The Government and Banks May Punish "Strategic Defaults"

September 14, 2010

Steve Elias, NOLO BANKRUPTCY AND FORECLOSURE BLOG

What Are Strategic Defaults?
A number of articles have recently appeared in leading newspapers and magazines reporting that more and more people are engaging in what they call "strategic defaults," defined as not paying your mortgage when you can afford to do so.
The typical story involves a family with a decent income who bought into the housing market when it was high and who now are upside down on their mortgage payments. Rather than continuing to the keep the mortgage current, this family decides to remain in the home without paying the mortgage and then moving when forced to do so (usually due to foreclosure).
This tactic is similar to the advice I give clients who would benefit from stopping their mortgage payments in order to save money to use when they must leave their homes. The difference is that most of the people I speak to really can't afford their mortgage anyway (so foreclosure is probably inevitable). By stopping their mortgage payments, these folks are just trying to cut losses and save some money which they'll need to find new housing at some point in the future.
Proposed Government Actions to Discourage Strategic Defaults
It is not against any law to stop paying your mortgage, whatever the reason. However, the banking industry is pressuring lawmakers and the government housing entities (Fannie Mae, Freddie Mac, and the Federal Housing Administration) to punish people who have engaged in strategic defaults.
Effective October 1, 2010, Fannie Mae will not purchase any mortgage made to a person who has engaged in a strategic default within the past seven years, and Freddie Mac is expected to follow suit. Since almost all mortgages are purchased Fannie or Freddie for securitization and resale, if this happens to you, you will probably be banned from the home mortgage market for seven years.
And it gets worse. The U.S. House of Representatives has passed a bill [H.R. 5072, FHA Reform Act of 2010] that would deny insurance under the Federal Housing Administration to anyone who has engaged in a strategic default. Since FHA insurance is a requirement for many mortgages, this law (if passed by the Senate) might prevent you from obtaining a new mortgage loan -- forever.
Distinguishing Between Strategic Defaulters and Truly Distressed Homeowners
But how will "strategic default" be defined by the law? The House bill leaves the definition of "strategic default" to the HUD Secretary. But figuring out what is and isn't a strategic default won't be an easy task. What if you obtained a modification "in good faith" but then purposely re-default? Do you need to show proof of unemployment or other hardship? If differentiating between strategic defaulters and truly distressed borrowers were an easy task, laws would be better able to distinguish between the two groups. But it's not an easy task, and the laws are unlikely to do a good job of distinguishing between the two groups. 
Next up: Using the loan modification process to avoid a "strategic default" accusation.

The Loan Modification Process Can Help Avoid a Charge of Strategic Default

October 18, 2010

 

Steve Elias, NOLO'S FORECLOSURE AND BANKRUPTCY BLOG

 

Banks are beginning to punish homeowners who engage in "strategic default," and pushing for legislation to do the same. A strategic default is defined as not paying your mortgage when you can afford to do so, thereby letting your home fall into foreclosure. (For a more comprehensive discussion of strategic defaults and the steps banks and legislatures are taking to punish homeowners, see my previous blog post The Government and Banks May Punish Strategic Defaults.)

An Ounce of Prevention:  The Loan Modification Process
One way that homeowners can reduce the risk of a strategic default accusation is to use the loan modification process.  (To learn about loan modifications, see Nolo's article Mortgage Modification and Refinancing Under the Homeowner Affordability and Stability Plan.)  Here's how it might help:
Because nonpayment when you have the ability to do so is the key aspect of a strategic default, your best protection against having this label applied to you is to make a diligent effort to obtain a loan modification. Of course if you don't really need a modification, the mere attempt to obtain one probably won't immunize you from being considered a strategic defaulter. But few people are that well off.
If your first mortgage is 31% (or more) of your gross income, you have a non-affordable mortgage under the Making Home Affordable guidelines, and failing to pay it should not be considered a strategic default on your part. And you may have additional reasons why you cannot afford your mortgage at the time you defaulted (for example, student loan repayment obligations, a second or third mortgage, or erratic periods of employment).
Defaulting After a Obtaining a Loan Modification Might Hurt You
On the other hand, If you do obtain a modification and then immediately default without a change in circumstance, you may be considered a strategic defaulter almost by definition. (However, obtaining a loan modification is no easy feat.  See my previous blog post More Money for Foreclosure Prevention: Will It Help?)
So, if your main goal in participating in a modification process is to avoid this label, success may be failure, and failure success. Such are the strange times we live in.
Document Everything
If you think that you might be considered a strategic defaulter, be sure to thoroughly document your modification efforts. Use email or the post to document all discussions with the bank or a HUD-approved housing counselor. If you receive a phone call from the bank or counselor, follow up with a confirmation letter and record the names and titles of everyone you talk with. Your goal is to be able to provide a ton of paperwork showing that you diligently sought a modification and your default was not made for "strategic" purposes.

