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Saturday, August 28, 2010

8 Things To Consider Before Walking Away From Your Mortgage

8 Things To Consider Before Walking Away From Your Mortgage

Last week I received an email from a desperate couple. Here's the edited version of their note:
"My wife and I have been struggling, morally, with what to do. We have two interest-only, adjustable-rate mortgages with two different lenders coming due in May of 2011. I currently can handle paying all my bills–but just barely, with nothing left over for replenishing of the emergency fund, or even my kids' college savings.
In one year, when those adjustable rate mortgages adjust, it's a different story. The home is now worth about 70% of the loan values. We do not want to stay in the home and have been trying to be proactive about doing something before the rates adjust. My lenders both said that if I do a short sale they would definitely make me sign a promissory note (for the deficiency). That defeats our purpose, so it is not an option for us. Bankruptcy attorneys have told me I make too much money to file for Chapter 7. I am currently employed. Last June I lost my previous job, and squandered our savings to stay above water with bills and the mortgages. Hindsight is 20/20 and at the time I should have filed for Chapter 7.
So, I am considering just letting the home go to foreclosure, saving my money, paying off other smaller debts (such as credit cards, and car loan), but am hesitant. I want/need to do the right thing fiscally for my family, but am wavering on the fence as to just take the plunge or not in a strategic foreclosure.
What should we do?"
These people are far from alone. Millions of middle-class Americans today are in a similar situation. They are struggling with their mortgage payments, and cannot sell because they are a long way underwater, owing more on their home than it is worth. They have wiped out their savings trying to keep up. One worker in six is either unemployed or underemployed, and there is a tsunami of rate resets coming in the next two years.
No one forced them to borrow –but no one forced the banks to lend either. More important right now is how they get out of it. I took this conundrum to two experienced bankruptcy attorneys–Richard Nemeth in Cleveland and Jeffrey Tromberg in Ft. Lauderdale, Fla.–for their advice. Here are some thoughts they offered.
1. Put those suitcases down! Stop and take a deep breath. Sure, you could just walk away from the home today. There is a decent chance the banks won't come after you for the shortfall either. And, as I've written before, the issue is not really a moral one. But you should first make sure you explore all your options to make sure you do it right.
2. Find out if you are eligible for help from the federal government. If your lender won't modify the loan or agree to wipe out the deficiency through a short sale, Uncle Sam may still help you. The Making Home Affordable program was signed into law by President Obama last year. It hasn't achieved as much as some may have hoped, but it has still helped some homeowners. The program offers mortgage modification and refinancing for some homeowners who are struggling, but there are conditions. The Department of Housing & Urban Development also offers help and advice on avoiding foreclosure: Details can be found here.
3. Get another legal opinion. You say you've spoken to bankruptcy attorneys, but were they specialists? Bankruptcy law in the U.S. like something out of Charles Dickens, even though it was just rewritten a few years ago. It's convoluted, self-contradictory, and complex. The laws vary from state to state, and case law is changing almost weekly. It's just five years since Congress passed sweeping legal changes, and many of the new rules are only getting road tested now. You may get different answers from different experts. Even those who pushed for the law, such as the lending industry, have been surprised at how some of it has worked out. It's worth making sure your counsel knows the minutiae. The National Association of Consumer Bankruptcy Attorneys ( should be able to help you find a local specialist.
4. Double-check to see if you can still squeeze under the bar for a Chapter 7 bankruptcy. Chapter 7 is probably the simplest way to clear your debts, walk away and start again. I know you say you've been told that you earn too much to qualify. The 2005 law made qualification much tougher. But the new means test is actually far less restrictive than many people–including many attorneys–think. It allows some pretty generous exclusions from your gross income. You are, for example, allowed to deduct some pension and 401(k) contributions. You are also allowed to deduct charitable donations up to 15% of your gross income, though you have to demonstrate some history of these contributions. Make sure your counsel is experienced at bankruptcy filings and has fully explored how you might be able to make these work for you.
5. Realize that even if you can't file now, that may change. The means test also excludes mortgage payments from your income. So even if you earn too much to file for Chapter 7 today you may do so when the mortgage rates reset. Mr. Nemeth says that the bankruptcy laws contain some peculiar loopholes you need to know about. For example, they may actually reward you for falling behind on your mortgage payments. That's because your mortgage arrears will help reduce your effective income for the purposes of the means test–even if you plan to walk away from the home. Crazy? Yes. But blame the lenders. This is the law they, um, lobbied for.
6. Understand how a Chapter 13 might help you after all. Chapter 13 is "bankruptcy lite," for those whose income is too high to qualify for a Chapter 7. It involves a debt repayment plan (it's something like the Chapter 11 bankruptcy process used by corporations, though not as generous). In Chapter 13, the courts work out how much of your unsecured debts you can reasonably repay and set up a schedule to repay it.
Chapter 13 will not reduce the value of your primary mortgage. But make sure your counsel understands a little-known gap in the law that can help distressed homeowners who either have two mortgages, or one mortgage and a home equity line on top. If the property value has fallen so far that the primary mortgage is now under water, the courts can rule that the second mortgage is now an unsecured loan. And that, miraculously, means they can modify it. An example: You take out a $200,000 first mortgage and $50,000 second mortgage to buy a home for $250,000. The home then falls in value to $180,000. As that's not even enough to cover the first mortgage completely, the second mortgage now has no collateral against it at all. The court, in most jurisdictions, can now modify that second mortgage the way they could other unsecured debt, such as a credit card payment.That could include reducing it to zero.

