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Wednesday, June 30, 2010

Bad Credit Can Cost Your Job

Bad Credit Can Cost Your Job

The effects of debt can affect your credit, your health, and even your job.  Calls to your work from debt collectors can interfere with your job performance.  Requesting payday advances from your employer can cost you a raise or promotion.  In some extreme cases your debt problem can even get you fired. 
The Cleveland Plain Dealer recently reported that 39 Defense Finance and Accounting Service employees will lose their jobs as a result of their bad credit ratings.  In each case the employee mismanaged finances and failed to meet standards the government requires of employees who have access to sensitive information like Social Security numbers.  While you may not have a government job that requires a security clearance, if your debt issues are affecting your job, it is time to get help.
Government and many private employers hold the opinion that excessive indebtedness increases the temptation to commit unethical or illegal acts in order to obtain funds to pay off debts.  Private employers that are especially sensitive to their employees’ debt include banks and other financial institutions, retail stores, and any business where the employee might handle cash on a routine basis.
The federal bankruptcy laws can help you solve your debt problem without losing your job.  Section 525 of the Bankruptcy Code prohibits a government or private employer from terminating or discriminating against an employee who files bankruptcy.  The federal law clearly forbids an employer from firing you on account of your bankruptcy.
Many employers view bankruptcy as a resolution of a debt problem through a government approved process, which may positively reflect on the employee as an indication of financial responsibility.  Eliminating your debts through bankruptcy may also decrease financial pressures and lessen the risk of unethical or illegal acts.
If your debts are affecting your job, consult with a bankruptcy attorney and explore your options.  Bankruptcy is a federally guaranteed legal process that helps individuals recover from overwhelming financial hardship.  Protect yourself and your job by getting the help and relief you need.

Sunday, June 27, 2010

Today's Consumers Prefer Chapter 7 Bankruptcy 3 to 1

Today's Consumers Prefer Chapter 7 Bankruptcy 3 to 1

While the media focuses on the total number of filings, a drill down into those data can also tell us something about the pain that families are suffering. In the last two years, since the foreclosure crisis, the fraction of all consumer filings that are chapter 13 cases has plummeted. In the language of taste tests of soda pop, today's consumers prefer chapter 7 three-to-one over the competition (aka chapter 13). Check out these data from the UST Program. In 06-07, chapter 13s averaged about 38% of all filings. In 08, there was a steep drop to 31%; and in 09, a further drop to 26.5%. These are really big changes in such a large system.
Chapter13Filings
The obvious explanation for this fall in chapter 13 is a decline in people trying to save their homes, which we think is a major reason that people chose chapter 13 instead of chapter 7.
Homeowners in 2008 and 2009 seem to have realized three things: 1) home prices are not going up anytime soon; the "crisis" is  a long-term change in the housing and mortgage markets; 2) they are not going to get a loan modification; the Administration's projected numbers of those who would be helped by HAMP and HARP were fanciful (dare I say "misleading"?); and 3) they simply cannot make their mortgage payments in a world where overtime is being eliminated, unemployment is a fear or reality, increased tax burdens loom as states and localities can't make ends meet, and many other costs remain high (gas, health care, etc.) Many people had these realizations in 2008, and many more had them in 2009. Each year, the share of chapter 13 filings plummeted. And all this, despite BAPCPA's purported intent of driving up chapter 13 filings and making people pay more of their debts.
Homeowners' pessism may not be a bad thing. In a research paper that I authored with John Eggum and Tara Twomey, we found that chapter 13 filers in April 2006 (before the foreclosure crisis) had very high homeownership costs, with more than 70% of homeowners trying to save homes that subsumed more than 30% of their incomes (the long-standing standard for affordable housing). The lower fraction of chapter 13 filings may ultimately translate to a higher rate of plan completion for chapter 13; if consumers are reticient to try to save homes with high costs, maybe more than 1 in 3 chapter 13 plans will make it to completion and a higher fraction of chapter 13 debtors will earn a discharge. Time--a long time, given the five year repayment plans that dominate chapter 13--will tell if the lower proportion of chapter 13 cases as a share of total bankruptcies will correlate with a higher discharge rate for chapter 13.