Lawsuits Allege Banks Broke Promises to Homeowners Facing Foreclosure

February 7, 2011

Steve Elias, NOLO'S BANKRUPTCY AND FORECLOSURE BLOG:

Two recent lawsuits, in Washington and California, use "promissory estoppel" (a legal theory in contract cases) to get monetary damages from banks that broke their promises to homeowners facing foreclosure. 

The Washington Case: Promissory Estoppel as a Cause of Action

Abuses by mortgage banks and servicers committed while dealing with homeowners seeking foreclosure relief or mortgage modifications have been well documented. They are especially and eloquently detailed in a class action lawsuit filed on January 10, 2011 in the State of Washington. Reading the Introduction to the complaint (if not the whole document) will be well worth your while. 

Among the claims contained in the class action complaint is a type of breach of contract known as promissory estoppel. Promissory estoppel may seem like an impossible-to-understand example of legal jargon but i'ts actually relatively simple. It means that a party making a promise is prevented (estopped) from reneging on the promise. You can sue for promissory estoppel if 1) someone makes you a promise that is clear and unambiguous, 2) your reliance on the promise is reasonable and foreseeable, and 3) you suffered damages as a result of your reliance. 

You can't hold someone to a naked promise just by itself. In other words forget about suing your parents who failed to deliver on their promise to send you to Harvard. But if you go through all the motions of enrolling, signing a lease for your housing, and buying textbooks, and your parents had good reason to believe that you would act on their promise, you may have a winning case to recover, at the very least, your out-of-pocket expenses, and possibly even for other liabilities you incurred. 

In the class action complaint the promissory estoppel claim deals with a common practice in the mortgage industry. There the bank promised the named plaintiff a permanent mortgage modification if she completed a trial period during which the modified payments were to be paid to the bank. The plaintiff did, in fact, complete the trial period but the bank refused to give her the modification as promised. Here, the requirements for promissory estoppel were clearly met. The bank promised a permanent modification in exchange for three (or more) trial payments. The homeowner reasonably and foreseeably relied on the promise and made the payments. The bank reneged on the promise, and the homeowner suffered damages in that the trial payments would not have been made absent the promise.

You might wonder why this isn't a common-variety breach of contract case. For a contract to be enforceable both sides have to receive something of value (called consideration) in exchange for their agreement to perform the terms of the contract. Also, there has to be an offer and an acceptance. In the situation where the bank makes a promise to modify, it's arguable that only the homeowner is receiving consideration and so a valid contract has not been made. But the law, through the doctrine of promissory estoppel, eliminates the need for mutual consideration and will, under the appropriate circumstances, enforce the promise or award damages if it is not carried out.

Promissory Estoppel in a Recent California Foreclosure Case

The doctrine of promissory estoppel was recently applied to a mortgage workout situation in a California appellate court case titled Claudio Aceves v U.S. Bank (Court of Appeal, Second Appellate District, Div One (1/27/11)). Here Ms. Aceves fell behind on her mortgage and filed for Chapter 7 bankruptcy after the bank served a Notice of Default, a required step in the California foreclosure process. She decided to convert the case to chapter 13 bankruptcy and raise the necessary money to reinstate the loan and pay off the arrearage over the course of the chapter 13 plan. The bank told her they would work with her and that she needn't pursue her Chapter 13 remedy. Relying on this representation, Ms Aceves did not file Chapter 13 and also did not object when the bank filed a motion in her Chapter 7 case to lift the automatic stay (which legally enabled the bank to continue with its foreclosure remedy).

In fact the bank failed to enter into good faith negotiations and instead completed the foreclosure. Ms. Aceves sued the bank alleging a cause of action for promissory estoppel, among others. She argued that 1) the bank's promise to work with her in reinstating and modifying the loan was clear and unambiguous, 2) the bank in fact failed to negotiate the modification, 3) she relied on the bank's promise by forgoing bankruptcy protection under chapter 13 and failing to oppose the motion to lift the stay, 4) her reliance was reasonable and foreseeable, and 5) she suffered damages in the form of losing her house. 

The lower court dismissed the action but the court of appeals ruled that in fact Ms. Aceves had stated a claim for promissory estoppel and should be allowed to proceed with her lawsuit in the trial court. In making its ruling the court specifically found that "U.S. Bank never intended to work with Aceves to reinstate and modify the loan. The bank so promised only to convince Aceves to forgo further bankruptcy proceedings, thereby permitting the bank to lift the automatic stay and foreclose on the property."

As long as this case remains published (and isn't ordered de-published by the California Supreme Court) it provides great precedent if you decide to sue your mortgage lender or servicer for breaking its promises. If you can't find an affordable lawyer, you might consider doing your own state court lawsuit with the help of Nolo resources such as Represent Yourself in Court, by Paul Bergman and Sara Berman-Barrett, and Everybody's Guide to Small Claims Court, by Ralph Warner.

While you may be invited to join a class action, those types of cases usually are much more  beneficial to the lawyers bringing them than they are to the plaintiffs. If possible, you should consider going your own way. However, sometimes a class action is the only way to find a lawyer without parting with an arm or a leg and if that is your situation, and self-help is not an option, by all means sign up as a class action plaintiff. . 

