Today’s Bankruptcy Law helps the Banks

auction-hammer-in-flag.jpg  

The New Bankruptcy Law is protecting Banks and Lenders more than the Consumers.

CONGRESS REVISED THE nation’s bankruptcy laws under 2005’s Bankruptcy Abuse Prevention and Consumer Protection Act, effectively making it harder for individuals to claim insolvency. The reform was seen by critics as protecting banks and lenders more than the consumers the legislation’s title claimed to help. Now, as the fallout from the subprime mess continues to expand, an uptick in bankruptcy filings may yet be another kink in the growing mortgage crisis.

Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, has long thought the revised law to be too restrictive. Now, Sommer says, it needs to be revamped again to better reflect the current mortgage market. (The original bankruptcy law dates back to 1978, when exotic mortgages were less common and foreclosure was rarely a reason to file for bankruptcy.)

Even with the toughened rules, personal bankruptcy filings for the first six months of 2007 are up 48.3% compared with the same period last year. As of June 30, 391,105 individuals filed for bankruptcy this year, up from 263,660 a year earlier, according to the American Bankruptcy Institute.

Once-confident homeowners who, during the real-estate boom, bought homes using adjustable-rate, interest-only, no-money-down mortgages are now overwhelmed by a weaker house values and crushing debts. Indeed, foreclosure filings reported in July jumped 93% from July 2006, and 9% from June.

Still, bankruptcy filings are well below pre-2005 levels. Sommer says the higher costs and increased paperwork of the new law make it too onerous for consumers to file. Ultimately, he says, that makes it harder for those facing foreclosure to use personal bankruptcy to protect their homes while they figure out how to meet ballooning mortgage payments.

“One of the nice things about bankruptcy until 2005 was that it was a pretty inexpensive proceeding,” says Sommer, who also serves as the supervising attorney of the Consumer Bankruptcy Assistance Project in Philadelphia. “Most places would have it done for under $1,000. Some places have gone up 50% to 100%. That’s a real big barrier.” Besides lowering costs, another part of his proposal involves stripping down the mortgage to the home’s current value and re-amortizing that over 30 years.

Here’s what else Sommer had to say about the bankruptcy code’s problems and his ideas to help borrowers facing foreclosure hold on to their homes.

SmartMoney.com: Why do you think the number of bankruptcy filings is higher so far this year than last year?

Henry Sommer: The number of bankruptcy filings has gone up steadily. They went way down right when the law went into effect [in 2005] — primarily because people rushed to file beforehand. Since then, it’s only at 70% of levels before…. It has been steadily going up. Certainly, people having problems with their mortgages is one reason why they’re filing.

SM: How do you propose to change the bankruptcy law?

HS: There are a couple of different types of changes we propose. One is to make filing for bankruptcy less complicated. One of the side effects of the new law — and I’d like to think Congress didn’t intend this — is the phenomenal increase in paperwork and cost associated with filing, and it’s therefore denying access to people who can’t afford them. So one type of change we’d like to see is a cutback on the paperwork and the expense of bankruptcy. The other is that bankruptcy laws be changed to give people more tools to deal with foreclosures, including these exploding adjustable rate mortgages (ARMs) you see now, where payments just go so high because of the interest rate adjustments. So we propose changes to make bankruptcy more useful.

SM: What’s an example of that?

HS: Typically, when people face a foreclosure, bankruptcy has allowed them to take up to five years to catch up on their arrearages. In a Chapter 13 case, [usually you would] start paying your monthly mortgage payment of, say, $1,000. You [pay] arrearages over 12 months…. Bankruptcy allows you to do that. That’s worked well for people who had a temporary income interruption that caused them to fall behind on payments. [Our proposal] gives three, four or five years to catch up, instead of typically two months…. The two months, or slightly longer, is how long mortgage companies will usually give debtors to catch up outside of bankruptcy.

