Understanding the National Mortgage Settlement

loan modification national mortgage settlement


In the last few months, there has been a steady stream of news stories about the “National Mortgage Settlement” reached by the biggest mortgage lenders, the federal government, and every state that isn’t Oklahoma.  As with any trending news related to the foreclosure crisis, this development has prompted dozens of calls to my office from clients and potential clients who want to know about its impact, if any, on their efforts to save their homes.

While the mortgage settlement itself is complex, the general outlines can be expressed simply.  The settlement affected the “big five,” which are Bank of America, Wells Fargo, Chase, Citibank, and GMAC (now known as Ally Financial).  Those lenders agreed to a combination of loan modifications and loan forgiveness to atone for their bad behavior, which included false affidavits and other legal shenanigans during the foreclosure crisis.

One important thing to mention about this is that the settlement does not REQUIRE the banks to modify any particular mortgages.  However, while they are allowed to choose in which cases they will offer relief, they have certain financial obligations to meet.  In total, these amount to $17 billion.  How each modification or loan forgiveness is counted for this purpose is complex; the important thing to keep in mind is that they are obligated to offer some form of relief to hundreds of thousands of people.

In addition, the settlement provides payments for some people who lost their homes in foreclosure, if there were mistakes or abusive practices involved.

From a practical standpoint, here is what we are seeing: more people are getting approved for modifications, and they tend to be processed much more quickly than in the past.  They are also approving loan modifications while the borrowers are in bankruptcy, in some cases more easily than before the bankruptcy was filed.  This is likely due to a combination of factors, including the elimination of unsecured debt or the management of back taxes.  That makes the borrower less of a risk to re-default, and makes the banks more likely to offer relief.

For borrowers in an active bankruptcy, loan modifications are still available.  However, Court approval may be required, though it is almost always given if the documents are filed  properly.  If the case is filed under Chapter 13, the plan may need to be modified, or in certain cases, the case can simply be dismissed or converted, since the modification usually fixes the arrears and brings the loan current.

As a borrower, the way to take advantage of this settlement is to contact your lender, and apply for a loan modification.  In addition, there is a claim form you can fill out, and this must be done by January 18th, 2013.  It really is that simple.  And, while I won’t give my whole spiel about this topic, resist the urge to pay a company thousands of dollars to “assist” you in obtaining a loan modification.  If it can be done, it can be done by you, and professional help is only likely to lighten your wallet.

You also should check to see if your state has a website with specific information about the settlement.  Those sites generally contain information and instructions on how to take advantage of the settlement.

Good luck, and happy hunting!



Christmas and Bankruptcy

Christmas gift asset bankruptcy transfer


One of my more detail-oriented clients asked me an excellent question today about Christmas and bankruptcy, and I want to share some of my thoughts in this forum.

The client is planning to file for bankruptcy in January, or possibly February, and his biggest concern was about how this was going to affect Christmas.  You see, one of the questions asked in the bankruptcy process is whether you have given anything away to family members or friends in the months before you file.  She was concerned that this meant she could not give any gifts for Christmas!

To examine how this works, we need to look at the rule about “fraudulent transfers” and the role it plays in bankruptcy.  The purpose is simple and straightforward: we don’t want people with big assets being able to simply give those assets away, and then file for bankruptcy.  This would be unfair to creditors, who might be entitled to money if the assets hadn’t been given away.

The purpose is NOT to interfere with ordinary, everyday aspects of living, and this can include holiday gifts.  While a strict, technical reading of the code implies that even the smallest gift can be “avoided” by the trustee (essentially, the trustee takes it back from the recipient), in practice, as long as the gift is reasonably small and typical, that simply doesn’t happen.

This is for two reasons.  First, the amount of time and money the trustee would spend to get a small gift back is simply not worth it in administrative expenses alone.  Second, trustees are real people!  They have families, often have children, and most of them celebrate some December holiday involving gift exchange.  They understand, as long as you aren’t being abusive about it.

When we run into problems is when the gift is exceptionally large, like a vehicle or a transfer of over a thousand dollars.  It is not okay to give away large amounts of money or assets when you can’t repay your creditors; if you are heading for a potential bankruptcy filing, that doesn’t mean you can’t give gifts, but those gifts should be modest, with an emphasis on personal rather than price-tag.

One additional note: charitable giving is exempt from this analysis.  The code specifically allows you to make charitable donations.