Bankruptcy and Second-Mortgage Liens

February 15, 201

Steve Elias, NOLO's  BANKRUPTCY AND FORECLOSURE BLOG:

If you file for Chapter 7 or Chapter 13 bankruptcy, what happens to second or third mortgages and liens on your home? The real estate crash, and the resulting depreciation in home values, may mean that as a practical matter, many people won't have to worry about those liens. Here's why.
The Real Estate Crash Has Resulted in Many Unsecured Second and Third Mortgages
Because of the real estate crash, many people have second and third mortgages on their homes that are no longer secured by the home's value. For instance if your home is now worth $200,000 and you owe $200,000 on your first mortgage and $50,000 on your second mortgage, your home's value secures the first mortgage, but after that, there is no equity left to secure the second mortgage.
What Happens to Those Mortgages if You File for Bankruptcy?
In Chapter 7 bankruptcy, your bankruptcy discharge will eliminate your personal liability on the second mortgage but will not eliminate the lien. In Chapter 13 bankruptcy, you can eliminate both your personal liability and the lien in a procedure called lien stripping. The basic lien stripping rule is: You can eliminate a lien that has no security in the home, but you can't eliminate the lien if part of it is secured by the home's value.
Here's an example. Say your home is worth $210,000, your first mortgage is $205,000, and your second mortgage is $25,000. You can't strip off the second lien because it is secured by at least $5,000 of your home's value.
What if a Lien Remains on Your Home After Chapter 7 Bankruptcy?
Although you can't lien strip in a Chapter 7 bankruptcy, the lien may have very little effect on your future financial affairs. The Chapter 7 bankruptcy will discharge your personal liability for the second mortgage (meaning you can't be sued for money owed on it). And, absent value in the house securing the second mortgage, the holder wouldn't benefit from a foreclosure (since all the value of the home would go to the first mortgage holder in a foreclosure sale).
This means there won't be negative consequence from the lien remaining on the home after your bankruptcy -- unless of course your home's value comes back to a point that would allow you to sell the home or support a foreclosure action by the second mortgage lender. This is clearly less likely when your home is way underwater (50% is common) than when you are just a tad underwater.
The bottom line? Even though you might have a better result in Chapter 13 -- where you can lien strip -- from a practical standpoint, people with severely underwater second mortgages may do just as well in a Chapter 7 bankruptcy.
In some cases it needn't be one choice or the other. It used to be that you could file a Chapter 7 bankruptcy, discharge your personal liabilities and then immediately file a Chapter 13 bankruptcy to strip off the lien. This was called a "Chapter 20" bankruptcy. Now it's not quite that simple. You are still entitled to file a Chapter 13 bankruptcy right after your Chapter 7 discharge but you won't qualify for a Chapter 13 discharge. Still, at least one bankruptcy court said that you don't need a discharge to strip off a second lien in a Chapter 13 case filed on top of a Chapter 7 case, as long as you filed the Chapter 13 in good faith. 

Mortgages in foreclosure process hit record

Kathleen M. Howley, Bloomberg News

Bloomberg February 18, 2011 04:00 AM 

 

A record share of U.S. mortgages were in the foreclosure process at the end of 2010, matching the all-time high, as lenders and servicers delayed home seizures to investigate charges of improper documentation.
About 4.63 percent of loans were in foreclosure in the fourth quarter, up from 4.39 percent in the previous three months, the Mortgage Bankers Association said in a report Thursday. The combined share of foreclosures and loans with overdue payments was 14 percent, or about one in every seven mortgages.
Property seizures plunged at the end of 2010 as lenders such as Bank of America Corp. and JPMorgan Chase & Co. temporarily halted proceedings to review their handling of court documents. That left more homes in the foreclosure process with their status unresolved. Repossessions tumbled 32 percent in the fourth quarter from the prior period, according to data from RealtyTrac Inc. in Irvine.
"It's clear that the process issues were driving the increase," said Jay Brinkmann, chief economist of the Mortgage Bankers Association. "We would expect the foreclosure inventory to start coming down as that gets resolved and the court situations get cleared up."
That share of mortgages in foreclosure tied the record reached in the first quarter of last year.
Foreclosure actions were started on 1.27 percent of home loans in the fourth quarter, down from 1.34 percent in the prior three months, according to the report. The share of mortgages with overdue payments dropped to 8.22 percent from 9.13 percent in the third quarter as an improving labor market and an expanding economy helped homeowners to stay current on their loans, Brinkmann said.
Bank of America, JPMorgan and Ally Financial Inc. began resuming foreclosures at the end of last year. The allegations of impropriety such as "robo signing," the mass processing of paperwork without proper verification, have spurred an investigation by attorneys general across the country.

February 11th, 2011 by Carolyn Okomo

Personal Bankruptcy: What You Should Know Before You File

 

If you’re struggling to pay your debt, filing for bankruptcy might be the best thing you could do for yourself. Deciding what kind of bankruptcy protection could be a tough thing to do alone, but educating yourself about options and speaking with a professional who can guide you thorough the process can make all the difference.

