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Protect Yourself from Mortgage Fraud

By Jonathan on January 12, 2008

Mortgage fraud has been an on-going problem for many years. Over the years I have met with dozens of Atlanta area residents who have been victims of various types of mortgage fraud.

I remember one case in particular where a gentleman came to me with a stack of papers related to unpaid mortgage obligations for five different houses. I asked this gentleman if he was a real estate investor, and he replied that he wasn’t but that he had “signed some papers” at the request of the minister at his church.

It turns out that the minister and his associates were buying properties in other people’s names, making payments for a few months, then borrowing against the value of these properties (aided by inflated appraisals). My client, who was a “straw purchaser” never knew anything about the scam until the fraudsters took the loan proceeds and disappeared, leaving my client to face the consequences. His minister stayed in town but claimed he was a fraud victim as well.

Unfortunately, because my client had been paid around $1,000 per property for his signature on the loan documents, he was considered a participant in the scam and I advised him that he would likely face objections to discharge should he file bankruptcy.

The point here is that if something sounds too good to be true, it probably is. Earning $1,000 for your signature on some papers you don’t read certainly falls into that category.

Here is a helpful article from Experian (one of the 3 national credit bureaus) about preventing mortgage fraud.

Financial Managment Course Requirement – Filing Deadline

By Jonathan on January 2, 2008

The bankruptcy law requires debtors to attend two educational courses. The first requirement calls for a "debt management course" and must be completed prior to filing – your certificate of completion is your "ticket in" to the bankruptcy process.

The second course, which is the subject of this post, is the "ticket out." Known as the "financial management course," this educational requirement involves education about budgeting, interest rates and other financial managment tools that will, hopefully, keep you out of bankrutpcy in the future.

In a Chapter 7 case, you are supposed to complete your financial management course within 45 days from the 1st date set for your Section 341 meeting of creditors hearing. In a Chapter 13 case, you must complete the financial managment course prior to making your last Chapter 13 payment or prior to the closing of your case.

If you do not complete your financial managment course requirment and file your certificate of completion (your attorney will file this for you), you will not be eligible for a discharge.

In my practice I recently represented a Chapter 7 debtor who did not complete her course prior to her case being closed and we had to reopen her case for the sole purpose of filing the financial management course certificate. So far, it appears that most bankruptcy judges will permit such reopenings, but be aware that there is a filing fee to do this as well as an attorney’s fee for the time involved.

Most of the vendors who provide pre-filing debt counseling will also provide financial managment courses as well. The list of vendors that I provide to my clients can be found on my BankruptcyWorksheet web site.

I always advise my clients to get the Financial Management course out of the way. You are not likely to think about this requirement 4 years into your Chapter 13 and the only notice set out by the clerks’ office is done a couple of months into your case.

The Financial Managment course can be taken by phone or over the Internet and it will last only a few hours. I would be interested to hear from anyone who has taken this course to get your observations and thoughts about its value.

Chapter 7 and Middle Class Debtors

By Jonathan on December 28, 2007

Over the past few weeks, I have received several emails from potential clients that begin with lines like “my salary is over $100,000 and I need to file Chapter 7 to protect myself against lawsuits from credit card companies” or “together, my wife and I earn well over $100,000 but we need to file Chapter 7 because….”

In each of these cases, I have had to respond to the prospective client with the bad news that about 99% of the time, Chapter 7 is not going to be available to an individual or couple whose household income exceeds $100,000. Why? Under the current bankruptcy law, something called a “presumption of abuse” arises is your gross household income exceeds the “median income” for a similarly sized family in the State where you live.

In Georgia, where I practice, the median income for a family of 4 is $66,711. If there are more than 4 people in a household, you would add $6,900. If you make $100,000, you would need a family of 9 to fit within the median. Note that these figures will be adjusted upward as of January 1, 2008 but the general principle here still applies.

If you do not meet the median income test, you could still qualify for Chapter 7 under something called a “means test” which allows you to deduct certain permitted expenses from your median income figure. Unfortunately the means test is derived from IRS calculations used when people negotiate installment payments on overdue tax debt. In other words, you don’t get a lot of deductions.

