A bipartisan group of Representatives is planning to offer an amendment to the Wall Street reform bill being debated on December 9th that would allow bankruptcy judges to approve changes to mortgages on the family home.

Currently, lenders are protected from plan terms that change the terms of loans secured by personal residences.  Judges can approve plans that modify secured debts on investment property, vacation homes, and commercial buildings, but not on the most important asset an individual has.

The amendment is identical to H.R. 1106, which passed the House last fall and was defeated by banking interests in the Senate.  Well, banks are now profitable, the foreclosure contagion is spreading to prime loans, and the voluntary mortgage modification programs are laughably ineffective.

Nearly 8% of American home loans are delinquent, and 25 percent of homes are underwater.  Without mortgage modification, I advise many clients to walk away from homes where the debt towers above the present value of the houses.

If some courage and vision can be found in Congress, maybe I’ll have another solution to offer.  Contact your representatives and ask them to support the Conyers-Turner-Lofgren-Marshall amendment to H.R. 4173.  Find your representative and their contact information.

Homeowners should be walking away from underwater houses in droves, according to the analysis of University of Arizona law professor Brent White.  And they shouldn’t feel guilty about it either.

White’s argument is that until  borrowers make clear headed economic, rather than emotional, decisions about paying for underwater houses, the banks will not be moved to modify mortgages.  And of course, the statistics that are coming out about the number of mortgages actually, permanently modified are laughable:  something like 1700 mortgages modified in a country where 8% of mortgages are delinquent.

So, is a contract to repay money a moral commitment, or is it a promise made with economic consequences for breaking it?  Look at the example of professional sports coaches:  coach has a five year contract, team doesn’t perform, and owner fires coach after two years.  Coach has a right to damages for the remaining three years of the contract.

Does anyone think the team owner has done something immoral?  Rather, he has chosen to pay the price of breaking a legally enforceable promise to pay the coach for five years.

It is the scale of the impact that adoption of White’s view of home loans that has provoked a stern, finger wagging response from lenders and Fannie Mae.  White terms the campaign by banks, government and media to brand voluntary default as immoral as “social control”.

White’s 50+ page paper is available online.

On the surface, my initial consult had a tax problem: years of unpaid income taxes.  The salary was on the upper end of what I usually see.

It was only after we talked at length that the story came out:  the client had a mentally ill child and had drained retirement savings to pay for hospitalization for the child.

The client’s health insurance had a low limit on coverage for mental health;  the only way to pay for treatment was to dip into retirement savings, generating a tax obligation.

The bankruptcy schedules will show tax debt.  The underlying story will show that our health care system can be fatal to your economic health.

The amount of equity a California homeowner can protect from judgment creditors and bankruptcy trustees goes up on January 1, 2010.  A married couple will be able to exempt $100,000; a single person, $75,000; and the elderly or disabled, $175,000.

These increases are a welcome nod to the reality of California home prices: the current exemptions are almost insignificant against the cost of a house in California.

The balance of the California exemptions will change on April 1 in the tri annual adjustment for changes in the cost of living.

Remember, too, that debtors get the benefit of the unwritten exemptions.

If the headline drew you in, like the Geico gecko, you can complain you’ve been duped:  in bankruptcy, you disclose everything. Period.

My colleague David Leibowitz, himself a bankruptcy trustee writes, about things frequently omitted from bankruptcy schedules., and the possible consequences.

In my experience, the problem is not so much an intention to conceal that leads to omissions of assets, it’s failure to take disclosure seriously.  Clients don’t want to read the questionnaire that prompts them for various kinds of assets they might have.  They don’t commit to thinking about how this question might apply to their situation.  Or they assume because an asset has little market value, it’s excluded from the schedules.  You would not believe the number of clients whose completed questionnaires tell me they have no clothes. Yet I’ve never met with a naked client.

The hardest kind of things for laypeople to “see” as assets are those that are just legal rights, or even, possible legal rights:  the worker’s compensation claim, the claim against the landlord, the participation in a class action.  All of those are assets that need to be listed.

Often a trustee will elect not to administer even non exempt assets, because the effort to pursue them is too great compared to the possible return.  But even if the trustee were to administer the claim for the benefit of creditors, the loss to the debtor is usually far less than the value of the discharge of debts that results in bankruptcy.

The good folks at the Collaborative Law gathering yesterday had the same questions that their clients have:  when is the right time to file bankruptcy?  what happens when you file?  what does it  do to (for?) your life?

Collaborative Law, as I understand it, involves couples in a cooperative effort with a shared set of legal, financial, and mental health professionals to navigate a divorce.  My task was to add the bankruptcy arrow to their quiver.

It was energizing to meet a vibrant, engaged group of professionals all trying to make divorce and the accompanying issues more rational, less expensive, more comprehensive.

The details are set:  October 29  5-7:30 p.m.  Computer History Museum, Mt. View

Designed for lawyers new to the bankruptcy practice, this class will focus on the practicalities of the means test.  Who has to take the test?  What is income?  What are the overlooked deductions?

The class is limited to 35 participants and we will leave ample time for questions.  The materials will go through the B-22 line by line with case law and annotations.  There are not always answers, but there are approaches that competent lawyers should be advocating.

I expect to have MCLE credit for the class and snacks.  Whichever rings your chimes, join us.  Expected cost $250 with discounts for those who sign up another new lawyer.

Reserve a spot by emailing cathy@law-full.com.

I am inching closer to presenting a 2 + hour class for attorneys new to bankruptcy on the bankruptcy means test.

My target date is mid October, mid way between my speaking engagement for the Midwest Bankruptcy Institute in Kansas City first of October, and my two presentations at the NACBA Fall Workshop in November.

You’d think I’d tire of hearing myself talk- or would you<g>.

We were exploring the timing of a bankruptcy case, trying to live free in the house to be foreclosed while avoiding a garnishment on the working spouse’s wages.  I was thinking about comparing the cost of a garnishment to the cost of renting a house:  the client was thinking that a wage garnishment was forever!

Not so.  Bankruptcy eliminates the right of any creditor to continue to collect on its debt.  The prohibition requires that the creditor with a wage garnishment instruct the sheriff to cease withholding money from the debtor’s wages.

Further, the debtor may be able to recover from the creditor funds garnished in the 90 days before the bankruptcy case was filed, as a preference.  (My experience is that preference actions over sums this small are seldom economic, however.)

The client was also worried that multiple judgments could result in multiple garnishments at the same time.  Again, not so.  California law permits only one garnishment in place at a time and caps what the garnishing creditor can take from each paycheck at 25% of after tax wages.

The world was a lot less scary place for the client after we found and destroyed another bankruptcy myth.

My Bankruptcy Law Network colleague Craig Andresen reported on a decision that found large payments on secured debt, including some for boat and RV, were permissible deductions in the means test.  The UST had argued that the debtors were abusing the system if they didn’t stop paying on the secured debt in order to fund a Chapter 13 plan.

Note that the UST’s argument was that the debtors should stop paying on the secured debt in order to pay other creditors, the unsecureds.  What business does the UST have in trying to further the interests of one set of creditors over another?  What makes the unsecured creditors more deserving than the secured creditors?

You wonder how the UST determines when a house payment is excessive, in its view.  Does the title make one all knowing?

In the crazy world of BAPCPA, hurray for a judge who reads the (idiotic] law and applies it as written.