7. Keep contributing to your 401(k), IRA and 529 plans. It's very easy in a crisis to stop thinking about the distant future. After all, you've got your hands full dealing with today. But this is a dangerous reaction. Why? Because money invested in a qualified retirement plan, and in 529 college savings plans under some circumstances, enjoy substantial legal privilege. They can be sheltered from creditors in bankruptcy. And the contributions may actually help you qualify for bankruptcy--as mentioned above. But the earlier you start making these contributions, and the longer you have been making them, the more respect the courts are likely to give them. Mr. Tromberg's advice: "If both parents are working, I would contact the HR or 401(k) coordinator at work and say 'I'd like to max out my contributions today.'"
8. If all else fails? There are not always easy answers. If there really is no way to make use of Chapter 7 or Chapter 13, you may indeed decide just to walk away from your mortgage and let the chips fall where they may. You have already made valiant efforts to keep up your payments. You are absolutely right to put your family's finances first. But do explore the implications fully. Specialist knowledge can help. For example in some states the lenders have a very limited time to file legal papers for the arrears. And in many cases they are so swamped that they aren't even bothering. And before walking you should also at least consider ceasing payments on your mortgage but staying in the home. Many mortgage lenders have made this crisis worse by refusing to sit down with borrowers to strike a deal. Alas, they may react better to a stopped check than a polite phone call.

Sunday, August 15, 2010

Banks to benefit most from White House program to help fight foreclosures

Banks to benefit most from White House program to help fight foreclosures

Banks will get the biggest benefit from an Obama administration housing program designed to help unemployed homeowners escape foreclosure.

Housing experts expressed concern that banks, not homeowners, will be helped by the White House's $3 billion funding infusion -- $2 billion from the Treasury Department and another $1 billion from the Housing and Urban Development Department -- going to those states hit hardest by the housing market crash and unemployment.

"Giving money to the banks isn't what the government should be doing right now," said Dean Baker, co-founder of the Center for Economic and Policy Research.

"I'm not a big fan; it's ill-conceived," he said.

The basic principle is to help struggling homeowners but with so many people underwater on their mortgages the new funding is unlikely to do much good, Baker said.

"You need to make sure that someone benefits from the program other than banks," he said.

Baker suggested that if the government is going to provide up to $50,000 in loans over the course of two years to those struggling homeowners that the money should be used for any of their needs, not just to pay the mortgage.

He said banks could offer a program that would allow homeowners to rent their home back from the bank at a lower monthly rate than their mortgage payment for up to five years, providing some security for those struggling to make monthly payments.

The arrangement would provide lenders with a real incentive to negotiate with homeowners because they don't want to be landlords.

If the recently announced program is expected to work there has to be a reasonable expectation that at the end of the two-year program homeowners will have some equity in their property.

"If that's not the case, then it's not worth it," he said.

He said he'd be "very surprised" if the vast majority of those who take advantage of the program don't eventually lose their homes.

Foreclosures were up 4 percent in July with 325,229 filings, a nearly 10 percent increase over the same month in 2009, according to a report from RealtyTrac, a group that tracks foreclosure filings.

David Abromowitz, senior fellow at the Center for American Progress, said the main problem with the funding is that lenders will benefit without requiring any concessions or matching of the federal aid.

"My concern is what are we asking from lenders who are going to get the benefits source to pay those loans for 24 months," he said.

Under the program, lenders don't have to make principle reductions on loans or major modifications, he said. Lenders should also be required to make concessions and possibly even match funding.

"Banks also should be required to share in the burden being faced by homeowners," he said.

Despite his reservations with the funding, he emphasized that with millions facing foreclosure, the fragile economy and a slowing economic recovery, "anything that slows or stops foreclosures is good."

"It's targeted well toward people facing a temporary situation when they can't pay their mortgage because of unemployment," he said.

Still, the challenge is difficult as federal officials try to find ways to get the economy to turn the corner and pick up pace.
"No one piece is going to turn the tide," Abromowitz said. "But this certainly could help in the housing market." 
Under the federal program, Treasury will direct the $2 billion to the "Hardest Hit Fund" created earlier this year, while HUD will create a new "Emergency Homeowners Loan Program" that will provide zero-interest loans of up to $50,000 for two years. The funding will be divided up among 17 states and the District of Columbia. 

The funding allocation announced last week is the third payout for the housing program, pushing the cost of the program to $4.1 billion. 

Nevada, Arizona and Florida posted the worst foreclosure rates in July, with Nevada reporting the nation's highest foreclosure rate for the 43rd straight month. 

Five states accounted for more than 50 percent of national total -- California, Florida, Illinois, Michigan and Arizona. 

Four of those states will get part of $3 billion from the Treasury and Housing and Urban Development Department to help unemployed homeowners stave off foreclosure. 

At $476 million, California gets the largest share while Florida will receive about $239 million, Illinois gets $166 million, Michigan $129 million and Nevada is set to receive $34 million under the program. 

John Weicher, director of the Center for Housing and Financial Markets at the Hudson Institute, said "the most important thing is the strengthening of the economy overall."  

"What's happened so far hasn't been very helpful," he said about the administration's past efforts. 

The Obama administration had tried several different avenues to stem foreclosures but hasn't made much headway. About 530,000 homeowners, or more than 40 percent, have dropped out of the Making Home Affordable program. 

"There's an open question of whether this will work particularly well," Weicher said. 

He said maybe just getting money to people to help them make their mortgage payments may be more successful than other programs. 

Republicans have argued that it puts taxpayer money at risk, and the special inspector general for the $700 billion Troubled Asset Relief Program is auditing the program. 

"It’s troubling that just weeks after the SIGTARP assailed the administration for its lack of success and transparency in managing their signature mortgage-relief program, they have ignored the IG’s warnings and are committing even more money in a failed program that ultimately isn’t helping those who need it the most," Rep. Darrell Issa (R-Calif.) told The Hill. 

Issa, ranking member on the House Oversight and Government Reform Committee, said "if the administration were serious about helping the jobless keep their homes, they would be advancing policies that would create jobs and address the root causes of the housing crisis – Fannie Mae and Freddie Mac.

Thursday, August 12, 2010

Dealing with the Bankruptcy of Your Commercial Landlord or Tenant

Dealing with the Bankruptcy of Your Commercial Landlord or Tenant

With the economy seemingly in a tailspin, even comparatively healthy businesses are being affected by thebankruptcy of other companies with which they have a landlord-tenant relationship.  For commercial landlords faced with the bankruptcy of a business tenant, the questions usually revolve around will I get paid and, if not, how can I get this deadbeat out?  For tenants, the bankruptcy of a landlord raises the even more basic question:  so now, what?   Either way, section 365 and section 502 of the Bankruptcy Code have the answers.
>>> If You Are a Commercial Landlord of Nonresidential Real Property with a Tenant Who Has Filed Bankruptcy...
     1.      Remember the Automatic Stay!   Section 362 of the Bankruptcy Code imposes an injunction-like automatic stay which prevents a landlord from commencing or continuing any eviction or collection action against a delinquent tenant.  This applies in all bankruptcy cases, whether Chapter 7, 11,12, or 13.  Contempt charges, fines, and in extreme cases, even jail, can result from vi9olations of the automatic stay.
  • EXCEPTION - If the lease has in fact actually been terminated  BEFORE  the date the bankruptcy petition, Bankruptcy Code sections 362(b)(10) and 541(b)(2) allow actions to recover possession of the premises to proceed.  Collection actions to recover money judgment would still be stayed.
     2.     Expect to Receive Post-Petition Administrative Rent If Tenant Does Not Vacate Premises.  If a business tenant remains in possession of premises after filing bankruptcy, the landlord is entitled under section 365(d)(3) of the Bankruptcy Code to rent at the contract rate payable according to the terms of the lease until such time as the debtor tenant rejects the lease, surrenders and vacates the leased property.  The debtor is expected to make immediate timely payment of these amounts as they come due.  The amount of this post-petition rent is an administrative claim entitled to priority  in payment over other unsecured claims; it's up there with taxes and the debtor's attorneys fees.
  • In Chapter 7 cases, the lease is automatically deemed rejected in 60 days unless the trustee has sought and obtained additional time within which to make a decision regarding how to handle the lease.  Section 365(d)(1). 
  • If administrative rent is not promptly and timely paid, it may be necessary to file a motion seeking relief from stay.
     3.     Know Your Rights If the Debtor Tenant Wants to Assume or Assign the Lease.  Before an unexpired lease of nonresidential real property can be assumed or assigned, Bankruptcy Code section 365(b) requires the following:
  • All monetary defaults must be cured.
  • "Adequate assurance" must be provided that any nonmonetary defaults will be promptly cured.
  • Adequate assurance" must be provided that lease obligations will continue to be satisfied in the future. 
  • If the property involved is a shopping center, there are some additional specific requirements that must be met pursuant to section 365(b0(30 of the Bankruptcy Code
In addition, the lease must be assumed as a whole; the debtor tenant is not allowed to modify or cherry-pick the terms it wishes to have included and reject the remaining terms.  It is also important to rememeber that, in a change made in 2005 by Congress, the debtor tenant must make a decision concerning whether to assume or assign a lease within 120 days after the date the bankruptcy petition is filed; the debtor may obtain one 90 day extentsion of this deadline, but that is all.  If no decision is made, the lease is deemed rejected.  Section 365(d)(4).

