A $450 million injection of money into the company will, backers hope, be a sufficient component of a proposed plan to exit bankruptcy protection, the Wall Street Journal is reporting. Court papers in the bankruptcy case call on Paulson & Co. and Centerbridge Partners to provide the funds.

Paulson & Co. and Centerbridge Partners will invest $225 million into Extended Stay. This would represent a 22.5 percent stake in the struggling company. Additional money would come from a plan for Extended Stay to raise money via a rights offering. In this offering, the mortgage lenders that hold $4.1 billion in Extended Stay debt will have the chance, according to the Wall Street Journal, “to buy all the shares for an additional 22.5 percent stake plus warrants.”

These holders of Extended Stay mortgage debts will get new mortgage notes valued at $2.5 billion, and they will get a 55 percent stake in the company in the form of stock.

The details of this plan have come to light recently, following the investment agreements that Extended Stay made with the private firms.
Extended Stay filed for bankruptcy last June, following dropping occupancy in their hotels as a result of the difficult economy. The South Carolina-based company owns and maintains over 600 hotels, which are targeted at business travelers and mid-range hotel customers.

Two years ago, the Lightstone Group bought out the company from Blackstone Group LP for $8 billion. Under the new agreement, the entity that manages Extended Stay’s hotels will resign for these duties, in exchange for $30 million.

Following announcements of Extended Stay’s plan to get out of bankruptcy, a rival investor group made the announcement that its own plan would have been a better option than the one chosen.

Starwood Capital had been in the bidding to become the group investing the money in Extended Stay, though Paulson & Co. and Centerbridge Partners were chosen instead.

Now, the group is saying in court that it offered what it called a "binding offer" to sponsor the reorganization plan that Extended Stay will put in place. According to Starwood, it claims that its offer would provide "substantially greater" value to Extended Stay creditors, and that Extended Stay would have access to more cash than it will under the current plan.

Specific details of the Starwood offer were not filed in court. They did present their plan to object to Extended Stay’s current plan.

In January, Starwood claimed that it was being frozen out of the bid process. It said also that they were not getting the information that they needed to make a competitive bid, and that Centerbridge and Paulson were.

Starwood Capital led the restructuring and expansion of Starwood Hotels and Resorts Worldwide back in the 1990s. They cited this experience in the hotel management business to support their claim to investment rights in court.

Here are the pertinent details:

• The law states that bankruptcy lawyers are prohibited from advising clients to take on more debt before filing for bankruptcy. In theory, the restriction is meant to prevent advice that would lead to actions that might constitute fraud under U.S. bankruptcy laws.
• The question raised by the Minnesota law firm was one of free speech for lawyers. Apparently, the firm suggested that the aforementioned restriction amounted to an unconstitutional violation of the free speech rights of bankruptcy lawyers.
• The court decided that the law was not, in fact, unconstitutional, and that lawyers can give their clients any advice that does not promote defrauding the bankruptcy court.
  • Filing incomplete or inaccurate information
  • Attempting to pay a "favorite" creditor in full before filing for bankruptcy
  • Failing to disclose assets or expected income
  • Attempting to “give away” assets before filing

The Broader Issue

While the law firm’s concern with free speech may seem piddling here, in the context of bankruptcy cases, it has merit. In some cases, as the WSJ article points out, taking on certain kinds of debt immediately before a bankruptcy filing could benefit both the filer and his or her creditors.

For example, refinancing a troublesome mortgage to better allow a debtor to make payments could benefit all parties. The Supreme Court Justices reportedly acknowledged the truth of this and agreed that taking on more debt can, at times, be the wisest decision for a potential bankruptcy filer.

But, the court noted, the law can be read to mean that bankruptcy lawyers are restricted only from giving their clients advice that would lead to bankruptcy fraud.

What Constitutes Bankruptcy Fraud?

Bankruptcy fraud is a serious matter – in fact, it can lead a court to throw out your case (and thus eliminate your chances at receiving a debt discharge) and earn you fines and jail time. This is one reason why working with a bankruptcy lawyer can be helpful.

Bankruptcy fraud includes:

LifeLock is a company that protects customers' identities from theft, and alerts customers about identity theft security breaches, according to the company web site. LifeLock will even help consumers if their identity is stolen, by canceling and replacing stolen cards and verifying information changes.

According to federal regulators, however, LifeLock has made claims about its ability to protect customers from identity theft that it cannot uphold, leading to an agreement for the company to pay $12 million in settlements.

CNNMoney is reporting that the fine will settle charges that LifeLock made deceptive claims about its identity theft protection abilities. $11 million of the fine will go to the FTC, while another $1 million will go to a group of attorneys general from around the country. According to the FTC, this is one of the largest joint settlements between the FTC and the states.

According to the chairman of the FTC, Jon Liebowitz, LifeLock claimed that it could protect consumers against identity theft completely, including all types of identity theft.

The protection it actually provided, said the chairman, left enough holes that you could drive a truck through it.

LifeLock advertises its services in a brash manner, by displaying the social security number of the company's CEO, Todd Davis, on the side of a truck that drives around in public, as well as on national television commercials. This show of confidence is meant to publicize their $10 per month services that they claim will keep users safe from identity theft.

The case that the FTC made against LifeLock was that the company made "deceptive claims" about its protection services. Among these claims were that LifeLock could guarantee protection against identity theft, and that, according to CNNMoney, "it was the first company to prevent identity theft from occurring."

There are certain types of identity theft that LifeLock claimed it could protect against, and the FTC argued that these fraud alerts did not actually protect against one of the most common types of identity theft: the misuse of existing accounts.

There was also the charge that LifeLock claimed, falsely, to be able to prevent changes to customers' address listings that weren't authorized, and that it constantly monitored customer credit report activity.

The FTC also said that LifeLock made untrue statements about data security, claiming that sensitive data was only accessed on a "need-to-know" basis. According to the FTC, however, LifeLock collected social security numbers and credit card numbers on a routine basis.

Davis, the CEO of LifeLock, said of the settlement that he was pleased with it, and that it would help to establish the advertising standards for the identity theft protection industry. He went on to say that the activities in the FTC charges were from several years ago, and that LifeLock agreed to settle the case as a way to put the issues behind them.

We agreed to settle this matter, he said, in order to quickly put this behind us so we can get back to doing what we do best—helping to protect our members from identity theft.

Identity theft was by far the largest complaint category, concerning 21 percent of all complaints filed. The top fifteen list looks like this:

• Identity theft (21 percent)
• Third party and creditor debt collection (nine percent)
• Internet services (six percent)
• Shop-at-home and catalog sales (six percent)
• Foreign money offers and counterfeit check scams (five percent)
• Internet auctions (four percent)
• Credit cards (three percent)
• Prizes, sweepstakes and lotteries (three percent)
• Advance-fee loans and credit protection/repair (three percent)
• Banks and Lenders (two percent)
• Credit bureaus, information furnishers and report users (two percent)
• Television and electronic media (two percent)
• Health care (two percent)
• Business opportunities, employment agencies and work-at-home plans (two percent)
• Computer equipment and software (two percent)

The FTC reports that identity theft complaints also constituted the largest single group of consumer worries last year, but have dropped as an overall percentage of the whole. In addition to the release of 2009’s data, the FTC has posted an animated video detailing how and when to file a complaint (available here).

A Potential Data Breach You Should Know About

In another recent news release, the FTC noted that it has warned almost 100 companies that information they store on peer-to-peer websites (used for everything from playing video games to sharing text, audio and video files to conducting online phone calls) may be vulnerable to data breaches.

Specifically, if peer-to-peer (P2P) software is improperly configured, any sensitive data may be accessible to anyone on the network. This presents a huge security risk, and could lead to identity theft or other costly and frustrating scams.

What this could mean for you is that, if you have given your personal information to one of the companies in question, your information could be at risk.

While no companies have necessarily broken the FTC’s regulations regarding storage of sensitive information, some may be at risk for significant future data breaches.

Additional Resources

FTC 2009 Full Report on Consumer Complaints.

"Presidential Reunion" brings together presidential impersonators from the past 35 years of "Saturday Night Live," including Will Ferrel as George W. Bush, Dana Carvey as George Bush, Sr., Chevy Chase as Gerald Ford and Fred Armisen as President Barack Obama. The video also features Jim Carrey as Ronald Reagan.

In the video (see it below), President Obama is struggling with opposition to the Consumer Financial Protection Act by congress and lobbyists. He is then visited by the six previous presidents (including the late Reagan and Ford). Bush, Jr., and Clinton (played by Darrel Hammond) explain how they eased restrictions on banks, helping to create the financial mess in which the nation finds itself. Later, Jimmy Carter (played by Dan Aykroyd) explains in clear terms the benefits of the proposed CFPA.

"Mr. President, you have to establish the Consumer Financial Protection Agency. People are tired of being ripped off by credit card companies and banks," he says.

The video was made in conjunction with the Main Street Brigade, an organization committed to bringing awareness to, and dispelling myths about the CFPA.

The act was first suggested to Congress by Harvard professor Elizabeth Warren, author of several studies about consumer credit and bankruptcy.

An interesting post from FiveCentNickel.com offers a look at Visa’s rules that merchants must follow if they accept Visa cards. Here’s a summary.

• What to take: Vendors can choose whether to accept credit and business cards, debit cards and gift cards, or both.
• No price limits: If a merchant accepts Visa cards, it is required to accept the cards for any transaction, regardless of its dollar amount. However, many merchants ignore this policy and set a minimum purchase amount to encourage spending. If you’re irritated by a specific vendor’s policy, consider speaking to a manager.
• Near equality: Items bought with Visa cards cannot be subjected to any special charge, but vendors can offer customers discounts for paying with cash (you may notice this especially at gas stations).
• Convenience fees: Online and over-the-phone transactions may be subject to extra charges, so long as they’re disclosed and not applied to any in-person transactions.
• No cash tax: Sellers cannot collect taxes from Visa transactions in cash.
• Tip not included: When you pay with a Visa card and intend to add a tip, vendors can only authorize your account for the amount of the service minus tip.
• No cash returns: If you buy something with a Visa card, sellers cannot give you cash should you return it.
• Time crunch: Merchants have to report Visa sales receipts within five days of purchase.
• Privacy limits: Receipts for Visa transactions should only show the final four digits of your card number and should not show your card’s expiration date. Further, sellers have to keep all account number information private.
• Policy disclosure: Vendors must explain (or make available) return and exchange policies before a customer makes a purchase.
• Signature required: Unsigned cards are considered invalid. If a cashier encounters one, she is supposed to make the customer sign the card and compare the signature to one on an ID card. Writing “ask for ID card” in lieu of a signature is considered an invalid substitute.
• ID optional: Merchants may ask for a photo ID, but cannot require buyers to have one in order to complete a transaction.

It’s always a good idea to make sure you know the rules of your debit or credit card, so if you don’t have a Visa, check out your cardholder’s website!

Additional Resources

Just the Facts about Credit Cards (PDF)

A Consumer’s Guide to Credit Cards (PDF)

And now, as layoffs and salary reductions become more and more common around the country, many once-comfortable graduates are finding themselves unable to meet the terms of their loans. Here are some ways you can handle your student debt.

Know Your Numbers

If you need to rework the terms of your student loans, consider contacting your lender. But before you do so, take these preparatory steps:

• Outline your budget: Crunch the numbers and figure out what you can realistically afford to pay each month.
• Read the fine print: Make sure you understand the terms of your loans as they now stand so that you’ll be ready to ask for specific modifications when you speak with your lender.

Once you’ve determined what kinds of payments you can make, familiarize yourself with your options for repayment. Depending on your circumstances, these may include the following:

• Modify your repayment plan: Some lenders offer graduated repayment schedules, meaning you pay more per month as you go along (which can be useful if you expect to make more money in the future). If your loans are through the Federal Government, visit the Federal Direct Loan web site to see your choices.
• Consider a deferment: Many lenders offer you a chance to defer payments for a variety of reasons (such as going back to school, working in certain fields, being unemployed, etc.). Check with your lender to see how to apply, but keep in mind that interest will likely still accrue during the deferral period.
• Apply for forbearance: You may also be able to make reduced payments or suspend payments altogether for reasons of financial hardship but, as with deferments, interest will likely still build up.
• Look at consolidation: Consolidation offers often prove helpful because they allow you to make a single payment each month and can even help lower interest rates. But be sure you understand the complete terms—some come with prepayment penalties.

If you’re just beginning school and considering loan options, remember that they may not seem like a big burden at this stage, but can add up quickly and should be considered carefully.

Additional Resources

Federal Student Loans: Learn the Basics and Manage Your Debt (PDF)

Sen. Jim Bunning, a Republican from Kentucky and former Major League Baseball pitcher, has objected to extending jobless benefits, which are attached to a larger spending bill that was past unanimously by the House last week.

The New York Times reports that 4,300 of Bunning's own constituents will exhaust their unemployment benefits in the next week, and that number will surely continue to rise over the coming weeks and months.

In New York, about 54,300 jobless workers are set to see their benefits run out next week, the most of any state, according to the Labor Department. Florida and Georgia follow, with approximately 49,600 and 41,000 workers losing benefits after March 13, respectively.

Bunning, who is not seeking reelection this year, has received praise from fellow Senate Republicans for taking his controversial stance.

The $10 billion bill up before the Senate would use stimulus money to extend unemployment insurance for jobless workers, and resume work for 2,000 Department of Transportation workers on highway construction projects.

About The Bankruptcy Blog

The Bankruptcy blog provides news and information on the economy, financial trends and bankruptcy information.

Center for Responsibility Lending Responds

The Center for Responsible Lending released a humorous (though cynical) animated video that highlights some of the areas not addressed by the new act—and illustrates ways in which credit card issuers have adapted their policies to maintain profit levels. These include:

• Interest rate hikes: To compensate for lost revenue, some card issuers have already raised users’ interest rates. Even users in good standing may be “forcibly eligible” for this, as the video claims.
• Over-limit fees: If you accidentally exceed your credit limit, your cardholder likely charges a fee. And, with new restrictions in place on other charges they can assess, you might see this fee jump.
• Inactivity fees: On the other hand, if you use your card too infrequently, you might see a fee for that, as well, because that means you’re less profitable for the company.
• Increased minimum payments: Another technique some card issuers are using is to up the minimum amount you can pay each month. This could be profitable for those who won’t be able to afford the increased payments and can be charged an under-payment fee.

The Regulation-Creativity Relationship

As the video illustrates with a graph, more consumer protection may seem like a good thing, but in practice, it often means that card issuers just get more “creative” with fees they charge reasons they charge them.

If you’re thinking now is a good time to get out of credit cards altogether, you’re not alone, but, before you cancel your cards, consider this:

• Your credit score: Part of your credit score is based on age of accounts (older ones are better); another part is based on diversity of credit (so eliminating one type entirely would hurt you).
• Your reentry: If, at some future time, you decide you want a credit card again, you’ll likely have to contend with uber-high interest rates (above 70 percent) because you won’t have any recent credit card history.

The video exaggerates a little (by mentioning, for example, a “legibility fee” for left-handed users), but by doing so draws attention to the more serious matter of how significantly your credit card could change.

Be sure to read all correspondence from your card issuer, even mailings that seem like junk: some of them might contain important details about the new rates and fees you may have to pay. These statements will also come in handy if mounting fees and interest force you into bankruptcy.

Additional Resources

Credit CARD Act

Some experts suggest the rules are unlikely to pass because they would mean more work, and potentially less income, for many mortgage lenders and loan servicers. This issue, according to some, highlights the core problems with that industry.

The Proposed Mortgage Rule Changes

Here’s a look at what alterations have allegedly been suggested and what they reveal about the way HAMP and the mortgage lending system in general is currently working, and how it could better work to help people avoid bankruptcy and stay in their homes:

1. Introduction of a 30-day “borrower response period.” This period would begin after a borrower was denied a mortgage modification; during the 30 days, mortgage lenders would be prohibited from foreclosing on properties. The aim is to provide a window in which borrowers can determine whether their denial resulted from mistakes in their application.

Those in the know suggest that this proposed change is necessary because a number of borrowers are being denied modifications because of mistakes in their application – not because they don’t actually qualify.

2. Prohibition of foreclosures for borrowers who have not been proven ineligible for modifications. In other words, banks would be required to offer borrowers an alternative to foreclosure (namely, modification) and would not be permitted to foreclose on a home if a borrower proved eligible for that modification.

According to sources, this type of language already exists in some form in HAMP – in fact, that’s part of the whole purpose of the program. The inclusion of this as a proposed modification suggests that mortgage lenders are not taking adequate steps to avoid foreclosing on properties.

3. Suspension of all foreclosure action once a borrower has been approved for a 90-day trial modification. HAMP requires a trial period. In this 90-day window, approved borrowers make payments under a modified mortgage plan. If they adhere to the terms, they should qualify for a permanent modification.

The fact that a new rule expressly prohibiting foreclosure action during the trial period has been proposed suggests that lenders are disregarding modification agreements and proceeding to foreclose regardless of a borrower’s status.

4. Written verification (from a trustee or lawyer) that a borrower does not qualify for HAMP before foreclosure can proceed. In other words, this rule would require banks to have proof that they can go ahead and foreclose.

This suggests that mortgage lenders have not been following this rule on their own, and have perhaps been foreclosing on properties even when a borrower qualified for a modification.

Bottom Line For Anyone Needing Mortgage Relief

If you are at risk of losing your home to foreclosure, you may want to contact a bankruptcy attorney. These proposed rules suggest the cards may be stacked against you.