Bankruptcy & Loan Modifications

In February of this year, President Obama signed into law the new Credit Card Act, which reglulates how banks and other collections agencies can market and promote credit cards.  In addition, the Federal Trade Commission has enacted several laws that protect consumers from fraudulent and deceptive practices of creditors as well as shaddy companies that pray on consumers.  Finally, many states have enacted laws such as the Massachusetts Consumer Protection Act, MGL 93A, that provide additional protection against unfair and deceptive commerical activity.

With all of this in place, some debt settlement companies who may have engaged in conduct that is now unlawful under the many state and federal laws have proclaimed that they will take their operations overseas and to the Caribbean in order to continue to operate their business in the same way and to avoid the protection of the United States laws. 

Steve Rhode drafted a very telling article, Here’s How Debt Settlement Companies Plan to Get Around New Consumer Protection Rules – Go Offshore! detailing inforamtion generated at a trade association presentation from The Association of Settlement Companies (TASC) that appears to suggest to TASC members to consider circumventing new consumer protection rules to come from the FTC by avoiding traditional phone lines, moving operations offshore like gambling and payday operations, and selling discounted medical & health products with the debt settlement sale.

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The Massachusetts Consumer Protection Act is a law which allows consumers to take legal action against unfair or deceptive business activity. M.G.L c. 93A is the Massachusetts statute which is used in order to deal with such matters. Violation of the regulation gives the individual litigant an opportunity to obtain actual damages and equitable relief, the Attorney General may obtain injunctive relief, and a civil penalty may be imposed. United Cos. Lending Corp. v. Sargeant, 20 F. Supp. 2d 192, 204 (D. Mass. 1998)

In relation to banks and their lending practices to prospective homebuyers or consumers the Massachusetts Consumer Protection Act is a useful tool in order to protect those subject to the unfair and fraudulent practices used by banks and lender services. One way courts determine whether a bank or lender has violated this particular statute is if the conduct was done so with the intent to deceive or fraudulently induce a purchase.

With respect to banks offering loans to homeowners, sub-prime loans tend to be the most common loans involved within consumer protection cases. Sub-prime loans are defined as “…loans offered by banks to borrowers who generally would not qualify for traditional loans offered at the generally prevailing rate of interest for conventional mortgages” Commonwealth v. Freemont 452 Mass. 733, 734 (Mass. 2008).

There are times were banks and lending institutions will use various tactics in order to avoid their duties or responsibilities which the court has deemed unfair and deceptive according to the Massachusetts Consumer Protection Act. For example, in one case,the lender breached their agreement when they made the borrower believe certain procedures needed to be followed in order to obtain loans but the lender never followed through with these procedures. The court found this behavior to be unfair and a violation of the Consumer Protection Act. Zuker v. GE Capital Corp., 20 F. Supp. 2d 254, 263 (D. Mass. 1998).  In another example,extremely high brokerage fees were charged to the borrower. The court ruled that charging such high fees was unfair and deceptive according to the Consumer Protection Act because the lender substantially deviated from industry-wide practice United Cos. Lending corp. v. Sargeanty, 20 F. Supp. 2d 192, 209 (D. Mass. 1998).

For those who may find themselves subjected to the tactics and unfair behavior of banks and lending institutions be mindful that the Massachusetts Consumer Protection Act will prevent those banks and lending institutions from allowing their acts to go unpunished.

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In order to determine if you should be granted the use and privilege of a credit card, mortgage, car loan or other source of funding, most creditors rely heavily on your credit report.  These credit reports are generated by information provided by your current creditors, that is those who you owe money for goods and services.  The score itself is derived by looking at several factors including you new debt, the type of credit used, the total amounts owed, your payment history and how long you have owed a certain debt.   

It’s estimated that 3 out of 4 credit reports contain some sort of inaccurate information.  If one of your creditors reports something negative, such as a missed payment, or an improper amount of debt owed, your credit score can decline.  So what do you do if someone has misrepresented a fact to the major credit boroughs?

The first step that you must take is become informed.  More specifically, you must know that there is a misrepresentation on your credit report and in order to do that, you need to get a copy of your credit report and review it.  The Federal Trade Commission, (“FTC”) is the government agency that regulates and monitors credit scoring, credit collections and all debt issues.  Several years ago, the FTC and other political figures pushed for a law that allows consumers to get a free credit report annually without needing to pay.  In order to obtain a free credit report you can go to www.annualcreditreport.com or call 877-322-8228. 

            Once you have confirmed that your credit report contains inaccurate information, The Fair Credit Reporting Act provides a means for correcting these mistakes by allowing you to challenge any information you believe to be incorrect. If you challenge something and the information isn’t verified within a certain period of time, the Act even requires that it be automatically removed. You can complete this process of challenging the information on your own or you can hire a professional to assist you; it is a very time consuming process oftentimes, so you must decide how much time you are able and willing to devote to the process when deciding whether or not to seek out help.

As you move forward in an effort to repair your credit, it is also helpful to be aware that there are protections available to you from debt collectors as outlined in the FDCPA (Fair Debt Collection Protection Act) that protects you from excessive and inappropriate collection methods. You can set what times collection calls can come and where, especially if you do so in writing. Generally they’re allowed to call any number they have between 8AM and 9PM. However, if you make them aware of a certain time or place that calls would be inappropriate; they are not allowed to call.

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The affects of bankruptcy can have a lasting impact on a person. Once a child is involved the affects can last for a long time. The topic of dealing with the affects of bankruptcy on children is not a topic that has received much attention over the years, but this topic is one that should be addressed.In many cases, parents try to minimize the affect of a bankruptcy on the family. Children in most situations may not even know anything has transpired. Moreover, it may be far less traumatic even if the children know their parents are facing financial distress, then to know your home has been taken away by the bank.

Once a bankruptcy claim is filed the courts will decide which debts require payment. As such, the court can determine that certain expenses are allowed while others are not. Once such expenses is 529 plans or other savings accounts for college. During times like this consulting with an attorney can be beneficial in order to get a good understanding of how your child may be affected once you file for bankruptcy.  In addition, there are many other situations that can comingle a parents debt with the financial interest of their kids.  To read more about these situations, check out Jonathan Ginsberg an Atlanta bankrutpcy attorney’s blog. 

There is no doubt that the stress of bankruptcy can take a toll on a child. A study conducted by the Iowa State University Institute for Social and Behavioral Research states that children who experience socioeconomic adversity at an early age are at an increased risk of experiencing mental health challenges during their teen years. A child may begin to wonder whether or not their family will have a place to live or what will happen to them in the future. A family’s financial status can affect a child because of society’s emphasis on being financial stable and achieving a certain level of success. Once a child realizes the lack of financial resources available for their family that child may be embarrassed and could be subjected to negative treatment amongst his or her peers.

Despite all the negative emotions associated with bankruptcy it is important to keep your children involved in the financial matters of your family. If a parent is laid off from their job of made the decision to file for bankruptcy the financial make up of that family changes. The next step is to explain the financial situation of your family with your children so they are aware of the situation. Parents must remember that children are learning from how their parents are dealing with bankruptcy and other financial matters.

The issue of bankruptcy is not an issue topic to discuss. For parents the issue of bankruptcy can become even harder to explain because their financial outlook can be affected as well. Despite this obstacle, it is important to minimize as much stress as possible and make the right decisions that will benefit your children in the future.

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When you work with an attorney on a bankruptcy filing, there’s a long list of documents you’ll be asked to gather and give to your attorney. Some of the most critical documents you’ll gather are your last three years’ worth of tax filings, both state and federal. Why are these so important?First, and most important, tax returns contain a great deal of the financial information that your attorney will use when preparing your bankruptcy petition. Your attorney will review your returns to get a good foundational grasp of your financial situation—what real estate you own and whether it’s investment property; what bank accounts or investments you may hold; whether you are self-employed and how the business has been doing over time, and so on.

Similarly, your attorney uses your tax returns as a kind of financial checklist when preparing your bankruptcy petition. Most of the information that you’ve already reported on your tax returns is information that your attorney must include in your petition.

Importantly, bankruptcy is information-based. In other areas of law, when you go to court, you may be asked to testify and tell your side of the story. At your bankruptcy hearing, your bankruptcy petition—the specialized financial report that your attorney has presented to the court for approval—tells your story for you. The bankruptcy trustee who examines your petition may ask some questions, but the more accurate and detailed your attorney’s information, the easier it is for the bankruptcy trustee to review and approve your petition.

So don’t flinch when your attorney asks for copies of your tax returns. You can share them confidently, knowing that your attorney is helping you toward bankruptcy’s “fresh financial start.”

The forgoing post was drafted by Attorneys Marsha Graham and Liz Weishaar who work in an of counsel relationship with the Law Office of Goldstein and Clegg, as well as for Weishaar and Graham.

