The U.S Federal Reserve anticipates that in fiscal year 2009, the Unites States’ economy may shrink between 0.5% and 1.3%.   By historical standards, this means that we are in a serious recession.  This slowdown may be attributed to many factors - an increase in unemployment, a lack of consumer confidence, a lack of confidence in the investment community and an overall reduction of the amount of liquid assets in our banking system.    Perhaps the biggest factor that has hurt the American economy (and the world economy as well) is what can only be called a collapse of the housing market in the United States.  Many lenders have gone bankrupt, housing values have diminished and many homeowners are in trouble.   Because the housing market is so big it affects every facet of the American economy and when the housing market is in trouble the entire financial foundation of the United States will be in trouble as well.  How did we get here and what are the solutions?

Why is the housing market in the United State in trouble?   A big part of the problem arises from a collapse of  the so-called “subprime” mortgage market.  Until just a few months ago, subprime lending – or lending to credit challenged borrowers was a big profit center for many banks and mortgage lenders.   Subprime lending was so profitable that many lenders changed their business models to accommodate the demand for subprime credit.  Subprime loans, or more accurately, pieces of subprime loans, were sold off by loan originators as securities in the stock market. More on A Simple Explanation of the Sub-Prime Mortgage Meltdown

Earlier this month, I wrote a post on this blog setting out the question of whether Congress should enact legislation empowering bankruptcy judges to modify the terms of mortgages within a Chapter 13 bankruptcy.

Several of my colleagues in the Bankruptcy Law Network have argued that adding this power to the authority of bankruptcy judges will help stem the foreclosure crisis we are seeing in many cities and towns and that so called "voluntary" mortgage modification programs created by mortgage lenders has not and will not work.

Bankruptcy Law Network founding member Cathy Moran, who I respect greatly, has created a special advocacy page on her website that you can use to encourage your elected representatives to support mortgage modification in bankruptcy.  At  the same time Cathy notes that the judicial mortgage modification legislation now circulating in Congress leaves many unanswered questions.

North Carolina bankruptcy attorney Adrian Lapas, writing on the Bankruptcy Law Network blog, makes a compelling case in favor of judicial mortgage modification - click on the link to read Adrian's post.

What, then, are the arguments against judicial mortgage modification.   A thoughtful and well reasoned argument against modification comes from Andrew Grossman of the Heritage Foundation.   Mr. Grossman argues that judicial mortgage modification will impose uncertainty and financial loss on mortgage lenders, thereby increasing the cost of mortgage loans in the open market.   Credit, therefore, would further tighten, causing additional limits on mortgage availability. More on Are Mortgage Modifications in Bankruptcy a Good Idea - Part Two

I have probably written about this subject before, but I am going to raise it again because it creates so many unnecessary problems and it arises month after month and year after year.

If you are a Chapter 13 debtor, you and you alone are responsible for making your trustee payments.

Pre-confirmation

In the Northern District of Georgia, all Chapter 13 cases must be funded by payroll deduction. An employer deduction order ("EDO") should be filed in your case at the time your case is filed. Until the money starts coming out of your check, however, do not assume that your employer knows what to do or knows how to do it right. Further, you should assume that your employer may need 1 to 3 payroll cycles to implement the payroll deduction. Until the money starts coming out, you have to make the payments directly.

I cannot tell you how many confirmation hearings have been held up because a Chapter 13 debtor was one or two bi-weekly payments behind. In fact, I advise my clients to send in the first one or two bi-weekly or semi-monthly payments under the assumption that the employer will not withhold accurately the first time.

The pre-confirmation period in a Chapter 13 functions as a kind of probation period for your Chapter 13. If we drafted an "aggressive" plan, there is a good chance that we may have to amend the plan and increase the payment to the trustee. If this happens, your attorney will file an amended EDO. But guess what. Some payroll office employees don't recognize that the amended EDO is different than what they received 4 weeks previously. When you plan is amended to increase the payment you need to verify that the correct amount is being withheld.

Post-confirmation

Five years is a long time. And during that five years you may experience an interruption in your employment causing an interruption in your pay and therefore an interruption in payment received by the trustee. Do not ignore this interruption and hope that no one will notice. The trustee uses a computer program to track payments. If you fall behind, the lapse will eventually trigger a trustee Motion to Dismiss. If that Motion to Dismiss occurs in year three, leaving you, for example 22 months left in your plan, any delinquency needs to be cured in that 22 months. This may require a substantial increase in your monthly payment or a large lump sum.

