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Wednesday, July 13th, 2011

Personal Bankruptcy Filings Down This Year

Recently released data show that consumer bankruptcy filings in the first half of 2011 fell by eight percent compared with the first half of 2010. The numbers, reported by the American Bankruptcy Institute, paint a potentially hopeful picture for the overall rate of economic recovery:

  • From January 1, 2011 to June 30, 2011, a total of 709,303 personal bankruptcy cases were filed in the U.S.
  • In the first six months of 2010, 770,117 personal bankruptcy cases were filed.
  • This year has seen eight percent fewer personal bankruptcy filings than last year.
  • Personal bankruptcy filings in June 2011 also fell compared to those in June 2010: 119,768 cases were filed this year; 126,270 cases were filed in June 2010.
  • Compared to May of 2011, June filings rose by four percent.

What Do Personal Bankruptcy Filings Mean for the Economy?

It’s impossible to measure the health of the economy by looking at only a single indicator. But still, these bankruptcy numbers seem to follow other trends in economic factors:

  • Overall, unemployment has been steadily decreasing for several months. The pace of the decrease has been slow – this seems to mirror the slight decrease in personal bankruptcy filings and suggest a gradual economic recovery.
  • The last two months have shown slight upticks in the unemployment rate, which might also be reflected in the May-to-June increase in bankruptcy filings.
  • Bankruptcy filings are still on pace to hit or surpass a million this year, meaning that the economy is still a long way from fully healthy.

What Can Personal Bankruptcy Do for Unemployed Americans?

Surveys given to those who file for bankruptcy in the U.S. almost always indicate that unemployment plays a contributing role in prompting people to file for bankruptcy protection. And it’s no wonder: bankruptcy can offer powerful protections to those who have lost their job or had their hours reduced.

Specifically, bankruptcy offers:

  • Protection of assets: Once filers submit their bankruptcy petition, the court protects certain assets from repossession and/or garnishment. In Chapter 7 bankruptcy, these protections are called “exemptions.”
  • Protection from creditors: For the duration of any bankruptcy case, a legal protection called the automatic stay prevents creditors from making contact with or collecting from filers. The automatic stay can halt foreclosure, vehicle repossession, wage garnishment, debt lawsuits and more.
  • Discharge of debts: At the end of a successful bankruptcy case, the court discharges (that is, eliminates) all eligible debts. Filers are not responsible for repaying discharged debts.
  • Time to catch up on payments: In Chapter 13 bankruptcy, filers get a chance to catch up on late payments with help from the court.
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Monday, June 20th, 2011

Sympathy for Debt Collectors?

Anyone who’s been harassed by debt collectors during tough financial times may have a hard time swallowing the latest request from the debt collection industry: give them a break. But the collection industry’s trade association has a fair point to make about its workers – they’re not all bad.

And, as happens too often, the bad apples in the group have given the whole industry a rotten reputation. Consider this troublesome info (reported in the New York Times):

  • Many debt collectors have to use fake names when they work because clients frequently threaten them. An alias protects them from anyone who might actually take action.
  • Most debt collectors have stories of being shouted at, called names and belittled while on the job.
  • In many cases, debt collectors are, in fact, trying to get money that we consumers agreed to pay.

New Consumer Protection on the Horizon?

Right now, the Fair Debt Collection Practices Act outlines what debt collectors can and cannot do. The Federal Trade Commission (FTC) regulates the industry, but has little power to punish offenders or tighten rules.

That could change starting this July, though. The Consumer Financial Protection Bureau will start actively playing the role outlined for it in 2010’s consumer protection law. Part of that role is regulating the debt collection industry, which has some debt collection workers worried.

Activists on both sides of the issue have highlighted problems with the 1977 FDCPA:

  • Since its passage, it hasn’t changed much to acknowledge new technologies like mobile devices or email.
  • The fine for violations has stayed constant at $1,000, which today doesn’t significantly deter debt collectors.
  • Many debt collectors are two or three times removed from the original creditor, which can frustrate and confuse consumers.