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When you go into Bankruptcy Court for your Chapter 7 hearing, you appear before a Bankruptcy Trustee in what is known as a “341 Meeting.” Your hearing takes place in a conference room rather than a courtroom; however, you must be neatly groomed and appropriately dressed as for any official occasion.You must bring photo identification and your Social Security Card. If you forget either of these things, the Trustee’s Clerk may have to reschedule your hearing.

You will be sworn in before testifying. The Trustee’s job is to identify and liquidate all “property of the estate” that your attorney has not exempted. The Trustee’s questions depend on the complexity of your bankruptcy. In the unlikely event that a creditor objects to your bankruptcy, the Trustee examines the objections and tries to resolve the issue on the spot. You will, as in all official hearings, be asked to state your name and current address for the record. The Trustee will ask you to authenticate your signature on the bankruptcy filing. The Trustee wants to know that you have read and understand the Chapter 7 information that the Court provides when you checked in with the Clerk. Also, you need to let the Trustee know that you have read the bankruptcy filing and that it is true. The Trustee will ask questions about your income, real estate, personal property, and assets such as life insurance and 401K accounts.

It may sound like a lot, but don’t forget that you’re not on your own. Your bankruptcy attorney will have helped you adequately prepare for your hearing, so that the Trustee’s questions will be simple and easily answered.

The forgoing post was drafted by Attorneys Marsha Graham and Liz Weishaar who work in an of counsel relationship with the Law Office of Goldstein and Clegg, as well as for Weishaar and Graham.

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In today’s Wall Street Journal, I found a great article by Sare Murray and Conor Dougherty about the increase in bankrutpcy filings.  

The number of Americans filing for personal bankruptcy rose by nearly a third in 2009, a surge largely driven by foreclosures and job losses.

And more people are filing for Chapter 7 bankruptcy, which liquidates assets to pay off some debts and absolves the filers of others. That is significant because a 2005 overhaul of federal bankruptcy laws aimed to encourage Chapter 13 filings, which force consumers to sign onto debt-repayment plans in exchange for keeping certain assets.

The changes were designed to make it more difficult for people to shed their debt, particularly in a Chapter 7 filling. A “means” test, for example, was introduced to separate those who could afford to repay their debt from those who couldn’t. A Chapter 7 filing is off the table if the means test determines a person is able to pay back at least a portion of the debt after it is restructured.

to read the rest of the aritcle on Personal Bankruptcy Filings Rising Fast, click here.

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There are two main chapters (or types) of Bankruptcy that Consumers typically file. Chapter 7 (liquidation) and Chapter 13 (reorganization). In order to sell your property in either of these, the bankruptcy court must not have an interest in the property or give permission to effectuate a sale. Under the Federal bankruptcy law, as soon as you file for bankruptcy, all of your legal and equitable interests become assets of the bankruptcy estate and as a result, is administered or managed by the Bankruptcy Court Trustee. What this means in plain English is that all of things you thought you owned, are temporarily owned by the bankruptcy court, unless those assets have been exempted in order to ensure a fresh start.In Massachusetts and most other states, the Debtor will attend a hearing called a “Meeting of Creditors” where the Trustee will ask questions about the Debtor’s property and then decide if he or she will abandon those assets. At that point, the abandoned assets are no longer property of the estate.

With respect to a Chapter 7 bankruptcy, as soon as the Trustee abandons his or her interest in the property, you are free to sell the home. If time is of the essence, your bankruptcy attorney can file a motion with the court requesting the Trustee abandon the property, but your attorney must demonstrate the sale will fail unless it is effectuated before your case is discharged, which is typically less then 60 after the Meeting of Creditors.

When determining if you can sell your home in a Chapter 13, the issues become significantly more complex due to the length of time a case is open, usually three to five years, and the nature of reorganization and the repayment plan.

As in a Chapter 7 case, the Debtor’s property remains the property of the bankruptcy estate, including the Debtor’s house or condo. The big difference is that the chapter 13 trustee shall have no responsibility regarding the use or maintenance of property of the estate, such as the Debtor’s home. As such, the trustee will have an interest in a home sale, and the debtor must obtain a Bankruptcy Court order approving the sale.

When drafting a motion to present to the court to allow a sale, the motion needs to assert the sale price, disclose the amounts of all liens and mortgages being paid off, and list payments to any professionals such as attorneys and real estate agents. The motion must be served on all parties who may have an interest in the sale, and if anyone files an objection within the 20-day deadline, the court will schedule a hearing on the motion. These motions are fairly common, and when they are done correctly, the court usually grants the motion without requiring a hearing.

