrote, raised “difficult policy questions” that required the court to weigh the competing interests of returning stolen property to its rightful owners against the innocent former spouse of the defrauder.
In ruling for Ms. Schaberg, the court made an analogy between Ms. Schaberg and her divorce settlement proceeds and any person who unknowingly receives tainted money in a business transaction. For instance, the government could not seize stolen money from an architect whom a thief had paid to build his home.
The court said its decision to protect Ms. Schaberg, an innocent recipient of stolen funds, over the victims of the Ponzi scheme, was “rooted in New York’s concern for finality in business transactions.”
The decision emphasized that fraud victims could try to reclaim their stolen money if the former spouse was aware or participated in the crime.
Representatives for the S.E.C. and C.F.T.C. declined to comment.
New York divorce lawyers are divided on the decision. Michael D. Stutman, a divorce lawyer in Manhattan, is uninvolved in the Schaberg case, but along with three other lawyers, he submitted a brief that sided with the government.
“We disagree with the decision because someone in possession of stolen property should not be able to claim an ownership interest superior to the rightful owner,” Mr. Stutman said.
“Here, however, largely because she received ‘title’ to the ill-gotten gains through the divorce, she trumps the claims of people from whom the money was stolen,” he said.
Mr. Stutman also questioned the court’s emphasis on what it called New York’s “strong public policy of ensuring finality in divorce proceedings.”
He said other facets of divorce law — the amount of child and spousal support, as well as child-custody issues — are all subject to change based on newly discovered facts.
“Why is finality all of a sudden so sacred that you’re depriving victims of a fraud from access to their assets?” he asked.
Richard Emery, a lawyer for Ms. Blank, who is battling with her former husband in the New York case involving the Madoff fraud, applauded the ruling, calling it ”the right result for families and society.”
“The appeals court embraced the plight of a spouse who relies on the right to move on with her life after divorce,” Mr. Emery said. “This consideration trumps the interest of even the federal government.”
Copyright 2011 The New York Times Company. All rights reserved.
Thursday, June 16, 2011
A California Bankruptcy Court Rejects U.S. Law Barring Same-Sex Marriage
By JOHN SCHWARTZ
A bankruptcy court in California has declared that the 1996 law barring federal recognition of same-sex marriage is unconstitutional, increasing pressure against the law.
“In this court’s judgment, no legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple,” wrote Judge Thomas B. Donovan of the United States Bankruptcy Court for the Central District of California. In an unusual move, 19 other judges — nearly all of the 24 judges of the central district — also signed the decision.
The impact of the opinion could be limited, since the decision of the court is specific to the bankruptcy of the couple, Gene Douglas Balas and Carlos A. Morales. But the other judges’ signatures suggest that as a matter of policy they would rule similarly.
It is not the first blow to the law known as the Defense of Marriage Act. A federal judge in Boston declared the law unconstitutional last July, and that case is working its way through the legal system. The Department of Justice, however, is not driving that appeals process. In February, Attorney General Eric H. Holder Jr. announced in a letter to members of Congress that while the Obama administration would continue to enforce the law, it would no longer defend it in court and that classifications based on sexual orientation should be subjected to a tough legal test intended to block unfair discrimination.
Speaker John A. Boehner, Republican of Ohio, then announced that Congress would defend the law, and that it had hired former Solicitor General Paul Clement to argue on its behalf.
Mr. Balas and Mr. Morales cited Mr. Holder’s letter in their pleadings, and Judge Donovan quoted it approvingly in his 26-page opinion, and stated, “The Holder Letter demonstrates that DOMA cannot withstand heightened scrutiny.”
Mr. Balas and Mr. Morales were legally married under California law, and wanted to file jointly for bankruptcy. The trustee, the federal officials who oversee the bankruptcy process, moved to dismiss their petition under the Defense of Marriage Act. They then asked Judge Donovan to allow them to file jointly, and Monday’s decision was the result.
Adam Winkler, a professor at the law school at the University of California, Los Angeles, called the decision “a powerful statement about the status of gay rights today.” Professor Winkler said, “it shows the effect of Eric Holder’s letter in shaping legal decisions that came after it, almost as if it’s a precedent in the case.”
Mary Bonauto, the civil rights project director for Gay and Lesbian Advocates and Defenders, the group that brought the Massachusetts case, said she was not surprised to see another judge agree with the earlier decision, because the law “advances a blatant legal double standard.” Ms. Bonauto added, “In our system of justice, it’s the job of courts to call that out.”
One of those who signed Judge Donovan’s opinion, Judge Sheri Bluebond, said that a signing by other judges is “an unusual occurrence, but it is certainly not unprecedented.”
Judge Bluebond said bankruptcy judges signed on to their colleagues’ decisions when “threshold questions” were brought before one judge and the others in that district “so the bar would know where we stand,” and whether they would be able to file in those courts. While 20 judges signed the opinion and there are 24 in the Central District of California, Judge Bluebond said, “the fact that some judges did not sign on to it does not mean one way or another what their views on that issue are.”
“There could have been procedural reasons or just logistical reasons that they did not sign on,” she said.
It is unclear whether an appeal will be filed. Judge Donovan noted that the House Bipartisan Legal Advisory Group, which is leading the Congressional action, requested a brief delay in proceedings while it considered whether to intervene, but that “no further pleadings and no challenge” had ensued.
“The government’s nonresponse to the debtors’ challenges is noteworthy,” Judge Donovan wrote.
A spokesman for Mr. Boehner, Brendan Buck, said the ruling would not be appealed.
“Bankruptcy cases are unlikely to provide the path to the Supreme Court, where we imagine the question of constitutionality will ultimately be decided,” Mr. Buck said. “Obviously, we believe the statute is constitutional in all its applications, including bankruptcy, but effectively defending it does not require the House to intervene in every case, especially when doing so would be prohibitively expensive.”
Copyright 2011 The New York Times Company. All rights reserved.
Wednesday, May 25, 2011
Banks Amass Glut of Homes
EL MIRAGE, Ariz. — The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.
All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.
Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.
“It remains a heavy weight on the banking system,” said Mark Zandi, the chief economist of Moody’s Analytics. “Housing prices are falling, and they are going to fall some more.”
Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy.
Although sales have picked up a bit in the last few weeks, banks and other lenders remain overwhelmed by the wave of foreclosures. In Atlanta, lenders are repossessing eight homes for each distressed home they sell, according to March data from RealtyTrac. In Minneapolis, they are bringing in at least six foreclosed homes for each they sell, and in once-hot markets like Chicago and Miami, the ratio still hovers close to two to one.
Before the housing implosion, the inflow and outflow figures were typically one-to-one.
The reasons for the backlog include inadequate staffs and delays imposed by the lenders because of investigations into foreclosure practices. The pileup could lead to $40 billion in additional losses for banks and other lenders as they sell houses at steep discounts over the next two years, according to Trepp, a real estate research firm.
“These shops are under siege; it’s just a tsunami of stuff coming in,” said Taj Bindra, who oversaw Washington Mutual’s servicing unit from 2004 to 2006 and now advises financial institutions on risk management. “Lenders have a strong incentive to clear out inventory in a controlled and timely manner, but if you had problems on the front end of the foreclosure process, it should be no surprise you are having problems on the back end.”
A drive through the sprawling subdivisions outside Phoenix shows the ravages of the real estate collapse. Here in this working-class neighborhood of El Mirage, northwest of Phoenix, rows of small stucco homes sprouted up during the boom. Now block after block is pockmarked by properties with overgrown shrubs, weeds and foreclosure notices tacked to the doors. About 116 lender-owned homes are on the market or under contract in El Mirage, according to local real estate listings.