How to Decide Whether Bankruptcy Is Right for You

The ramifications of filing for bankruptcy protection are harsh, so you’ll want to think very carefully about what your options are before choosing that path. The American Bankruptcy Institute has a great guide to aid you in deciding whether or not you should seek bankruptcy protection. If you’re faced with several of the following circumstances then you should definitely consider seeking bankruptcy protection:

• Your wages or your bank account are garnished
• A majority of your debt is unsecured, like credit card bills or hospital bills
• Your total debt is more than you can pay after five or more years
• You have little or no savings
• You cannot pay your outstanding taxes
• There are lawsuits pending against you
• You have had property repossessed or have property that is in danger of being repossessed
• You are getting calls at home or at work from collection agencies

Bankruptcy: The Process

If you finally do decide to file for bankruptcy, you’ll have the option of filing under either Chapter 7 or Chapter 11 of the bankruptcy code. The minute a bankruptcy petition is filed, something called an automatic stay is enacted. During the automatic stay period creditors are barred from attempting to collect debts from you.
In both the event of a Chapter 7 or Chapter 13 filing, you’ll have to file a petition and other legal documents that include the following information:

• A list of all of your creditors and how much each are owed
• Your income information: how much you earn, and how often you get paid
• All of your personal property
• A detailed list of your monthly living expenses, such as food, clothing, utilities, transportation, etc.

Your creditors will have no more than 90 days from the day a petition is filed to submit proof of their claims with the bankruptcy court administering your case.

Chapter 13: Making a Plan of Action

In Chapter 13 bankruptcy, you’ll be able to retain your property and propose a repayment plan spelling out how you will repay your creditors over the course of three to five years. This plan must be filed with the court no more than 15 days after a you file for bankruptcy. If you think you’ll need more time to construct a repayment plan, then you’ll be able to request an extension from the court.
Next, a creditors’ meeting is convened within 50 days after a bankruptcy petition is filed, where you’ll be placed under oath and both the trustee and your creditors will ask you questions about your finances. From that meeting the parties can propose a plan.
While some debt is dischargeable in Chapter 13 bankruptcy, you won’t be able to discharge student loans, home mortgages, taxes, fraudulent debts, alimony and child support and criminal fines.
The final step in the Chapter 13 process will involve winning approval, or confirmation, of your Chapter 13 plan from a bankruptcy judge. Garnering as much support as possible from your creditors will be a very important step, because it will ensure that the confirmation process runs as smoothly as possible. If your plan is approved, then you’ll need to make sure that you follow through on your payments to your trustee, who will then provide those payments to your creditors. Until your plan is full executed, any and all new debt you incur will have to be approved by the bankruptcy trustee.
If you find you’re having difficulty making payments on your plan due to unexpected circumstances you can request a hardship discharge.

Chapter 7: A Fresh Start

Unlike in a Chapter 13, a Chapter 7 bankruptcy filling essentially allows you to wipe the slate clean on your debt, which is why it’s much more difficult to legally qualify for this type of bankruptcy protection. In order to qualify to file for Chapter 7 protection, you’ll need to pass a ‘means test’— or, a test that, based on your income, will determine whether or not you are capable of paying off your debt.
Because you’ll be extinguishing most, if not all, of your debt, you’ll only be allowed to retain essential property like motor vehicles, household appliances, pensions, a portion of your home equity and necessary clothing. A Chapter 7 trustee will then take possession of your nonexempt property, sell it, then distribute the proceeds from the sale to creditors.
Whether you file for Chapter 7 or Chapter 13 bankruptcy, just remember there is no shame seeking bankruptcy protection. Find a great attorney or financial professional to walk you through the process and take charge of your personal finances!

Debt Relief, Credit Check: Hot Trends by Theresa McCabe

by Theresa McCabe

NEW YORK (TheStreet) -- "Debt relief" is a trending search topic today after thousands of consumers were victims of a fraudulent debt-relief program.

The Federal Trade Commission will mail almost 7,000 refund checks to consumers who were involved in the nationwide deceptive operation. According to the FTC, a fraudulent debt-negotiation company collected an up-front fee of about 5% of customer's unsecured debt, but failed to actually help the customers reduce their debt. The average amount of redress per consumer is about $180.

New federal rules have been put in place that require for-profit debt-relief companies to disclose how long it will take to get results before consumers agree to sign up. Companies can no longer charge upfront fees.

---

"Credit check" is a popular search topic today following concerns that employers are not accepting applicants on the basis of their credit.

A survey conducted by the Society for Human Resource Management showed that 60% of all organizations polled conducted background checks on job applicants.

Reports speculate as to whether this is a fair procedure and if employers should be allowed to keep someone out of a job based on their credit.

---

"Bankruptcy" is a trending search topic today after a recent study by John Pottow, a law professor at the University of Michigan Law School, showed that the number of Americans aged 65 and older declaring bankruptcy is on the rise

By 2007, 7% of those filing for bankruptcy were 65 or older, up from 4% in 2001.