From our friends at BankruptcyBill - a graphical explanation of how creditors get paid in a bankruptcy.

Strip #10 - Natural Order

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More on Bankruptcy Bill Explains Secured Transactions in Bankruptcy

There has been a lot of chatter on bankruptcy blogs and bankruptcy lawyer forums about the possibility that Congress will amend the bankruptcy laws to give judges the power to modify mortgages.   To offer some perspective, bankruptcy judges have long had the power to modify vehicle loan contracts and other secured debt claims but never mortgage debt.

When I first started practicing bankruptcy law some 20 years ago, I was introduced to the term "cram down" which is a kind of bankruptcy lawyer slang for the process of forcibly changing the terms of a contract against a creditor's interests.  In a typical car loan cram down, you might enter into bankruptcy with four years remaining on a five year note, a monthly payment of $530 per month, an interest rate of 12% and a total outstanding balance of $28,000.   After cram down the interest rate might be 6% and the outstanding balance may be $18,000 (which represents that approximate value of the vehicle) and the monthly payment to the creditor within a Chapter 13 plan might be $250 per month.

As you can see from this example, the purpose of a cram down is to bring a debtor's obligation more in line with the value of the collateral and prevailing interest rates.  I suspect that Congress allowed cram downs on car loans because it saw a problem in the market place whereby consumers with poor credit were ending up with unreliable used cars at unreasonable terms in the secondary market.

Debtor's attorneys also included cram down provisions in Chapter 13 plans to modify the terms of other secured loans, such as furniture and jewelry.  However, home loans were specifically excluded from cram down.

In 2005, with the enactment of the BAPCPA changes to the bankruptcy laws, Congress added restrictions to the power of judges to cram down vehicle purchase loans.   In other words the era of freewheeling bankruptcy cram downs was over.   Under the amended law, vehicles purchased less than 910 days prior to the filing of a bankruptcy case were not subject to cram downs.

These new restrictions on the authority of a judge to forcibly modify the contractual terms between a debtor and his car finance company were the result of extensive lobbying on the part of the automobile industry who argued that market forces, not bankruptcy judges ought to set the terms of vehicle purchase financing.

There has been no organized effort to change the rules regarding vehicle cram downs.   Instead, Congress has turned its attention to mortgage loans.   Perhaps this is not surprising since the federal government, through its mortgage guarantees, now owns or controls a fairly significant chunk of mortgages owed by Americans.

Legislation is now circulating in Congress that would allow a bankruptcy judge to change the terms of a mortgage, which would involve such things as:

• reducing the outstanding balance to line up with the current market value
• modify the terms (monthly payments)
• change the interest rates

The sense among bankruptcy lawyers is that if this legislation makes it into law, Chapter 13 bankruptcy will become a viable and attractive option to middle class families who might never have considered bankruptcy relief.   Mortgage debt is often a family's largest obligation and an opportunity to "re-write" one's mortgage at more favorable terms while at the same time reducing credit card debt and canceling unfavorable leases and service contracts may very will put the bankruptcy option on the table.

Is it a good idea to enable mortgage loan cram downs?   If you have a mortgage and have been contemplating bankruptcy should you wait?  We'll explore those questions next….

I am not going to promise you that you are going to be able to follow this, but the folks at Nolo have released a free on-line means test program.    I find this calculator more complex than the means test calculator built in to BestCase - the petition preparation program that I use.   The BestCase program draws data from other fields that you fill out anyway - like mortgages and car payments, whereas the Nolo program is a stand alone and requires manual data entry.

If you are computer savvy I would almost suggest that you download the BestCase trial version (full featured except that it prints  "demo" on the output) instead of the Nolo version.  I supect that the folks at Nolo assume that most prospective debtors will get frustrated and call one of the lawyers who buy advertising space at the Nolo site!

In any case, here are links to both the Nolo calculator and to the BestCase download:

Nolo means test calculator

BestCase petition preparation program with means test calculator

My Bankruptcy Law Network colleague Brett Weiss wrote a timely article on the Debt Law Network blog about a type of loan that is almost always a bad idea.  Pioneered by the national tax return filing service chains, tax refund anticipation loans are short term loans collateralized by your refund.   In exchange for a set up fee, a high interest rate and a two week loan, you too can get your refund 1o to 14 days earlier than you would if you e-filed.

If you are willing to wait the two week s for the IRS to issue your refund, you will save hundreds of dollars and that's what I advise you to do.