As a practical matter, you might squeeze into a Chapter 7 if your income is just over the median, but if you are $20,000 or $30,000 over the median, you are facing a real uphill battle.

If you don’t fit into a Chapter 7, your only alternative is Chapter 13. Here, too, the $100,000 income family is likely to feel a squeeze. My experience with the means test suggests that families the $70,000 to $100,000 range won’t qualify for Chapter 7, and the means test will require a Chapter 13 payment that often is not affordable.

Over the next few weeks, I’ll be working on a video presentation that will demonstrate how the means test works.

Credit Card Offers Being Mailed to You at Accelerating Rates

By Jonathan on December 18, 2007

I read in this week’s issue of the Consumer Bankruptcy News (a trade publication for bankruptcy lawyers) that during the 3rd quarter of 2007, credit card companies mailed 1.29 billion (that’s billion with a "B") credit card offers to U.S. households. This is an increase of 2 million offers a year as compared to the 3rd quarter of 2006. Approximately 29% of these offers were mailed to households that were already utilizing more than 30% of available credit.

To put this another way, men and women who already have credit card debt and who are most likely carrying balances month to month are still getting pitched on new credit card offers. This is not an accident.

Credit card companies use sophisticated economic models to calculate expected profit. They make their money on late fees and high interest rates. You pay obscene costs if you carry a balance every month and if you make your payments late.

If you are struggling financially, do not allow yourself to be fooled that more credit will help you. This is especially true if you find yourself paying monthly budget items like electricity, food and gasoline with credit cards. If you find yourself carrying a balance for more than a month or two, take the cards out of your wallet.

Do not fall prey to balance transfer offers if bankruptcy is even a remote possibility (since a transfer to a new creditor within a few months of filing will be considered "new" debt by the transferee card.

There can be a time and place for unsecured debt. Recognize the manipulation inherent in credit card activities and don’t allow yourself to become a victim.

Metro Atlanta Foreclosures Up 29% in 2007

By Jonathan on December 11, 2007

The Atlanta Journal-Constitution reports that foreclosures in the 13 county metro Atlanta area are up 29% in 2007 as compared to 2006. In 2007, there were 58,076 foreclosures, which is equal to around 4,900 foreclosures per month. Note that these numbers only refer to the metro Atlanta area, not Georgia as a whole.

By contrast, in 2001, there were just over 20,000 foreclosures in the metro Atlanta area.

What has caused the metro Atlanta foreclosure rate to triple? From my viewpoint, the mortgage industry has created this situation by creating one junk mortgage product after another. Mortgage loan originators have a vested interest in writing loans – these loans are usually bundled and sold as investment products. Therefore, it does not really matter if a homebuyer is truly qualified – as long as there is some way to write the loan, the originating lender is happy, the mortgage broker is happy and the first line of investor is happy.

For example, a prospective homeowner who earns $85,000 might qualify for a $200,000 loan at a fixed rate payable over 30 years, coupled with 10% down. That same prospective homeowner might qualify for a $250,000 loan with a teaser rate of 2% for three years then adjustable thereafter.

The loan originator will have long sold the loan before three years are up and when the loan adjusts, the monthly payment may go up $200 to $400 per month.

Homebuyers naturally look for ways to afford bigger and newer homes and easy money makes it easy to get in and drives prices up.

Until recently, a cash strapped home buyer could at least try to sell, even it meant just getting out. Now, the investment community has dicounted these packages of underperforming loans, meaning that new money is tight and home prices are being squeezed downward. Thus, we have a foreclosure “crisis.”

The AJC story further reports that many of the loans in foreclosure have not adjusted recently at all – as the Fed has kept rates stable or down. When more adjustable rate mortgages begin adjusting up, the current foreclosure situation could get much worse very quickly.

My advice to homeowners who are struggling to pay their current mortgage loans is to downsize as soon as possible. Chapter 13 has become a much less viable option and it won’t help if you have an adjustable rate mortgage anyway.