  • This claim will be treated as an unsecured claim, but is in addition to the administrative rent claim discussed above and any unsecured claim to prepetition deliquent rent discussed below.
  • Generally, CAM common area maintenace charges and similar aspects of "additional rent' required under a lease are included within the calculation if they are properly designated. 
  • There is some case law suggesting that  a landlord may forfeit this claim if the property is sold after the debtor tenant's rejection of a lease. 
  • The amount of any security deposit held by a landlord may be used to offset this claim or one for prepetition rent owed, but under section 362(a)(7) of the Bankruptcy Code, relief from stay is needed before doing this. 
  • A landlord may be able to protect itself by insisting upon a letter of credit which would allow it to receive payment for the remaining rent from a source other than the debtor's bankruptcy estate.  However, not all courts agree.
     5.      Don't Forget to File a Proof of Claim for Prepetition Unpaid Rent .   In addition to lease rejection damages and any applicable administrative rent, a landlord of nonresidential real property is entitled to anunsecured claim pursuant to section 502(b)(6)(B) for unpaid rent due and owing to the landlord from the debtor tenant  as of the day the bankruptcy petition was filed.
 >>> If You Are a Tenant Occupying Nonresidential Real Property and Your Landlord Has Filed Bankruptcy....  
     1.     Don't Panic,,,, Yet.  Unless you are subletting - which raises a whole 'nother set of issues - you don't have to vacate the premises.  Until a decision is made by the landlord to reject the lease, the landlord remains obligated to comply with its obligations under the lease to you.  Also the automatic stay may protect you - at least temporarily -- from any disruptions that might otherwise be caused by creditors of your landlord.  And because you represent a source of revenue, it is likely that you will receive the attention of professionals engaged to assist the debtor landlord.
     2.     If the Landlord Chooses to Assume or Assign Your Lease.  Just as a tenant debtor must cure monetary defaults and provide "adequate assurance"  of the prompt cure of nonmonetary defaults and of future performance under the lease, so too must the debtor landlord if it wishes to assume or assign the lease with a nondebtor tenant.  The Retail Law Observer has this useful post regarding how tenants can take protective action now to strengthen their position in the event of a landlord bankruptcy.
   3.      If the Landlord Decides to Reject the Lease.    Even if the debtor landlord decides to reject a teant's lease, under section 365(h), the tenant still has the option of either (i) treating the lease as terminated and vacating the premises; or (ii) remaining in possession.  If the tenant opts to remain, the landlord is not required to perform any of its obligations under the lease, but is entitled to offset any damages cause by the landlord's failure to perform its obligations against the tenant's rent obligations.
    4.     File a Proof of Claim for Any Damages Not Offset by Rent Obligations.  If the landlord fails to perform their obligations under the lease, this may cause a tenant damages.   if so, a proof of claim shuld be filed detailing those damages.

