The bankruptcy mortgage modification provision, headed to the Senate this week, is a bargain to taxpayers next to the “voluntary” mortgage modification programs instituted by the administration.

HR 1106 involves no taxpayer money;  it strips the special interest provision sheltering banks from  home loan modification.  The costs of changing the mortgage so that the debtor pays the current value of the collateral and the lender is spared the costs of foreclosing are borne by the borrower and lender.

The modification and refinance programs introduced by the adminstration involve taxpayer  cash subsidies to servicers and borrowers who successfully renegotiate a mortgage.

Why is it that the opposition to judicial mortgage modification claim that the honest and responsible are paying the mortgage for the greedy and irresponsible?

Two positives today in the quest to allow bankruptcy judges to enforce modification of home mortgages:  Citibank came out in favor of the change.  This seems monumental since it’s been the bankers who have crushed earlier attempts to repeal this safe haven for mortgage lenders.

The second was Obama’s call to move the stimulus bill quickly.

I’ve read the bill and am planning on how to use it when it becomes available.   Upon enactment, it will apply to cases already on file.

Stand back!  I’m on my soapbox again.

This blog got its start when bankruptcy “reform” legislation was under consideration in Congress and I had heartfelt views about the defects of the proposed changes.  Bankruptcy in Brief has attempted for 10 years to be objective and informative.   I needed to advocate, and thus on the Bankruptcy Soapbox was born.

Yesterday, S. 2136 was introduced in the Congress, which would enable bankruptcy judges in Chapter 13 to modify mortgages on people’s homes. The experience of most all professionals in the housing world is that voluntary loan modifications are infrequent and inadequate.  Extending  the mortgage cram down provisions to homes would utilize the existing infrastructure of the bankruptcy courts to make meaningful modification possible, under court supervision.

My colleague Carmen Dellutri recounted the history of the mortgage modification provision, which prior to the current meltdown, was defeated by the arguments of the mortgage bankers.  They asserted, falsely it appears, that to do so would increase everyone’s mortgage interest rate.  Prof. Adam Levitin of Georgetown University Law Center   analyzed that claim and found it baseless.

(One might also ask, why should the mortgage bankers, who had a large hand in bringing the American economy to its current strait, have any credibility on this issue?   But, it seems, they are wrong as well as guilty, so we can move on.)

So, once again I’m calling on the interested public to contact their representatives in Congress.  Voice support for this change and urge your Senators and Members of Congress to pass this bill immediately.  Every day without it, more families lose homes to foreclosure.

California was one of 18 states who sued the tax settlement firm JKHarris for selling services they couldn’t provide. The settlement reached will require fuller disclosure of the odds of reaching the promised results.

Everyone in debt trouble, particularly those in trouble with a heavy hitter like the IRS, wants to believe that a cheaper resolution is available for their problem. The consumer is predisposed to believe that a former insider, like the former IRS agents who supposedly work for JK Harris, can solve their problem on the cheap. Even as I write this, Google brings up the following headline for Harris:

JK Harris Company Will Solve Your IRS Problems Today.I see lots of clients with large tax problems who have signed up with J K Harris to “settle” their taxes before they come to me with their tax problems unaddressed. Often, it is obvious to me that these people are not good candidates for an offer in compromise, which is what tax settlement firms are touting.

The IRS will compromise taxes where the taxpayer (or non-taxpayer) has few assets; little income; the collection statute of limitations is approaching; or other factors that make it unlikely the IRS can collect everything it’s owed.

If the individual doesn’t fit that profile, a successful offer in compromise is unlikely. Yet I see no evidence that Harris explored those factors before taking money from the desperate customer.

One of the myths about bankruptcy is that you can’t discharge taxes. Wrong: income taxes first due more than three years ago, for which a truthful return has been on file for at least two years, and assessed more than 240 days ago are dischargeable in bankruptcy.

My next candidate for the Attorneys General of the various states are the debt settlement companies, whose pitch to consumers is equally as false as JK Harris.

My colleague Jonathan Ginsberg pointed out the play that the bankruptcy filing numbers are getting in the press: his local paper reports that bankruptcy filings are soaring.
In looking at the filing numbers, it is important to remember that 2006 was an aberrational year in consumer bankruptcy. The bankruptcy “reform” act became effective mid October, 2005. Huge numbers of people rushed to file bankruptcy before the law changed.

After the law changed, there was a lull in bankruptcy filings. I think two things are behind the low filing numbers in 2006. People who were on the fence about filing bankruptcy accelerated their decision to file because of the consumer-hostile provisions of BAPCPA, so those folks who normally would have filed in 2006, filed in 2005 to beat the change.

Secondly, after the amendments became effective, it took a while for the public to realize that bankruptcy relief was still available and for bankruptcy lawyers to master the changes in the law. Some bankruptcy lawyers left the practice and debt collectors told debtors that bankruptcy was not longer available to them or for the kind of debt that collector was trying to collect.
Certainly, there was no drop off in 2006 of people up to their ears in impossible debt; prosperity did not break out because we erected barriers at the bankruptcy court door. People’s ability to deal with the debt they had remained unchanged.

So, one should be cautious in drawing conclusions from a comparison between bankruptcy filing numbers between 2006 and 2007. That said, my experience suggests that there will be an onslaught of bankruptcy filings in 2008: the mortgage meltdown, slowing economy, and higher awareness of bankruptcy’s continuing availability will make debt relief look good to the consumer.

