Bankruptcy Bits

Massachusetts foreclosure crisis – when banks refuse to fix the mess they caused

Lately, it seems as if housing news is just one bad thing after another, and the most recent information indicates that things have not yet begun to look up. According to Reuters, one in eight homeowners across the United States is either paying in arrears or is in foreclosure.

This is an astounding number for anyone to reconcile, despite the fact that this number is comprised largely of very concentrated geographical regions. As an attorney practicing both consumer bankruptcy and real estate law in western Massachusetts however, I am still seeing the issue arise nearly on a daily basis. Between both subprime and prime adjustable rate mortgages, and rising unemployment, staying on top of payments has quickly become a near impossibility for many, and for some reason, lenders are still resistant to modifying loans.

In instances where modification might actually be an effective remedy, this resistance on the part of lenders is a great problem. Their failure to modify loans before a borrower is at or near the point of foreclosure, coupled with the fact that consumers are facing less and less ability to come up with money owed in arrears, is creating a vicious cycle of foreclosure. This failure on the part of lenders is also leading to a greater exacerbation of consumers needing to file for bankruptcy protection and banks being forced to write uncollectible bad debt off of their books.

I have an elderly client, for example, who has been referred to me to modify a negatively amortizing mortgage on her home. She is less than thirty days behind on payments and not yet approaching foreclosure, but she lives on a very small fixed income and will undoubtedly default if she cannot get into a fixed rate, traditional mortgage. I have made multiple phone calls and have spent hours researching how I might assist this woman. Yesterday, I finally reached a call center for Wachovia that recognized my client’s loan number. I was told that Wachovia is not doing any loan modifications until further notice and there is currently no procedure for applying to modify the very loans that are jeopardizing our banking system. As is the case with many other big lenders, Wachovia is sitting on its hands, ostensibly waiting for the next infusion of federal bailout money.

Many homeowners are unable to sell because of the slow real estate market or because they owe more on their mortgage than the house is worth. Most are also ineligible to refinance for credit reasons because lenders have become understandably and necessarily conservative since the subprime crisis came to light, or because they lack sufficient equity in their homes. And to compound all of this, lenders seem to often prefer foreclosures to the reasonable modification of completely unreasonable mortgages.

In the meantime, one in eight homeowners waits to see what the future holds, while consumer attorneys continue trying to pave a road that lenders seem to want to plow up right behind us.

By: Greta LaMountain, Esq.

10 misconceptions about bankruptcy

1. Bankruptcy is a process mainly used by people who are reckless and overspend on luxury items. Reality: the majority of those who file my clients are honest, hard working people who have fallen on hard times due to no fault of their own.


2. I can only get rid of credit card debt in a bankruptcy. Reality: Most debts can be discharged, including credit cards, medical bills, utility bills, personal loans, foreclosures, repossessions, and family debts.


3. If I file bankruptcy, I will have to pay a large tax penalty for the debt I discharge. Reality: You will not be taxed on the debt discharged in a bankruptcy.


4. Once I file bankruptcy, I will carry a stigma around forever. Reality: There is no longer a bankruptcy stigma; people can continue to live their lives essentially in the same manner they had before bankruptcy.


5. I will have to go to court if I file bankruptcy. Reality: A vast majority of bankruptcy cases conclude without the debtor ever going to court.  


6. Bankruptcy is a long proceeding that takes years. Reality: Most bankruptcy cases conclude in a mere few months.   


7. Income taxes can never be discharged in a bankruptcy.  Reality: Many income tax debts that have been properly filed and are at least three years old can in fact be discharged in bankruptcy. 


8. I will lose my house, car and assets if I file bankruptcy. Reality: Most people keep all of their assets, including their house, car, bank accounts, retirement accounts, clothing, jewelry, and household furniture/appliances.


9. Bankruptcy laws changed a few years ago, and now everyone must repay their debts. Reality: Almost everyone who qualified for bankruptcy a few years ago still qualifies today and can still discharge their debts without repayment.  


10. I will never be able to get credit again. Reality: If responsible debt repayment is evidenced after filing bankruptcy, most people are able to get some unsecured credit immediately, and secured credit for significant purchases within a year or two.

by: Justin H. Dion, Esq.

