Mortgage Modifications and Dashed Hopes

I get a lot of calls from people trying to get some kind of mortgage modification done who are confused by the process.  I tell them to get in line.  They seem to think I’m supposed to know all the answers and have a magic guidebook telling me how to force a mortgage servicer to return phone calls, act timely, tell you in advance what they will and won’t do and finally produce the result the borrower wants.

I tell them that I don’t intervene in the loan modification process.  I don’t know anymore about it than anyone else who reads the news regularly.  I have little to no faith in mortgage servicers doing anything that is not in their best interests (and they have no real interest in mortgages performing), I think most expectations about mortgage modifications (including most that I have heard come out of government officials’ mouths) are outside the contractual rights of most servicers and to call me if they get a good result –  because I would love to hear it.

Then, they start arguing with me.

Ok, finally, some real numbers.  In today’s CNNMoney article, CNN is reporting that fewer than 5% of trial modifications done on Freddie Mac loans were being converted into permanent mods.  Across the board figures are expected to be substantially lower.

I found the reasons suggested in the article to be rather different than what I hear.  People who call me after arranging a 3-month trial mod (and going through the repeated requests for the same documentation that has already been produced multiple times to multiple servicer addresses, etc.) tell me that they have a 3-month modification and they are told that they are eligible for a permanent modification; but there are two problems.  First, they have no idea what the terms for that permanent modification will be; but they are expected to sign all kinds of binding agreements.  Second, despite being current in a temporary modification and approved for some undefined permanent modification, their foreclosure is continuing to proceed.  In one case a Sheriff’s Sale was set before the temporary modification was to be completed.  Even though the people held paperwork saying that they had been approved for a permanent modification — and if they signed all the paperwork, they might someday be told what the terms of that modification would be — of course, by then they would have lost their house at Sheriff’s Sale — details, details.

I’m still waiting for my Law School alma mater to send me the magic wand that was supposed to come with my law degree.  Until then, I am going to continue to refuse any involvement with loan modifications.

Elaine

The Automatic Stay Protects WHAT????

You don’t have to hang around the Bankruptcy Court long to figure out a few things about the automatic stay.  After all, it is a pretty simple concept.  The Automatic stay goes into effect automatically upon the filing of a Bankruptcy and it stays (meaning temporarily stops) all collection activity against the Debtor or property of the debtor.  Oh, and there is a private cause of action for damages if the automatic stay is violated.

Pretty simple.  If a Debtor files for Bankruptcy and a creditor tries to collect a debt as to the Debtor or his property (i.e., repos a car, garnishes wages, etc.), then the Debtor can sue in the Bankruptcy Court for damages.

Seems simple enough.  At least, until a Creditor sues another creditor for damages  for violating somebody else’s automatic stay.  SAY WHAT?????  You just know this had to be a case from Texas.  Sure enough, in St. Paul Fire & Marine Insurance Co. v. Labuzan decided today in the 5th Circuit a creditor successfully counterclaimed against another creditor claiming damages resulting from the violation of somebody else’s automatic stay — oh, and it wasn’t even a Chapter 13 with that really cool co-debtor stay.

You just know the facts are convoluted, but in a nutshell, here they are.  Corporation had performance bonds with St. Paul Fire & Marine.  The owners of the Corporation gave personal indemnities to St. Paul Fire & Marine in the event that it had to pay out on the bonds.   Corporation filed for Chapter 11.  St. Paul Fire & Marine then contacted the owners of the corporation’s ongoing projects and basically warned them not to pay the corporation or if St. Paul had to pay off on the bonds, St. Paul would come after the project owners for any amounts that they paid to the corporation.  The corporations cash flow went off a cliff, the reorganization failed, the corporation converted, St. Paul had to pay off on bonds.  St. Paul then sued the owners of the corporation on their indemnity agreements.  The owners counterclaimed on the grounds that it was St. Paul’s violation of the corporation’s automatic stay that destroyed the corporation’s cash flow and made payments on the bonds necessary.  The Fifth Circuit agreed.

Wow, and I thought 72 degrees, overcast and rainy in August was weird.

Elaine

Creditors Have to Play by SOME Rules

The Tenth Circuit handed down a decision two days ago reversing its Bankruptcy Appellate Panel and basically finding that at least some rules really do apply to creditors.  Imagine that.

The facts have become routine in virtually every Bankruptcy case in which assets are to be distributed to creditors (i.e. every chapter 13 and some chapter 7’s).  A debt repurchaser, in this case B-Line, LLC filed a claim alleging that it was entitled to be paid for a debt owed to it by the Debtor.  Its claim included the last 4 digits of an account number listed on the debtor’s schedules and an amount that was close to the amount scheduled for that debt.  B-Line claimed to have bought the debt from the former creditor, but it produced no documentation to support the amount of the claim or its ownership of the claim.

