Grossbart on Bankruptcy Law

Introduction to this Blog

My practice focuses on consumer bankruptcy and consumer debt issues. These are difficult times for consumers as we are experiencing great upheavals in the credit markets while our the health of economy continues to decline.

I see many kinds of problems in my office that range from simple Chapter 7 bankruptcies to mortgage service company and credit card abuse, to mortgage foreclosure problems, to complex Chapter 13 bankruptcies. I practice in the State of Maryland, so a portion of my practice is based on state law, although the important statutes in this area tend to be Federal. In this blog I intend to identify and comment on emerging issues in the consumer debt and bankruptcy area as well as to comment and analyze the interrelationship between Maryland law and Federal consumer bankruptcy and debt law.

This blog is aimed at consumers -- not lawyers -- in order to better inform and to educate them about the consumer debt issues that they face. It is designed to supplement the information that already appears on my law firm web site at MDBANKRUPCYLAW. Comments from consumers are encouraged as well as comments by my colleagues who are members of the bar.

Bankruptcy and the "underwater home"

Many individuals find themselves with a residence that has gone down in value. These same people might have obtained what is referred to as a  80/20 mortgage. The first mortgage is usually a low initial interest rate adjustable mortgage and the second mortgage a high interest fixed  rate. What does a chapter 13 allow the homeowner to do? If the debtor files a chapter 13 bankruptcy and their residence is worth less than the first mortgage, they can strip off the second mortgage? How does that work? Here are typical facts:

Fair market value (FMV)of residence $250,000

1st mortgage balance                              260,000

2nd mortgage (home equity) balance    50,000

The debtor must file the appropriate motion that has a valid appraisal attached to strip off the mortgage. The debtor continues to pay the first mortgage and the second mortgage becomes an unsecured debt. The  second mortgage is typically paid a percentage of its balance by the chapter 13 Trustee.

Bankruptcy or Debt Management?

People who are looking to resolve their inability to manage their debt are typically presented 2 options - bankruptcy or debt management. No one wants to file bankruptcy. It is the last solution. In the last several years particularly after the new bankruptcy law was enacted, debt management companies promoted themselves as the "alternative" to

bankruptcy. Their selling point is that it is "not" bankruptcy but are silent on its impact on your credit report. Fact - it does have a negative impact on your credit report. Further you should ask what percentage of their "customers" (remember it's a business) are successful in reducing their debt permanently. Ask what happens if even one creditor does not agree with they are promoting? Further, what you don't receive from a debt management company is a "discharge" order. A discharge is a court order that discharges your dischargeable debt permanently.   

 

If I file for bankruptcy will I lose my house?

 

 

This question requires more questions. First whose name(s)is/are on the deed? If it's just one person then the question becomes how much equity is there?  In Maryland you are allowed $11,000 in exemptions that can be applied to a home. If the property is owned husband and wife (called tenancy by the entireties) the question is "are there any joint unsecured creditors that both spouses owe"? If the answer is no, the amount of equity does not matter and the property is safe. If the answer is yes, then you must ask how much joint unsecured debt there is while simultaneously considering how much equity there is to see if the property is safe. 

Can my mortgage servicer foreclose or not?

Maybe. Before you plunge into a chapter 13 to stop your foreclosure check the court file to see what your mortgage servicer’s attorney filed. Who may foreclose?  Do you remember when you borrowed your mortgage all the settlement papers you signed and hopefully received  executed copies. One of those papers was a promissory note between you and the original lender. First question, is the mortgage company that is foreclosing the original lender on the promisory note? Probably not. If not you may have defenses. Call  your attorney.

2008 NACA Mortgage Lending Litigation Conference

I have spent this past week digesting what I learned at a conference I attended in Cleveland last weekend. It was well attended by hundreds of attorney’s from across America. There were many opportunities to learn new or fine tune current mortgage litigation strategies to protect homeowners from mortgage service abuse. No current mortgage discussion can be had in this current environment without a discussion about the impact of securitization on the mortgage and lending community at large. I took particular interest in violations under the Truth in Lending Act (TILA). Briefly if you have a residential mortgage that has been refinanced within the last 3 years you could have a potential TILA claim. The other major litigation strategy concerns mortgage servicers that game the “system” to obtain unnecessary, excessive and fraudulent fees from borrowers that generally have no idea this it is occurring unless they either refinance or hire an attorney.

Debt Relief (settlement?) Firms Complaints

Complaints about debt settlement companies are on the rise. The web site Credit.com says complaints have doubled from last year. American express won't even work with debt settlement companies.

How does it work? First the client is instructed to pay the debt settlement company on a monthly basis instead of paying the creditors (this has a negative inpact on your credit score). Many times these companies charge a large up front fee(10-20% of total debt due) that is taken from this payment. While the debt settlement company is being paid the creditors are not. The clients interest and late fees begin to accrue. Also, the client incurs taxes on the amount of debt forgiven in a settlement.

If you are against filing bankruptcy, only consider using a non-profit credit counseling organization.

Secretary Paulson quote at press conference on 11/25/08

"It is naive for anyone to think that when we are dealing with a financial crisis of this magnitude that any one bill or legislative action will solve the problem. This is once in a 100 year crisis.

Maybe once in 200 years. Right now nothing is more important that saving our banks. The financial markets are not working and we must do all we can to make them work."

Why aren't loan modifications working?

The amount and rate of homeowners getting behind on their mortgages increases daily. Loan modification seems an obvious solution. So what is the holdup? Here are a few:

(1) mortgae servicers lack of staff and technology (2) the process is balky in getting the borrower and "investor" to agree to new terms (3) home owners not responding to mortgage servicer phone calls (4) the borrower ends up owing more money after the modification than before and (5) no or little principal reduction is offered to allow the homeowner enough money to live on.  

Can I file bankruptcy again?

The question "Can I file bankruptcy again?" is a very common question for bankruptcy attorney's. The bankruptcy attorney needs to ask the following preliminary questions: (1) When did you file before?; (2) What type of bankruptcy did you file? ;(3) Where you dismissed/discharged and when?;(4) If you were dismissed, was it under 11 U.S.C. section 109(g)? Without getting into the more unique scenerios here are the basics rules to follow:

(1) If you filed a chapter 7 and received a discharge, you must wait 8 years from the date you previously filed before you may file chapter 7 again.

(2) If you filed a chapter 7 or 13 and were dismissed under rule 109(g), you must wait 180 days before you can file again.

(3) If you received a chapter 7 discharge and its been between 181 days and 2 years from the date of first filing, then you can file a chapter 13 but you will not discharge any debt but you will get the automatic stay.

(4) If you received a chapter 7 discharge and its been between 2 and 4 years from the date of first filing, then you can file a chapter 13 but you must pay 100% of your unsecured debt through the plan and you may obtain a discharge.

(5) If you received a chapter 7 discharge and its been more than 4 years from the date of the first filing, then you may file a chapter 13 and pay less than 100% to your unsecured creditors through the plan and obtain a discharge.