Combining Chapter 13 with a Voluntary Mortgage Modification

Combining Chapter 13 with a Voluntary Mortgage Modification


Most of us are all too familiar with the failure of Congress to pass legislation allowing judicial modification of mortgages in chapter 13 bankruptcy cases. Sadly, our predictions of millions of foreclosures, most of which could have been prevented by that legislation, are coming true, and most knowledgeable observers believe the worst is yet to come. In the absence of a law requiring lenders to modify mortgages, creative bankruptcy attorneys have been doing the best they can with the tools that are available and are having considerable success. 
Increasingly, consumer bankruptcy attorneys are combining loan modifications under the Obama Administration's HAMP (Home Affordable Modification Program) with chapter 13 plans that can eliminate or greatly reduce most other debts. In some cases second and third mortgages can even be eliminated in chapter 13. This strategy was made much more feasible by recent changes in the mortgage modification program directives that prohibit mortgage companies from discriminating against homeowners who are in bankruptcy cases.  It also provides a mechanism for attorneys to be paid for loan modification work (as part of the compensation for chapter 13 representation paid through a chapter 13 plan) without requiring large up-front payments.
It is sometimes possible to obtain a loan modification before filing a bankruptcy case and then file the bankruptcy, under chapter 7 or chapter 13, to deal with other debts.  But bankruptcy attorneys have also had success with submitting a loan modification request after a chapter 13 bankruptcy case has been filed, and incorporating the proposed modification into a  chapter 13 plan to be approved by the court once the mortgage company agrees to modification.
Some bankruptcy courts, such as S.D.NY. and Rhode Island, have also begun mediation programs to help homeowners come to agreement with mortgage holders on loan modifications.  A strong mediation program can ensure that homeowners are dealing with someone who has the authority to make a deal and can hold servicers accountable, preventing the “lost document” problems and other problems frequently encountered by consumers attempting to get modifications.  Courts can hold lenders' feet to the fire by refusing to permit them to foreclose if they do not make a good faith effort to achieve a workable modification.       Of course, voluntary mortgage modifications, especially the vast majority that do not reduce principal, are not as effective in the long term as the restructuring that chapter 13 provides for all other kinds of secured debts. But being able to obtain both an affordable mortgage payment through a loan modification, as well as relief from other debts, gives consumers the best chance under current law to keep their homes and get a financial fresh start.  It should greatly ameliorate the problem of the high debt to income ratios that are causing some homeowners who have received modifications to default, even with their lower mortgage payments.

Thursday, June 24, 2010

108 Million Settlement on Countrywide's Servicing Practices

108 Million Settlement on Countrywide's Servicing Practices

Last week, the FTC announced a $108 million settlement with Countrywide based on allegations that Countrywide's loan servicing operations collected excessive fees. The complaint describes Countrywide's servicing practices for default fees as part of its strategy to keep on profiting from consumers, even in hard economic times. I'vepreviously commented on Countrywide's description of this as a "countercyclical diversification strategy" that it trumpeted to investors, and what Senator Schumer thought of such a strategy. The complaint alleges that Countrywide used subsidiaries to mark-up fees--often by 50-100%--on default services such as property inspections. Instead of Countrywide loan servicing working directly with vendors for these default services, Countrywide loan servicing would contract with its subsidiary, who would then work with the vendor. And that extra step--from one Countrywide entity to another--dramatically boosted the fees that got charged to struggling homeowners. To me, the lesson of the FTC's enforcement action is that businesses can use subsidiaries but they can't use subsidiaries to upcharge consumers and obscure the real costs of services.
The settlement also addresses the problems with Countrywide's mortgage servicing in bankruptcy. The FTC alleged many of the same wrongs that I identified in a law review article on mortgage servicing in 2008, including that filing claims that it could not substantiate. The UST Program cooperated with the FTC on the enforcement activity, and the settlement also resolves the UST litigation against Countrywide.
If you are a consumer who filed a chapter 13 bankruptcy case with a mortgage serviced by Countrywide, you may be eligible for a cash award. The FTC website has more details