Wednesday, August 11, 2010

Student Loans Now Greater Than Credit Card Debt

Student Loans Now Greater Than Credit Card Debt

Total outstanding student loan debt now exceeds credit card debt, as reported in the Wall Street Journal  Revolving consumer credit according to the Federal Reserve is $826 billion. Outstanding student loan debt at almost $830 billion.
The Federal Reserve does not separately report student loan debt--and why not? Instead, the Federal Reserve rolls student loan debt into nonrevolving debt along with auto loans and other installment loans. Thus, Kantrowitz has to rely on other sources. For public student loan debt, Kantrowitz does his calculations off an analysis of the federal budget, and for private student loan, Kantrowitz relies on a model he has developed. He estimates there is $605.6 billion outstanding in federal student loans and $167.8 billion outstanding in private student loans.
Credit card debt actually has been declining, an unprecedented fact historically, and is off almost 14% from its 2008 high of $958 billion. Other forms of credit have been tight and hard to obtain. In contrast, Kantrowitz's numbers suggest student loan debt has been increasing.
All of these facts suggest more questions than answers for me. Should we be concerned as a policy matter about rising levels of student debt, or is this just an indication of a populace investing in human capital during a financial downturn? Are growing levels of student loan debt sustainable? The growing rate of default on student loans leads me to believe it is not sustainable.  If not, what are the implications for universities (and, gasp, law schools)? Did the 2005 changes to the bankruptcy laws that made most private student loan debt nondischargeable contribute to growing student debt (in that private lenders were more willing to lend with the belief that student borrowers would not discharge their debt)?