Professor Pottow said that more than 66% of those 65 and older who filed for bankruptcy blamed credit cards for their financial problems. "They're using credit cards as a maladaptive coping mechanism," Pottow said.

The study also showed that about 40% of adults were still struggling with medical bills after they filed for bankruptcy.

---

"IRA accounts" is a hot search topic on the Internet today after the Internal Revenue Service announced a new tax law that is scheduled to take effect next year.

The provision in the Small Business Jobs Act, which President Obama signed into law in September, now allows 401(k) plan participants to roll their accounts over into their designated Roth account.

If a participant rolls over an eligible rollover distribution into a Roth account, he or she must include any previously untaxed portion in gross income. The rolled over amount is not subject to the additional 10% early withdrawal tax

The chatter on Main Street (a.k.a. Google) is always of interest to investors on Wall Street. Thus, each day, TheStreet compiles the stories that are trending on Google, and highlights the news that could make stocks move.

-- Written by Theresa McCabe in Boston.

Bank of America creates unit for foreclosures- by Eileen AJ Connelly

Bank of America creates unit for foreclosures

By EILEEN AJ CONNELLY, AP Business Writer Eileen Aj Connelly, Ap Business Writer – Fri Feb 4, 6:51 pm ET

NEW YORK – Bank of America Corp. on Thursday said it is splitting its mortgage business into two units, with a new division created specifically to handle foreclosures and discontinued loan products.
The bank said the new Legacy Asset Servicing unit will be responsible for resolving issues involving faulty paperwork that led Bank of America to suspend foreclosures in all 50 states in October. After reviewing procedures, it resumed the actions nationwide in December.
The legacy unit will also handle mortgage modifications and buyback claims on bad home loans sold to investors. It will be led by Terry Laughlin, who joined Bank of America in July 2010 as an executive in its mortgage unit handling credit loss mitigation strategies.
The move is the latest in a series of management shifts since Brian Moynihan took over as CEO in January 2010.
Bank of America Home Loans lost $8.92 billion in 2010, according to the bank's year-end financial report, largely due to the toxic loans it acquired when it bought Countrywide Financial Corp. in 2008.
Countrywide was writing one in six of the nation's mortgages in 2006. The Calabasas, Calif.-based company spiraled into disaster as it became clear many of its borrowers wouldn't be able to repay mortgages that had required no proof of income or down payment, and contained adjustable rates that quickly made monthly payments unaffordable.
In addition to the continuing cascade of consumer defaults, Bank of America has also been beset with buyback claims and lawsuits over the investment securities backed by those loans.
It reached a settlement last month with Fannie Mae and Freddie Mac regarding some of Countrywide's toxic investments, and made payments of about $2.6 billion to the two government-owned mortgage finance companies. At that time, the bank said it still faces claims of about $2.7 billion from the two. Analysts have estimated the bank faces up to $10 billion in claims from private buyers.
Bank of America, which is based in Charlotte, N.C., has also been beset with lawsuits related to securities backed by toxic mortgages. In regulatory filings the bank has said it, Countrywide and its Merrill Lynch unit have been named as defendants in suits related to the sales of more than $375 billion in mortgage-backed securities.
Bank of America Home Loans will continue to handle new loans and the servicing of loans — or collection of monthly payments — that are up-to-date. It will be continue to be led by Barbara Desoer, who has run the unit since 2008.
The bank wrote $306 billion in new mortgages in 2010. At the end of the year, it had a mortgage servicing portfolio of $2.06 billion, according to regulatory filings.
Separately, the company said it will exit the reverse mortgage origination business and shift the staff from that business to other mortgage operations. Customers with pending reverse mortgage loans will be allowed to continue through the process, and the existing loans will remain in force. The bank has about 100,000 existing reverse mortgages outstanding.
Reverse mortgages are typically sold to borrowers over age 62 who want to access the equity in their homes for personal expenses.
Bank of America stock closed Friday trading down 14 cents at $14.29. It gained 44, or 3 percent, to $14.73 cents in afterhours trading following the announcement of the creation of the new mortgage unit.

Limiting Psychological Damage From Collections-by Michael Casey

Debt by Michael Casey (Author Archive)

Limiting Psychological Damage From Collections

When Joe Bonadio negotiated a 69% reduction in $54,000 of credit card debt this year, his most valuable tool was a caller ID box with ring controller made by JF Technical Developing Co.