What to Do When The Debt Collector Calls You

It’s important to understand your rights and responsibilities as a consumer. Certain debts (like those discharged in bankruptcy and those whose statute of limitations has expired) cannot legally be collected. Other debts are the debtor’s responsibility to pay.

One debt collector interview in the Times commented that it was much easier to work with consumers than to yell at them. In many cases, admitting you don’t have the money to pay a debt can save everyone a lot of hassle. Once you’ve determined the facts, a debt collector might be able (and willing) to work toward an alternate payment schedule or some other debt modification.

And people who are really in over their heads financially may want to start making phone calls themselves – to a bankruptcy lawyer.

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Monday, June 6th, 2011

Housing Prices Hit Eight-Year Low

The latest figures from Standard & Poor’s Case-Schiller Index show that the double-dip in the housing market many economists feared is now a reality. In other words, according to sources, housing market prices have taken another nosedive and home values are now near the same level they were in mid-2002.

How much of a dip is this second downward spike? Reports indicate that:

  • The first quarter of 2011 saw a 4.2 percent decline in home prices.
  • In the final quarter of 2010, prices dropped 3.6 percent.
  • Home prices are currently 5.1 percent lower than they were this time last year and, according to Standard & Poor’s, have reached a new low even for the recession.

If all this sounds like bad news, the kicker is that the cycle of foreclosures and lowered home values seems unlikely to end any time soon.

Gloomy Outlook for the Housing Market

Consider these troublesome figures.

  • About 1.9 million homes in the U.S. are currently in some stage of foreclosure, according to RealtyTrac, a company that keeps track of such things.
  • Housing prices fall when supply is greater than demand (that is, when there are more homes available than people looking to buy).
  • Right now, supply is skyrocketing: empty foreclosure properties are common sights in many states, and apparently nearly two million more are about to follow.
  • Unfortunately, demand is also fairly low: many Americans are still skittish about their employment situation and unwilling to take on the burden of a mortgage. Further, many banks have tightened lending standards, making mortgage loans harder to come by even for those interested in buying.
  • On top of all this, sources note that as many as 28 percent of U.S. homes are currently underwater, meaning that the owner owes more on the mortgage than the home’s current value. Underwater homeowners may find themselves in foreclosure down the line, whether by strategically defaulting or by being unable to make payments.

Can Chapter 13 Bankruptcy Help?

In the past, Chapter 13 bankruptcy has often been heralded as a way to stave off or prevent foreclosure for some filers. The question of whether Chapter 13 could help some of the millions of Americans who might have mortgage foreclosure in their future is a complex one.

Chapter 13 may work for some people facing foreclosure, but only if those people have sufficient income to make regular payments according to the repayment plan. In other words, if you’re in danger of losing your home because you lost your job, Chapter 13 may not do the trick.

One interesting note, though, is that some sources have reported bankruptcy judges ruling for mortgage cram-downs in Chapter 13 cases, despite laws that prohibit such rulings.

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Friday, June 3rd, 2011

How Bankruptcy Saved Detroit

Presidential hopeful Mitt Romney says that the reason America's Big Three automakers have bounced back since the recession is due to bankruptcy, not bailouts.

In an interview Friday with the CBS Early Show, Romney repeated the stance he took in a 2008 op-ed piece in the New York Times at the height of the bailout talks - that filing bankruptcy is a responsible step to take when faced with financial hardship.

"The right process for an enterprise in trouble is not to be given free money from the taxpayers with a bailout, but instead go through a bankruptcy process, reorganize debts, and reduce costs and come out stronger," Romney told CBS's Erica Hill Friday.

Of the three major Detroit automakers, General Motors and Chrysler both filed Chapter 11 bankruptcies in 2009. Both also received bailouts from the U.S. Government, funded by tax payers. Only Ford survived the recession without turning to bankruptcy or receiving a bailout, and instead secured a line of credit to help them bridge the recession's gap in sales.

