I urge anyone out there to contact your Senators and urge them to pass this legislation and specifically to keep this provision in the legislation. 

According to NACBA, the National Association of Consumer Bankruptcy Attorneys this is our best chance at getting real mortgage relief this year!  Please ask your fellow attorneys, family members, and clients to do the same. 

Obviously, this piece of legislation is strongly opposed by mortgage bankers and their allies.  We need strong support from you to get this done!

 The House Judiciary Committee approved the legislation after making some limitations on the legislations scope.  First, the legislation only applies to loans made after 1/1/00 and already existing as of the enactment of this legislation, so this legislation won’t help those who get loans after the date of the legislation.  Second, the legislation only applies to nontraditional, subprime loans, not all mortgages.  Third, the legislation will only apply to loans where the mortgage company has already served a Notice of Foreclosure.  Finally, the legislation limits judicial discretion so that the judge can not lower the mortgage below market value and can not lower the interest rate below conventional mortgage rates.

 The legislation is expected to be considered in the full House in January or February of 2008 and the Senate Judiciary Committee is expected to take up similar legislation in January or February of 2008.  Lobby your Congressmen and Congresswomen to pass this legislation!  Despite its limitations, there are thousands of people who could benefit and keep a roof over their head if Congress enacts and the President signs this legislation.   

James J. Saccacio, CEO of RealtyTrac predicts that at this rate, foreclosures could easily surpass 2 million filings by the end of the year!  This would be a 65% increase over 2006.  The states with the largest foreclosure rates are Nevada, Colorado, Michigan, Florida, Ohio, Georgia, Arizona, Connecticut and Indiana.

It is interesting because this phenomenon contrasts with the picture painted by the credit industry and things most of us read and hear about from credit counseling agencies and debt settlement negotiators.  We’ve all heard proclamations throughout society that “bankruptcy ruins your credit” or “you will never be able to finance a house” or other similar doomsday forecasts (I’ve discussed before about how bankruptcy is a first step in the rebuilding of credit since most who need bankruptcy already have bad credit or are about to without bankruptcy).

The data collected by the Consumer Bankruptcy Project support what I and many others have been saying for years.  It is not only possible to obtain credit after bankruptcy, it might actually be easier to obtain credit after bankruptcy than after other non-bankruptcy options are attempted (usually unsuccessfully). 

 As Professor Porter says in her article, “Bankruptcy Profits:  The Credit Industry’s Business Model for Postbankruptcy Lending,” “despite debtors’ trepidations and creditors’ warnings before bankruptcy, borrowing after bankruptcy is not only possible after bankruptcy, such activity is actively encouraged by the credit industry.  These data suggest that creditors’ threats to refuse credit after bankruptcy are hollow.  The credit industry may tell consumers that they will not lend after bankruptcy and that paying the debt is the only option to maintain their credit access, but such statements are largely untrue.  Rather than resulting from a marketing mistake, the widespread availability of postbankruptcy credit more likely reflects a careful calculus about the profits of lending to consumers vulnerable to financial distress.  The bankruptcy system shapes creditors’ ability to profit from former bankrupts, and law can play a critical role in defining the appropriate boundaries of credit solicitation.”

As a lawyer, I can provide information and offer my experience to address guilt and fears about the future, but it is very difficult to address someone’s moral dilemma. The fact is, most of us were raised in a culture that preaches that we should all be “responsible” and should “pay your bills.” I, as a Christian, have heard sermons from well-meaning church leaders about how filing bankruptcy is not a “responsible, Christian” thing to do and that a good Christian should struggle to “honor” our obligations, even to the point of adopting a pauper’s existence.

The point of this blog is not to offer an opposing view on these attitudes (believe me, I have one!). But, recently I read an article reporting about studies that were completed by “The Insolvency Service.” The report was titled “Attitudes to Bankruptcy Revisited.” The report looks at the results of surveys carried out in 2006 and 2007 which were carried out to obtain a cross section of views regarding attitudes to bankruptcy. In particular, the surveys wanted to establish whether there was a stigma attached to bankruptcy and if so, why.

The results of the surveys from 2006 and 2007 were compared to the results of surveys taken in 2004. The report found that while opinions of bankrupts and businesses have not changed significantly since the previous surveys, the opinions of individuals have changed. In the latest surveys, only 43% of individuals interviewed thought there was a stigma associated with bankruptcy. This was down from 53% in the previous survey.

It is interesting how attitudes have changed so significantly in just 2-3 years. The full report can be found at http://www.insolvency.gov.uk under “Insolvency Profession & Legislation.” The report didn’t really explore why the attitudes have changed, but it is interesting to me to see how they obviously have changed.

The editorial urged Congressional action and discussed that in Congressional hearings this spring held by Senator Carl Levin, the abusive policies were highlighted. There was testimony from one witness in which the person had exceeded the card’s $3,000 limit by $200 triggering penalties and interest that amounted to $7,500! After paying an average of $1,000 per year for six years, the witness still owed a balance of $4,400!

While this evidence is anecdotal, the phenomenon has become too common. The editorial cited teaser packages that “bombard” unwary customers. These packages promise low interest rates to start, yet reserve the right for the credit card company to raise rates whenever they want. These provisions are buried in deliberately arcane contracts that run 30 pages long and that “even lawyers have trouble understanding.”

The Congressional investigations and studies by consumer advocates exposed even other deceptive practices such as penalty rates being applied retroactively (higher rates being applied to purchases made before the penalty was incurred or in some cases even on debts that were paid off). One witness pointed out at the hearings that the credit card industry “is the only one allowed to increase the price of a product after it has been sold.”

The editorial also cited the credit card company policy of “universal default” wherein a credit card company can apply high interest and penalty on a credit card for missing payments with a different company! The hearings also discovered the practice of “double cycle billing.” This practice describes credit card policies of charging interest on the full balance in a cycle, even if someone has paid off a large majority of the balance. For example, a cardholder who pays $450 of a $500 balance is still charged interest on the entire amount, not just the $50 remaining.

The editorial goes on to point out that there used to be usury laws in most states that prevented these practices, but those laws have been preempted by federal regulations that are designed to make banks and credit card companies happy.

The editorial went on to support the legislation proposed by Michigan Senator Levin that proposes to limit “penalty” interest rates to an additional 7% above the previous rate and would prohibit proactive penalties and the practice of “double cycle billing.” The proposed legislation would also limit the amount of fees companies could charge customers who exceed their credit limit.

The editorial says this bill is a good “start,” but urges a “comprehensive” approach to the problem. Such an approach should include banning deceptive card offers outright, strengthen federal oversight and toughen truth-in-lending laws toward credit cards.

The Seidelman firm basically has the person pay them money every month that they deposit into a trust account and when they accumulate enough money, they try to work out a negotiated reduced debt amount in exchange for a lump sum payment. Unfortunately, the hairdresser was confused and thought the program worked like credit counseling where creditors agree not to pursue collections (at least that’s the story) and take smaller payments each month. After months of making payments to the Seidelman firm, the credit card company that had continued to accumulate interest and late charges sued her. She went from a $16,000 balance on a credit card to over $27,000 when they finally sued her.

The hairdresser ended up filing for bankruptcy. Bankruptcy, of course, offered her the only true relief. The point of the article was to expose the truth about “bankruptcy alternatives.” The fact is that credit counseling, debt settlement negotiations, etc… do not save your credit from negative reports. They aren’t “cheaper” than bankruptcy. They can’t force creditors to do things they don’t want to do. Even a representative from the Federal Trade Commission cited in the article, Frank Dorman, points out that debt settlement is “very risky.” In the end, you may or may not get a deal with your creditors and meanwhile your credit is “shot.” Even the Seidelman law firm on its website acknowledges as much.

Be careful, anything other than bankruptcy is riskier and doesn’t offer any guarantee of relief from debt.

“Personal bankruptcies continue to be more volatile this year than in 2006,” said Samuel J. Gerdano, ABI Executive Director. “Overall, consumer bankruptcies are higher than last year, but still well below the levels of 2004-05.”

The downturn coming on the heels of rampant speculation has seen more and more houses available on the market now. This has increased the market listing times and forced sellers to reduce prices. Builders have been slashing new construction prices, thereby making it more difficult to sell existing homes. These “flippers” never anticipated having to meet mortgage payments for as long a time period and more and more houses are now going into foreclosure.

This is interesting because usually people will struggle to make their mortgage payments at the expense of their payments to credit card companies. Logically, it would seem that credit card default rates would increase before mortgage default rates. That doesn’t appear to be what is happening right now.

I have also read news reports about mortgage companies tightening their money policies. In other words, it’s not as easy these days to get a mortgage or second mortgage as it used to just a year or two ago. I would think eventually we will start to see credit card default rates increasing because equity loans and equity lines of credit won’t be so readily available as an option to pay off unsecured debt, like credit cards. But, that doesn’t appear to be the case as of yet. I suspect it might have to do with the huge push in advertising of credit counseling firms touting debt management plans and debt settlements. I have no statistical data to support my opinion, but it just seems to me that I’m hearing a lot more commercials for these “not-for-profit” credit counseling agencies than I heard in years past. Unfortunately for consumers who need help paying debt, I don’t think these are good solutions. I’ve blogged before about reports from the credit counseling agencies that only approximately 25% of debt management plans complete. In my opinion a 25% completion rate doesn’t sound like success.