The elderly are a growing percentage of bankruptcy filers. The reasons are myriad: health care costs, inadequate retirement savings, and financial entanglements with family. The trend to market home equity loans as a way to live better makes it less likely the mortgage is paid off when retirement arrives.

The question, “Should I file bankruptcy?” is usually most easily answered for the elderly. Younger clients with a significant remaining working life may have options for avoiding bankruptcy. Those options are not generally available for those at the end of their working lives. Incomes will not increase over time. Minimum payments on credit cards are calculated to pay off even small balances over 20-40 years! Seniors don’t have 40 years.
The stress of being in the bill collectors’ cross hairs is less tolerable for the elderly, even if nothing they have would be available to satisfy a judgment.

Discussing money with a senior generation is not easy, but it needs to be done. I’ve seen a number of cases where it is not until there is a crisis that adult children learn that their parent has been living with unmanageable debt. Too often, the senior has stinted on food or medication in order to make the minimum payments on credit cards.

The rational choice may be bankruptcy and a debt free old age.

The newly enacted prohibition on stripping down car loans in Chapter 13 bankruptcy to the value of the car may not cover as many transactions as drafters thought. When the bankruptcy bill was working its way through Congress prior to 2005, the car lenders persuaded Congress to protect them from having their claim in a bankruptcy measured by the value of the car that is the collateral.

You see, new cars lose a lot of value when they are driven off the lot, and lose value more rapidly for the first several years of the loan than the payments on the loan reduce the loan balance. If bankruptcy is filed during those years, there may be several thousand dollars difference between what is owed on the car and what that car is worth.

So the amendment prohibited stripping down car loans on cars purchased within 910 days of the bankruptcy filing where the lien on the car is a “purchase money security interest.” That term has a meaning outside of bankruptcy, describing a lien that secured a loan to buy the collateral. But what if the loan bought a bunch of other stuff too?

Bankruptcy lawyers have started analyzing all the things that the “car loan” bought: there is GAP insurance (protecting only the lender from the gap between the car’s value and the debt); there’s the unpaid loan balance on a trade in; there are various kinds of warranties, etc. All of these other things muddy the waters as to whether the lien in question is a “purchase money security interest” under state law.

As cases work there way through the courts, we will see how bankruptcy judges and appellate court judges apply longstanding non bankruptcy legal terms to this provision of the gloriously ill-drafted Bankruptcy “Reform” Act.

The Bankruptcy Abuse Prevention and Consumer Protection Act became effective little more than a year ago. The net of our experiences thus far with the amended Bankruptcy Code is that bankruptcy relief remains widely available. What has been sacrificed is economy and predictability.

Lawyers and judges struggling with applying the statutes amended by BAPCPA find the sloppy draftsmanship of this law painful to encounter. So much of what has been added isn’t compatible with the balance of the code and applying the words as written in one place produces either idiocy or the opposite effect somewhere else in the Code. My favorite judicial comment was by Judge Markell who analogized it to the White Queen who reported she was required to believe six impossible things before breakfast.

I have not yet seen a client who could not get relief in bankruptcy by reason of the changes to the Code. I have been surprised at how seldom the IRS collection standards used in the means test result in trouble for clients. Unfortunately, all of the additional steps in the bankruptcy process have required a substantial increase in the cost of a bankruptcy case. Further, about many of the issues raised by the new amendments, there are no clear answers about how these provisions will be applied in the real world.

Prepetition credit counseling has proven to be a farce. No one who has made the long postponed visit to a bankruptcy lawyer can manage his way out of a financial pit. The counseling requirement has just raised the cost and the number of ways a debtor without a lawyer can screw up.

I have greater hopes for the financial management class required to get out of bankruptcy. Most all of my clients have absorbed some self taught lessons about money; they are usually ripe for an attempt to learn to manage better. Of course, there is a limit in this economy to what good management can do for a family: you can hardly “learn” to avoid illness, unemployment or divorce. These are the three factors that account for more than 90% of bankruptcy filings.

BAPCPA was intended to reduce the number of folks filing bankruptcy. The initial numbers show that filings are down. There is no evidence that is because all the alleged “abusers” aren’t seeking bankruptcy relief. It is because, in part, an enormous pool of people considering bankruptcy last fall, took the plunge before October 05 to beat the harsh changes in the law. Many of those who didn’t file in 05 mistakenly believe that bankruptcy is no longer an option. This misconception is being fed by bill collectors who are telling debtors that “you can’t file bankruptcy on credit card bills”, or medical debt or whatever it is that they are collecting.

The financial precariousness of the American middle class has not been remedied by closing the door to the bankruptcy court. I hope this dawns on our political leaders.

Cathy Moran

The IRS’s list of its annual “Dirty Dozen” tax frauds includes credit counseling.

Credit Counseling Agencies. Taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment plans or impose high set-up fees or monthly service charges that may add to existing debt. The IRS Tax Exempt and Government Entities Division is in the process of revoking the tax-exempt status of numerous credit counseling organizations that operated under the guise of educating financially distressed consumers with debt problems while charging debtors large fees and providing little or no counseling.

The debt settlement model heads my personal list of scams, since it so seldom produces any meaningful settlement, provides no protection to the consumer while the money is accumulating, and lines the pockets of the organization in the meantime.

This is the industry that Congress made the gatekeeper to bankruptcy for individuals. Go figure.

Cathy Moran