Archive for October, 2011

Monday, October 24th, 2011

Second Mortgages & Foreclosure Rights

Filing for personal bankruptcy is often cited as a way to stop or delay mortgage foreclosure. But what happens to a person’s home in the months and years after a bankruptcy discharge? Bankruptcy may temporarily relieve the threat of foreclosure, but it doesn’t necessarily offer lifetime foreclosure immunity.

Here’s a closer look at some issues homeowners might face after filing for bankruptcy to prevent or delay foreclosure.

Second Mortgages & Home Equity Lines of Credit

One major concern for people who bought houses or refinanced their homes during the housing bubble is “junior mortgages,” or the secondary and tertiary loans and lines of credit that many homeowners were able to afford when housing prices kept rising.

Now that home values have fallen around the country, many of these secondary loans are unsecured – that is, the value of the house is less than the value of combined primary and secondary mortgages and/or credit lines.

Worry comes into play when the so-called “balloon payments” come due on these secondary loans: many homeowners simply don’t have the money on hand to cover such payments and are afraid of losing their home to foreclosure processes started by secondary mortgage lenders.

If you’re in that situation, here’s some essential information:

  • Filing for bankruptcy might help. If you haven’t already filed for bankruptcy and are having trouble making payments on secondary mortgages or lines of credit, you may be able to discharge them during a bankruptcy case. If your house’s value has fallen below the total value of your loans, secondary mortgages become unsecured debt, which is often dischargeable in Chapter 7 bankruptcy.
  • Reaffirming debts may be risky. In Chapter 7 bankruptcy, filers have three options for how to treat secured debts: they can reaffirm them (i.e. agree to keep making payments), redeem them (i.e. pay the remainder in one lump sum) or surrender the attached property (i.e. stop making payments and lose the collateral). If a filer reaffirms secondary mortgages in Chapter 7 bankruptcy, she is responsible for repaying them regardless of what happens to the house (i.e. even if she loses the house to foreclosure).
  • Lender negotiation may be possible. Chapter 7 filers who do not officially reaffirm a secondary mortgage but continue making payments may be able to negotiate modified payment terms if they become unable to afford those payments. This is particularly true if your secondary mortgage loans are unsecured: though the lender could legally foreclose, it would have to pay proceeds for the home’s full value to the primary lender before taking any money itself.
  • Debt collector negotiation may be possible: Because most secondary mortgage lenders aren’t likely to make a profit from foreclosing, there’s often a better chance that they would sell the debt to collectors than that they would foreclose. In that case, you may be able to negotiate with the debt collectors for lower monthly payments or a reduction in principal. If you do successfully negotiate modified loan repayment terms, be sure to find out whether you’ll have to pay taxes on the difference.

A recent report from highlights a growing trend of business bankruptcy filings in the U.S. While personal bankruptcy filings have actually decreased in recent months, some lawyers are predicting that 2012 through 2014 will see upticks in business bankruptcy reorganizations.

Some lawyers, it seems, have already reported an increase in clients.

A Double-Dip Recession?

One factor some analysts are watching is the U.S. economy’s ultimate move toward or away from a double-dip recession. First, a quick look at where the economy is now: though unemployment remains high and the housing market has still not recovered from the rash of foreclosures that touched off the Great Recession, the U.S. is technically not in a recession right now – probably.

A recession only occurs when the country’s gross domestic product (GDP) recedes, or shrinks over successive quarters. In other words, when there is a decrease from one measurement period to the next, the country is in a technical recession.

The problem is, there’s no way of determining whether an economy is in a recession until after the fact – that is, we can’t measure this month’s data until next month.

Recessions & Business Bankruptcies

During economic recessions, bankruptcy filings tend to rise. That’s led some insiders to point at recent numbers reported on

  • Ten companies worth $100 million or more filed for bankruptcy in September of this year. The $100 million mark is often considered the threshold for a “large” company.
  • September had the highest rate of business bankruptcies since April, when 17 large companies filed.
  • Business bankruptcy filing rates have not been so high since 2009, when the country was in the thick of the recession.

Still, business bankruptcy numbers alone cannot establish the presence or absence of recessionary conditions. But businesses do tend to need bankruptcy protection more often when the economy is receding than when it is growing.

In 2008, for example, the beginning of the recession touched off the United States’ biggest bankruptcy ever. Lehman Brothers, a company worth $639 billion, filed for bankruptcy protection and caused a number of financial ripples for its customers - and the global economy.

On the other hand, a recession alone will not automatically trigger a business to file for bankruptcy. Banks’ willingness to lend money, consumers’ behavior, and developments in foreign markets could all impact future business bankruptcies in the U.S.

And often (as the airline companies have demonstrated), filing for bankruptcy can let a business restructure to emerge as a stronger entity than it was before. That’s because in bankruptcy court, businesses can eliminate debt, renegotiate costly labor contracts, modify lease agreements and otherwise take important steps to ease their financial burdens.

