January 20, 2020

Trends in Mortgage Foreclosures

One component of the new bankruptcy law that gets little popular attention has to do with the limitations the new law places on re-filed Chapter 13 cases.  The Bankruptcy Code now provides that in a second case filed within one year of a first filing, the automatic stay terminates in 30 days unless the debtor files a Motion to Extend Stay.  For a third filing within a year, the automatic stay does not go into existence at all.

The intent of this new Code section is to stop so called “serial filers” – people who file and re-file to stop mortgage lenders from foreclosing.

Under the old law, by the way, bankruptcy judges could and frequently did exercise their power to dismiss a case “with prejudice” (pursuant to Section 109(g) of the Code) thereby barring a debtor from refiling for 180 days.

The problem from my perspective as a consumer debtor lawyer arises when a debtor has to file a  second or even third case because of circumstances beyond his control.  For example, in the Northern District of Georgia, where I practice, problems with Chapter 13 plan funding are the primary reason why Chapter 13 cases fail.  Often the funding is short because the employer fails to start the payroll deduction on time.  In our district every debtor who is employed must be subject to an automatic payroll deduction.

An initial Chapter 13 case may fail because the debtor’s lawyer was inexperienced or got in over his head.  Chapter 13 now requires numerous document disclosures and fast response to trustee objections.  Many times over the past twenty years, I have received a frantic call from a debtor whose case had been filed by a lawyer who “dabbled” in bankruptcy and who failed to respond properly to the trustee objections.  And there are also those cases that debtors filed pro se and  two or three months into the case decided (usually on advice from their trustee) to get a lawyer. Under the old law trustees and judges frequently recommended re-filing. Now, that option is much less appealing or practical.

A case may fail because a debtor has not yet wrapped his mind around the idea that his lifestyle and spending habits must change.

When a debtor wants or needs to refile, he will find that it has become much more difficult and expensive to find a  lawyer to take his case.  In my office, I will take a second filing within a year sometimes, but the up front cost will be higher that it would be for an initial filer. Why?  I know that at a minimum I will be making an additional court appearance to extend the stay and because the trustees tend to be much more demanding in a refiled case.

As a rule I will not take third filings and many of the more experienced, capable bankruptcy lawyers I know will not take third filings either.  The risk of getting stuck in litigation and hours of unpaid time loom too large.  I routinely refer third cases to one of the high volume filers.

No doubt the debtors themselves are partially to blame.  In my office I advise my clients orally, in memo form and by letter and email that the debtor is responsible for making all trustee payments until the payroll deduction kicks in and that all mortgage payments must be paid directly as on-going mortgage payments are not part of the plan.  And every month or so I have a debtor insist that “nobody told me” to make my mortgage payments or trustee payments.

However, without minimizing the debtor’s responsibility, I can see how a debtor would be confused by the process.  Bankruptcy is confusing and a bit terrifying.  Debtors are almost always very stressed and overwhelmed by months of financial pressure.  And, often, a main reason that a debtor is in bankruptcy relates to that debtor’s poor financial management skills and practical budget know-how.  This lack of know how, in my view, extends to the debtor’s decision making in choosing a bankruptcy lawyer and evaluating his bankruptcy and non-bankruptcy options.

Often the choice of a bankruptcy lawyer is made at the last minute.  Cash strapped debtors often choose a lawyer based on up front price.  Usually a law firm offers a low up front cost because (a) it is a volume filer or (b) it is a new or inexperienced lawyer trying to get cases to learn the practice area.  In both these scenarios, despite the good intentions of the lawyer, there is an increased risk that the first filing will not work.

The bottom line, in my view – there are many reasons why an initial filing may not work and more often than not the dismissal is for a reason other than a serial filing mindset by the debtor.

Now I am reading that teaser rates and adjustable rates are rising, especially in the subprime lending market.  In the Bankruptcy Litigation blog, Illinois bankruptcy attorney Steve Jakubowski cites a Wall Street Journal article as stating that subprime loan originations have increased from $150 billion in 2000 to $650 billion in 2005.  Further, about 25% of all mortgage debt in the United States is coming up for interest rate resets in 2006 and 2007.  Many of these resets will result in substantially higher monthly mortgage payments.

This all means that there are going to be a lot of first time filers looking at Chapter 13 to stop a foreclosure.  How many of those debtors will be affected by the new restrictions on refiling Chapter 13?


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