There are other potential problems with refund anticipation loans.  If the IRS challenges your tax calculations and does not issue a refund right away, you will be stuck with a high interest short term loan with very unfavorable terms.

Tax preparation services pitch refund anticipation loans by offering to finance the cost of tax preparation services into the loan as well.   Don't fall for this pitch - tax return services for simple returns often cost only $100 to $300.   Save up the money or work a weekend job but avoid high interest short term credit.

Today's Atlanta Journal Constitution ran a front page article exposing the slimy underside to Georgia's Car Title Loan industry.  It turns out that Georgia has minimal regulation on car title lenders - who basically serve as a lender of last resort for desparate borrowers.

Georgia consumers learn the hard way that title loan borrowers literally risk the entire value of their vehicles when they take these loans.

The AJC article tells the story of a building contractor named Scott Oden, who pledged his wife's $13,000 Ford Expedition for a $2,000 loan.   Scott was unable to make the payments on time and the title loan store repossessed the vehicle.  When the vehicle was sold, however, the title lender kept all of the proceeds.   In other words if the vehicle generated $10,000 at auction, the title lender kept the entire $10,000 as Georgia law does not require the lender to refund to the borrower the difference between the loan balance and the sales price.

Needless to say the title loan law in Georgia makes it very profitable for title lenders to find a way to repossess and sell vehicles.   In Scott's case, he contends that a representative from the title lender promised him that he would have a chance to catch up the loan, but he discovered that this verbal promise was not kept. More on Georgia Consumer Should Avoid Car Title Loans

Personal bankruptcy is made for "what if" scenarios.  What if I file individually instead of jointly with my wife?   What if I quit my job while I am in the middle of my Chapter 13?   What if I need a replacement vehicle after I file?

I don't always have the answers but I can usually think through one or two likely scenarios.  I can be more effective helping you if you give me the information I need.   Specifically that means the following:

• take the time to complete my intake questionnaire in its entirety.  Don't leave out information that you believe is not relevant.   My intake questionnaire is keyed to my bankruptcy program and I have been developing and updating it for over 15 years.  Everything on my questionnaire is there for a reason - and I can serve you better if I have everything that is requested there
• get me copies of your credit reports.   AnnualCreditReport.com offers a free service to get current copies of your credit reports.  Current credit reports help us avoid leaving out creditors from our analysis and they can also provide other helpful information such as prior addresses and other names in which you have been extended credit
• get me copies of all payment advices for the past 7 months.  The Bankruptcy law now requires all debtors to engage in a median income test as well as a means test analysis.  The starting point of this analysis is evidence of income you and other members of your household have received.   Payment advices should be provided for salaries, investment income, one-time checks, some disability payments, dividends, etc.  If you are not sure, ask.

Sometimes I hear from clients who want to submit their information on a spreadsheet or Quicken file.   Feel free to send those files along, but do not send them in lieu of my questionnaire and the other requested information.

About 25% of the bankruptcy clients I represent have bounced checks due to insufficient funds.  While there can be a criminal law violation if you bounce a check, often merchants do not prosecute unless the amount is significant.  Even if there are no criminal implications, a bad check is most certainly a debt that needs to be included in your bankruptcy filing.

Many merchants use check reporting services like Chex Systems.  Another check reporting service I see frequently is called Telecheck.    These companies are credit reporting agencies just like Equifax or Experian and merchants use these companies when deciding whether or not to accept a check from a customer.

My Bankruptcy Law Network colleague, San Diego bankruptcy lawyer Michael Doan has written a very helpful post that sets out the specific steps that you need to take when you include a Chex Systems or Telecheck debt in your bankruptcy.   You can click on the link to read Michael's timely post.  Michael notes that the check reporting agencies sometimes do not update their databases to show a "zero balance, discharged in bankruptcy" on accounts that are included in bankruptcy.

A Chex Systems file that show outstanding debt will make it very difficult, if not impossible, to obtain a new bank or checking account after bankruptcy.  If you take the necessary steps to clear your check reporting file, you greatly improve your chances.

Michael's advice clearly applies once you have received a discharge in Chapter 7 or Chapter 13.   This raises a question in my mind as to what a Chapter 13 debtor can or should do during a five year Chapter 13 plan.   I wonder if a Chapter 13 debtor could argue that a check reporting agency's refusal to delete a reference to an outstanding balance could be considered as a violation of the automatic stay.  I will pose this question to my BLN colleagues and update this blog post.