But that’s just a small fraction of what is to come. An additional 491 houses are either sitting in the lenders’ inventory or are in the foreclosure process. On average, homes in El Mirage sell for $65,300, down 75 percent from the height of the boom in July 2006, according to the Cromford Report, a Phoenix-area real estate data provider. Real estate agents and market analysts say those ultra-cheap prices have recently started attracting first-time buyers as well as investors looking for several properties at once.
Lenders have also been more willing to let distressed borrowers sidestep foreclosure by selling homes for a loss. That has accelerated the pace of sales in the area and even caused prices to slowly rise in the last two months, but realty agents worry about all the distressed homes that are coming down the pike.
“My biggest fear right now is that the supply has been artificially restricted,” said Jayson Meyerovitz, a local broker. “They can’t just sit there forever. If so many houses hit the market, what is going to happen then?”
The major lenders say they are not deliberately holding back any foreclosed homes. They say that a long sales process can stigmatize a property and ratchet up maintenance and other costs. But they also do not want to unload properties in a fire sale.
“If we are out there undercutting prices, we are contributing to the downward spiral in market values,” said Eric Will, who oversees distressed home sales for Freddie Mac. “We want to make sure we are helping stabilize communities.”
The biggest reason for the backlog is that it takes longer to sell foreclosed homes, currently an average of 176 days — and that’s after the 400 days it takes for lenders to foreclose. After drawing government scrutiny over improper foreclosures practices last fall, many big lenders have slowed their operations in order to check the paperwork, and in two dozen or so states they halted them for months.
Conscious of their image, many lenders have recently started telling real estate agents to be more lenient to renters who happen to live in a foreclosed home and give them extra time to move out before changing the locks.
“Wells Fargo has sent me back knocking on doors two or three times, offering to give renters money if they cooperate with us,” said Claude A. Worrell, a longtime real estate agent from Minneapolis who specializes in selling bank-owned property. “It’s a lot different than it used to be.”
Realty agents and buyers say the lenders are simply overwhelmed. Just as lenders were ill-prepared to handle the flood of foreclosures, they do not have the staff and infrastructure to manage and sell this much property.
Most of the major lenders outsourced almost every part of the process, be it sales or repairs. Some agents complain that lender-owned home listings are routinely out of date, that properties are overpriced by as much as 10 percent, and that lenders take days or longer to accept an offer.
The silver lining for home lenders, however, is that the number of new foreclosures and recent borrowers falling behind on their payments by three months or longer is shrinking.
“If they are able to manage through the next 12 to 18 months,” said Mr. Zandi, the Moody’s Analytics economist, “they will be in really good shape.”
Friday, April 15, 2011
Downtown Express article on our work opposing the sale of St. Vincent's Medical Center Greenwich Village campus to the Rudin family
BY Albert Amateau
U.S. Bankruptcy Judge Cecilia Morris approved the sale of St. Vincent’s Hospital’s Greenwich Village campus last week in a deal allowing Rudin Management to develop luxury residential condos and North Shore-Long Island Jewish Health System to operate a comprehensive care center with a 24-hour emergency department.
The ruling came in a packed courtroom on Thurs., April 7, almost one year after New York City’s last Catholic hospital filed for bankruptcy and ended its 161 years of serving the neighborhood.
In a joint statement, Michael Dowling, North Shore-L.I.J. chief executive officer, and Bill Rudin, chairman of Rudin Management, said they were “especially pleased that the judge confirmed what we’ve been hearing from residents, business owners and community leaders—the historic agreement reached last month by St. Vincent’s, North Shore-L.I.J. and the Rudin family is a great deal for the community and would ensure an innovative return of comprehensive healthcare to the neighborhood.”
Dowling and Rudin added, “We look forward to securing the necessary approvals from city and state officials and working closely with the community, so that we can restore high-quality healthcare on the West Side by 2013.”
Judge Morris delivered her decision after the two-and-a-half-hour hearing on Thursday morning.
“I realize how sad it was to close St. Vincent’s,” she said. “It has been hanging over our heads for a year,” she added, noting that she has heard pleas for alternatives intended to save the full-service, acute-care hospital. But she ruled there was no likelihood that alternatives would be found to improve on the Rudin-North Shore-L.I.J. proposal.
“The court must not blindly follow the most vocal interest group but must find the likelihood of a proposal that would lead to the plan for the liquidation of the Chapter 11,” she said, referring to the type of bankruptcy sought by St. Vincent’s trustees.
She overruled a recently filed objection by James Shenwick, an attorney representing former City Councilmember Alan Gerson and others; Gerson’s group had sought a 45-day adjournment in hopes of nailing down a better proposal than Rudin’s $260 million for St. Vincent’s creditors and North Shore-L.I.J.’s $100 million (plus another $10 million from Rudin) to convert the former hospital’s O’Toole Building into a 24/7 emergency medical department and ambulatory surgery center.
“For my clients, this is a matter of life and death,” said Shenwick at one point last Wednesday, drawing applause from the public and prompting Morris to warn that she would clear the courtroom if there were further demonstrations.
Shenwick told the court that Jim Partreich, a principal in the Pinetree Group, a real estate brokerage firm, has been talking to potential investors. The attorney added that the National Football League’s Retired Players Association wanted to be a partner in a hospital that could serve its members. But Shenwick did not specify who the other investors were. Neither did he mention the name of any “major academic medical center,” despite assurances by the alternative plan’s supporters that one or more were interested.
Gerson, who was at the April 7 hearing but did not testify, submitted an affidavit saying that unnamed medical centers and developers had told him they did not submit proposals because they believed the Rudin proposal was a “done deal” and that pursuing their interest would antagonize parties, “which could inflict economic retribution.”
The former councilmember’s affidavit concluded with Gerson saying, “I believe there is a reasonable probability that, if given an extension, I and fellow objectors could work with the community, government officials and potential medical centers and development participants to come up with a plan which will both provide both a greater payment to creditors and better meet community needs.”
But Morris rejected the argument and also overruled another proposal for a 45-day adjournment sought by Arthur Schwartz, attorney for the tenants’ association of the Robert Fulton Houses, a New York City Housing Authority development in Chelsea.
Schwartz is associated with the Gerson group in seeking an alternative to the Rudin proposal, but he did not join in the Gerson group’s objection because he was representing his Fulton tenants clients in a separate objection.
Schwartz told the April 7 hearing that he was disturbed both by the lack of details in the North Shore-L.I.J. proposal and by the lack of a formal bidding process for the sale negotiated by Rudin and North Shore-L.I.J. with St. Vincent’s creditors. He called for the adjournment in order to “make sure there is an arm’s-length transaction” that would allow other bidders to offer more money than Rudin and provide a full-service, acute-care hospital for the community.
Morris, however, said that negotiated, private sales of debtors’ assets are not unusual in bankruptcy cases if they are the result of sound business judgment. She also said that although the New York State Constitution requires the state to provide healthcare for low-income residents of Fulton Houses, it does not mean that a facility has to be on the shuttered St. Vincent’s campus.
Yetta Kurland, attorney for the Coalition for a New Village Hospital, also called for an adjournment, saying that the proposed North Shore-L.I.J. free-standing emergency department did not meet the neighborhood’s healthcare requirements. Kurland also faulted the privately negotiated aspect of the deal. But her pleas did not move the judge to grant a delay in the case.
Morris dismissed all moves to delay the sale. She said that Schwartz’s State Supreme Court lawsuit demanding that the state build a full-service hospital as a successor to St. Vincent’s “could take years.” She also said she doubted that Gerson’s group could raise a financially credible challenge to the Rudin-North Shore-L.I.J. proposal.
Kenneth Eckstein, attorney for St. Vincent’s, opposed any delay, saying, “Every month we don’t close costs, the estate is assessed $1.2 million in interest and carrying charges.” Stephen Bodder, attorney for St. Vincent’s unsecured creditors, said the proposed deal had the unanimous approval of creditors.