Thursday, August 5, 2010

The Long Road of Chapter 11 Bankruptcy: A Sample Timeline

The Long Road of Chapter 11 Bankruptcy: A Sample Timeline

If I questioned my instincts before about the truly distressing condition of the economy, the car ad I saw on TV the other day - which sought to induce viewers to purchase a car by telling them that if they lost their source of income over the next year, they would be able to bring the car back - removed all doubt.  Then I heard this morning that theunemployment rate is the highest it has been in TWENTY-FIVE YEARS, which is to say AS LONG AS I'VE BEEN WORKING!!   Which certainly puts things in perspective and leads to the further disturbing conclusion that for lawyers like me working for creditors in the bankruptcy law area, job security is probably somewhat better than for the rest of America.
Unfortunately, for the country as a whole, the number of businesses becoming familiar with the mechanics of Chapter 11 of the Bankruptcy Code is likely to increase in the year ahead.  Either one of their customers or vendors will be going through this or they themselves will become a Chapter 11 debtor-in-possession or DIP, for short.   
In addition, there has been a great deal of discussion recently about prepackaged bankruptcy for Detroit's Big Three automakers as being a possible antidote to the problems associated with the lengthy time frames associated with the usual Chapter 11 bankruptcy. To understand that, it's useful to consider the timelines generally associated with a Chapter 11 bankruptcy proceeding.
So what actually happens when a business "goes Chapter 11"?   In many cases,those not in the know about the particular financial condition of a business may not even know that the business has sought the protection of the federal bankruptcy laws.  Companies in Chapter 11 bankruptcy are allowed to continue operating their business as before and from the customer perspective, the filing of the bankruptcy does not necessarily change the customer experience.  However, it is the bankrupt company's vendors and suppliers that will notice an immediate difference in their relationships as various restrictions imposed by the Bankruptcy Code on the activities of the debtor company come into play. 
Technically, everything grinds to a halt when a bankruptcy petition is filed and the world - for that company (who has now become a Debtor-in-Possession or DIP), its employees, customers, and vendors - was now become divided into
•               "prepetition" involving claims arising and events occurring BEFOREthe bankruptcy petition was filed AND
•                "post-petition" involving claims arising and events occurring AFTERthe bankruptcy petiton was filed
Prepetition claims cannot be paid  - and collection cannot be pursued against the DIP company - absent specific authorization by the Bankruptcy Court.  Post petition claims can be paid in many instances if they arise in the ordinary course of the company's business and even if further authorization by the Bankruptcy Court is required, generally go to the head of the line of unsecured creditors as administrative claims.
The U.S. Courts' website provides a great summary of the typical Chapter 11 process, as well as the Official Forms to be used by the company filing bankruptcy.  While there is no set timeline in a Chapter 11 (for an excellent visual representation of precisely how complicated things can get, look at the well knownLoPucki's Bankruptcy Procedure Charts designed by UCLA law professor Lynn M. LoPucki) , some of the usual benchmarks might include the following:
ONE YEAR BEFORE PETITION IS FILED  - "Preference" period for "insiders" begins
NINETY DAYS BEFORE PETITION IS FILED - "Preference" period for noninsiders begins
PETITION DATE ("P") -   Day that Chapter 11 VOLUNTARY Bankruptcy Petition is filed    (Assume this is January 1, 2009)
•               Bankruptcy Petition  is only a few pages and easy to complete
•               Must also include Creditor Matrix - list of names and addresses of all creditors
•               List of Credtiors Holding 20 Largest Unsecured Claimsmust also be filed.
•               Numerous "first day" motions filed (different ones in different cases), including motions for
◦                                 Appointment of Debtor's Counsel
◦                                 Appointment of other professionals being retained by Debtor (CPA, etc.)
◦                                 Payment of prepetition employee wages and benefits
◦                                 Interim financing
◦                                 Interim use of "cash collateral", i,e. proceeds generated from collateral on which a creditor has a lien
◦                                 Authorizing honoring of Prepetition Obligations to Customers in the form of warranties or gift certificates
◦                                 Ensuring uninterrupted use of utlities
◦                                 Extension of time to file bankruptcy schedules
>>>> Meet with U.S. Trustee, open DIP (debtor-in-possession) bank accounts  
>>>> Resolve use of cash collateral issues, if not (hopefully) already done 
