Monthly Archives: April 2007

Boomers and Bankruptcy

The Associated Press has just released a short article that is based on a report due out in the American Bankruptcy Institute’s Journal next month. Basically, the report looked at the ages of people filing for bankruptcy and the apparent causes for the filings.

The data used is slightly older, it covers 1994 – 2002. However, nothing here is going to come as a great surprise to anyone in the Bankruptcy system. We have all known for years that the real growth in bankruptcy filings was not young adults. In fact, according to this study, the percentage of people under the age of 25 decreased substantially between 1994 and 2002; and the median age for filers is now 41.4 years, up from 37.7.

So, what age group is driving the filing numbers? People over the age of 55 who are getting caught between housing costs and ever increasing health care costs — especially prescription drugs.


Why Pay for National CLE

Ok, so I have now forgotten twice to bring to the office the survey results I intended to blog about after getting my first full night’s sleep in a week. Instead, I am going to carry-on about why it pays to go to National CLE seminars.

I just got back from the National Association of Consumer Bankruptcy Attorneys’ national seminar in Philadelphia. Was it expensive? Yes. Was it a hassle to be out of the office and out of town from early Thursday morning until midnight Sunday night? You bet. Was it worth it? I can’t imagine practicing without this or something like it.

I’ve done countless CLE seminars locally. Generally, there will be one or two really good sections and the rest — um, less so. Look around the room after 3:00 sometime. The place is half empty. There is a reason the bar makes us sign in after lunch.

I used to think that out-of-state CLE was just an excuse for a tax deductible vacation, and I have seen brochures that fit that bill. I remember a Creditor’s Bankruptcy seminar several years ago that promised you could be on the ski slopes by 1:00 every day. At NACBA it is not at all uncommon for us to be in class or otherwise engaged with the seminar from 8:30 in the morning well into the evening.

Yesterday after my morning docket I had an attorney who practices some bankrutpcy ask me if I thought this kind of thing was worth the money. So, being a lawyer, I answered his question with a question — well, lots of them really.

There was another lawyer at the table who files more Bankruptcies than I do. Neither of them had any answers. Oh, and several of my questions were how to get creditors to pay debtor’s attorneys fee.

That is why it pays to go to National CLE.

If you do Bankruptcy work and are not a member of NACBA. Check it out

The brochure for Philadelphia is still up if you want to see what you missed.


I’m Baaack — did you miss me?

Well, I have returned from the National Association of Consumer Bankruptcy Attorneys annual seminar in Philadelphia. The first words I heard coming off the airplane were from the airport speaker welcoming me to Oklahoma City and telling me that it was 12:00 a.m. Yep, that’s what you call first thing Monday morning. It was 1:00 by the time I was home, and I had a Status Conference at 9:45.

Oh, and my brain exploded about 2:00 on Saturday. If you have never been to an NACBA seminar and you do any bankruptcy work — you have to go. Just be prepared for overload.

I’ll be back tonight or tomorrow with some points of interest (at least to me) in NACBA’s recent survey of attorneys about Debtor Audits coming out of BAPCPA.

Until then — I need a nap.


All those abusive debtors. . . .

I have just heard some statistics from Bankruptcy filings under the new law. As of the end of March, 2007 the U.S. Trustee’s office says that in only 8% of all Bankruptcies filed has the Debtor had income in excess of median income for the Debtor’s State. In addition, of that 8% only 10% of the 8% flunked the means test; and the U.S. Trustee only chose to take action in 20% of those. In other words, surprise, surprise; high income debtors are not filing Bankruptcy in droves.

That means that this incredibly expensive and complicated Means Test, the centerpiece of Bankruptcy reform, is catching only .8% of all cases being filed; and of those only 20% are actually being challenged by the U.S. Trustee. Amazing.

Ok, so, where are the flaws in these statistics? I see two just off hand. Higher income debtors tend to be more aware of legal developments, and in my opinion, were more likely to file before the law change. Second, exactly how the Means Test is going to work isn’t really known yet. We are developing a patchwork of cases (most of which don’t agree with each other) attempting to apply some of the most basic Means Test issues.

Also, far too many lawyers are still not looking beneath the most basic, surface issues on the Means Test. If it isn’t an IRS allowance, they aren’t filling it out. As a result, more Debtors are flunking the Means Test than is probably accurate.

Even so, all problems with the numbers aside, I am not seeing anything that contradicts the U.S. Trustee’s original position which is that fewer than 2% of all cases filed under the old law qualified as abusive.