That doesn’t work so well when your monthly payment has been bumped up because of an adjustable rate mortgage. That’s the problem suddenly facing a lot of people. It doesn’t work if you can’t even afford the monthly payment. Our proposal is to take the ARMs and re-amortize them over 30 years as a fixed rate. They’d do that as part of Chapter 13 bankruptcy. [This would apply] if your house was overappraised or it’s fallen in value. Say you got a 100% mortgage for your $200,000 house, and now it’s worth $170,000. You re-amortize it over 30 years and pay off the mortgage that way. That’s the crux of our proposal — strip down the mortgage to the current value of the house and re-amortize that over 30 years. We’re hoping that will be introduced in Congress in September.

SM: Is that considered at least a partial loan forgiveness?

HS: No, definitely not. It’s been done for years with cars. In 1978 [when the law was first established] we didn’t have these kinds of mortgages either. Even if it made sense in 1978, it doesn’t make sense now.

We’re not trying to repeal the 2005 law wholesale, but we’re trying to get rid of the excess paperwork and deal with the particular mortgage problem, which really wasn’t addressed in the 2005 revisions. One of the nice things about bankruptcy until 2005 was that it was a pretty inexpensive proceeding. Most places would have it done for under $1,000. Some places have gone up 50% to 100%. That’s a real big barrier.

SM: How much paperwork are we talking about?

HS: The paperwork is roughly doubled. Among other things, debtors must provide tax returns, 60 days’ worth of pay stubs, bank statements and complete a six-page “means testing” form. All of these are new requirements, along with the requirement of obtaining credit counseling before bankruptcy and a credit education course during the case. On top of this, the United States Trustee’s office, part of the Justice Department, often demands numerous additional documents, like six months’ worth of pay stubs, two years of tax returns, all credit card statements.

SM: Steve Bartlett, president and chief executive of Financial Services Roundtable, an organization that represents financial-services companies, in May testified in Congress that the new bankruptcy reform law is working well as evidenced by the big decrease in filings since it was enacted.

HS: I disagree with him. He’s employed by banks and other creditors. He bases that on the fact that the number of bankruptcy filings are down. He said the number of bankruptcies was down something like 40%…. But what about all the people who want to file but can’t? People aren’t filing because it’s much more difficult. It’s something of a misperception out there that you can’t file for bankruptcy anymore.

SM: Why do people think that?

HS: There was kind of a superficial publicity when the new law went into effect. Many were told that by debt collectors, which of course makes the debt collectors’ job easier. That’s another reason why that [notion] will slowly go away — when people know of others who have file for bankruptcy.

One of the things mortgage companies say is that they’ll do a loan modification, they’ll reduce the principal. But it’s extremely hard to get those. A lot of people are led down the path thinking they’ll get them and the next day they’re facing foreclosure. So what the companies claim to be doing and what they’re actually doing are two different things.

SM: What would you advise at-risk consumers do?

HS: People have tendencies to put their heads in the sand and wait for a solution to come. But the sooner they deal with it, the better…. If people think they’re going to have a problem, it’s a good time to figure out what their options are.

Advertisements

26 Responses

  1. A resident of Asia for over 20 years, she works with companies
    across multiple industries to enhance their branding, marketing communications, personal communication skills and effectiveness in the workplace.

  2. Good day! I could have sworn I’ve been to your
    blog before but after browsing through some of the posts I realized
    it’s new to me. Anyhow, I’m definitely happy I stumbled upon it and I’ll be
    book-marking it and checking back often!

  3. Thanks , I have recently been searching for info approximately
    this subject for ages and yours is the greatest I’ve
    discovered till now. But, what about the conclusion? Are you positive concerning the source?

  4. Spot on with this write-up, I truly feel this site
    needs much more attention. I’ll probably be returning to see more, thanks for the info!

  5. excellent submit, very informative. I wonder why the other experts of this sector
    don’t understand this. You should proceed your writing.
    I’m sure, you’ve a huge readers’ base already!

  6. I’m amazed, I must say. Rarely do I come across a blog that’s both equally educative and amusing,
    and without a doubt, you have hit the nail on the head.
    The issue is something that too few folks are speaking intelligently about.
    I’m very happy that I stumbled across this during my hunt for
    something concerning this.

  7. Excellent, what a weblog it is! This website presents useful information to us, keep it up.

  8. Following are so tests this can assist you to you check its performance
    condition. Many look and feel for the type of easy manner in which in, then lighting; hidden cameras and shut doors are unquestionably a reasonable
    barrier. The copy tool doable you you can put
    text message on your personal slides.