Tuesday, October 18th, 2011

New Bankruptcy Court Fee Schedules

Effective November 1, 2011, a new fee schedule will apply to all bankruptcy cases. The Judicial Conference of the United States agreed on the fee increases in mid-September and will use the proceeds generated to fund Judiciary needs.

Here’s a look at the new fees, the old fees, and what the changes might mean for you.

New Bankruptcy Fees

Most bankruptcy filers’ primary concern is the fee charged to file the bankruptcy petition with the court.

  • Chapter 13 bankruptcy: Formerly $274, the fee is now $281.
  • Chapter 11 bankruptcy: Formerly $1,039, the fee has been raised to $1,046.
  • Chapter 7 bankruptcy: Formerly $299, the fee has been raised to $306.

Luckily for most filers, the total increase in basic filing fees is not drastic; however, some critics of the bankruptcy system have complained that the fees were already prohibitively high for individuals truly struggling to make ends meet.

Other Bankruptcy-Related Fee Increases

In addition to the basic filing fee increases, the Judicial Conference also hiked fees associated with other parts of the bankruptcy process. The services whose fees have been altered include:

  • Certification: Formerly $9, now $11;
  • Exemplification: Formerly $18, now $21;
  • Audio Recording: Formerly $26, now $30;
  • Amended Bankruptcy Schedules: Formerly $26, now $30;
  • Record Search: Formerly $26, now $30;
  • Adversary Proceeding Fee: Formerly $250, now $293;
  • Document Filing/Indexing: Formerly $39, now $46;
  • Title 11 Administrative Fee: Formerly $39, now $46;
  • Record Retrieval Fee: Formerly $45, now $53;
  • Returned Check Fee: Formerly $45, now $53;
  • Notice of Appeal Fee: Formerly $250, now $293; and
  • Lift/Stay Fee: Formerly $150, now $176.

Which Fees Apply to My Case?

Because no two bankruptcy cases are exactly alike, it’s not easy to determine which of the fees listed might affect your bankruptcy case. As a bankruptcy lawyer can explain to you, the complexity and intricacy of your bankruptcy filing can affect the duration and costs of the case, which is affected not only by bankruptcy court fees but often by certain legal fees as well.

One way to keep bankruptcy fees to a minimum is to pay careful attention to the advice you receive from your lawyer. A lawyer may guide filers on what paperwork to prepare, how to complete bankruptcy forms, and otherwise how to proceed with a case.

Taking note of the rules and regulations that govern bankruptcy court early on in the proceedings may prevent you (and the bankruptcy judge, your trustee, or creditors) from having to return to the bankruptcy case to investigate or contest part of the information.

If you are truly unable to afford the fees associated with filing for bankruptcy, you may qualify for a bankruptcy fee waiver, about which a bankruptcy lawyer can tell you more.

The current financial situation of American Airlines serves as a lesson on how filing for bankruptcy can lead to long-term financial strength – and, perhaps more importantly for the airline, how avoiding bankruptcy can sometimes cause long-term financial struggles.

Of course, every individual situation is unique and the American Airlines model can’t be applied across the board. But for people teetering at the edge of their finances wondering whether personal bankruptcy could have any benefits down the road, the story of American Airlines is worth considering.

Avoiding Bankruptcy

In the months and years immediately after the terrorist attacks of September 11, 2001, Americans flew less and many airlines struggled to remain profitable. In the ensuing years, many of them (including Delta, Northwest, US Airways and others) filed for Chapter 11 bankruptcy protection, which allowed them to reorganize their finances and debts.

American Airlines did not choose bankruptcy; instead, the airline opted to negotiate benefits and salaries with its employees and managed to continue operating. At the time – and, according to some reports, even today – the airline’s CEO was proud of his company’s ability to stay out of bankruptcy court. But some analysts are questioning whether the decision made sense financially.

Today, American Airlines operates at a loss. In fact, sources note that the airline:

  • Has more than $12.1 billion in outstanding debts;
  • Is saddled with a pension liability (for which it has no funding) of about $7.9 billion;
  • Earned $11.6 billion last year but had a net loss of $716 million;
  • Is expected to report a $132 million loss for 2011’s third quarter; and
  • Recently took on a high-interest (8.75 percent) loan for about $726 million.

These numbers are particularly gloomy when compared with those of the nation’s other leading airlines, most of which are currently operating at a profit, according to sources. In fact, comparisons between American Airlines and its competitors show stark differences.

In addition to having the least fuel-efficient fleet of planes in the country (which sources estimate cost it as much as $400 million in extra fuel expenses per year), American pays its staff more per flight hour than other airlines. One analyst estimates that if American could cut its per-flight-hour operating costs to those of US Airways, the airline would save $2.2 billion per year.

So how have other airlines managed to do so well in a struggling industry? Most of them filed for bankruptcy – and reemerged as stronger, more profitable companies.

Emerging Stronger from Personal Bankruptcy

For corporations, Chapter 11 bankruptcy provides the rare opportunity to renegotiate contracts with venders, employees and unions. Most companies also sell of unused assets and devise a court-approved way to be able to make a profit while treating all of their creditors fairly.

