June 2010 Archives

A recent order from the U.S. Bankruptcy Court for the District of South Carolina has shed some light on whether a debtor who has inherited a house subject to a reverse mortgage in foreclosure can pay off that mortgage as part of a Chapter 13 bankruptcy plan. According to the Honorable John E. Waites, Chief Bankruptcy Judge of that court, such a debt is eligible for Chapter 13 under certain conditions.

In this case, Ms. Brown had lived with her mother, along with several other family members, in the family home for 40 years. Her mother took out the reverse mortgage on the home during her lifetime. Upon her mother's death, Ms. Brown inherited the house, along with the remaining balance on the reverse mortgage -- $29,524.44 -- which became payable in full immediately upon her mother's death.

The reverse mortgage was owned by Financial Freedom Senior Funding, which called in the debt and began foreclosure proceedings. In 2009, Ms. Brown filed for Chapter 13 bankruptcy, proposing to pay off the reverse mortgage in full as part of her five-year Chapter 13 repayment plan.

Reverse Mortgage Holder Argues That the Chapter 13 Repayment Plan Would Impermissibly Modify Its Rights; Court Disagrees

The Federal Trade Commission (FTC) won a big victory last month. A federal judge ruled that three credit repair telemarketers -- AMS Financial, Rapid Reduction and PDMI -- must shut down their operations.

The three companies, which are based in Washington and Texas, all operated by bombarding consumers with robocalls, even if those consumers were on the National Do Not Call Registry or had specifically requested not to be called. Most telemarketing robocalls are prohibited without a consumer's express written consent.

Worse, the companies promised desperate consumers that they could reduce their credit card interest rates and help with credit repair. The deal they offered was that, in exchange for up-front fees ranging from $499 to $1,590, they would help them reduce their interest rates.

There was no real risk to the consumer, they promised, because if they didn't save at least $2,500 through credit card rate reductions they could "earn back" 100% of their up-front fee.

According to the FTC, their promises were false. Instead of contacting credit card companies and negotiating for lower rates, the three companies simply produced consumer information on how to pay off your credit cards early. The companies also misled consumers about their refund policies, which were strictly limited.

It's good news that regulators are taking notice of credit correction scams, although it is too late for consumers fleeced by AMS, Rapid Reduction and PDMI.

FBI Tips on How to Avoid Being a Victim of Credit Card Fraud

Despite nearly record levels of both insolvency and bankruptcy filings, many people who are in serious financial distress are unable to get bankruptcy protection.

According to a recent report in USA TODAY, many debt-laden Americans are finding the benefits of bankruptcy denied to them by the restrictions passed in 2005 -- or they simply can't afford to file. Here's why:

• The increased cost and complexity of filing for bankruptcy created by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) have meant many debtors are unable to afford to fight for certain bankruptcy protections that require a hearing, or can't afford to file at all.
• The real estate crisis prevents troubled homeowners from selling unaffordable homes, but debt secured by a principal residence is not dischargeable in Chapter 7 bankruptcy and, until this month, filing for Chapter 13 disqualified them from the federal HAMP program.
• The economic downturn has made it hopeless for many to find jobs with wages high enough to pay back educational debt, but student loans are virtually non-dischargeable in bankruptcy.

As a result, many financially strapped Americans are having to forego bankruptcy's promise of a fresh financial start. But postponing filing for bankruptcy is like delaying going to the doctor, according to law professor Robert Lawless of the University of Illinois -- you'll just end up in deeper and deeper financial trouble.

Stephanie Lanning of Kansas filed for Chapter 13 bankruptcy protection in October of 2006. In a Chapter 13 bankruptcy, the Bankruptcy Court sets up a three- to five-year debt repayment plan based on the debtor's ability to pay, which the court determines by calculating the debtor's projected disposable income.

Projected disposable income is the debtor's average monthly net income minus reasonable monthly expenses. To determine average monthly net income, the courts look at the debtor's income for the last six months -- a period called the "look-back period."

The Chapter 13 repayment plan distributes the debtor's projected disposable income, whatever it may be, among the creditors. When the plan is successfully completed, any remaining debt is wiped away.

In Ms. Lanning's case, there was a hitch. During the six-month look-back period, Ms. Lanning received a one-time buyout from her former employer, which was paid in installments over April and May of 2006. When the court averaged her gross income over the March-September period, the buyout payments in April and May inflated her average gross income level, and thus her disposable income.

The difference was devastating. Based on her actual income as reflected on her paychecks, Ms. Lanning could afford to pay $144 a month toward her Chapter 13 plan. If the inflated figure were used, she would have had to pay $756 -- more than 40 percent of her total pay.

Under the largest mortgage servicing settlement in the Federal Trade Commission's history, Bank of America is to repay former Countrywide Financial customers $108 million for what the FTC called "false or unsupported claims" in Chapter 13 bankruptcy proceedings and "illegal and excessive fees" charged to desperate homeowners.

Bank of America purchased Countrywide in July 2008 and admitted no wrongdoing on behalf of the company.

The FTC's complaint alleges that Countrywide acted improperly in numerous Chapter 13 bankruptcy proceedings where it was a creditor. The FTC also charges that Countrywide deceptively and illegally jacked up certain fees on properties in foreclosure in order to pad its bottom line during the housing crisis.

Making an End Run Around Chapter 13 Bankruptcy Protection

In the Chapter 13 cases, the FTC contends that Countrywide made "false or unsupported claims" to borrowers who had filed for Chapter 13 protection. When some borrowers filed for bankruptcy, Countrywide misled them about the amounts they owed and the status of their loans.

Debtors' prisons have been illegal in the U.S. since the 19th century. Not only was the practice of imprisoning people because they owed money cruel, it was also a pretty ineffective way of dealing with insolvency, since people in debtors' prisons were unable to maximize their earning capacity to repay their debts, if they were able to work at all.

It's not a crime to owe money, but major debt collection companies across the nation have found a way around that: debt warrants.

In a typical debt collection process, a debt collector gets a court judgment to force the delinquent borrower to pay. If the debtor doesn't comply with that order, the court may hold the debtor issue a contempt citation and a warrant.

According to a recent investigative feature in the Minneapolis Star Tribune, some debt collectors are taking these contempt orders to the police and having them enforced.

"The law enforcement system has unwittingly become a tool of the debt collectors," added Michael Kinkley, an attorney in Spokane, Wash., who represents arrested debtors. "The debt collectors are abusing the system and intimidating people, and law enforcement is going along with it."

Taxpayers foot the bill for the entire process, from the arresting police officers to jail accommodations and court expenses. "We hear every day about how there's no money for public services," one debtor who was arrested on a debt warrant pointed out to the Star Tribune. "But it seems like the collectors have found a way to get the police to do their work."

Insolvency, caused in part by millions of dollars owed on arbitration judgments involving fraud, brought one of painter Thomas Kinkade's businesses into Chapter 11 bankruptcy on June 2. The company, Pacific Metro of Morgan Hill, California, (previously known as Media Arts Group Inc.) had been responsible for licensing independent Thomas Kinkade Signature Gallery stores nationwide.

Pacific Metro's bankruptcy was filed one day after a $1 million payment was due on an arbitration judgment owed to former Signature Gallery owners, among several who who had successfully sued the company for fraud, and were still trying to collect after four years.

In one 2003 lawsuit, former Signature Gallery owners Karen Hazlewood and Jeff Spinello sued Thomas Kinkade and Media Arts Group, claiming that he had used his Christian faith to fraudulently induce them to invest. In a 2006 arbitration by other gallery owners, the arbitration panel found that the company had "failed to disclose material information" that might have kept them from investing.

There's good news and bad news in the May 2010 report by the American Bankruptcy Institute. On the positive side, May consumer bankruptcy filings were down six percent from April. Unfortunately, filings were up nine percent over May 2009, with a total number of Chapter 7 and Chapter 13 bankruptcy filings of 124, 838 this year.

According to Wall Street Journal writer Paul Ausick, bankruptcy filings in the second quarter of 2010 are likely to reach approximately 390,000, an all-time high.

The percentage of consumer bankruptcies filed under Chapter 7, 74 percent, was also down slightly  from April numbers but higher than last year's percentage. Despite the 2005 bankruptcy law intended to force most filers into Chapter 13, the number of consumers qualifying for Chapter 7 averaged 71 percent in 2009 but rose to 73 percent in the first quarter and 74 percent in the first two months of the second quarter of this year.

According to a Labor Department report released Wednesday, the jobless rate topped 15 percent in fourteen U.S. metropolitan areas. Eleven of those were in California, which only highlighted the economic troubles leading to insolvency for many Californians.

The city with the highest rate of unemployment of all metropolitan areas was El Centro, which had a jobless rate of 27.9 percent, not taking into account seasonal adjustments.

Partly because California was such a large beneficiary of the housing boom, the resulting foreclosure crisis has cost the state dearly in job losses and insolvency. The financial crisis has resulted in the deepest recession since the end of World War Two for cities nationwide, and municipal bankruptcy is becoming an increasingly likely option for many California cities. Vallejo has already filed and Antioch is considering the move.

Unemployment can hit cities especially hard by driving up demand for basic and relief services while driving down tax revenue at the same time. As a result, municipalities and states tend to gauge economic progress by unemployment rates, rather than growth in gross domestic product, the measure the federal government uses.