The Bankrupty Appellate Panel found some two years ago that B-Line’s claim was sufficient.  Since the claim resembled one included on the Debtor’s schedules,  the schedules essentially constituted prima facie evidence that the claim was accurate and that B-Line owned it.  This ruling few in the face of the statutory requirements that creditors attach documentation to their claims establishing the amount of the claim and the creditor’s ownership of the claim.

The Tenth Circuit has very wisely ruled that the statute means what it says and even debt repurchasers must comply with it.  B-Line’s claim was not sufficient, because it lacked documentation to support it.   Oh, if you want to read the opinion for yourself, it is Caplan v. B-Line LLC (In re:  Kirkland), Case No. 08-2017 (1oth Cir. May 14, 2009)

Elaine

Medical Bills and Credit Cards

CNN seems to think that paying medical expenses with credit cards is a new thing.  (Can’t Pay Your Doctor?  Charge It!)  They should have talked to a bankruptcy lawyer.   Anybody who thinks the credit card debt in this country was racked up on soccer shoes and restaurant meals, needs to take another look.  Elderly clients who have never used their credit cards anywhere but the pharmacy are just not that unusual — and haven’t been for years.  Think about the last time you were in a doctor’s office that didn’t display the Visa card sign.  This ain’t news, guys.  It may seem like news, because lobbyists spent so much money trying to influence the characterization of the people who file for bankruptcy prior to Bankruptcy reform passing; but nothing has really changed.

Elaine

Consumer Debt Levels

USA Today has an article on consumer debt levels.   Basically, consumer debt isn’t going anywhere fast.  In 2008 household debt totaled $13.9 trillion.  That was almost double the 2000 levels.  In 2009 –  after the collapse of the credit bubble, banks cutting back lending, tightening of lending standards — you know, after the last year — household debt level is down for the first time in ages.  Well, sort of.  Household debt is now down to $13.8 trillion.  Whoo Hoo!

If this doesn’t scream that we’ve got a problem, then I don’t know what does.  Oh, and all those economists calling for a 2nd half economic recovery?  On the backs of what jobs and what income?  We are a consumer driven economy.  As long as the consumer is busy NOT getting debt paid down and NOT staying employed, I wouldn’t start singing Happy Days are Here Again anytime soon.

So, where to start?  The credit card reform bill going into effect next year is a start.  Anyone who has spent any time at all reading credit card terms figures out pretty quickly that the credit card companies have spent a huge amount of time figuring out ways to make debt almost impossible to pay down.  If you haven’t read about interest rate increases (by sometimes 30% apr or more) just because the card company thinks it can, then maybe you should start by googling double cycle billing; but I wouldn’t recomend trying that before breakfast.

Elaine

Small Business Bankruptcies

USAToday just ran an interesting article on small business bankruptcies.  This article makes several interesting points about the rising numbers of small business failures and the impact that will have on the economy.  What I think the article misses is that you cannot track the failure of really small busineses through the bankruptcy courts — because they don’t go there.

In most cases the owners of the business file.  The Corporation or LLC that is actually the business does not file.  Why?  Simple, unless you are going to attempt a reorganization in a Chapter 11 (which most really small businesses can’t afford), then there is no reason for a Corporation or LLC to file a Bankruptcy.  They aren’t eligible for a discharge in a Chapter 7 filing.

Usually, the better course is to just let the business entity die on the vine.  The owner files and goes on down the road.  The business entity is just essentially abandoned.  The bankruptcy statistics will never be able to track those business failings.  So when you read articles on the bankruptcy rate amongst small businesses, assume that the actual failure rate is far higher.

Elaine

Court Slaps Legal Assistant Directly

The Bankruptcy Court for the E.D. of New York handed down  a very unusual opinion early this month.  If you are interested the case is  Adams v. Giordano, et al. (In re:  Clarke, et al), Adv. No. 08-8133.  As far as I can figure out from the opinion, an attorney hired a contract legal assistant to prepare bankruptcy petitions.  The legal assistant thought that he was doing a first draft of the documents.  The documents, instead, were filed as he prepared them and with his electronic signature on them.  Although, they wound up being filed pro se by the Debtors.  The legal assistant explained some things to the clients, interviewed them, prepared docs, etc.  In other words, he did what most legal assistants do.  He did not provide bankruptcy petition preparer disclosures, or any other disclosures, to the clients before commencing work.

The UST brought an Adversary Proceeding against the attorney, another entity I don’t recognize and the legal assistant.  The UST settled with the other two defendants and proceeded against the legal assistant.  The Court found that the legal assistant violated the mandatory disclosure provisions  of Sections 110 and 528.  In addition, the Court found that the legal assistant had committed the unauthorized practice of law for explaining and summarizing documents for the clients.

There is no mention in the opinion what the settlement terms were for the other defendants, but the legal assistant — who was working for a licensed attorney, albeit on a contract basis, the whole time — was sanctioned more than $5,000.

I can’t help but think that this case would have been decided differently if the legal assistant were a full-time employee working in the lawyer’s office, but this opinion reinforces my decision not to use legal assistants.  Although, I do use some contract attorneys; and I might reconsider if I am properly shielding them from any liability under the every sneaky Bankruptcy Code.  I think the second area to be wary of is making sure that we are not providing our clients with documents that they can file on their own — with or without our consent.