Like airlines, individuals can use the power of the bankruptcy court to introduce positive financial change into their lives. Bankruptcy may offer several unique protections and opportunities not offered by common debt elimination alternatives, including:

  • Full discharge of certain debts, meaning that the court legally excuses filers from paying them;
  • A temporary halt to collection actions, which can give filers breathing room to take control of their finances; and
  • Financial management and credit counseling resources so filers can learn to establish and maintain financial habits that will improve their overall finances.

Washington Mutual, Inc., the holding company for failed bank Washington Mutual, has faced some trouble having its reorganization plan accepted in bankruptcy court. The company filed for bankruptcy three years ago, but the court has twice rejected its plans for reorganizing and emerging from bankruptcy.

Here’s a look at what’s going on with this particular bankruptcy case and what kinds of issues might prevent an individual’s Chapter 13 repayment plan from earning court approval.

Insider Trading Accusations

At present, the bankruptcy judge overseeing Washington Mutual, Inc.’s bankruptcy case has ordered the company to undergo thorough mediation with its creditors in an attempt to work out a settlement that pleases everyone.

The judge suggested this course of action because, according to reports from the Associated Press, hedge funds supporting the company’s bankruptcy used information from the filing to engage in insider trading. Had the judge approved the current repayment plan, she believed creditors would have contested the ruling because of that insider trading.

Of course, such an issue is something that only a business seeking bankruptcy protection would have to worry about. Still, in individual bankruptcy reorganizations, a court might find reason to reject a reorganization plan.

Common Reasons for Chapter 13 Plan Rejection

In Chapter 13 bankruptcy filing, filers commit to a three- to five-year repayment plan designed to help them repay debts to some or all of their creditors. Filers submit their plan to the court, which approves it depending on a number of factors. Common reasons a Chapter 13 repayment plan might be rejected include:

  • Creditor objections to repayment terms: If creditors can show that they would have received more money from a Chapter 7 liquidation, they might object to the repayment plan. In the case that a Chapter 7 case would indeed better benefit creditors, the court may require a filer to file again, under Chapter 7. This is because the bankruptcy court has an obligation to both filers and their creditors.
  • Insufficient commitment of disposable income: Another common problem with Chapter 13 repayment plans is that a debtor has not committed all her disposable income to the repayment plan. Chapter 13 bankruptcy is designed to help both debtors and creditors, and it is most effective when both groups adhere to its rules – for filers, that means committing the entirety of disposable income to the repayment plan.
  • The repayment plan is not feasible: A plan that requires too great a commitment of money from the filer might be rejected as unrealistic, based on figures about a filer’s income and expenses. If a filer is unlikely to stick with the repayment plan for its full three- to five-year duration, the court is unlikely to approve it.

Tuesday, October 4th, 2011

Report: Credit Scores During the Recession

The Fair Isaac Corporation (FICO), which develops the primary formula used to calculate credit scores, released data this week on changes to credit scores during the economic turmoil of the last several years. The report shows credit score distribution from 2005 through 2011 and indicates that, on average, our credit scores have not changed significantly since the collapse of the housing market in 2007.

If that sounds fishy to you, don’t worry: the term “average” here is meant mathematically. Individual credit scores fluctuated in various ways:

  • More people in the highest group: In 2005, when the stock and housing markets were still going strong, 16.9 percent of Americans had a credit score in the highest range (800 to 850). In 2011, though, the highest-scoring group has swelled to 18.1 percent.
  • More people in the lowest group: In 2005, people with credit scores between 350 and 599 stood at 23.6 percent of the population. This year, the number has risen to 24.9 percent. Early in the recession, people with the lowest scores (350 to 499) jumped, too, though that percentage has leveled out in the last two years.
  • Fewer people in the middle: Those with credit scores between 600 and 799, usually considered to be in the middle of the credit scoring pack, saw their numbers decrease between 2005 (59.5 percent) and 2011 (56.5 percent).

Making Sense of the Numbers

While the findings at first may seem confusing or counterintuitive, there is a satisfying explanation behind the shift toward the extremes of the credit-scoring spectrum during a downturn.

  • The strong shore up: People who already have fairly strong credit scores tend to be more financially secure than those with lower scores. When the economy sours, these people tend to pay down debt more quickly than they might have otherwise, save more money, and avoid new sources of credit. These actions not only prepare them for potential financial road bumps (such as unemployment) but also improve their credit scores.
  • The weak struggle: People already overextended on credit tend to be less financially secure and may be hurt especially hard by tough economic times. Job loss, reliance on new lines of credit and unexpected expenses could cause this group even more financial distress, thus lowering their scores further.

Individuals close to either end of the spectrum may move further toward that end in tough times, thus lowering the total percentage of folks in the middle.

Individual Habits Most Important

Another important factor in determining credit scores is a person’s individual spending and saving habits. Because these tend not to change much regardless of external forces, recessionary times might not affect credit scores as much as they affect other economic indicators such as home prices and interest rates.