Tuesday, June 22, 2010

Honesty In Bankruptcy Is Best Policy

Honesty In Bankruptcy Is Best Policy

Several courts have stated that the bankruptcy laws are meant to give an honest debtora fresh start, but not a head start.   It is important to understand that the bankruptcy laws in this country are very forgiving, but these laws require the debtor to make reasonable efforts to repay creditors.  The debtor is obligated to disclose all income and assets to the bankruptcy court.  From these disclosures the bankruptcy trustee, creditors, and the court are able to determine what, if anything, the debtor can afford to repay.
The debtor has a great responsibility to truthfully disclose income and assets to the best of his or her ability.  The federal bankruptcy laws will relieve the honest debtor from the stress of overwhelming debt.  However, the dishonest debtor can face serious consequences.
One consequence of failing to disclose income or assets is that the debtor may be denied a discharge.  Section 727 of the Bankruptcy Code is designed to protect the integrity of the process and permits the court to dismiss the debtor’s case for dishonest acts like lying on the bankruptcy schedules, hiding assets, failing to maintain financial records, refusing to turn over records, and refusing to cooperate with the trustee.  The court may deny the dishonest or uncooperative debtor a discharge under Section 727 and the debtor will remain liable for all debts.  To make matters worse, any assets turned over during the case will still be administered by the bankruptcy trustee and the debtor may lose non-exempt property to creditors.
Another more serious consequence for the dishonest debtor is the prospect of being charged with bankruptcy fraud.  The Federal Bureau of Investigation ordinarily investigates allegations of bankruptcy fraud, but other federal agencies may become involved including the Internal Revenue Service Criminal Investigation’s Bankruptcy Fraud Program.  Most bankruptcy fraud is first discovered by the bankruptcy trustee, and is often the result of whistle blowing from neighbors, creditors, or ex-souses.  The Department of Justice Trustee Programencourages individuals to report bankruptcy fraud.
In bankruptcy, honesty is the best policy.  For an individual who needs relief from overwhelming debt, bankruptcy is a tremendous tool that gives real results.  The promise of bankruptcy is a fresh start, but not a head start.  Debtors who are dishonest during the bankruptcy process can lose the benefits of a bankruptcy discharge, and may be criminally charged with one or more federal crimes.  If you need help with your debt problem, speak honestly and frankly with an experienced attorney and learn how the powerful federal bankruptcy laws can help you.

Tuesday, June 15, 2010

Bankruptcy Can Help Build A Better Future



Bankruptcy Can Help Build A Better Future

Pop quiz: What do Walt Disney, Mark Twain and Larry King have in common?
A.   They each filed a personal bankruptcy and went on to have extraordinary success in life.
Bankruptcy is not a professional or financial death sentence.  Just ask Donald Trump who has filed multiple Chapter 11 reorganization bankruptcies for his casinos.  Bankruptcy is a financial tool that uses the federal law to protect the honest, but unfortunate debtor.  Bankruptcy allows the debtor the opportunity to restructure finances and formulate a plan to repay or discharge debt. Bankruptcy provides the debtor a fresh start to a new financial future – one free of the pressures from debt collectors.
Here’s another question: What honor did Kim Basinger and Burt Reynolds receive after filing personal bankruptcy?
A.   Each was nominated for an Academy Award in 1997.  Basinger won an Oscar for best supporting actress for L.A. Confidential, and Reynolds was nominated for best supporting actor for Boogie Nights.
Bankruptcy can help you and your family build a more solid financial foundation.  Henry Ford created another automobile company after his first company filed bankruptcy.  It’s safe to say that Ford Motor Company would not exist today without the help of the federal bankruptcy laws.  The same can be said for General Motors, which filed for Chapter 11 bankruptcy in 2009.
How can bankruptcy help you?  The bankruptcy laws can stop a foreclosure sale, a pending lawsuit, and creditor harassment.  Bankruptcy can protect your family assets and retirement accounts from creditors.  Bankruptcy can eliminate debt or give you time to repay loans including delinquent car and home payments.  The federal bankruptcy laws helped over a million people get relief during 2009, including celebrities Stephen Baldwin, Sinbad, and Bernie Kosar.
As Abraham Lincoln (filed bankruptcy in 1833) once said, “The best thing about the future is that it comes only one day at a time.”  If you are experiencing overwhelming financial difficulty, take the first step to a better future by speaking with an experienced bankruptcy attorney today.

Monday, June 14, 2010

Bankruptcy and the Automatic Stay: What Does It Mean and How Does A Lender Get Around It?

Bankruptcy and the Automatic Stay: What Does It Mean and How Does A Lender Get Around It? 