So how did bankruptcy help Detroit? While bankruptcy can be complex, especially for corporations, it offers a very clear benefit: a reorganization of debts into a more affordable plan. In the case of a Chapter 11, business can also renegotiate contracts, sell off unnecessary assets, receive some debt forgiveness, and reorganize as a new business entity. This is typically favored over Chapter 7 bankruptcy, as it allows the business to stay in operation during and after the bankruptcy.

Bankruptcy allowed GM and Chrysler to shed off the obligations that were keeping them from being truly innovative, and reorganize as a new entity that could focus on a successful future, Romney argues. And while the two automakers did receive bailout funds, having gone through bankruptcy first left them in a better position to capitalize on the investment by taxpayers. Both GM and Chrysler have repaid significant portions of the bailouts.

Romney also takes credit for the situation, saying that his 2008 New York Times piece convinced Obama to hold off on an immediate bailout.

"So I'm very proud of the fact that, in fact, we called it like it was, and that is these companies needed to go through a bankruptcy process, come out through bankruptcy, go back to work, get jobs for the people who had would otherwise have lost jobs if these companies just trailed on down," he told CBS.

"And by the way, we could have saved billions of dollars had we moved to bankruptcy from the very beginning."

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Tuesday, May 31st, 2011

Bankruptcy Filings Dropped in April

Recently released numbers on personal bankruptcy filings show that April’s numbers were down from both March 2011 and April 2010, more or less following the trends that experts have predicted for the remainder of this year. Here’s a closer look at the specifics, and what this means for you.

Breakdown of April Bankruptcy Figures

  • The 21 business days in April saw 130,000 total bankruptcy filings, which comes to 6,177 filings per business day.
  • The number of filings shows a decline of 2.9 percent from March, and 7.1 percent from April 2010.
  • So far this year, filings have decreased each month at a rate somewhere between 5.6 percent and 8.2 percent compared to 2010 numbers.
  • In the past 12 months, 4.9 in 1,000 people have filed bankruptcy petitions. The number in 2004 (before the new bankruptcy law was passed) was 5.5 per thousand.

According to these statistics, April 2011 bankruptcy numbers suggest a decline in bankruptcy filings both compared to recent months and to last year. Bankruptcy filing rates, though not as popularly cited as unemployment numbers, can be used to offer at least a partial picture of economic recovery.

Projected Bankruptcy Filings for 2011

Based on the numbers for April and 2011 so far, predictions for total bankruptcy filings this year include the following:

  • 1.475 million bankruptcy filings if Americans continue filing at the daily average rate (5,876) for the first four months of 2011 combined;
  • 1.525 million bankruptcy filings if we continue at April’s daily average rate (6,177); or
  • 1.499 million bankruptcy filings if the last eight months of the year make up the same proportion of filings as they did in the last two years.

How does that compare with the recent past? In 2010, the country had 1.56 million total filings; in 2009, the total was 1.474 million; and in 2008, 1.118 million. If filings stay on track, then, it looks like 2010 might have been the peak year for bankruptcy filings and 2011 will be the beginning of a decline.

There is no guarantee, however, that bankruptcies will steadily decrease. After all, the housing market is still glutted with foreclosure properties and home prices don’t seem to be rising. As a new wave of foreclosures begins to affect homeowners, combined with sluggish growth in the jobs sector, the need for bankruptcy protection could climb or remain constant for a few years to come.

Bankruptcy Filings and the “New” Law

If nothing else, these latest bankruptcy numbers suggest (once again) that the Bankruptcy Abuse Prevention and Consumer Protection Act passed in 2005 had little real effect on bankruptcy filing totals.

Those truly in need of the financial relief and protection bankruptcy offers are still largely able to get that help from the bankruptcy court, despite the tightened restrictions the law introduced.