Debtors who act badly will often be punished for their behavior

In a recent bankruptcy case from the Northern District of Texas (In re: MD Promenade, Inc, 51 BCD 22, decided in 2009,) the Court used its equitable powers under 105(a) to impose contempt sanctions against a corporate debtor’s principals and a company owned by the principals’ parents.

In this case, the debtor was a restaurant, which had agreed to vacate its premises and surrender possession to its landlord. Shortly before the agreed moving date, the restaurant filed Chapter 11, but shortly after that the principals, who were two brothers, proceeded to remove all of the restaurants assets and contents in a very destructive manner and removed kitchen equipment, furnishings, alcoholic beverages. They then also decided to remove the toilets, windows, and air conditioning units off the roof, among other clear fixtures. They were assisted by their parents and their parents’ company, friends, and even some laborers that they hired from a local parking lot. When questioned about the removal process after the landlord discovered the results of the move, they claimed that the items had been removed by the restaurant’s “secured creditor” as a repossession action.

When the truth was finally learned by the Bankruptcy Court, the principals and their parents were ordered to pay the Trustee the sum of $250,000 for contempt of the automatic stay, and the parents’ company was ordered to pay an additional $150,000 for damages to the landlord as sanctions for contemptuous conduct in violating the turnover order.

A lesson should be learned that no bad deed goes unpunished.

By: Michael B. Katz, Esq.

Some thoughts on the Residential Mortgage Cramdown proposal

A recent opinion in the Wall street Journal was most critical of the plan presently being proposed to allow Bankruptcy Judges to modify residential home mortgages. This is commonly known as the “Cram Down” provision. In that opinion, Professor Todd Zywicki raised several perceived problems with the proposed legislation that would provide homeowners facing foreclosure with a remedy short of losing their homes.

The first objection he raised was that mortgage modification would provide a windfall for troubled homeowners but raise the costs of credit of any kind from car loans to credit cards. Professor Zywicki cites the lessening on car loan rates since 2005 after congress eliminated the ability of bankruptcy judges to modify auto loans.

Nowhere in his argument does he cite the dire economic straits of the automobile industry as a factor in this lowering of the average rate, which surely is the prime reason for this reduction.

His second point is that the allowance of mortgage modification could unleash a torrent of bankruptcies. While this is so, our experience to date is that anyone in the process of losing their home is presently resorting to bankruptcy anyways, as in virtually every case, debt has built up on credit cards, medical bills and other creditors in what usually turns out to be a failed attempt to make payments on the home mortgage until there is simply no more ability to make any payments at all. The result is not only a bankruptcy that wipes out all unsecured debt to those creditors, but also a foreclosure on the home, and all payments made in attempts to retain the home are gone at great expense to other creditors. The home mortgage lender gets back the home at a depressed price and is forced to take the loss anyways, while displacing entire families from their homes.

A third argument is that this rewards bankruptcy abuse, as it allows homeowners to retain their homes and make reduced payments, while reaping the benefit of any increase in value that may occur in the future. The fallacy here is that in virtually every case, the homeowner is unable to make the contract payments, and a foreclosure is going to result in a loss to the lender in any event and possibly create the windfall to a purchaser at foreclosure. The only unfortunate result is displacement of a family.

It is clear that the current economic downturn is in good part blamed on the lax credit and underwriting standards of those lenders. They now seek to take advantage of homeowners who although also should share the blame, are mostly unsophisticated about the ways of the credit industry. They have relied on opinions of so called experts in the field either as mortgage brokers or bankers, who ignored longstanding credit requirements and got caught up in the hoopla of unlimited rising prices in the real estate industry. Those so called experts or professionals are equally if not more to blame that the borrowers and should be called to task by assuring that they share in the losses by writing down their notes to no less than the amounts that they could recover in a foreclosure.

The net result of this will be to keep many families in their homes and alleviate the current inventory of unsold homes that are presently a glut on the market further depressing prices.

Yes, there are inequities in this proposal, but not to the extent that Professor Zywcki sets forth. There are certain protections that will be built into the proposed bill in the way of partially repaying some of the gains to homeowners, should they later be in a position to sell their homes in excess of the mortgage balances, however those feared inequities are far less damaging to the economy than allowing the present rate of foreclosure to continue.

Let’s also not forget that bankruptcy judges still have the power to rewrite and recast all other secured debts, and this has not resulted in any dire results to lenders. Why single out homeowners to bear the burden of resolving any bad lending decisions for the lenders?

By: Paul R. Salvage, Esq.