By blocking his telephone’s ring on designated numbers, the device kept the financially strapped musician from Mt. Vernon, NY, in peace while representatives from the country’s three biggest banks barraged him with 40 to 50 automated calls a day.
“They know what’s going to drive you nuts and that you are going to give them $60 just to shut the phone up,” he said. “I’m not a religious person, but it is as if Satan said, ‘I want to be on earth,’ and God asked him ‘What are you going to be?’ And he said, ‘I’m going to be a bank.’”
Millions of Americans forced into the same situation since the financial crisis are similarly disillusioned.
These debtors’ stories underlie Wednesday’s Federal Reserve report of a 1.8% annualized July decline in consumer credit, the 19th reduction in the 21 months since September 2008. It reflects the overly long process through which debts are cleared and the mistrust of lenders that makes people reluctant to borrow anew.
In turn, sluggish lending explains the interminably slow recovery in consumer spending. In part, the U.S. trade deficit’s 14% drop in July, as reported Thursday, stems from consumers having no credit with which to buy imports.
Bonadio’s experience highlights a psychological element to all this.
Helped by the Consumer Recovery Network, which teaches people to self-manage the wrenching debt settlement process, Bonadio got through the tough “collections” phase in the first three months after he first stopped making payments. Then, in the fourth and fifth months, he received letters offering settlement of around 50 cents on the dollar, which he negotiated down to an average 31 cents.
But countless others are worn down by the phone calls and the debt collectors’ warnings — about bankruptcy, about the blow to their credit score. They pay the minimum due in the futile hope that a job or some other funding source will arise. Meanwhile, subject to a higher default rate, the unpaid balance keeps ballooning.
With each payment, the bank avoids charging off the account as a loss, which would be required if it became more than 180 days past-due. (That deadline explains why Bonadio got his unsolicited settlement offers in months four and five.) Yet in so many cases the accounts end up in settlement anyway–or worse, in recovery.

Retirement Planning for the Bankrupt Boomer- Catey Hill

Published September 9, 2010  |  A A A

Retirement by Catey Hill (Author Archive)

Retirement Planning for the Bankrupt Boomer

Even before the recession struck, baby boomer bankruptcy was climbing. More than 42% of all individuals who filed for bankruptcy in 2007 were between the ages of 45 and 64, according to a study by the American Bankruptcy Institute released last month. From 2002 to 2007, the percentage of people filing for bankruptcy between the ages of 55 and 64 grew from 9.2% to 15.2% (the biggest jump for any age group), compared to a decline among those 25 and younger.

The study pointed to several reasons for the increase in boomer bankruptcies, including a jump in significant debt payments among older families, a decline in home values and rise in foreclosure rates.
“The problem may only be getting bigger,” write John Golmant and James Woods, the authors of the study, citing rising credit card debt and the declining total net worth of the generation.
Boomers filing for bankruptcy face a unique challenge: how to recover quickly and substantially enough to retire on schedule or at all. Older boomers face a particularly tough road back because they have the least time to save.
"In your 60s, it will be much harder to recover," says Mark Zaifman, a registered investment advisor at Spiritus Financial Planning in Petaluna, Calif. “I can’t sugar coat this. You will probably have to delay retirement for a while.”
Still, even for older boomers, retirement after bankruptcy is not impossible, especially with the right austerity program and an income from an additional job.
Boomers who retain some of their net worth are also in a better position. Retirement accounts like 401(k)s and IRAs are protected in bankruptcy, but most other assets are not. A bankruptcy filing almost always wipes out an individual’s savings, and in many states, filers may lose their home and other assets, too.
SmartMoney asked a few financial advisers to share their advice on how a boomer filing for bankruptcy can recover in time to retire.

Redefine retirement

Adjust your ideas about the way you’ll live and when you’ll stop working. Prepare for a lower standard of living than you may have originally planned for, and consider a part-time job in retirement.
If you're in your 60s, consider delaying retirement for a few more years to generate more savings and contribute to Social Security for a longer period of time to accumulate more benefits credits.

Make and follow a cash-flow plan

Document the amount of money coming into and out of your household each month, and be prepared to change it. This may seem obvious, but many financial advisers say they have myriad clients who aren’t sure exactly how much they make, save and spend.
To create a cash-flow plan, Zaifman recommends using a web site like Mint.com, a resource like Quicken or a fee-only financial advisor. For couples, he also advises weekly financial “check-ins” with their partners to help keep each other's finances on track.
Part of a bankrupt boomer's cash-flow plan will likely require spending cuts. "It is key that they become budget-minded and frugal," says Anita Eisthen, a chartered financial analyst and founder of Cincinnati-based Labrador Investments. "Clip coupons, look in the circulars for stores with the best deals, and things like this."
And expect to keep it up. "They really have to rethink their lifestlye," says Manisha Thakor, a Houston-based CFA and author of "On My Own Two Feet," a financial planning guide for women. "It's not only about the lifestyle they live now but also the standard of living they will have in retirement. These both will probably have to change if they want to retire in a reasonable time frame."

Aim savings at retirement accounts

Gary Gilgen, Director of Financial Planning for Rehmann Financial in Troy, Michigan, advises his clients to contribute as much as they can to their retirement accounts and take advantage of catch-up contributions.
If you are unsure about your needs, consult a fee-only financial advisor and read our primer on retirement planning.