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Wednesday, May 18th, 2011

Bankruptcy Lawyers Help Homeowners Erase Second Mortgages

Many Americans currently considering bankruptcy are in financial trouble partly because of the struggling housing market. Underwater mortgages (those in which the homeowner owes more than the home’s current value) are a reality for as many as 28 percent of American homeowners.

Even though bankruptcy law prohibits the court from modifying the terms of a primary mortgage, some bankruptcy lawyers have found a legal way to help their clients stay in their home and avoid foreclosure.

Unsecured Second Mortgages

Here’s the process some bankruptcy petitioners are following to help ease their mortgage debt:

  • File for Chapter 13 bankruptcy: Entering a Chapter 13 case means that the filer agrees to a three- to five-year repayment plan in which she will catch up on past-due debts.
  • Petition the court to declare a second mortgage unsecured debt: Filers who have second mortgages that, combined with their primary mortgages, exceed the value of their home’s current value, may be able to make this move. A bankruptcy lawyer can explain in more detail how the move works and whether it might be possible in any individual’s case.
  • Make payments according to the repayment plan: If the court accepts the petition, the filer must continue making payments according to her repayment plan for the duration of the bankruptcy case. At the end of the case, the remaining unsecured debt (including that from the second mortgage) may be excused by the court.
  • Avoid foreclosure: In many cases, reclassifying a second mortgage as unsecured debt allows filers to make mortgage payments and remain in their homes.

The Winners and the Losers

Naturally, this legal maneuver is good news for struggling homeowners and potential bankruptcy filers. But banks and other lenders are apparently less than thrilled about the development – after all, they’re the ones who lose out on mortgage payments when debts are excused in court.

But, as one news outlet reminds us, the only way to change the law is an act of Congress. Given the current state of the American housing market and level of financial difficulty many Americans are facing, a move of that sort seems unlikely: what politician would want to be responsible for taking away a tool for avoiding foreclosure?

Can You Save Your Home from Foreclosure?

In order to take advantage of this legal protection, your financial situation must meet a number of criteria:

  • Sufficient income to make payments: In order to benefit from Chapter 13, you have to be able to make monthly payments according to a repayment plan, which means you have to have a steady source of income.
  • Two (or more) mortgages: Again, primary mortgages cannot be modified in bankruptcy court.
  • An underwater home: Finally, you can only have debt declared unsecured if there is no property to secure it (that is, if your loan is worth more than your home). If your home value exceeds the amount of your primary mortgage, then at least a portion of the second mortgage is secured by the home, and cannot be excused by the court.

If you’re ready to find out whether this might work for you, connect with a bankruptcy lawyer today.

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Monday, May 2nd, 2011

Strategic Default and Foreclosure: What’s the Difference?

With the housing market headed for what some analysts are calling a double-dip downturn, there’s been a lot in the news lately about homeowners who strategically default on their mortgages. Here’s a look at what that means, how strategic default relates to foreclosure and what you need to know if you’ve got a mortgage you can’t afford.

What Is a Strategic Default?

The mortgage manipulation known as the strategic default works like this:

  • A homeowner reassesses her debt situation: This can be spurred by a number of things, and in the current economic climate common triggers include having difficulty paying bills (though not necessarily making mortgage payments) and realizing that a home is now worth less than the amount of the mortgage loan.
  • A homeowner decides not to make mortgage payments: After a month or two of missed mortgage payments, the mortgage loan will be in default (or, said another way, the borrower will have defaulted on the loan). The decision is usually considered “strategic” because those who choose this path opt to meet other financial obligations in lieu of paying their mortgages.
  • The home goes into foreclosure: Because the homeowner stops making mortgage payments, the mortgage lender begins the foreclosure process and takes back the home.
  • The homeowner deals with the credit consequences: In addition to finding new housing, strategic defaulters must also face serious financial consequences. Strategically defaulting on a mortgage can seriously damage a credit score, and many lenders (of all kinds) may refuse to issue loans to those with strategic defaults on their record. Fannie Mae, for instance, has announced that strategic defaulters are banned from Fannie Mae mortgage loans for seven years after defaulting.