In approving the sale, Morris cited the fact that Rudin’s offer included a $22 million cash down payment. In addition, Morris said, the fact that Rudin’s offer was not contingent on city zoning or state Department of Heath approvals was an important reason for her decision. She noted that the current deal was a successor to Rudin’s 2007 contract to buy St. Vincent’s east campus. That deal, which included Rudin’s right to buy the property for 15 years, was canceled with the hospital’s bankruptcy filing last year.
As of last week, there were 18 medical tenants in the O’Toole Building, at 12th St. and Seventh Ave., on a month-to-month basis. Eight have agreed to leave by July 31, and the rest will meet with St. Vincent’s on May 19 in an effort to resolve their issues, according to a court-approved agreement.
Copyright 2011 Community Media LLC. All rights reserved.
Monday, April 11, 2011
NYT: Avoiding Refinancing Costs After Divorce
By LYNNLEY BROWNING
DIVORCED homeowners wrangling with the task of removing a former spouse’s name from the mortgage after buying out his or her equity stake in the marital house may think that refinancing is the only choice.
There is another, little-known option that can avoid refinancing and its costs, which generally run 3 to 6 percent of the outstanding loan principal, according to LendingTree. You simply ask your lender to remove the former spouse’s name, leaving the loan note in your name only.
The problem is that not all lenders or mortgage servicers offer this option, known as release of liability. The lenders and servicers that do will most likely run a separate credit check on you — requiring, for example, that you meet minimum credit scores (typically from Fannie Mae, the giant government buyer of loans), and ensuring that you are current with the monthly mortgage payments. They may also require that any investors in the loan, after it is sold off, agree to the deal.
And if you are “under water,” and owe more on the mortgage than the home is currently worth, this process is not an option.
“This is a common and often messy business,” said Jack Guttentag, a mortgage expert and emeritus finance professor at the Wharton School of Business at the University of Pennsylvania. “Lenders seldom have a reason to take a co-borrower’s name off the note.”
But, he added, if a homeowner can prove that he or she can afford the payments and meet the required credit criteria — typically those of the investor in the loan — then release of liability may work.
Neil B. Garfinkel, a real estate and banking lawyer at Abrams Garfinkel Margolis Bergson in New York, says the lender “will require the borrower to prove that the borrower is able to support the monthly payments without the co-borrower spouse,” typically through monthly bank statements, annual tax returns and investment statements.
Having the name removed protects the credit of both parties, actually. If the former spouse failed to pay other debts, a lien could be placed on the home, and if you were delinquent on the mortgage payments, your former spouse’s credit could be hurt.
Most divorce settlements stipulate one of two outcomes for marital property. Either the house must be sold, or the person wanting to keep the property must buy out the other’s share, usually within months of the date of the settlement, and get the other party’s name off the mortgage — either through refinancing or a release of liability — typically within a year.
Under the second option, the former spouse signs a quit-claim deed at the divorce settlement, relinquishing his or her claim to the property. But while that action takes the former spouse off the house’s title and leaves it in one name only, it does nothing to remove his or her name from the actual mortgage.
Lenders or servicers typically charge $300 to $1,000 to execute a release of liability and require the property owner to pay an additional, nonrefundable application fee, typically $250 to $500. The process can take from 30 to 90 days, mortgage experts say.
One mortgage servicer, PHH Mortgage of Mount Laurel, N.J., requires that a homeowner with a loan sold to Fannie Mae have a minimum FICO credit score of 620 and a debt-to-income ratio of 50 percent or below (the ratio measures the amount of gross monthly income that goes to paying off all debts).
Still, a lender or servicer “generally has no obligation to release one of the borrowers,” Mr. Garfinkel said.
But Mr. Guttentag says homeowners may have one point of leverage. He suggested that qualified borrowers not accorded the release they seek tell their servicer or lender that unless a release of liability can be executed, the borrower will refinance the mortgage — at another lender.
“In such cases,” he said, “the servicer might agree to do it.”Copyright 2011 The New York Times Company. All rights reserved.
Friday, April 08, 2011
Representation of objecting alternative purchaser group in the sale of St. Vincent's Hospital's Manhattan Campus
Yesterday, the U.S. Bankruptcy Court for the Southern District of New York approved the sale of the Manhattan campus of St. Vincent's Catholic Medical Centers to the Rudin real estate family and the North Shore-LIJ Health System.
We represented an alternative purchaser group (comprised of former New York City Councilmember Alan J. Gerson, attorney Dudley Gaffin and Dr. Robert Adelman) that objected to the sale. Please read articles about the sale in the Washington Square Journal and Crain's New York Business.
We represented an alternative purchaser group (comprised of former New York City Councilmember Alan J. Gerson, attorney Dudley Gaffin and Dr. Robert Adelman) that objected to the sale. Please read articles about the sale in the Washington Square Journal and Crain's New York Business.
Thursday, April 07, 2011
NYT: Learn How to Collect From Slow Payers
By HANNAH SELIGSON
SMALL-BUSINESS owners know it is cash flow or die. While the recession officially ended in June 2009, many companies are still reeling. Credit can be hard to come by, and profits have not completely bounced back. On top of that, many customers are taking longer than ever to pay their bills.
Exhibit A is Cisco Systems, one of the largest technology companies in the world, which announced last year that it would wait a full 60 days to pay its small-business suppliers — mostly because it had found that that was what other big companies were doing.
So how does a small business get paid in a tough economy without hiring a collections agency or alienating its clients? Better yet, how does it avoid ending up with a stack of unpaid invoices in the first place?
Judging from the experiences of the small-business owners interviewed for this guide, it is part art and part science.
DO YOUR DUE DILIGENCE It used to be that credit reports were expensive and only for big companies with large budgets. Not anymore.
Ron Phelps, commercial credit manager at Boulevard Tire Center, a tire distributor with 26 locations in Florida, pays $99 a month for Pulse, a service offered through Cortera, , an online business credit reporting system, that keeps tabs on his clients. Last December, Cortera’s monitoring system noted that there was a large federal tax lien on one of Mr. Phelps’s clients, a small trucking company. He cut off the company’s credit line.
“That very same day,” he said, “we decided just to make them a cash customer, because we were concerned about their ability to pay.”
Cortera also offers a free service that collects and analyzes payment histories on more than 20 million businesses. Think of it as Yelp for business credit — instead of reviewing restaurants and stores, its community gives feedback on how promptly a company pays.
“We are helping small businesses tell the world that this person is a deadbeat,” said Alex Cote, vice president for marketing for Cortera. (There are other services, including Dun & Bradstreet, that will assess the financial strength of a company.)
SET YOUR TERMS (WITH A SMILE) Diane Nicosia manages and coordinates major construction and design projects through her company, D. E. Nicosia & Associates, which is based in New Rochelle, N.Y. “I’m in charge of the budget and have to make sure vendors, architects and engineers get paid,” Ms. Nicosia said. “What I’ve learned is that you have to negotiate these days.”
On a recent project involving 45,000 square feet of office space in a Midtown Manhattan office tower, a construction company said it would back out of the deal after it found that it would take 90 days to get paid by Ms. Nicosia’s client, a Fortune 100 financial services and manufacturing firm. Ms. Nicosia met with her client’s senior management and found that the payment timetable was not set in stone; there was room to broker a schedule that could keep the construction company from walking.
“Most people don’t think to challenge the payment schedule,” she said, “but we have to step up as small-business owners and say, ‘This is my living.’ ”
What Ms. Nicosia learned through this negotiation process, which she said was very amicable, was that there are often options: “All they have to do is push a little button that says pay in 10, 30 or 60 days, and that gets your invoice in a queue, so I got my vendor paid faster by working with the right people in the company.”
GET THE PAPERWORK RIGHT Is your invoice perfect? Did you fill out all the forms (even the ones you may not know about)? Companies do not need much of an excuse, if any, to delay your invoice. So make sure not one piece of information is missing.
Do you know whether the invoice needs a purchase order number? Not having this number can leave invoices lingering in accounts-payable purgatory, and it is unlikely that accounts payable will call to tell you.
Is your invoice formatted correctly? Some companies accept invoices only in the form of a PDF. If you are a new vendor, did you fill out a new vendor form? Many companies require these forms to process a first-time payment (but do not always make that known).
KNOW WHEN TO LOSE A CLIENT If customers do fall behind, when do you decide to cut them off? And what do you do if it is a customer you think you cannot afford to lose?
At Boulevard Tire, delinquent accounts are placed in one of two buckets — 30 days overdue and 60 days overdue.
“We look at those lists long and hard and ask ourselves,” Mr. Phelps said, “is this someone I want to immediately put on credit hold? Or is there something salvageable here? Are they a first-time offender?”
There are, he said, no hard and fast rules. “It’s all about the dynamics,” he said. “For example, if we have a customer who is in dire straits, and they appear to be making an effort to pay, we might continue working with them.”
Still, the economics may ultimately dictate the decision. As Mr. Phelps pointed out, if your company has a 10 percent profit margin and you lose $10,000 on an account, that is an additional $100,000 in revenue that your company has to find.
DON’T RELY ON THE POST OFFICE To avoid having someone in the accounting department tell you that “the check is in the mail,” push for direct deposit or electronic transfer. That way, you can get paid exactly on the 45th or 60th day. There are also services available from banks that will allow checks to be faxed and scanned, with the money deposited into your account the same day.
Consider accepting credit cards or PayPal. Yes, there is a fee, depending on which card or service you use, but the cash comes almost instantly.
“Some credit card companies pay their merchants on the following day,” said George A. Cloutier, founder of American Management Services, a financial turnaround firm. “And in a climate where cash is so tight, that’s often worth the fee.”
LET THEM KNOW IT’S IMPORTANT Rachel Lawrence oversees invoicing and bill collection at Bright Power, an energy efficiency company based in Manhattan. She was trying to collect from a property management firm that was 30 days late on a $25,000 invoice.
“They kept giving me this excuse that they had changed accounting systems, which I think can be a delay tactic,” she said. “It got to the point where I really had to make it clear that I wanted payment, so I offered to physically pick up the check.”
Ms. Lawrence gave the property management company dates and times she would be available to make the 30-minute trip to its office in Midtown Manhattan. The firm agreed to have the check ready. “When you say this is important enough to me that I will go out of my way,” she said, “I think people respond.”
OFFER A DISCOUNT Mr. Phelps said he does not like to reward clients for not paying, but that in certain cases extending a discount on the condition that the debt be paid immediately in cash or a cashier’s check can make the money appear.
“We’d rather have something than nothing and save ourselves the time and effort of going to court,” he said, “but we probably wouldn’t enter into a credit relationship with that company in the future.”
And do not be afraid to give a 10 percent discount, said Mr. Cloutier: “For 1 or 2 percent, it’s probably not worth it to the person who owes the money, particularly if they are short on cash.”
Copyright 2011 The New York Times Company. All rights reserved.
SMALL-BUSINESS owners know it is cash flow or die. While the recession officially ended in June 2009, many companies are still reeling. Credit can be hard to come by, and profits have not completely bounced back. On top of that, many customers are taking longer than ever to pay their bills.
Exhibit A is Cisco Systems, one of the largest technology companies in the world, which announced last year that it would wait a full 60 days to pay its small-business suppliers — mostly because it had found that that was what other big companies were doing.
So how does a small business get paid in a tough economy without hiring a collections agency or alienating its clients? Better yet, how does it avoid ending up with a stack of unpaid invoices in the first place?
Judging from the experiences of the small-business owners interviewed for this guide, it is part art and part science.
DO YOUR DUE DILIGENCE It used to be that credit reports were expensive and only for big companies with large budgets. Not anymore.
Ron Phelps, commercial credit manager at Boulevard Tire Center, a tire distributor with 26 locations in Florida, pays $99 a month for Pulse, a service offered through Cortera, , an online business credit reporting system, that keeps tabs on his clients. Last December, Cortera’s monitoring system noted that there was a large federal tax lien on one of Mr. Phelps’s clients, a small trucking company. He cut off the company’s credit line.
“That very same day,” he said, “we decided just to make them a cash customer, because we were concerned about their ability to pay.”
Cortera also offers a free service that collects and analyzes payment histories on more than 20 million businesses. Think of it as Yelp for business credit — instead of reviewing restaurants and stores, its community gives feedback on how promptly a company pays.
“We are helping small businesses tell the world that this person is a deadbeat,” said Alex Cote, vice president for marketing for Cortera. (There are other services, including Dun & Bradstreet, that will assess the financial strength of a company.)
SET YOUR TERMS (WITH A SMILE) Diane Nicosia manages and coordinates major construction and design projects through her company, D. E. Nicosia & Associates, which is based in New Rochelle, N.Y. “I’m in charge of the budget and have to make sure vendors, architects and engineers get paid,” Ms. Nicosia said. “What I’ve learned is that you have to negotiate these days.”
On a recent project involving 45,000 square feet of office space in a Midtown Manhattan office tower, a construction company said it would back out of the deal after it found that it would take 90 days to get paid by Ms. Nicosia’s client, a Fortune 100 financial services and manufacturing firm. Ms. Nicosia met with her client’s senior management and found that the payment timetable was not set in stone; there was room to broker a schedule that could keep the construction company from walking.
“Most people don’t think to challenge the payment schedule,” she said, “but we have to step up as small-business owners and say, ‘This is my living.’ ”
What Ms. Nicosia learned through this negotiation process, which she said was very amicable, was that there are often options: “All they have to do is push a little button that says pay in 10, 30 or 60 days, and that gets your invoice in a queue, so I got my vendor paid faster by working with the right people in the company.”
GET THE PAPERWORK RIGHT Is your invoice perfect? Did you fill out all the forms (even the ones you may not know about)? Companies do not need much of an excuse, if any, to delay your invoice. So make sure not one piece of information is missing.
Do you know whether the invoice needs a purchase order number? Not having this number can leave invoices lingering in accounts-payable purgatory, and it is unlikely that accounts payable will call to tell you.
Is your invoice formatted correctly? Some companies accept invoices only in the form of a PDF. If you are a new vendor, did you fill out a new vendor form? Many companies require these forms to process a first-time payment (but do not always make that known).
KNOW WHEN TO LOSE A CLIENT If customers do fall behind, when do you decide to cut them off? And what do you do if it is a customer you think you cannot afford to lose?
At Boulevard Tire, delinquent accounts are placed in one of two buckets — 30 days overdue and 60 days overdue.
“We look at those lists long and hard and ask ourselves,” Mr. Phelps said, “is this someone I want to immediately put on credit hold? Or is there something salvageable here? Are they a first-time offender?”
There are, he said, no hard and fast rules. “It’s all about the dynamics,” he said. “For example, if we have a customer who is in dire straits, and they appear to be making an effort to pay, we might continue working with them.”
Still, the economics may ultimately dictate the decision. As Mr. Phelps pointed out, if your company has a 10 percent profit margin and you lose $10,000 on an account, that is an additional $100,000 in revenue that your company has to find.
DON’T RELY ON THE POST OFFICE To avoid having someone in the accounting department tell you that “the check is in the mail,” push for direct deposit or electronic transfer. That way, you can get paid exactly on the 45th or 60th day. There are also services available from banks that will allow checks to be faxed and scanned, with the money deposited into your account the same day.
Consider accepting credit cards or PayPal. Yes, there is a fee, depending on which card or service you use, but the cash comes almost instantly.
“Some credit card companies pay their merchants on the following day,” said George A. Cloutier, founder of American Management Services, a financial turnaround firm. “And in a climate where cash is so tight, that’s often worth the fee.”
LET THEM KNOW IT’S IMPORTANT Rachel Lawrence oversees invoicing and bill collection at Bright Power, an energy efficiency company based in Manhattan. She was trying to collect from a property management firm that was 30 days late on a $25,000 invoice.
“They kept giving me this excuse that they had changed accounting systems, which I think can be a delay tactic,” she said. “It got to the point where I really had to make it clear that I wanted payment, so I offered to physically pick up the check.”
Ms. Lawrence gave the property management company dates and times she would be available to make the 30-minute trip to its office in Midtown Manhattan. The firm agreed to have the check ready. “When you say this is important enough to me that I will go out of my way,” she said, “I think people respond.”
OFFER A DISCOUNT Mr. Phelps said he does not like to reward clients for not paying, but that in certain cases extending a discount on the condition that the debt be paid immediately in cash or a cashier’s check can make the money appear.
“We’d rather have something than nothing and save ourselves the time and effort of going to court,” he said, “but we probably wouldn’t enter into a credit relationship with that company in the future.”
And do not be afraid to give a 10 percent discount, said Mr. Cloutier: “For 1 or 2 percent, it’s probably not worth it to the person who owes the money, particularly if they are short on cash.”
Copyright 2011 The New York Times Company. All rights reserved.
Wednesday, March 02, 2011
NYT: Credit Card Data Tells Mixed Story
By STEPHANIE CLIFFORD
American shoppers did not shed their reliance on credit cards over the year-end holidays.
While the average debt on credit cards in December decreased by 4 percent compared with the same month a year before, Americans still carried an average of $4,284 on credit card statements in December 2010, according to data released this week by the credit monitoring company Experian.
The data offers conflicting versions of the economy’s already mixed picture. While some consumers spent more during the holidays because the economy was rebounding, others were still unable to cover expenses without leaning on their credit cards. And while holiday spending also appeared to have been more robust than in the last several years, even more recent data has shown a bit of a slowdown in consumption this year.
“You’ve got people who already had good credit and were pretty much managing their credit, and because of the risk, paid down their debt even more,” said Maxine Sweet, vice president for public education at Experian. Then there were “very dramatic increases in debt by people who, mainly, lost jobs, but also had medical emergencies, and turned to credit cards to carry them through the hard times.”
The most recent consumer credit report from the Federal Reserve showed that revolving credit, which is mostly credit card debt, increased by 3.5 percent in December at an annual rate, the first such increase in 27 months. (That data included “charge-offs,” or debt that the credit card companies considered essentially uncollectible, while the Experian data, since it was pulled from active credit files, did not.) Card spending (including credit, debit and electronic benefit-transfer cars) was up 6.5 percent in December compared with spending at the same stores a year earlier, according to First Data, which processes merchant transactions.
Retailers tend to benefit from credit card spending, as it often means people are spending beyond their budgets.
Holiday spending rose 5.5 percent in the 50 days before Christmas in 2010 compared with 2009, according to MasterCard Advisors SpendingPulse. Much of that was driven by increases in apparel, jewelry and luxury goods.
While many shoppers had vowed to spend only with cash this holiday season, that was a budgeting trick that not everyone could use.
The cash shoppers, Ms. Sweet suggested, “were the ones that were pretty much in control — they can say, ‘I’m going to be more conservative.’ ” People under more difficult circumstances had to put certain debts on their credit cards, she said. In February, the retail analyst David Strasser issued a note to clients saying that the increase in credit spending was good news.
Spending at Visa and MasterCard in the United States was up a combined 8.3 percent for the fourth quarter, Mr. Strasser noted, “a hopeful sign that big-ticket spending is in recovery mode for 2011.”
“Weak credit trends have clearly bottomed out,” he wrote, and the increases in credit card spending “will disproportionately help big-ticket retailers that were hit hard during the downturn, as credit was curtailed and consumers lacked liquidity to purchase big-ticket products.”
The Experian data, which is broken down by metropolitan area, also gives a sense of how different cities may be recovering from the recession.
The city with the highest card debt in December was San Antonio, with $5,177 due on average, 21 percent above the national average. (The figures include debts on regular credit cards and retail Visas and MasterCards, but not a retailer’s own card — so a Gap-brand credit card would not be included, but a Gap Visa card would.)
San Antonio was followed by Jacksonville, Fla., at $5,115, a city with one of the lowest average credit scores, suggesting that pure debt may have been piling up there. Dallas, which came in at fifth with $4,936, also has one of the lowest average credit scores in the country.
Atlanta was third, with $4,960, and Honolulu, with $4,939, was fourth.
In 2009, the list of cities with the most credit card debt was similar: Dallas, Atlanta, San Antonio, Jacksonville and the Waco, Tex., metropolitan area.
Jeanie Wyatt, chief executive of the San-Antonio based advisory firm South Texas Money Management, said the economy in the city had been quite steady.
“Our unemployment rate is lower than the national average,” she said, “the health care field has been fast-growing, and of course we still have a big military component, and tourism, and a growing energy component. People are feeling, I think, pretty good about their job security.”
She said San Antonians were largely living on working-class paychecks, which could explain some of the credit card debt.
“While San Antonio has a lower unemployment rate and a more stable economy, our wage earners are at that mid- to lower end,” she said. “I would presume that lower-income individuals tend to have a higher percentage of credit card debt.”
The cities that racked up the lowest credit card debt for December were Sioux Falls, S.D. ($3,446); the area in Tennessee and Virginia around Kingsport, Johnson City and Bristol ($3,449); Fort Wayne, Ind. ($3,476); Paducah, Ky.($3,515); and Davenport, Iowa ($3,515).
In December 2009, the cities with the lowest credit card debt were Altoona, Pa.; Lafayette, La.; Evansville, Ind.; Davenport, Iowa; and Cedar Rapids, Iowa.
VantageScore, a credit rating produced by the three major reporting bureaus, Experian, Equifax and TransUnion, gives a picture of whether the credit card spending came from economic confidence, or from desperation.
Midwest and West Coast cities dominated the list of cities with the 25 highest VantageScores. Wisconsin had three cities on that list (Green Bay, at No. 1; Madison, at No. 2; and Milwaukee, at No. 21). Several states had two: California (San Francisco and Santa Barbara), Minnesota (Minneapolis and the Valley City-Fargo area, which crosses into North Dakota), Oregon (Eugene and Portland) and Iowa (Cedar Rapids and Des Moines). There were no Southern or Southwestern states on the list of the top credit scores.
“Cities like Minneapolis, that always have great credit scores, actually have higher debt than other cities,” Ms. Sweet said. “But it’s offset by the fact that they never miss payments, and they always have high credit limits.”
The list of the 25 cities with the lowest VantageScores in December was heavily Southern. Texas had seven cities on the list (Harlingen, El Paso, Tyler, Waco, San Antonio, Dallas and Houston, going from lowest to highest credit scores). Other than two California cities (Bakersfield and Fresno) and Las Vegas, every other city on the list was from the South.
“Part of that is a lot just a lot of younger people moving in, and a larger migrant population — so by younger, meaning not just in age, but also less depth in their credit history, and we think that’s one factor,” Ms. Sweet said of the lower credit scores in Texas in particular.
“When you have these consumers who are in crisis with foreclosures and unemployment, that has to be driving up their credit card debt,” Ms. Sweet said.
Shoppers interviewed last December sounded quite cautious about their spending.
Julianne Cantarella, 43, was at the Garden State Plaza Mall in Paramus, N.J. (the New York metropolitan area is No. 42 on the Experian list of high credit card debt). Her house had finally sold over the summer after being on the market for a year and a half, she said, so she thought the economy was improving.
“But I did cut down on the money I’m spending and the amount of gifts I’m buying,” she said.
In Columbus, Ohio (No. 12 on the Experian list), Dorothy Huggins, 54, was shopping with her granddaughter.
“Everybody in our family is fine — nobody’s lost their jobs, but I have lots of friends and neighbors who have been hit,” Ms. Huggins said. “That made us more conservative this year because we’re wondering, are we next?”
“There are so many people hurting, through no fault of their own. And we’re fortunate enough to be doing well,” she said. “So we bought a lot less stuff this year.”
Christopher Maag contributed reporting from Columbus, Ohio, and Nate Schweber from Paramus, N.J.
Copyright 2011 The New York Times Company. All rights reserved.
American shoppers did not shed their reliance on credit cards over the year-end holidays.
While the average debt on credit cards in December decreased by 4 percent compared with the same month a year before, Americans still carried an average of $4,284 on credit card statements in December 2010, according to data released this week by the credit monitoring company Experian.
The data offers conflicting versions of the economy’s already mixed picture. While some consumers spent more during the holidays because the economy was rebounding, others were still unable to cover expenses without leaning on their credit cards. And while holiday spending also appeared to have been more robust than in the last several years, even more recent data has shown a bit of a slowdown in consumption this year.
“You’ve got people who already had good credit and were pretty much managing their credit, and because of the risk, paid down their debt even more,” said Maxine Sweet, vice president for public education at Experian. Then there were “very dramatic increases in debt by people who, mainly, lost jobs, but also had medical emergencies, and turned to credit cards to carry them through the hard times.”
The most recent consumer credit report from the Federal Reserve showed that revolving credit, which is mostly credit card debt, increased by 3.5 percent in December at an annual rate, the first such increase in 27 months. (That data included “charge-offs,” or debt that the credit card companies considered essentially uncollectible, while the Experian data, since it was pulled from active credit files, did not.) Card spending (including credit, debit and electronic benefit-transfer cars) was up 6.5 percent in December compared with spending at the same stores a year earlier, according to First Data, which processes merchant transactions.
Retailers tend to benefit from credit card spending, as it often means people are spending beyond their budgets.
Holiday spending rose 5.5 percent in the 50 days before Christmas in 2010 compared with 2009, according to MasterCard Advisors SpendingPulse. Much of that was driven by increases in apparel, jewelry and luxury goods.
While many shoppers had vowed to spend only with cash this holiday season, that was a budgeting trick that not everyone could use.
The cash shoppers, Ms. Sweet suggested, “were the ones that were pretty much in control — they can say, ‘I’m going to be more conservative.’ ” People under more difficult circumstances had to put certain debts on their credit cards, she said. In February, the retail analyst David Strasser issued a note to clients saying that the increase in credit spending was good news.
Spending at Visa and MasterCard in the United States was up a combined 8.3 percent for the fourth quarter, Mr. Strasser noted, “a hopeful sign that big-ticket spending is in recovery mode for 2011.”
“Weak credit trends have clearly bottomed out,” he wrote, and the increases in credit card spending “will disproportionately help big-ticket retailers that were hit hard during the downturn, as credit was curtailed and consumers lacked liquidity to purchase big-ticket products.”
The Experian data, which is broken down by metropolitan area, also gives a sense of how different cities may be recovering from the recession.
The city with the highest card debt in December was San Antonio, with $5,177 due on average, 21 percent above the national average. (The figures include debts on regular credit cards and retail Visas and MasterCards, but not a retailer’s own card — so a Gap-brand credit card would not be included, but a Gap Visa card would.)
San Antonio was followed by Jacksonville, Fla., at $5,115, a city with one of the lowest average credit scores, suggesting that pure debt may have been piling up there. Dallas, which came in at fifth with $4,936, also has one of the lowest average credit scores in the country.
Atlanta was third, with $4,960, and Honolulu, with $4,939, was fourth.
In 2009, the list of cities with the most credit card debt was similar: Dallas, Atlanta, San Antonio, Jacksonville and the Waco, Tex., metropolitan area.
Jeanie Wyatt, chief executive of the San-Antonio based advisory firm South Texas Money Management, said the economy in the city had been quite steady.
“Our unemployment rate is lower than the national average,” she said, “the health care field has been fast-growing, and of course we still have a big military component, and tourism, and a growing energy component. People are feeling, I think, pretty good about their job security.”
She said San Antonians were largely living on working-class paychecks, which could explain some of the credit card debt.
“While San Antonio has a lower unemployment rate and a more stable economy, our wage earners are at that mid- to lower end,” she said. “I would presume that lower-income individuals tend to have a higher percentage of credit card debt.”
The cities that racked up the lowest credit card debt for December were Sioux Falls, S.D. ($3,446); the area in Tennessee and Virginia around Kingsport, Johnson City and Bristol ($3,449); Fort Wayne, Ind. ($3,476); Paducah, Ky.($3,515); and Davenport, Iowa ($3,515).
In December 2009, the cities with the lowest credit card debt were Altoona, Pa.; Lafayette, La.; Evansville, Ind.; Davenport, Iowa; and Cedar Rapids, Iowa.
VantageScore, a credit rating produced by the three major reporting bureaus, Experian, Equifax and TransUnion, gives a picture of whether the credit card spending came from economic confidence, or from desperation.
Midwest and West Coast cities dominated the list of cities with the 25 highest VantageScores. Wisconsin had three cities on that list (Green Bay, at No. 1; Madison, at No. 2; and Milwaukee, at No. 21). Several states had two: California (San Francisco and Santa Barbara), Minnesota (Minneapolis and the Valley City-Fargo area, which crosses into North Dakota), Oregon (Eugene and Portland) and Iowa (Cedar Rapids and Des Moines). There were no Southern or Southwestern states on the list of the top credit scores.
“Cities like Minneapolis, that always have great credit scores, actually have higher debt than other cities,” Ms. Sweet said. “But it’s offset by the fact that they never miss payments, and they always have high credit limits.”
The list of the 25 cities with the lowest VantageScores in December was heavily Southern. Texas had seven cities on the list (Harlingen, El Paso, Tyler, Waco, San Antonio, Dallas and Houston, going from lowest to highest credit scores). Other than two California cities (Bakersfield and Fresno) and Las Vegas, every other city on the list was from the South.
“Part of that is a lot just a lot of younger people moving in, and a larger migrant population — so by younger, meaning not just in age, but also less depth in their credit history, and we think that’s one factor,” Ms. Sweet said of the lower credit scores in Texas in particular.
“When you have these consumers who are in crisis with foreclosures and unemployment, that has to be driving up their credit card debt,” Ms. Sweet said.
Shoppers interviewed last December sounded quite cautious about their spending.
Julianne Cantarella, 43, was at the Garden State Plaza Mall in Paramus, N.J. (the New York metropolitan area is No. 42 on the Experian list of high credit card debt). Her house had finally sold over the summer after being on the market for a year and a half, she said, so she thought the economy was improving.
“But I did cut down on the money I’m spending and the amount of gifts I’m buying,” she said.
In Columbus, Ohio (No. 12 on the Experian list), Dorothy Huggins, 54, was shopping with her granddaughter.
“Everybody in our family is fine — nobody’s lost their jobs, but I have lots of friends and neighbors who have been hit,” Ms. Huggins said. “That made us more conservative this year because we’re wondering, are we next?”
“There are so many people hurting, through no fault of their own. And we’re fortunate enough to be doing well,” she said. “So we bought a lot less stuff this year.”
Christopher Maag contributed reporting from Columbus, Ohio, and Nate Schweber from Paramus, N.J.
Copyright 2011 The New York Times Company. All rights reserved.
Monday, February 21, 2011
NYT: Rebuilding Your Credit Score
By TARA SIEGEL BERNARD
Millions of consumers have fallen out of favor with the credit scoring gods.
Some lost their jobs or were just overwhelmed by mounting debt. Others got caught up in the real estate bubble or had major medical bills. Whatever the reason, the rising number of foreclosures, short sales, late credit card payments and the ultimate credit sin — bankruptcies — have left black marks on credit reports most everywhere.
So what can these people do to repair their credit?
The simple answer is to focus on the information that is used to generate the all-powerful FICO score — the measure used most frequently by traditional lenders to determine creditworthiness. Its scale runs from 300 points to 850 points; the higher the score, the better your credit standing. “FICO is still the 500-pound gorilla,” said John Ulzheimer, president of consumer education at SmartCredit.com. “In 2011, the best way to get credit from the mainstream lenders is to have a good FICO score.”
Consumers can hope that the banks will eventually consider alternatives to the traditional FICO score, which was developed by Fair Isaac Corporation and has been in wide use for about two decades. After all, as banks regain their appetite for lending, they will be looking for ways to differentiate between borrowers with the same scores, some of whom are temporarily struggling and others who chronically have trouble with money.
For now, though, the FICO score reigns. The best antidote to a poor score is time. Still, there are a half dozen ways to speed the process, or, at the least, avoid even more credit trouble.
What to Do
ASSESS YOUR SITUATION Before you even start to think about rehabilitating your credit, make sure that you can pay your bills on time and not do any more harm. If keeping up with your credit card bills is still an issue, then call the issuer, explain your situation and try to negotiate payments you can afford. Ask the issuer how that will be reported to the major three credit bureaus: Not paid as agreed, which can hurt your score? Or will the new terms say that you are now paying as agreed?
“You have to get in writing that this is what they agreed to do,” said Mechel Glass, director of education at CredAbility, a nonprofit consumer credit counseling agency. Ditto for other providers, like utility companies.
Then, assess all the damage by getting a free copy of your credit report from each of the three major credit reporting bureaus through annualcreditreport.com. Each of the major credit bureaus — Equifax, Experian and TransUnion — generate their own FICO scores based on the data they collect. Two versions of your FICO score are also available for $19.95 each, through myFico.com.
How far your credit score has fallen will depend on where it started, as well as the frequency and severity of your credit mistakes. If you had almost perfect credit, but because of the loss of a job your credit card bills ended up at a collection agency, you can expect to lose anywhere from 80 to 150 points from your FICO score. A short sale or foreclosure? Both, Mr. Ulzheimer said, “would turn a FICO 790 into a FICO 590 overnight.”
CLEAN UP YOUR SCORE Start with the low-hanging fruit. Let’s say you were late paying a bill from a company that no longer exists, or a bank that has since merged with a larger institution. If the credit reporting bureaus cannot verify the accuracy of that black mark, they are required to remove it. “Not only does it have to be correct, but it has to be verifiable,” Mr. Ulzheimer said.
Next, focus on paying off the loans — namely, credit cards — that will help give your score the most lift. Paying off a mortgage, a student loan or other installment debts, like car loans, feels good but that won’t necessarily do much for your credit score.
You also want to get your so-called debt utilization rate into good shape. FICO considers how the total amount of debt on each of your credit cards compares with your total available credit. The credit score “elite” — that is, people with FICO scores above 760 — typically don’t have debts that exceed 7 percent of their available credit. But if you are at 50 percent and can get the rate down to 30 percent, that will help.
LEAVE A NOTE Because prospective employers may pull a copy of your credit report, consider adding the equivalent of a doctor’s note to each of your reports explaining your hardship, like a job loss. All three major credit bureaus allow you to add a brief statement through their Web sites. FICO doesn’t consider these statements when formulating scores, however, so don’t expect it to sway lenders.
GET SECURED CARDS It will obviously be hard to get a traditional credit card when you have a poor credit history. Secured cards, if used strategically, can help nurse your credit back to health more quickly. These cards require you to put a set amount of money in a bank account, say $250 or $500, which is used as collateral. And the amount of available credit should be equivalent to the amount on deposit.
“What is the most predictive and powerful in your score are the things you’ve done most recently,” Mr. Ulzheimer said. “That cuts both ways. If you add a secured card and you pay it religiously and the balance is low, it will help your score a lot more quickly than if you do nothing.”
But read the fine print before signing up. Consumer advocates said some unscrupulous card issuers have charged the security deposit to the card. And be sure the issuer reports your payment information to the big three credit bureaus, since not all do.
Curtis Arnold, the founder of CardRatings.com, recommended two cards, both of which report payments to the big three: the Orchard Bank Secured MasterCard, which has an attractive interest rate of 7.9 percent, waives the annual fee in the first year and charges a moderate $35 annually thereafter. He also likes the Citi Secured MasterCard, largely because it offers an interest rate on the security deposit equivalent to an 18-month certificate of deposit, which he says is an industry first.
TALK TO A CREDIT UNION These institutions may be more willing to work with members who have checkered histories. Their offerings vary, but they may be more likely to consider alternative credit scores, offer free credit counseling or have products tailored for people with poor credit histories. “Certainly, many credit unions have credit builder or rebuilder loans, often structured as a loan with a built-in savings component so that a person gradually builds up funds that can act as partial collateral,” said Clifford Rosenthal, the president of the National Federation of Community Development Credit Unions, a trade association representing credit unions in low- and moderate-income areas.
ALTERNATIVE VERIFICATION There are other credit reporting agencies and services that — for a monthly fee, and sometimes a hefty one — will collect your payment history from sources that aren’t included in your traditional credit report or FICO score. At this point, however, most mainstream lenders base their decisions on the big three bureaus’ reports and FICO scores. So you’re better off saving your money. “All of those companies say they will report your accounts to a credit bureau, and they may be doing that,” Mr. Ulzheimer said. “But if it is not the big three, then who cares?”
This could change, of course, as banks become more willing to lend and potentially open to using other means to identify promising borrowers. Lenders may begin to consider rental payment histories, for instance. Or they may be willing to look at alternative credit scores that incorporate payment information that doesn’t show up on traditional credit reports.
Or perhaps one lender will permit so-called shoe box credit: Did you know that if you walk into a lender with a box stuffed with receipts proving that you paid your cable bill, for instance, that they are required to consider it? They aren’t obliged to give you a loan, but the regulation says they must consider the information.
What to Avoid
CREDIT REPAIR OFFERS You may have seen the advertisements for credit repair companies on the Web. “We really tell our clients to stay away,” said Ms. Glass, of CredAbility. One re-emerging scam, she says, involves companies that claim they can clean up your credit. Some companies manage to do this for a limited time by disputing all of your accounts, sending letters to the bureaus claiming the accounts aren’t valid. But after the credit bureaus validate the accounts and debts, they reappear on your report and your score will plummet again.
Legitimate credit repair companies exist, and they can assist in disputes. But there’s nothing they can do that you can’t do yourself at little cost. Besides, these companies often besiege the bureaus with letters, and the bureaus are allowed to ignore what they believe are frivolous disputes. Be wary of companies that do not disclose in writing that you can do these tasks free on your own, that guarantee results or that try to charge you before they perform any services.
CERTAIN CARDS Despite the tighter credit environment, Chi Chi Wu, a staff lawyer at the National Consumer Law Center, said the center was still receiving complaints about credit cards aimed at people with poor credit histories.