Reexamine your investment strategy

The strategy you used to save for retirement over the last 40 years or so is probably not going to help you now.
Jonathan A. Blumenthal, a certified financial planner and senior vice president at Peak Capital Investment Services, advises boomers to select the "investments that will give them the highest probability for success." The principles remain the old standbys – manage risk, diversify your investments and properly allocate your portfolio, Blumenthal says – but the numbers governing how much risk you take on have almost certainly shifted on your balance’s way down to zero. This tool can help you reassess.

Don't hide your situation

Because many boomers retain the same friends – with the same spending habits – that they had before bankruptcy, it may be hard to stick to a new, more frugal lifestyle. Thakor recommends letting your friends and family know you’ve had some financial difficulty and are working toward cutting back. She also suggests looking into online support groups to reach out to others coping with bankruptcy.

Read more: Retirement Planning for the Bankrupt Boomer - Personal Finance - Retirement - SmartMoney.com http://www.smartmoney.com/personal-finance/retirement/retirement-planning-for-the-bankrupt-boomer/#ixzz1DC9b6jUO

Filing for Bankruptcy: What Can You Protect? by AnnaMaria Andriotis

Debt by AnnaMaria Andriotis (Author Archive)

Filing for Bankruptcy: What Can You Protect?

 

This year may go on record as the one during which the recession officially ended. But the effects are clearly still being felt: More personal bankruptcies are projected to be filed since 2006, a year after new laws went into effect. And responsible consumers – people who pay their mortgage on time and save for retirement – are losing the most in the process.
By the end of the year, more than 1.6 million people are expected to have filed for personal bankruptcy, according to the American Bankruptcy Institute. Almost 65% of filers chose “income reduction” as a reason for filing, while 42% listed “job loss” as a reason (debtors can choose more than one).
Filers who have been conscientious borrowers and consumers will often have equity in their homes, possess cars that are partly or fully paid for, and hold savings accounts designed to provide for them in the future. But there’s no credit for being responsible when it comes to bankruptcy court — and the more responsible a consumer has been, the more they have for a trustee to take and sell off to pay creditors. “Bankruptcy doesn’t care that they’ve been good Samaritans,” says Steve Elias, bankruptcy attorney in Lakeport, Calif., and co-author of “How to File for Chapter 7 Bankruptcy.”

CHAPTER 13 or CHAPTER 7? Regardless of filing status, a FICO credit score will take the same hit — a reduction of up to 240 points for a borrower with a score of 780 and a reduction of up to 150 points for a 680 scorer. But there are other differences: Chapter 13: Who it’s for: People who are trying to hold on to their assets and who also make enough money to cover daily expenses — with a little left over to pay creditors a reduced amount. How it works: A payment plan is set up through the court, but usually for less than the amount owed. Payments are made over a three-to-five year period, and must equal at least the amount of money creditors would have received if you filed Chapter 7. Chapter 7: Who it’s for: People who have no assets, like a home or car, to lose — or who have just enough to cover daily expenses (or less) but no extra for a payment plan.  How it works: Non-exempt assets are sold, proceeds are given to creditors and most debts are forgiven.

What and how much someone in bankruptcy can keep depends mostly on where they live. Florida millionaire Burt Reynolds was able to keep his 160-acre ranch through his bankruptcy – a feat that would be impossible in, say, neighboring Georgia. And there are a number of exemptions and loopholes in each state that allow consumers to hold onto some assets. Among them is the federal “wild card,” a credit of up to about $12,000 per person, which in 16 states and Washington, D.C. can be used to help a consumer keep items like cars or jewelry. (Some states have their own wild card options, but they’re far less generous.) There are also assets that bankruptcy trustees aren’t interested in taking because they won’t yield profits to pay creditors — like a home or car, if the filer owes more it’s worth.
Here are the five assets that might be protected in bankruptcy.

A home

Holding on to your home depends on the state you live in and the equity in your house. Florida residents can keep up to 160 acres outside of city limits and the home that’s on it, or up to half an acre and a home in cities. Texans can protect up to 200 acres of rural property or up to 10 acres in the city. And in general, if a home is worth less than the mortgage balance – that is, the owner has no equity – the owner can keep it as long as the payments stay current.
For filers who do have equity, most states offer an exemption — money from the trustee’s sale of the home that stays with the homeowner. But over that amount, every penny of a sale is applied to outstanding debts and paying the trustee. In California, for example, the equity exemption is up to $175,000, but other states are far less generous: In Ohio, the state exemption for a home is up to around $45,600 if married or up to half that for singles. In Tennessee, the exemption is as much as $12,500 for singles and up to twice as much for couples.

Tax-exempt retirement funds

Most tax-exempt retirement funds, like 401(k)s and individual retirement accounts, are out of reach from creditors. IRAs are protected up to about $1.17 million per person.
But trustees view these accounts skeptically and will flag suspicious actions like dumping cash and investments – which are usually not protected in full in bankruptcy – into retirement plans, says Howard Ehrenberg, a bankruptcy attorney and member of the Chapter 7 Panel of Trustees for Central District of California. Filers who get caught trying to protect assets in that way risk losing some of that amount, says Richard Nemeth, a bankruptcy attorney in Cleveland and state chair of the National Association of Consumer Bankruptcy Attorneys.