How Is Strategic Default Different from “Regular” Foreclosure?

A strategic default is a conscious choice on the part of a homeowner to stop making mortgage payments, even if those payments are still affordable. Those who choose to strategically default often indicate that they are no longer willing to pay for a loan worth more than their house.

“Regular” foreclosure happens when a homeowner can no longer afford a mortgage loan and so has no choice but to stop making payments. In both cases, the homeowner loses the house to the lender; in strategic defaults, doing so is a conscious decision on the part of the homeowner.

What Are Other Options for Struggling Homeowners?

Because of the serious credit consequences and questionable ethical nature of strategically defaulting, many homeowners are not willing to do it, even if their loan is bigger than they’d like. Alternatives include:

  • Applying for a mortgage modification: Some banks (assisted by federal programs) offer mortgage modification programs. To find out whether you might qualify, contact your bank as soon as possible.
  • Filing for Chapter 13 bankruptcy: Some homeowners are able to at least delay (and possibly prevent) mortgage foreclosure by filing for Chapter 13. If you’re interested in learning whether you qualify, contact a bankruptcy lawyer in your state.
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Monday, April 25th, 2011

Understanding the Changed U.S. Debt Outlook Rating

The credit rating agency Standard & Poor’s made waves last week when it announced that it had downgraded the outlook on U.S. debt from “stable” to “negative,” leaving many ordinary Americans wondering what the change means for the economy and how debt rating works in the first place.

Here’s a look at what our country’s debt rating might mean in future months and how that rating is like an individual credit score.

Rating the U.S. Debt

Currently, the United States has a credit rating of AAA, which is the highest rating possible. This rating indicates that the U.S. is a stable country and is likely to repay any loans it takes out. But there’s more to the story.

  • Outlook on U.S. debt: While the other two major credit rating agencies (Moody’s and Fitch Ratings) have not announced any changes to their ratings on the outlook for U.S. debt, Standard & Poor’s downgraded that rating last week, citing as one reason the continued inability of Congress to make a decision regarding the long-term future of spending policies.
  • A warning move: While the change in the outlook rating does not officially alter the country’s credit rating, it serves as a warning and reminder to legislators and others in positions of power that the country’s financial stability and credibility on the world stage are at stake.
  • Potential for positive impact: Some commentators have mentioned that the changed credit rating could actually prove beneficial to the country, as it may push Congress to act swiftly (and without unnecessary political posturing) in taking steps toward changing financial policy.

The Parallel with Individual Credit Ratings

As anyone who has ever file for bankruptcy, applied for a mortgage or thought about borrowing money for a car knows, individuals have credit ratings too. And, as with the credit rating for the United States, credit ratings for individuals are used to help lenders and investors determine whether or not to lend money to a person and on what terms.

If Standard & Poor’s actually downgraded the country’s credit rating, it would have a similar effect on the nation as seeing a drop in a credit score would for an individual. In other words, the U.S. would have more difficulty borrowing money and could suffer a variety of financial consequences.

So how can a country (or an individual) keep its credit rating as strong as possible?

  • Pay bills on time.
  • Pay down as much debt as possible.
  • Try to keep credit usage low (that is, stay well below the limit).
  • Keep old accounts active (but not maxed out).
  • Contact creditors before bill due dates if there is ever reason to expect inability to make timely payments.
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Wednesday, April 13th, 2011

New Solutions for Those with Mortgage Woes?

These days, many Americans are desperate to stay on top of mortgage payments, and are considering unorthodox ways to pay the bills. apparently, when a company called Adzookie offered to pay people’s mortgages for up to a year if those people would display large advertisements on their homes, applications flooded in by the thousands, as a recent report from Credit.com details.

The deal reportedly works like this: if you apply and are accepted into the program, Adzookie will paint advertisements on your home and pay your mortgage for three months (with a chance to renew for another nine if the ads remain in place).