“These cards are pitched as a way to build credit, but with these kind of steep fees and high interest rates, there is a good chance they will hurt,” she said.
Copyright 2011 The New York Times Company. All rights reserved.
Millions of consumers have fallen out of favor with the credit scoring gods.
Some lost their jobs or were just overwhelmed by mounting debt. Others got caught up in the real estate bubble or had major medical bills. Whatever the reason, the rising number of foreclosures, short sales, late credit card payments and the ultimate credit sin — bankruptcies — have left black marks on credit reports most everywhere.
So what can these people do to repair their credit?
The simple answer is to focus on the information that is used to generate the all-powerful FICO score — the measure used most frequently by traditional lenders to determine creditworthiness. Its scale runs from 300 points to 850 points; the higher the score, the better your credit standing. “FICO is still the 500-pound gorilla,” said John Ulzheimer, president of consumer education at SmartCredit.com. “In 2011, the best way to get credit from the mainstream lenders is to have a good FICO score.”
Consumers can hope that the banks will eventually consider alternatives to the traditional FICO score, which was developed by Fair Isaac Corporation and has been in wide use for about two decades. After all, as banks regain their appetite for lending, they will be looking for ways to differentiate between borrowers with the same scores, some of whom are temporarily struggling and others who chronically have trouble with money.
For now, though, the FICO score reigns. The best antidote to a poor score is time. Still, there are a half dozen ways to speed the process, or, at the least, avoid even more credit trouble.
What to Do
ASSESS YOUR SITUATION Before you even start to think about rehabilitating your credit, make sure that you can pay your bills on time and not do any more harm. If keeping up with your credit card bills is still an issue, then call the issuer, explain your situation and try to negotiate payments you can afford. Ask the issuer how that will be reported to the major three credit bureaus: Not paid as agreed, which can hurt your score? Or will the new terms say that you are now paying as agreed?
“You have to get in writing that this is what they agreed to do,” said Mechel Glass, director of education at CredAbility, a nonprofit consumer credit counseling agency. Ditto for other providers, like utility companies.
Then, assess all the damage by getting a free copy of your credit report from each of the three major credit reporting bureaus through annualcreditreport.com. Each of the major credit bureaus — Equifax, Experian and TransUnion — generate their own FICO scores based on the data they collect. Two versions of your FICO score are also available for $19.95 each, through myFico.com.
How far your credit score has fallen will depend on where it started, as well as the frequency and severity of your credit mistakes. If you had almost perfect credit, but because of the loss of a job your credit card bills ended up at a collection agency, you can expect to lose anywhere from 80 to 150 points from your FICO score. A short sale or foreclosure? Both, Mr. Ulzheimer said, “would turn a FICO 790 into a FICO 590 overnight.”
CLEAN UP YOUR SCORE Start with the low-hanging fruit. Let’s say you were late paying a bill from a company that no longer exists, or a bank that has since merged with a larger institution. If the credit reporting bureaus cannot verify the accuracy of that black mark, they are required to remove it. “Not only does it have to be correct, but it has to be verifiable,” Mr. Ulzheimer said.
Next, focus on paying off the loans — namely, credit cards — that will help give your score the most lift. Paying off a mortgage, a student loan or other installment debts, like car loans, feels good but that won’t necessarily do much for your credit score.
You also want to get your so-called debt utilization rate into good shape. FICO considers how the total amount of debt on each of your credit cards compares with your total available credit. The credit score “elite” — that is, people with FICO scores above 760 — typically don’t have debts that exceed 7 percent of their available credit. But if you are at 50 percent and can get the rate down to 30 percent, that will help.
LEAVE A NOTE Because prospective employers may pull a copy of your credit report, consider adding the equivalent of a doctor’s note to each of your reports explaining your hardship, like a job loss. All three major credit bureaus allow you to add a brief statement through their Web sites. FICO doesn’t consider these statements when formulating scores, however, so don’t expect it to sway lenders.
GET SECURED CARDS It will obviously be hard to get a traditional credit card when you have a poor credit history. Secured cards, if used strategically, can help nurse your credit back to health more quickly. These cards require you to put a set amount of money in a bank account, say $250 or $500, which is used as collateral. And the amount of available credit should be equivalent to the amount on deposit.
“What is the most predictive and powerful in your score are the things you’ve done most recently,” Mr. Ulzheimer said. “That cuts both ways. If you add a secured card and you pay it religiously and the balance is low, it will help your score a lot more quickly than if you do nothing.”
But read the fine print before signing up. Consumer advocates said some unscrupulous card issuers have charged the security deposit to the card. And be sure the issuer reports your payment information to the big three credit bureaus, since not all do.
Curtis Arnold, the founder of CardRatings.com, recommended two cards, both of which report payments to the big three: the Orchard Bank Secured MasterCard, which has an attractive interest rate of 7.9 percent, waives the annual fee in the first year and charges a moderate $35 annually thereafter. He also likes the Citi Secured MasterCard, largely because it offers an interest rate on the security deposit equivalent to an 18-month certificate of deposit, which he says is an industry first.
TALK TO A CREDIT UNION These institutions may be more willing to work with members who have checkered histories. Their offerings vary, but they may be more likely to consider alternative credit scores, offer free credit counseling or have products tailored for people with poor credit histories. “Certainly, many credit unions have credit builder or rebuilder loans, often structured as a loan with a built-in savings component so that a person gradually builds up funds that can act as partial collateral,” said Clifford Rosenthal, the president of the National Federation of Community Development Credit Unions, a trade association representing credit unions in low- and moderate-income areas.
ALTERNATIVE VERIFICATION There are other credit reporting agencies and services that — for a monthly fee, and sometimes a hefty one — will collect your payment history from sources that aren’t included in your traditional credit report or FICO score. At this point, however, most mainstream lenders base their decisions on the big three bureaus’ reports and FICO scores. So you’re better off saving your money. “All of those companies say they will report your accounts to a credit bureau, and they may be doing that,” Mr. Ulzheimer said. “But if it is not the big three, then who cares?”
This could change, of course, as banks become more willing to lend and potentially open to using other means to identify promising borrowers. Lenders may begin to consider rental payment histories, for instance. Or they may be willing to look at alternative credit scores that incorporate payment information that doesn’t show up on traditional credit reports.
Or perhaps one lender will permit so-called shoe box credit: Did you know that if you walk into a lender with a box stuffed with receipts proving that you paid your cable bill, for instance, that they are required to consider it? They aren’t obliged to give you a loan, but the regulation says they must consider the information.
What to Avoid
CREDIT REPAIR OFFERS You may have seen the advertisements for credit repair companies on the Web. “We really tell our clients to stay away,” said Ms. Glass, of CredAbility. One re-emerging scam, she says, involves companies that claim they can clean up your credit. Some companies manage to do this for a limited time by disputing all of your accounts, sending letters to the bureaus claiming the accounts aren’t valid. But after the credit bureaus validate the accounts and debts, they reappear on your report and your score will plummet again.
Legitimate credit repair companies exist, and they can assist in disputes. But there’s nothing they can do that you can’t do yourself at little cost. Besides, these companies often besiege the bureaus with letters, and the bureaus are allowed to ignore what they believe are frivolous disputes. Be wary of companies that do not disclose in writing that you can do these tasks free on your own, that guarantee results or that try to charge you before they perform any services.
CERTAIN CARDS Despite the tighter credit environment, Chi Chi Wu, a staff lawyer at the National Consumer Law Center, said the center was still receiving complaints about credit cards aimed at people with poor credit histories.
“These cards are pitched as a way to build credit, but with these kind of steep fees and high interest rates, there is a good chance they will hurt,” she said.
Copyright 2011 The New York Times Company. All rights reserved.
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