Filing for Bankruptcy: What Can You Protect?

(Page 2 of 2)

Car

Holding on to a car depends on several factors, including what’s covered by state exemption. In general, as with a house, owners who owe more than the value of the car can generally keep it, as long as payments stay current. Free-and-clear car owners can keep a car if it’s worth less than the state exemption, but drivers who have a car loan and some equity in their car can see their vehicle seized and sold, and recoup only their equity up to the exemption. Delaware and Nevada grant the most generous exemptions for cars, each up to around $15,000. In the 16 states that follow the federal exemptions, including Connecticut, New Jersey and Pennsylvania, the federal car exemption is up to about $3,450, but bankruptcy filers can also to dip into the federal “wild card” of up to roughly $12,000 to keep the vehicle. Married couples who jointly own the car can claim a federal exemption of up to $30,900. One of the strictest states is Florida, where the exemption is capped at $1,000 and there’s a wild card option of up to $2,000 per person, assuming the couple hasn’t claimed a homestead exemption.

Life insurance policy

Term insurance policies are safe after bankruptcy, but whole-life insurance policy holders aren’t always so lucky: These policies are considered an investment vehicle.
Depending on the state, there could be exemptions – Florida protects the entire policy, other states only protect a fraction. And in Ohio, life insurance policies remain intact when the beneficiary is a dependent; otherwise, there’s no exemption, and the state's wild card is around $1,075 per person.

College savings

The fate of the balance of a 529 plan depends on several factors. If a 529 plan is less than two years old, protection is limited to $5,000; creditors can take what’s been saved beyond that. The same mostly holds true for a Coverdell account. But after that two-year period, the plan is safe, as long as the person filing for bankruptcy is not the beneficiary; the account is not safe if the beneficiary is not the child or grandchild. If the filer is the beneficiary — for example, a 30-something with leftover college savings earmarked for grad school — trustees could cash out the 529 plan to pay creditors. 

FDIC’s Bair: Mortgage Industry Should Compensate Consumers. by Alan Zibel

By Alan Zibel

Getty Images

Sheila Bair, chairman of the Federal Deposit Insurance Corp.

The lending industry should compensate consumers harmed by shoddy foreclosure practices and is in need of far-reaching reforms to ensure that homeowners get better treatment in the future, a top U.S. banking regulator said Wednesday.
Sheila Bair, head of the FDIC, called for a “foreclosure claims commission” to handle complaints from homeowners who say they have lost their homes through errors made by their mortgage companies. The commission, she said, could distribute claims to affected borrowers–much like Gulf Coast oil spill fund–and would be paid for by the mortgage industry.
“We need to provide remedies for borrowers harmed by past practices,” Bair said in a sternly worded speech at a Mortgage Bankers Association conference in Washington. She called for broad changes across the industry, potentially as part of a settlement with attorneys general investigating allegations that mortgage servicers broke state laws.
“The fact is, every time servicers have delayed needed changes to minimize their short-term costs, they have seen a deepening of the crisis that has cost them–and the rest of us–even more,” she said. “It is time for government and industry to reach an agreement that will finally bring closure to the crisis.”
Mortgage servicers, which collect homeowners’ payments and distribute them to investors, have been under intense scrutiny amid revelations that lenders cut corners when processing foreclosure cases. Lenders have pledged to fix their problems. However, banks say the vast majority of affected homeowners have missed mortgage payments and will still face foreclosure.
The problems with mortgage-servicing companies show that the industry’s business model and fee structure are “fundamentally flawed and in urgent need of reform,” Bair said.
The industry, Bair said, has done a poor job of assisting homeowners on the verge of foreclosure. “Many servicers have refused to commit the resources necessary to pursue it in a coordinated and efficient manner,” she said. “Fair dealing with borrowers and adherence to the law are not optional.”
Bair’s remarks come as regulators are devoting heightened attention to mortgage-servicing companies. Federal housing regulators said Tuesday they will develop a new compensation structure for the industry.
The Federal Housing Finance Agency is working on the initiative with the Department of Housing and Urban Development and federally controlled mortgage buyers Fannie and Freddie. Since the pair dominate the mortgage market, any new rules would likely become an industrywide standard.
Compensation for mortgage servicers is currently based on a minimum servicing fee that is deducted from a borrowers’ interest payments. Consumer advocates and some regulators say mortgage servicers don’t have enough incentive to modify loans for troubled homeowners, which has led to poor results from loan-modification programs.
Industry officials say they have hired thousands of workers to deal with a crush of foreclosures and defaults. But some acknowledge that the industry was ill-prepared. “The current model does not work,” said Thomas Marano, head of Ally FInancial Inc.’s mortgage operations. “It’s not built for a calamity.”
Bair, meanwhile, proposed several other reforms. Borrowers, she said, should have the right to appeal to an independent third party if they are denied for loan assistance, and consumers seeking assistance with their loans should be provided a single person to contact.