This is one of those situations that calls for common sense.  Don’t buy things you can’t really afford, and don’t go overboard if you will be embarrassed explaining the transaction later to a trustee.  That said, a looming bankruptcy is no reason to cancel Christmas.


The Bizarre World of Reaffirmation

reaffirmation car loan


One of the most difficult tasks attorneys often face is explaining aspects of the law that, when you come right down to it, don’t make any sense.  As my friend and colleague Kenneth Sanders often says, “It’s not logical, it’s not ethical, and it’s not fair: it’s just bankruptcy!”

Reaffirmation agreements, and the legal significance of signing or refusing to sign the agreement, is one of the best examples of the disconnect between common sense, and the law.

I wrote an earlier post about the automatic stay, and why car statements often stop coming.  The automatic stay is a powerful tool, and during your bankruptcy case, it will stop creditors from taking actions to collect the debt.  This includes repossessing your car.  They might, however, send your attorney a reaffirmation agreement, and you should understand the legal consequences of signing- or refusing to sign- this document.

A reaffirmation, simply put, is an agreement to keep your obligation to repay the loan, despite the bankruptcy.  To illustrate the potential risk, let’s use the following example:  You have a car worth $5,000, and you owe $7,500 on it.  After the bankruptcy, you can’t afford to keep making payments.  The car company can repossess the car, and sell it.

If the court approved a reaffirmation agreement, you are still on the hook for the remaining balance.  If there was no reaffirmation, the car company cannot come after you, since you no longer owe the remaining debt.

There is also a risk to NOT signing a reaffirmation agreement.  If you do not sign, the car company can repossess the vehicle after bankruptcy, even if you remain current.  Most vehicle lenders do not exercise this option, but some do.

There is, however, a middle ground that provides the best of both worlds.  For a reaffirmation agreement to become effective, two things need to happen.  The debtor needs to sign it, and the court has to approve it.  Courts generally either defer to the debtor’s attorney, or hold a hearing to let the debtor explain why they want to reaffirm the loan.

As an attorney, I cannot sign off on a car loan if I don’t think it is in your best interest, or if it presents an undue hardship. If your bankruptcy schedules show that you do not have enough money to afford the payment, I cannot in good conscience sign off on the reaffirmation, since we have already shown the court that the payment is an undue hardship.

And THAT is where logic ends and the vagaries of the law take over.  Under an emerging line of cases, if the debtor signs the reaffirmation but the court does not approve it, the debtor gets to have their cake, and eat it, too: they can keep the car as long as they stay current on payments, but if the vehicle is repossessed, the lender cannot pursue the remaining balance.

This “best of both worlds” approach is called a “ride through,” and used to be the norm. The reasoning is that the debtor has done everything they were required to do under the code, and should not be punished because the mean ol’ attorney or the mean ol’ judge refused to ratify the agreement.

As with any emerging issue of the law, your mileage may vary depending on how your district’s judges view the issue. You should definitely talk to your attorney before agreeing to sign- or refusing to sign- any reaffirmation agreement.  In our district, very few reaffirmation agreements are approved by the court, and we see precious few repossessions for debtors who remain current on their payments.


The Self-Employment Problem

Small business owners are, by nature, risk-takers.  For every business that succeeds, there are several that never get off the ground, and wind up with more debt than they can repay.

For those who are self-employed and need bankruptcy protection, a unique problem arises.  Under the Chapter 7 bankruptcy rules, only the trustee may operate an “estate business,” which often includes a self-employed debtor’s livelihood.  This applies to handymen, attorneys, shops, and restaurants.  In other words, the moment the bankruptcy petition is filed, the business must stop operating, even if it is profitable.

Fortunately, there are several way to fix this problem for self-employed debtors.

First, before filing the petition, the business owner can convert the self-employment into a business entity.  In California, we tend to prefer LLCs for small businesses.  They are relatively inexpensive to form, flexible in their rules, and most importantly, they can continue to operate even if the owner files for bankruptcy.

Second, the owner can file a motion with the bankruptcy court to “compel abandonment” of the business.  Essentially, this takes the business out of the bankruptcy estate, allowing the owner to resume operations.  The down-side is that, depending on the court’s local rules, it may take several weeks to obtain this relief, and in the meantime, the business cannot operate.  In the Sacramento region, these motions can be set on 14-days notice.