 P+15 days: (January 16, 2009)  Statement of Financial Affairs  and Schedules of Assets and Liabilities  must be filed unless deadline extended by Bankruptcy Court,  (In large cases, deadline often extended several times.)   Schedules include  a Summary, as well as the following  (Schedule I-Current Income and Schedule J-Current Expenditures relate only to individuals).
•               Schedule A       Real Property
•               Schedule B       Personal Property
•               Schedule C       Property Claimed as Exempt (not relevant for non individual debtors)
•               Schedule D       Creditors Holding Secured Claims (includes both fully secured and only partially secured creditors)
•               Schedule E       Creditors Holding Unsecured Priority Claims(continuation sheet)
•               Schedule F       Creditors Holding Unsecured Nonpriority Claims
•               Schedule G       Executory Contracts and Unexpired Leases
•               Schedule H       Codebtors
Completing the Statement of Financial Affairs which relates to debtor's prepetition behavior with respect to its assets, liabilities, and revenues, and especially all of the above bankruptcy Schedules relating to the debtor's assets and liabilities, is extremely time consuming.  The larger the business, the more complicated the process becomes.  in addition, companies needing to file bankruptcy often may not have had the best recordkeeping to begin with.  
>>>> UNSECURED CREDITORS' COMMITTEE FORMED (usually within the first couple of weeks following the Petition Date) based on the identity of the Twenty Largest Creditors as listed by the Debtor.  Generally selected by U.S. Trustee.  Motion for Appointment of Counsel for Creditors' Committee filed.  In smaller Chapter 11 cases, often no Unsecured Creditors Committee is ever formed.  Purpose of Creditors' Committee is to represent the interest of creditors with smaller unsecured claims .
P+30 Days (February 1, 2009) - first Monthly Operating Report due showing results of post petition activities.
>>>>>FIRST MEETING OF CREDITORS (aka 341 Meeting because it is mandated by 11 U.S.C. 341) conducted by U.S. Trustee at which debtor's representative answers questions under oath from creditors about the factors triggering the filing, status of assets (including those pledged as collateral), and plans for restructuring.
>>> continued filing of Monthly Operating Reports
>>>>Miscellaneous stay relief, adequate protection, lease and executory contract assumption/rejection issues arise; adversary proceedings filed
>>>>Revisit or further establish cash collateral arrangements and post-petition financing arrangements
>>>Establishment of a BAR DATE for when proof of claims must be filed by creditors
>>>>Begin formulation and negotiation with pertinent creditors regarding terms of Plan of Reorganization, including proposed classification and treatment of claims
>>>Begin analysis of potential preference recoveries.
P+120 DAYS  (May 2009) - Expiration of "exclusive period" during which only DIP is permitted to file plan of reorganization.  Exclusive period often extended at request of DIP by Bankruptcy Court. 
>>>> PROOF OF CLAIM BAR DATE - all creditors not agreeing to amount of claim shown in bankruptcy schedules must have filed proof of claim form to participate in any distributions
>>>>> Continued formulation and negotiation of Plan of Reorganization.  Proposed PLAN OF REORGANIZATION and proposed DISCLOSURE STATEMENT filed.  Disclosure Statement must summarize contents of proposed Plan and provide "adequate information" concerning the Plan and its implementation.
•               At least a 25 day notice period is required for hearing on Disclosure Statement
•               Once Disclosure Statement approved, proposed Plan of Reorganization, approved Disclosure Statement, and Ballot for voting on Plan must be distributed to all creditors and parties in interest.
•               Revision and extensive negotiation of Plan often required
>>>>> CONFIRMATION HEARING on proposed Plan of Reorganization
•               At least a 25 day notice period is required for confirmation hearing  
•               Ballots must be tabulated - at least amajority in number and two-thirds in amount of claims voted in at least one class of impaired claims required for confirmation
•               Other confirmation requirements (including provisions governing contents of plan) set forth in sections 1126 and 1129  of the Bankruptcy Code such as feasibility must be satisfied
 >>>>PREFERENCE ACTIONS and other adversary proceedings initiated.
>>>> Claims determination and allowance proceedings
That, somewhat oversimplified, is the timeline of a typical Chapter 11 case.  Because there is often no way to know how long it may take to reach agreement or determination of such crucial issues as the valuation of particular property securing creditor claims, it is rarely easy to predict how long any particular case may take to resolve sufficient issues for the company to emerge from bankruptcy.  Along the way, questions as to whether the company has the ability to service even a debt burden as permitted to be modified under the Bankruptcy Code may arise.