Consumer Credit Protections for the Military

Congress has recently passed, as part of a much larger military bill, certain limitations on consumer credit extended to servicemembers and their dependents. This will ultimately be codified in Title 10 U.S. Code. In the meantime, I have attached a copy of just Section 670 of Public Law 109-364. Section 670 of Public Law 109-364

This statute is incredibly expansive. The cap on interest rates at 36% got all the press, and that doesn’t sound all that great — unless you have actually looked at a TILA disclosure that puts the interest rate, right there in black and white, at 1000%. There is way more to this Statute.

First of all, it doesn’t just apply to servicemembers, but also to their dependents. Second, it prohibits arbitration clauses, rollover/renewal based financing, and the use of post-dated checks, payments by electronic debit or the use of car titles as security for non-purchase money loans. This Act goes into effect October 1, 2007.

The Act also empowers those experts in consumer credit, the Department of Defense, to promulgate regulations to carry out this section. Those regulations are to establish the disclosures necessary, methods for calculating interest, allowable fees, definitions of creditor and consumer credit, and other things the Secretary of Defense deems necessary.

The Department has issued a draft of its proposed regulations which are now available for comment. DoD Proposed Regulation (actual proposed regulations begin at page 48 of the attachment.)

These regulations go a long way towards addressing the credit industry’s concerns about this Act. For instance, DoD limits the expansive definition of “consumer credit” in the statute to a very restrictive, payday loan description. The regulations require that the loan be:

  • Payday loans. Closed-end credit with a term of 91 days or less in which the amount financed does not exceed $2,000 and the covered borrower:
    • Receives funds from and incurs interest and/or is charged a fee by a credtor, and contemporaneously provides a check or other payment instrument to the creditor who agrees with the covered borrower not to deposit or present the check or payment instrument for more than one day, or;
    • Receives funds from and incurs interest and/or is charged a fee by a creditor, and contemporaneously authorizes the creditor to initiat a debit or debits to the covered borrower’s deposit account (by electronic fund transfer or remotely created check) after one or more days. This provision does not apply to any right of a depository institution under statute or common law to offset indebtedness against funds on deposit in the event of the covered borrower’s delinquency or default. . . .

This just doesn’t strike me as being that hard to wire around. Second, it expressly doesn’t provide protection for other types of incredibly usorious situations. Now, granted no one else is statutorily protected from some of the other kinds of loan products I have seen, but Congress has made the determination that the military and their dependents need special protection. I don’t think this is doing it.

One of the big concerns of the credit industry. is how to determine who is and is not a covered borrower? The introduction to the regs seems to indicate that the service member should be pretty easy to identify, because the lender will surely want proof of employment before making the loan. Have these people ever been inside a payday loan shop? I didn’t think so. Oh, and both the Statute and the Regulations define “dependent” as:

  • The member’s spouse, the member’s child defined in 38 USC 101(4), or an individual for whom the member provided more than one-half fo the individual’s support for 180 days immediately preceding an extension of consumer credit covered by this part.

So, a college student going to school in a State with no military bases could be covered. An elderly parent of a service member could be covered. The proposed regulations include a form that is to be offered to all applicants where the applicant must tell the loan shop whether or not they are a covered borrower, but the Statute does not provide a safe harbor for a creditor who relies on a statement from the borrower, and the penalty is voiding of the contract (or punishment for  a midemeanor for a knowing violation).

There are some things here I really like. For one, the acknowledgement from Congress that maybe mandatory arbitration clauses and consumer contracts aren’t a good combination. Also, the inclusion of all fees and costs in the interest rate calculation. I am waiting, though, to see how the industry will react and what litigation, if any, results from this Act.


Who Exactly is SallieMae?

We all know Sallie Mae as the face of student loans. That is the entity you make the payments to, that is the entity you generally schedule in a Bankruptcy filing; but who is Sallie Mae?

News articles breaking over the weekend have added some light to that question. Sallie Mae is a publicly traded corporation that is about to be taken private for $25 Billion. Oh, and it is a corporation that has paid its CEO over $200 Million during a five-year period.

Some of the news articles have touched on how parts of the student loan industry work. According to CNN’s story Bonfire of the Universities 85% of Sallie Mae’s portfolio is Federally insured. That means that 15% is not. Something that I found very intersting is that in the event of default on a federally insured loan, the Government pays the lender between 96 and 98% of the total principal and interest owed.

So, why the emphasis on interest in that last sentence?

I am starting to see student loans that have been in default for a long time, because since 1997 virtually all student loans have been non-dischargeable; and since 2005 that is expanded to include completely private student loans — i.e., that other 15% of Sallie Mae’s portfolio. One thing that I am noticing on these loans is a ballooning of the account balance that just doesn’t seem right for loans at 8 or 9% interest. Then, I learned about interest capitalization.