Third, the owner can close the business prior to filing, and after filing can start a new business.  The new business can be in the same line of work, as long as it does not make use of the old business’ property.  This can be a tricky analysis, since many business owners rely on certain assets, such as bank accounts, customer lists, and equipment.  However, for small businesses in the service industry, this can sometimes be a viable option.

For any of these three approaches, you should consult with a bankruptcy attorney to discuss the pros and cons, and which solution is best suited to your particular circumstances.  What you should NOT do is break the rules by continuing to operate your business while in bankruptcy without taking the appropriate steps to ensure you are complying with the law.


BAPCPA reaches its 7 year milestone

Seven years ago, Congress made some significant changes to the Bankruptcy Code in a law called the Bankruptcy Abuse Prevention and Consumer Protection Act, or BAPCPA.

This law dramatically altered the landscape of bankruptcy by, among other things, imposing a means test to prevent some high-income families from filing for relief.  It forced many people seeking protection from their creditors into a repayment plan under Chapter 13 by “disqualifying” them for Chapter 7 protection.

In the months after BAPCPA passed, but before it came into effect, there was an immense surge of filings as people tried to get their cases opened before the new standards made it more difficult to do so.  There were so many new filings that the Court Clerk had to open extra space for the overflow traffic of debtors filing for relief.

Of course, nobody knew at the time that we were in for the worst recession since the great depression of the 1930s just a few short years later.  It turns out a housing bubble and financial shenanigans were the real cause of economic trouble, not abusive bankruptcy filings.

However, for the folks who filed for bankruptcy back in 2005, there was a new dilemma.  Just like other people, they often got hit by job loss, income reduction, foreclosure, and the other trappings of the economic downturn.  Unfortunately, they were not always able to discharge their debts in bankruptcy, since the code only permits one chapter 7 discharge every eight years.

Over the coming twelve months, those original filers will once again be eligible for relief. I expect to see a large up-tick in filings as those who patiently waited for the time period to run once again seek relief from their debts.


The Student Loan Conundrum

This is one area of law where I have both a personal and professional interest.  Between my Jurisdoctorate and my wife’s Masters degree, we have significant student loans, even after half a decade of payments.  How significant?  Suffice it to say, bigger than yours.

This is also an issue for many of my clients.  They can wipe out their credit card debt, their judgments, and sometimes even their tax liability.  Student loans, however, are usually forever.  Even bankruptcy won’t do much for student loans unless you can pass the ill-conceived, sadistic standard known as the Brunner test (named after a case, of course):

1. You cannot maintain even a minimal standard of living while paying your student loan debt.

2. Additional circumstances suggest that this problem will persist for the majority of the payback period.

3. You have made a good faith effort to work with your student loan lender.

Courts have interpreted this test narrowly enough to mean that, while it is not technically impossible to pass, it usually is.  It is extremely rare for student loans to be discharged in bankruptcy.

Why?  For federally-backed student loans, the answer is obvious: the government will be left holding the bag if you discharge the debt.  As you might know if you pay even passing attention to the political news du jour, our government doesn’t have a ton of disposable income right now, so they don’t want to pick up the tab for billions of dollars in discharged student loans.

For private loans, the answer is more nuanced.  The lenders made the loans on favorable terms because they knew the risk was very small, since bankruptcy would not wipe away the debt.  That might change in the future, but is unlikely to change retroactively.

So, what do you do if you have significant student loan debt?  The best solution for most people is income-based repayment.  If you qualify for this option, depending on your type of loans, you are permitted to pay what the government has determined you can afford.  Here’s how you figure it out:

1. Take your gross income, usually from your last tax return.

2. Subtract 1.5 times the poverty level, based on your household size.

3. Take fifteen percent of the result, and divide by twelve (months in a year).  That is your monthly payment.

4. Re-apply each year, and after 25 years if you still owe, the remaining debt will be forgiven.

One small wrinkle: if you took out any loans after 2009, you take 10% rather than 15% in step 3, and the time period for forgiveness is shortened to 20 years instead of 25.  One additional issue that won’t come up for another two decades or so is whether the forgiven debt will be treated as taxable income; as it stands today, it will, and that can cause tax problems.

This is, in my opinion, the simplest way to deal with long-term student loan debt that you simply can’t pay.  It is far from the only option.  There is an attorney named Joshua Cohen who specializes in student loan issues, and you can check out his site for more information.