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This post discusses (1) how they are being reported, (2) how they should be reported, (3) what you can do to get your HAMP-modified mortgage reported correctly, and (4) possible effects even the “correct” reporting might have on your credit score.

How HAMP-modified loans are being reported now

Many servicers are reporting the modified mortgages to the credit bureaus as a “rolling 30-day late”  while the modification is in its trial period.

(The “trial period” is generally a three month period during which the homeowner must make all payments on time under a proposed modification plan. If the homeowner does so, he or she will be offered a modification under HAMP.)

Homeowners are deemed “delinquent” during the trial period because the modified payment amount is less than the original mortgage payment amount, but the homeowner is not yet officially in the modification program.

So, the credit reporting system interprets this as the homeowner’s making a partial mortgage payment each month.  Consequently, a new 30-day late is reported each month during the trial period.

Some servicers have told homeowners they are required by the Treasury Department to report the modified mortgages this way.   Other servicers have told homeowners Treasury instructed them to report the mortgages as “late” in order to weed out people who could afford to pay the original amount of their mortgage.

How HAMP-modified loans SHOULD be reported during the trial period

But, borrowers who are current on their mortgage when they enter into the trial modification period should NOT be reported as late, according to servicer guidelines for Fannie Mae, Freddie Mac, as well as other loans (”non-GSE loans”) being modified by HAMP-participating servicers.

Homeowners who were delinquent when they entered the modification trial period, however, will continue to be reported as delinquent during the trial period.  See below for more detail.

Information to forward to your servicer if it’s reporting incorrectly

If your loan is owned or guaranteed by Fannie Mae, see page 12 of Fannie Mae Servicing Guide Announcement 09-05R for information about credit reporting for HAMP-modified Fannie Mae loans. It says:

“If a borrower is current when they enter the Trial Period, the servicer should report the borrower current but on a modified payment if the borrower makes timely payments by the last business day of each Trial Period month at the modified amount during the Trial Period. If a borrower is delinquent when they enter the Trial Period, the servicer should continue to report in such a manner that accurately reflects the borrower’s delinquency and workout status following usual and customary reporting standards.  In both cases the servicer should report the modification when it becomes final.”

If your loan is owned or guaranteed by Freddie Mac, see page 5 of Freddie Mac Publication 800 for servicer instructions re:  credit reporting of modified loans.  It says:

“Borrowers who are current when they enter into the Trial Period and make payments by the 30th day of each month, report as current, but on a modified payment.  Borrowers who are delinquent when they enter into the Trial Period or do not make payments by the 30th of each month, report according to borrower’s delinquency and workout status. Notify when borrowers have completed the modification.”

If your loan is NOT owned or guaranteed by Fannie Mae or Freddie Mac, see page 22 of  “HAMP Servicer Supplemental Directive 09-01″ for information about credit reporting guidelines for modified non-GSE loans.  It specifies the following:

What does this mean for homeowners who are thinking about applying for a modification?

To help minimize damage to your credit report and score, you should apply and try to get into a trial period while you are still current on your mortgage.

You do not have to be behind on your mortgage to apply for a HAMP modification.

What does this mean for homeowners who have recently applied for a modification?

Verify that your lender or servicer understands how it should be reporting your modified loan.  Do this before starting your modification program, if possible.

Several homeowners have told our office they had to send a copy of the relevant HAMP credit reporting guidelines to the servicers, who were apparently unaware the guidelines existed.

Remember, you can review all the HAMP and HARP mortgage servicer guidelines at this link.

Will the reporting of  “current, but on a modified amount” hurt my credit?

It is impossible to say for sure because FICO does not publish its scoring model.

But, “current, but on modified amount” might ding your score a little.  This reporting is telling the credit bureau you are currently paying as agreed, but less than the original amount you contracted to pay.

The FICO scoring model may not give you full credit for paying as agreed.  But, this will not be nearly as damaging as rolling 30-day lates.

What if my modification is not through HAMP?

The credit reporting guidelines above apply only to HAMP-modified loans.  If you have arranged a non-HAMP modification with your lender or you have modified your loan through another mortgage relief program, these credit reporting guidelines will not apply.

Be sure to negotiate the credit reporting with your serivcer as part of your overall modification package.  Even if the servicer insists on reporting your loan negatively, at least you can make an informed decision as to whether a particular modification package will work for you.

This post was originally posted on Karen Ware

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