While that may sound like heaven to some struggling homeowners, only a handful of people will be selected for this deal. So what can the rest of us do?

Finding Affordable Housing

Because of the tight standards of many refinancing programs, few homeowners are able to qualify. So that might mean a few things, one of which could be giving up a mortgage (whether with the help of personal bankruptcy or not) and renting for a while.

So how can you find affordable rent? By following these steps for negotiating:

  • Know the area: Figure out what people are paying for apartments in the neighborhood you want. In addition, try to determine whether there are more apartments than tenants or vice versa. If there are lots of vacancies, you have a better chance of negotiating a deal. You can do this by scouring local postings and asking people who rent nearby.
  • Consider amenities: Determine whether your potential apartment is bare-bones or all-inclusive. The former may provide you better negotiation opportunities, but make sure you’re able to find necessary services nearby—if you have to haul your laundry across town every time you’ve got dirty clothes, a small rent savings might not seem worthwhile in the long run.
  • Prove yourself: Offer to show to a potential landlord a strong credit report, a reference from a previous landlord or proof of steady income. A landlord who views you as a good credit risk is more likely to cut you a deal because she’ll be less likely to have to chase you down for rent or lose money on you.
  • Think outside the box: Offering to sign a lease longer than one year (which saves a landlord the work of finding new tenants), pay ahead of the due date (which saves a landlord worry and possibly money loss) or move in whenever works best for a landlord can all give you leverage in negotiations, as all these circumstances tend to ease a landlord’s financial (and worry) load.
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Wednesday, March 23rd, 2011

The Latest on Student Debt and Underwater Homes

New reports highlight some interesting information about two topics near and dear to those who have filed or are considering filing for bankruptcy: underwater mortgages and student loan debt. Here’s a look at what kind of picture the latest numbers paint.

Students Don’t Need to Default to Be Behind on Loans

The Institute for Higher Education Policy released a report last week showing that two-fifths of those who borrowed money for educational purposes fell behind on their payments at some point in their first five years of repayment. So what does this mean?

  • Widespread repayment difficulties: These numbers may not even reflect the current rates of repayment difficulty, given that graduates in the last few years have faced a much tougher job market than those who graduated five years ago.
  • Old measures may be inadequate: Traditionally, studies on student debt have focused on the rate of default rather than delinquency. Looking at delinquent loans offers a clearer picture of how many people are struggling to repay their loans, even if they manage to get back on track at some point.
  • Bankruptcy not an option: Student loans are typically not dischargeable in bankruptcy court, which means that those with unmanageable student debt have few options for easing their debt burden. This is scary, considering that some estimates put the country’s total student debt at $896 billion, which is greater than our national credit card debt total.

Reports note that these numbers may affect the current debate in Congress over whether for-profit colleges and universities should be eligible for federally backed financial aid.

More Underwater Homes

Recent numbers released by a company called CoreLogic show that the number of underwater homes in the U.S. (that is, homes with a current value less than the amount of the mortgage on the house) has climbed since last quarter. Here’s a look at the numbers.

  • A reported 11.1 million U.S. homes were underwater in 2011’s first quarter, a jump from 10.8 million in the last quarter of 2010.
  • Nevada has a 65 percent rate of underwater mortgages, and is apparently the only state in which the average homeowner is underwater.
  • Besides the more than 11 million underwater homeowners in the U.S., 2.4 million Americans have less than five percent equity in their houses, according to sources.
  • Collectively, we reportedly owe about $751 billion more on mortgages than our homes are worth.
  • Analysts predict that home prices could fall by another five to 10 percent in 2011, meaning that those with little equity could soon find themselves underwater.

Unfortunately, mortgage loans for primary residences cannot be modified in bankruptcy court, but in some cases homeowners may find a Chapter 13 or Chapter 7 filing useful for eliminating other debts to help improve their odds of staying on track with their mortgages.

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