I didn’t know until recently that in the event of default or at the conclusion of an approved forbearance period, a student loan lender may capitalize the accrued interest. That means add that interest into the principal balance so that interest accrues from that point forward on a much larger principal balance. This effectively makes a simple interest note a partially compound interest note — all of which is effectively non-dischargeable.

No sweat, thought right? After all, deferments followed by default should be pretty early in the note history, the two tend to go together so there is only one incident of capitalization; it shouldn’t make that much difference right?

Tell that to the client of mine who is now being told she owes $22,000 on a note that was written for less than $7,000. Oh, and even though she never made a payment after the deferment period (not uncomon, by the way); she has two capitalization events on her loan history — several years apart. Can anybody explain that to me?

So, why are we, the taxpayers, guaranteeing a return on investment and insuring investment losses for a corporation worth $25 Billion, that is paying out hundreds of millions in executive compensation and charging and capitalizing interest at 9%?


Now Creditors don’t like BK Reform either?

Who ever would have thunk it.

Creditors are discovering that bk reform may not be exactly what they had hoped for. I got the impression in 2004 – 2005 that the creditor community seemed to think that if it were just more difficult and more expensive to file for bankruptcy, then debtors would just pay their debts instead. Hello?

Well, now Credit Suisse has published its March 8, 2007 Subprime HEAT Update finding that when the bankruptcy code makes people pay their general, unsecured creditors; there is less money to cure mortgage defaults. You have got to wonder how much they paid a room full of statisticians and MBA’s to come up with that conclusion.

I do think that some of Credit Suisse’s conclusions are driven by technical rather than financial problems with the new BK Code. The means test is a game, and it has to be played like one. We are just now starting to get the basic rules worked out. There is no question that two different debtors with identical financial pictures can both file under Chapter 13 and be required to pay wildly different amounts — because of the means test.

Debtors who are able to put together the information and documentation necessary to fully complete the means test to their best advantage and who hire attorneys willing and able to guide them through the tricks and the turns are paying significantly less than identically situated debtors who aren’t as able. That means that a debtor’s ability to produce documentation and choice of bankruptcy attorney can make the difference between being able to cure default on a house or lose it to foreclosure. It also can make the difference between a debtor being able to survive a rate increase on an ARM or otherwise continue to make mortgage payments in the face of other debt.

Something tells me I’m in a growth industry.


USA Today and Sub-Prime Restructuring

It shouldn’t come as any big surprise that when someone gets into trouble with a sub-prime loan a successful restructuring is difficult at best. thinks this issue warrants a front-page article. The article doesn’t read as if it were written by someone with real experience in the trenches with sub-prime borrowers. The focus seems to be that these aren’t FHA loans, and FHA loss mitigation regulations are not applicable. To my mind, article this makes certain assumptions that I don’t think can be made.

First, this assumes that FHA loss mitigation procedures are being applied in every FHA loan delinquency; and it assumes that they are being applied evenly and correctly. I don’t think that is a fair assumption.
To me, the real point of this article is my post from yesterday. Read the note. Read the mortgage. Everytime. Then, send a QWR to the servicer requesting a payment history, a copy of the servicing and pooling agreement and copies of any applicable loss mitigation procedures. Everytime.

Do I do this? Not often. Generally when clients come to me they are beyond this point, but I am starting to look more carefully at loan docs when faced with motions for relief. In a response I filed on Friday I asked for my fees, and I asked for an order finding that the servicer is not entitled to an attorney’s fee to be assessed against the account. Why? Because I had read the note and mortgage and neither the servicer nor his attorney had.

Read the note. Read the mortgage. Investigate the loss mitigation procedures included in the pooling and servicing agreement. Then, ask for fees.


Lesson of the Week

Read the note.

Read the mortgage.

Everytime.  No matter how sure you are that you know what it says.  No matter how sure you are that the mortgage servicer must know what it says, and they wouldn’t intentionally not comply with it.  No matter how sure you are that it is a purely generic form with nothing in it to hang a hat on.

Read the note.

Read the mortgage.

Every time.


Sub-Prime Car Loans?

Here is a link to an interesting article alleging something that is almost too obvious not to be true — a lot of the sub-prime lending techniques that have gotten the mortgage industry in trouble, they learned from CAR DEALERS.

If you have never talked to someone on the inside of the car industry about the multitude of ways they use to just flat out behave like — well, archetypal used car dealers, you really ought to try it sometime.