Tuesday, August 3, 2010

Visualizing Financial Distress

Visualizing Financial Distress

The Admistrative Office of the US Courts (AO) has released updated data on bankruptcy filings. While the AO data as some problems,  accessibility of the data has improved. For example, there is now an interactive map by state that is informative.
One nice thing is the statistics on net scheduled debt. Given the way that some people seize on the dollars of debt in bankruptcy as a marker of the system, the AO has deducted nondischargeable debt from the total debt listed by the debtor. To do otherwise, gives a misleading picture of how much "help" people get from bankruptcy. But additional caution is still needed. For the chapter 13 filers, about 2 in 3 of these people will not get a discharge of any unsecured debts because they will not complete the repayment plan. Much more importantly, these figures are total debt, the bulk of which will be mortgage and auto debt, which debtors must pay if they want to keep their homes and cars.
The interactive maps at the NY Fed are another useful visual tool. These have been upgraded recently to show delinquencies on auto loans, bank cards, mortgages, and even student loans. Check them out here.

Monday, August 2, 2010

Old Debts That Won’t Die

Banks routinely sell old debts, that is, debts past the statute of limitations, for about 0.2 cents per dollar. This is probably old news.
But the question that occurs to me, is why do we allow such sales? Just as we don't allow markets to sell expired milk, no matter what the discount, it would seem that allowing sales of debts that can only be enforced by trick is unlikely to be socially useful or something that our banking regulators should condone.
Timothy McCollough freely admits that he stopped making payments on his Chase Manhattan credit card in 1999. He says he did not have the means to pay after he was disabled by a head injury that cost him his job as a school security guard.
But more than a decade later, Mr. McCollough, who is 52 and lives in Laurel, Mont., is still haunted by the unpaid balance, which was originally about $3,000.
In 2007, he was sued a second time over the debt, and this time the suit contended that he owed significantly more: $3,816 in credit card debt, plus $5,536 in interest and $481 in legal fees. As he did the first time, Mr. McCollough sent a handwritten note to the court explaining that the statute of limitations on the debt had passed.
“I have had no dealing with any credit card in 8 1/2 years,” he wrote to the court. “The pain they caused is worth more than the money they want.”
Mr. McCollough is not the only borrower being pursued for a balance that has expired. Such claims are routinely sold on debt collection Web sites, where out-of-statute debt is for sale for a penny or less on the dollar.
In most states, it is legal for collectors to pursue out-of-statute debt, as long as they do not file a lawsuit or threaten to do so.
But some lawsuits are filed anyway, and consumer groups and even some industry consultants argue that collectors routinely harass debtors for unpaid balances that have exceeded the statute of limitations. In some cases, collectors have unlawfully added fees and interest.
“It’s so cheap, if you can work it smart, you don’t need to collect that much,” said John Pratt, a consultant to the debt-buying industry and an author of “Debt Purchasing: An Investor’s Guide to Buying Debt” (Morris Publishing, 2005). He said investors in old debt generally hoped to recoup two and half times what they paid for a group of claims.
Because collectors cannot sue on old debt, he said, they are more likely to resort to abusive tactics. “Time-barred debt is where the worst abuse has occurred towards the debtor,” he said.
In a report issued July 12, the Federal Trade Commission called for “significant reforms” in the debt collection industry and recommended that states change the murky laws that govern out-of-statute debt.
The statute of limitations for debt varies by state, generally from three to 10 years. In many states, collectors can restart the clock if they can persuade the consumer to make even a tiny payment toward the old debt. Debt collectors generally do not tell consumers that making a payment will revive the debt so it can be legally pursued.
“The point of the payments is not so much to get the money” as it is to restart the clock, said Daniel Schlanger, a New York lawyer who represents consumers in cases against debt collectors.
The F.T.C., in its report, recommends that states make sure the statute of limitations for outstanding debt is clear and that collectors filing a lawsuit be required to prove that the debt is not out of statute.
In addition, the agency recommends that states require collectors to tell consumers that they are not entitled to sue on out-of-statute debt and that making a partial payment revives the entire liability.
Rozanne Andersen, chief executive of ACA International, an association of debt collection companies, said she did not believe that old consumer debt should expire at all. The money is owed whether the debt is a month old or 10 years old, she said.
Ms. Andersen says her association opposes filing lawsuits against out-of-statute debt or using trickery to get consumers to pay. But she says she sees nothing wrong with debt collectors pursuing legitimate debts, even if that might spur the borrower to restart the statute of limitations.
In addition, she said it was ridiculous to expect debt collectors to warn consumers that their debts had expired.
“It suggests that if a consumer can avoid paying for a certain period of time,  The debt collection industry has undergone a transformation in the last decade. Credit card issuers, health care providers and cellphone companies now routinely sell debt that they deem uncollectible to debt buyers, who then either try to collect it themselves, turn it over to a collections law firm or sell it again.
The price of secondhand debt depends on factors like the age of the debt, average balance, how much documentation is available to prove the debt and where the debtors are located.
Out-of-statute debt is readily available on various Web sites that cater to the collections industry. For instance, a Chaska, Minn., company called Credit Card Reseller is offering an $8 million portfolio of Bank of America credit card accounts, which on average have a balance of $4,981 and were written off by the bank in 2003.
The expected asking price is $16,000, or two-tenths of a cent for every dollar owed.
While collectors are not supposed to file lawsuits to pursue out-of-statute debt, some consumer lawyers say it happens routinely. In California, for instance, Victoria Byers of Los Angeles was sued last year for $1,708 over an old AT&T cellphone bill that she disputed. Her last payment was made in 2005.
Last month, Ms. Byers, who is 50, filed her own suit contending that the debt collector, Professional Collection Consultants, and its lawyer, Scott Wu, violated the Fair Debt Collection Practices Act. Her suit asserts that the collection firm and Mr. Wu routinely file lawsuits on stale debt in the hopes of obtaining default judgments.
Ms. Byers’s lawyer, Michael Stone, said he based the accusation on the high volume of lawsuits filed by Mr. Wu and on the “reckless” manner in which they treated Ms. Byers.
Clark Garen, a lawyer for Professional Collection Consultants, denied that his firm purposely set out to collect expired debt. As a result of the accusations in the Byers lawsuit, he said the firm reviewed its record of filing lawsuits and found a small number of instances in which lawsuits were filed against debt in which the statute of limitations had expired.
Of the 11,946 lawsuits that it filed over the last four years in California, 73 involved debt in which the statute of limitation had expired, Mr. Garen said. Professional Collection Consultants is dropping the lawsuits in which a judgment has not been entered and refunding $44,710.82 to consumers in 29 of the cases in which some money was collected, he said.
Mr. McCollough, the man who was pursued for his old Chase credit card debt, also ended up countersuing the collection law firm that sued him, Johnson Rodenburg & Lauinger of Bismarck, N.D. Last year, a Montana jury awarded him $311,000 in damages, primarily for emotional distress. The decision is being appealed.
Fred Simpson, a Missoula, Mont., lawyer representing Johnson Rodenburg, declined to comment and pointed instead to his appellate brief, in which cites an “accumulation of errors” by the district court.
In his closing arguments at the trial, Mr. Simpson pointed out that Mr. McCollough still owed the balance on his Chase card.
“The money was green and he spent it,” Mr. Simpson said. “If Mr. McCollough paid his credit card bill to Chase Manhattan, we wouldn’t be here this morning.”will enjoy a windfall,” she said, adding later, “People are obligated to pay their debts, whether the statute of limitations period has run or not.”

Sunday, August 1, 2010

Undercount of Student Loan Default Rates

Undercount of Student Loan Default Rates

According to unpublished data obtained by The Chronicle, one in every five government loans that entered repayment in 1995 has gone into default. The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions.
These numbers are much higher than the official government statistics that track student-loan defaults only in the first two years of payment. The default rates become very high over a 15-year window. For example, over a 15-year window, the default rate is 31% for loans made to community-college students.