  9. Very nice blog post. I absolutely appreciate this website. Keep it up!

  10. I like the valuable info you provide in your articles.
    I’ll bookmark your weblog and check again here frequently.
    I am quite sure I will be told many new stuff proper right here!
    Best of luck for the following!

  11. Hi there this is kind of of off topic but I
    was wanting to know if blogs use WYSIWYG editors or if you have to manually code with HTML.
    I’m starting a blog soon but have no coding know-how so I wanted to get advice from someone with
    experience. Any help would be greatly appreciated!

  12. Remarkable things here. I’m very glad to look your post.
    Thank you so much and I am taking a look ahead to contact you.
    Will you please drop me a mail?

  13. Hi, I think your website might be having browser compatibility issues.
    When I look at your website in Ie, it looks fine but when opening in Internet
    Explorer, it has some overlapping. I just wanted to give you a
    quick heads up! Other then that, excellent blog!

  14. all the time i used to read smaller articles which as well clear their motive,
    and that is also happening with this piece of
    writing which I am reading at this time.

  15. A vacuum-cleaner is the most reliable of cleaning tools;
    it can be the costlier. There are several different kinds of vacuum with several different characteristics.
    So prior to purchasing a top rated vacuum cleaner
    be sure you know what class of hoover is best for your own needs.

    Picking the best vacuum-cleaner might be confounding.

    To make things clearer you ought to know what the different kinds of vacuum are, what the key features you’re able to find on a vacuum-cleaner, and desire you sort of floors you’ll
    be utilizing a vacuum-cleaner on.

  16. More recently Raimondo has disclosed a small
    victory in a wide range in price has made pension reform, will likely
    make this a priority. ‘ – how many hours discussing the issues
    that define it. Our team must make tosupport the 2014 roth contribution limits systems
    and sites to get a regular income for retirement plan.

  17. Hi it’s me, I am also visiting this web page on a regular basis,
    this web site is really fastidious and the visitors are actually sharing good
    thoughts.

  18. The very best way to get answers to your qnsteious is to meet with an experienced bankruptcy attorney in the state in which you live. Most attorneys offer a free consultation and can give you a much better idea of your options. You are more than welcome to call me as well (801) 781-2026 anytime to discuss your options.

  19. Cheap cialis is taken orally and helps men suffering from erectile dysfunction achieve and maintain an erection For cialis generic drugs very fast delivery worldwide.. No prescription required-buy levitra tabs on line! Easy to get sexual activity pills online! Find out more about ed treatment at the online viagara low cost site.
    ___________________________
    Buy cheap pill vaigra online!

  20. Tadalafil works in much the same way as Sildenafil Citrate, but is much faster, lasting up to 36 hours For levitra medicine fast delivery Europe. Save your time -buy sexual health tabs online… Fast to get tadalafil pills online. Find out more about priaprism at the official ciallis buy online generic site..
    ___________________________
    Order on line herbal vaigra online.

  21. Levitra works in much the same way as Sildenafil Citrate, but is much faster, lasting up to 36 hours For levitra alternative fast delivery for you! Save your money – buy cheap levitra tabs on line! Easy to get tadalafil pills online! Find out more about levitra at the famouse cialas levitra site..
    ___________________________
    Best price for dosing cealis !

  22. Cheap viagra is taken orally and helps men suffering from erectile dysfunction achieve and maintain an erection For levitra cheap generic fast delivery Europe.. Save your money-buy ed pills ! Fast to get levitra pills online! Find out more about ed treatment at the great ciallis generic site.
    ___________________________
    Order now london cealis now

  23. I would like to see a continuation of the topic

  24. You are absolutely correct. You are in a small, but quickly growing minority – My guess is, soon we will begin to see “the consumer” pull back (spend less), the economy slowing and the Fed lowering rates to keep the party going even longer.

  25. it’s hard to feel sorry for those who live beyonf their means. Of course the laws favor the bankers and lenders, they are the ones out the money. American’s have long lived beyond their means, virtually swimming in debt, and are now paying the price.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: