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Bill Collectors Have Blogs

By Jonathan on October 21, 2008

Here at theBKBlog, I focus on bankruptcy issues, creditor abuse issues and information that can benefit those considering bankruptcy. Did you ever wonder about the other side. Yes, bill collectors have blogs as well, and it makes for interesting reading because bill collectors blog about areas of concern to them – avoiding lawsuits for unfair or deceptive practices, educated debtors, whether or not to use email when contacting debtors.

Take a look at the CollectionTechnology.net blog, the Michigan Collection Law blog – you’ll read about topics that are of concern to the debt collection industry.

Countrywide Customers: Mortgage Help is on the Way for Many

By Jonathan on October 12, 2008

CNN.Money.com is reporting that Bank of America has announced a plan to cut mortgage payments on loans held by its Countrywide division. The program targets holders of subprime adjustable rate mortgage (ARMs), subprime fixed rate loans and option ARMs, but prime and Alt-A borrowers, who did not document their income, will be eligible as well.

Countrywide is now owned by Bank of America (as of July, 2008) and the Countrywide/Bank of America plan is designed to settle complaints filed against Countrywide by several state Attorneys General over predatory lending practices.

This foreclosure prevention plan will start in December and will reduce mortgage payments for eligible homeowners to no more than 34% of the borrower’s gross income. Countrywide is now in the process of screening its files and will notify eligible borrowers.

Don’t Assume You Can File Chapter 7 and “Start Over”

By Jonathan on October 11, 2008

Over the past few days, I have received several calls and emails from potential clients who comprise a very different profile from my traditional client base. These folks are solidly middle class to upper middle class families, often earning $100,000+ and living in $400,000 houses. Here is an example of the type of correspondence I have been getting and my response thereto:

Jonathan: I desperately need your advice. I work in sales at XYZ company and last year I earned more than $200,000. I am married with 2 kids. This year I’m on track to earn about $120,000. My house is worth $425,000, but the first and second mortgage combined equal to about $435,000. I am also financing a Mercedes – the monthly payment is $725 per month and the payoff is $37,500. I also have $35,000 in credit card debt. I am not behind on anything and I have borrowed twice against my 401(k) to keep afloat. My wife and I have made the decision that we are prepared to give up the house and the car and move into an apartment. I would like to file Chapter 7 and walk away from everything – when can I schedule an appointment? –Fred

Here is my response: Dear Fred – unfortunately I don’t think you can file a Chapter 7. Under the bankruptcy law, you cannot qualify to file a Chapter 7 unless your income falls below a certain threshold called the “median income.” As part of my analysis, I will compare your household income with the median household income for a family of 4 in Georgia ). As your household income exceeds the median by over $50,000, a median income evaluation in your case would create something called a “presumption of abuse.” This presumption is rebuttable in theory, but as a practical matter, I think is unlikely that you would be able to squeeze into a Chapter 7.

Instead, the “means test” of personal bankruptcy would dictate that you would have to file a Chapter 13 repayment plan. Assuming that you did give up your house and your expensive vehicle, the bankruptcy trustee would expect you to downsize your lifestyle substantially in a Chapter 13 – at least to the point where you would have sufficient disposable income to pay back all of your creditors in full in a Chapter 13 case that will last 3 to 5 years.

Given that you are in sales, you also run the risk of committing to a Chapter 13 that provides for a payment based on current income. Chapter 13 is not a flexible vehicle so you should not go into a Chapter 13 expecting that your plan payment would change if your commission income goes down.

So, for folks like Fred, the alternatives are – maintain your lifestyle and struggle to keep your head above water until you find a way to earn more money, or walk away from the expensive big ticket items, reduce your lifestyle, and commit every penny of disposable income to a 3 to 5 year payment plan.

What Does the Wall Street Bailout Mean to You?

By Jonathan on October 10, 2008

If you have been following the news, you know that a few days ago, the United States Congress passed a multi-billion dollar “bail out” of Wall Street firms and insurance companies that underwrote the risk to these firms. As of today (October 10, 2008), the bail out does not seem to have inspired much confidence and stock markets around the globe are tanking.

From my perspective as a bankruptcy lawyer, the collapse of the subprime mortgage market and the investment banking houses that underwrote these loans is not really a surprise. For years I met with homeowners who had “qualified” for mortgages that they clearly could not afford and who turned to bankruptcy to buy some time and perhaps to save their home ownership.

There has been a lot of talk recently about changing the bankruptcy laws to permit bankruptcy judges to rewrite the terms of mortgage loans. Many of my bankruptcy lawyer colleagues support this step as a tool to help struggling homeowners. With all due respect to my esteemed colleagues, I strongly disagree with such a move. The terms of mortgage loans reflect the risk inherent in writing a mortgage loan. Currently lenders price loans based on the likelihood of default. If we add another risk factor – the likelihood of having a bankruptcy judge arbitrarily reduce the balance or change the terms, the cost of mortgage loans will go up and the market for mortgage backed securities will become much less liquid.

Right now a fundamental problem in the mortgage industry is that a growing number of houses are worth less than the debt owed. Many homeowners in this situation are paying their mortgage loans as they would any other debt but clearly the stability of the real estate and mortgage markets will be negatively affected if homeowners have nothing to lose by giving up homes worth less than what is owed.

There are a number of suggestions about how to resolve this situation and I expect that we will continue to hear about this problem. My colleague Reed Almand in Dallas recently wrote a blog post about something called “Hope for Homeowners” that combines a voluntarily reduction of balances by mortgage companies with government underwritten loans.

What do you think? If you are a homeowner who is struggling to maintain payments on a mortgage on a house that has dropped in value, what are you thinking? Please let me know.

An Automatic Stay Violation Case that is Hard to Believe

By Jonathan on September 23, 2008

Search the term “stay violation” on any consumer bankruptcy blog and you will find stories of situations where creditors get hit with well deserved sanctions for their failure to stop harassing a debtor despite knowledge of a bankruptcy filing. Despite the trend in the law to give creditors more protections, bankruptcy judges are generally extremely protective of debtors when it comes to automatic stay violations. The automatic stay functions as the core protection of bankruptcy and creditors violate the stay at their peril.

Unfortunately, however, bad facts truly do make bad law. Now we have a case where a sincere, well-intentioned creditor is being hit with sanctions for what appear to be innocent actions against a debtor with less than clean hands. The case involves a Connecticut homeowner named Mark Poveromo who got slammed for sanctions after he pursued criminal sanctions against a dishonest contractor who used a bad address for Mr. Poveromo in this Missouri bankruptcy filing.

I suspect that most objective observers would conclude that creditor Poveromo was the wronged party here, after being ripped off by his contractor, spending money for two plane tickets and dealing with a judge who refused to let him appear telephonically. Nevertheless, this case shows how seriously bankruptcy judges treat stay violations even in situations where the debtors are very unsympathetic.

A bigger concern, however, is the likelihood that creditor advocates will use cases like this one to push Congress to erode automatic stay protections. My experience has been that most stay violation cases involve bullying creditors and fact patterns like the one in this case are rare. I will not be surprised to see efforts by lawmakers to reduce automatic stay protections.

Debt Collector’s Unlawful Message on Answering Machine May Give Rise to Stay or Discharge Violation Action

By Jonathan on September 3, 2008

Over the past few months, I have received a number of calls from former clients regarding possible discharge stay violation actions. As you may know, if you successfully complete your Chapter 7 or Chapter 13 case, the judge will issue a discharge order. One effect of that discharge order is to make the automatic stay that protected you from creditor collection activities into a a permanent injunction against attempts to collect discharged debt.

More and more, it seems, creditors and collection agencies are pursuing discharged debt despite the absolute illegality of such activity.

My Bankruptcy Law Network colleague Kent Anderson offers an informative overview of this “zombie debt” in a recent BLN blog post.

I have not previously included Fair Debt Collection or Fair Credit Reporting work as part of my practice, but I am thinking about doing so. Amazingly, there are some large, highly respectable companies involved in the zombie debt business. Business Week published an interesting article about this phenomenon in 2007 called “Prisoners of Debt,” an article that is worth a read.

Apparently the zombie debt collectors are trained to walk a very fine line in terms what they say in collection phone calls. These bill collectors are given scripts that often imply legal liability without specifically asserting that the debt is legally collectible. Attorneys who pursue discharge violation actions, Fair Debt Practices action or Fair Credit Reporting actions often do not have a paper trail. Zombie debt collectors rarely put anything incriminating in writing and they rely on the fact that most people do not have the equipment to record calls.

Texas attorney Brian Allen has an interesting post on his blog in July, 2008 in which he reproduces a recording from a zombie debt collector. As Brian notes, the bill collector is attempting to get as close to the line of illegal activity as possible – and perhaps this collector crosses the line – what do you think:

In any case, if you get calls from debts that were discharged or that are extremely old, you may have a claim for damages based on violation of federal law. I plan to explore these issues in future posts where I can hopefully give readers of my blog more guidance as to what to do.