This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).
Although I can NOT quantify this statement, we're seeing more and more commercial real estate go into bankruptcy.  Of course, these typically do NOT involve CMBS loans; probably because those loans typically have a "non-recourse carveout" that brings personal liability to the individual sponsor, key principal or owner of the borrower, if the borrower files for bankruptcy.  So, unless that person's financial condition is independently insolvent, the individual owners "behind" commercial property (that is financed with a CMBS loan) generally strive to avoid bankruptcy. 
But then, during the '04 to '07 "hot" production years, there seemed to have been a tendency to even NOT require an individual to be personally liable for this topic.  Instead, the non-recourse carveout party was an entity (such as the operating company).  So, these types of CMBS loans will be like bank loans to entities, or any loan that doesn't have an individual with liability upon a bankruptcy filing: bankruptcy is a viable option.   (I know, I know:  . . . then there is the General Growth Properties bankruptcy filing - but that case is a topic beyond the scope of this posting.)
In any event, we're seeing an up-tick in bankruptcy filings involving commercial real estate owners. So, our FAQ series will focus on some common bankruptcy questions.
FAQ #42 -  What happens if the borrower files bankruptcy?
  • Upon a borrower's filing of bankruptcy, an automatic “stay” immediately takes effect. The automatic stay prohibits all actions that may be taken against a borrower or its assets. This effect increases the costs and fees and dramatically delays a lender from foreclosing on the loan's collateral.
  • Here is a glossary of helpful terms used in bankruptcy.
FAQ #43 - How can Lender (servicer) proceed in spite of the “automatic stay”?
  • The lender as a secured creditor, may file a request with the court for relief from the prohibition of the automatic “stay”.
  • In a Chapter 7 case (look at the glossary [above] for a definition), a secured creditor will likely want to file a lift stay motion as early case as possible in order to obtain stay relief as quickly as possible.  A stay relief motion may require at least twelve to thirty days' notice.  Therefore, if a secured creditor wants to obtain stay relief to pursue repossession or foreclosure, it is important that it file a motion for stay relief as early as possible to avoid any further delay.
  • Occasionally, a secured creditor is able to negotiate with the Chapter 7 Trustee to reach an agreement whereby the Trustee will administer the secured creditors' collateral in exchange for a portion of the proceeds of such collateral to be distributed to unsecured creditors

Sunday, June 6, 2010

Rolling the Dice By Failing to Include Tenants as Defendants in Commercial Foreclosures

Rolling the Dice By Failing to Include Tenants as Defendants in Commercial Foreclosures

With all  the foreclosures going on these days, sooner or later one of these cases is bound to affect a tenant leasing all or a portion of the premises being foreclosed.  So what happens to a tenant in these situations?
The answers depends upon factors such as
  • what the lease says, i.e. does it say that it is subordinate to any mortgage
  • whether it was the lease or mortgage whcih was executed first
  • whether it was the lease or the mortgage which was recorded first
  • whether the tenant is joined as a party defandant to the foreclosure
So let's start with what the lease says.  Nearly all commercial leases in Ohio are likely to say that the lease is subordinate to any existing or subsequent mortgage financing by the owner of the real property.  In the unlikely event that a commercial lease does not have this provision, the tenant's lease will generally ride thorough the foreclosure if it was executed before the mortgage or at least recorded before the mortgage.  If the mortgage was executed before the lease, then it will depend on whether the tenant is named as a party defendant to the foreclosure and what rights of the tenant are at issue.
The BIG issue is what happens if a lease is executed after the mortgage, but the tenant is not made a party defendant to the foreclosure.  In Ohio, the definitive case is New York Life Ins. Co. v. Simplex Products Corp.,135 Ohio St. 501, 21 N.E. 2d. 585 (Stark Cty. C.P., 1939).  That case said that since there was no privity between the tenant and the purchaser at Sheriff's sale and the tenant's interest came from the property owner's interest which was auctioned, the lease was terminated - regardless whether the tenant was made a party to the foreclosure. 
However, as is often the case, the facts of the Simplex case left the door open for creative lawyering because it involved a foreclosure sale purchaser interested in  enforcing a lease of a tenant not named in the foreclosure.    In Davis v. Boyajuan, 229 N.E.2d 116 (C.P. 1967), the Stark County Common Pleas Court took the out and held that if the purchaser wanted to evict the tenant.  the lease remained in force with respect to a tenant not made a party to the foreclosure.  Consequently, if the tenant was not named as a party to the foreclosure but was in compliance with its obligations under the lease, the purchaser at a foreclosure sale could not kick the tenant out.  But see Prudential  Ins. Co. of America v. Bull Market, Inc., 420 N.E.2d 140 (C.P. Montgomery Cty. 1979)  ("[T]his court concludes that the Supreme Court  [of Ohio] did in fact announce in Simplex. that this state follows the minority rule to this effect that foreclosure terminates a lease of the mortgagor  for lack of priority between the lesee and the mortgagor.")
So these are mere Common Pleas Couty decisions - isn't there anything more authoritative?  More recently, the Ohio Court of Appeals for the Eighth Appellate District in Cuyahoga County has weighed in.  In Victoria Mortgage Corp. v, Williams, 1996 WL 200160,  involving a foreclosure sale purchaser attempting to evict a tenant with an oral lease who was not joined as a party to the foreclosure, the Court succinctly explained the majority rule  not followed  by Ohio:
The rule in a majority of jurisdictions regarding the survival of a lessor's rights when the lessee is not joined in a foreclosure action is that the lessee does not lose his or her right to possession  or quiet enjoyment.   A judicial sale is treated as a reversion which is subject to the lease, and the purchaser  acquires the rights and duties of the mortgagor thereby becoming the new lesser.
However, because Ohio follows the minority rule, the Court ultimately found that the lease was junior to the mortgage and was extinguished at sheriff's sale.
But what if the lease contains attornment provisions, as is common?  These provisions essentially say that the tenant will recognize any purchaser as stepping into the shoes of the seller/lessor, at least so far as it comes to continuing to pay rent.  In Brandon/Wiant Company v. Teamor, 125 Ohio App.3d 442, 708 N.E.2d 1024 (1998), the Eighth Appellate District Court of Appeals  in Cuyahoga County held that the lease as a contract was clear and unambiguous in stating that the tenant had agreed to accept subsequent purcahsers of the property as lessor.  While the case involved a lessor trying to collect rent from the tenant, in dicta, the Court noted:
[The tenant]  certainly has a right to enforce the obligations owed him bythe lessor against [the purchaser at foreclosure].  The lease is in full effect against both parties to the agreement.
The Fifth Appellate District Court of Appeals out of Muskingham County has consideted the foreclosure purchaser wishing to terminate a lease situation.  In First Federal Savings and Loan Association of Zanesville v. Rig Oil Company, Inc., 1983 WL 7013, the Court acknowledged Simplex, but found the reasoning in Davispersausive.  The Court said:
there is a significant difference between a nonjoined party being given the benefit that miight accrue from nonjoinder and denying him rights not litigated as a result of non-'joinder.  
Clear as mud, right?  So let''s try some general guidelines...
>>>>> IF YOU ARE A COMMERCIAL TENANT WANTING TO BE SURE YOU ARE PROTECTED AGAINST THE FORECLOSURE OF THE PROPERTY OWNED BY THE LANDLORD...
Consider obtaining a SNDA Agreement, short for Subordination, Non-Disturbance, and Attornment Agreement.  These agreements provide more certainty for commercial tenants when the landlord is in default, but the tenant is not and wishes to remain in place.  For more on how this works, vist the Ohio Real Estate Advisor Blog's post "Don't Forget the 'ND' and the 'A' in 'SNDA's'"
>>>>> IF YOU ARE A LENDER AND/OR SUCCESSFUL PURCHASER AT FORECLOSURE SALE WHO WANTS TO PROTECT THE STREAM OF INCOME OF RENTS FROM TENANTS FOLLOWI NG FORECLOSURE SALE...
Check the lease for attornment language.  If none, and perhaps even if there is, best to have tenant named as party defendant.
IF YOU ARE A LENDER AND/OR SUCCESSFUL PURCHASER AT FORECLOSURE SALE WHO WANTS TO BE ABLE TO HAVE EXCLUSIVE POSSESSION OF THE PROPERTY  FOLLOWING FORECLOSURE SALE.....
If you are in Stark County, definitely include tenants as defendants if there is going to be a desire to evict them following foreclosure.  If you are in Cuyahoga County, don't worry too much  about it.  Elsewhere in Ohio, it just depends on your judge, although to be safe, tenants should probably be included as defendants.  Of course, if the lease contains subordination language, you may be O.K regardless  on contractual grounds.
And of course, sometimes, there may just be too many tenants to make notification and addition as party defendants practical.  There's also the additional wrinkle that in some counties - Lucas Countywhich includes Toledo comes to mind - local rules actually require teants be notified