Elaine

Today I Have Hope for Real Bankruptcy Reform

Today, I have hope.

On January 6, 2009 Sen. Dick Durbin intruduced Senate bill 61, known as the Helping Families Save Their Homes in Bankruptcy Act. Identical legislation has been introduced in the House by John Conyers. One of the objectives of this legislation is to give home owners the same ability to modify their home mortgages in Bankruptcy that rental property owners already have.

I have blogged before about the fact that if you own rental property and file for bankruptcy, you can modify the terms of the mortgages secured by those properties. Under the right circumstances you can change the principal balance, reduce the interest rate, change the monthly payment amount, even modify the right to assess and collect certain fees. If you live in the house securing the mortgage, as a general rule; you can’t change anything. You can cure an arrearage if you were behind on the mortgage at the time that you filed, but it must be done in accordance with the terms of the note and mortgage.

One of the results of the Durbin/Conyers legislation will be to level the playing field. I am a member of an organization, the National Association of Consumer Bankruptcy Attorneys, that is fighting for this right for our clients in Washington. We need your help. Contact your Senators and Representatives now.

To my mind there are three important points in favor of this legislation.

First, in a Country that is supposed to encourage home ownership it strikes me as wrong that landlords get better treatment in the Bankruptcy Courts than homeowners.

Second, one of the problems behind the credit crisis gripping the world economy and devestating retirement accounts and any hopes of a balanced Federal budget, is that no one really knows where mortgage losses (and other consumer debt losses) are going to stop. Modifying the mortgages will accelerate the pain, but it will help determine its full extent.

Finally, the bank lobby is telling Congress that this bill will increase the cost of mortgage loans for borrowers. In fact, they are saying essentially the same things that the Credit Card lobby (more bankers) were saying about Bankruptcy reform in 2004. According to the credit card lobbyists passing Bankruptcy reform was going to reduce the costs of credit for the average American to the tune of $400 a piece per year. Well, I don’t know about you — but I haven’t gotten my check yet.

Maybe, it is time we address the root of the financial problem instead of simply throwing more money at the banks whose rush to invest in securitized loan products that paid too much, carried too little risk and nobody really understood in the first place created the biggest mess in our lifetimes.

Elaine

Getting Paid by the U.S. Trustee

I love reading opinions where the winning attorney had way more in the guts category than I do.  Dennis Feld, a fellow NACBA member from New Mexico, has just gotten a written opinion out of the Bankruptcy Court in New Mexico to the extent that a withdrawal of a 707(b) motion by the U.S. Trustee qualifies the debtor as a prevailing party under the Equal Access to Justice Act.

Ok, so in English?

The Equal Access to Justice Act allows an award of attorneys fees against the U.S. Government if four conditions are met:

1. First, the petitioner must be the prevailing party;
2. The government’s position in the litigation must not have been substantially justified (which means a reasonable basis in both fact and law);
3. A motion requsting an assessment of fees must be timely filed; and
4. No special circumstances exist that would make the award unjust

See, In re: Mendez, No. 7-07-11092 Bankr. N.M. decision date September 26, 2008.

The Mendez court found that the Trustee’s withdrawal of its 707(b) motion to dismiss qualified the debtors as a prevailing party. The opinion does not address the remaining three factors. However, I expect to see more litigation on this issue in the near future.

Oh, and as much fun as it is to spend Capital One’s money — and it is, trust me. It must be even more fun to cash that Treasury check.

Elaine

Discharge Violations

Countrywide has just been spanked to the tune of $55,000 for a discharge violation involving a mortgage.  Debtor’s counsel is providing the details here. The basic facts are that Debtor filed a Chapter 7, did not reaffirm the mortgage, received discharge, surrendered the property and then got harassed (pretty endlessly from the looks of things) by Countrywide trying to collect on the debt.

Countrywide’s collection actions included phone calls, billing statements, and reporting the balance as still owed on the Debtor’s credit report.  Debtor’s counsel claims that Countrywide received no less than 16 notices of Bankruptcy and demands to stop the improper conduct.

The debtor claimed damages in the form of emotional distress, credit problems resulting in higher interest rates and a lower credit score, and some kind of problem with an adoption.

Clearly, this is not your run of the mill discharge violation.  Countrywide was not only persistent but when your counsel tells debtor’s counsel on the phone to “take it to court” you are really asking for trouble.

It has been my experience that Judge’s hate discharge violation cases.  They want to be sure that it isn’t just a stupid mistake and that Debtor’s counsel has fired a warning shot before filing the Adversary Proceeding.  Even so, they appear to be reluctant to award serious damages.

When I was a young lawyer representing creditors, I was taught to be terrified of violating the automatic stay or the discharge violation.  That doesn’t seem to be the case anymore, and frankly, a lot of the problem comes from Courts who don’t have a whole lot of respect for their own orders.  That needs to change, and in my office it is going to.

Elaine