Presidential candidate Barack Obama isn't the only person who would like to reform the Bankruptcy Abuse Prevention Consumer Protection Act of 2005 to help people keep their houses. "What it has done is eliminated a segment of the population from being able to make an educated decision as to whether Chapter 7 or 13 is better for them," says Robin R. De Leo, a Mandeville attorney with 18 years' experience handling bankruptcy cases who considers the act unfair.
"It used to be you could sit down and we'd explain what happens with 7 or 13 and, if you wanted to save your home you'd always be a 13, which is the only way to pay past arrears. That it prohibits now is the people who don't want the home and want to start over." De Leo says the act presumes everyone abuses the system if they make more than the median income. These filers have to go into a Chapter 13 and it doesn't matter if they ran up the credit card bills, opened a small business that failed or invested in condominium or real-estate deals that have gone bad. "It doesn't matter how you have come to your financial problem but, because of your income level, you're prohibited from filing Chapter 7." Shreveport bankruptcy attorney Kevin Molloy calls the act "one of the most poorly written laws I've ever seen." The law includes a "means test," which determines if filers can qualify for Chapter 7. If they qualify, they can't claim contributions to a retirement fund like a 401[k] as a valid expense, which can result in money left over, which could have been paid to unsecured creditors in a Chapter 13.
In Chapter 13, the deduction to the 401[k] plan can he used as a valid expense, which could mean nothing goes to unsecured creditors and is the supposed point of choosing that option. Also, Molloy says vehicle lenders are big winners because the law eliminated "cramdowns" that would have allowed a filer to pay the value of the vehicle, rather than actual amount owed, if it was bought within 2 1/2 years of filing. "They're taking the wealth that would have gone to credit cards and shifted it to the car lenders."
David Boneno, general counsel of the Louisiana Bankers Association, says his group doesn't see a need to change the act because Louisiana is not experiencing financial distress like other states. Bankruptcies remain low in the state because it hasn't experienced a rapid economic decline or gotten into subprime loans substantially.
Boneno says the means test helps determine if a filer really needs bankruptcy, and the median income level, which changes per state, allows low-income filers to declare Chapter 7 bankruptcy while encouraging those with higher income to go to Chapter 13 reorganization, which would impose a payment plan rather than discharge the debt. De Leo considers the act so oppressive that she says, "I almost think its a war of the classes in an economic war. They've eliminated rich people's ability to file bankruptcy and escape liability."
While some may not sympathize with their plight, she says they have helped grow the economy by investing in property and businesses. "When individuals come in, their No. 1 reason for filing is typically they're behind on their mortgage and want to stop the foreclosure," she says. And the reason they're behind on their mortgages are these ARMs [adjustable-rate mortgages] with payments jumping from $800 to $1,800 a month."
Elaine McBroom, the foreclosure Department supervisor of East Baton Rouge says they're seeing more writs for property seizures but to stop foreclosures is in the discursion of those home owners . Her office has received 1,307 this year compared to 1,244 in the same period last year. McBroom says hurricanes and a slowing economy are boosting writs and, based on her 26 years in processing them, she anticipates they're about to get busier. She's also seeing an increase in evictions as more people stay in houses even after foreclosure.
De Leo says many ARM borrowers have appointed her firm to try to renegotiate these loans. They couldn't afford to stay in the house, couldn't get refinancing to avoid the adjusted interest rate and couldn't sell the property in a slowing housing market. When they declare bankruptcy, they typically go to Chapter 13, which means making past-due payments in addition to paying the higher mortgage payments that put them in bankruptcy. Many hoped for relief from Congress' $700 billion rescue plan, but that didn't happen.
Jack Williams, resident scholar in the American Bankruptcy Institute, says the United States Senate added provisions that would have allowed stripping down ARMs in bankruptcy, but those were quickly removed. If stripdowns were allowed, an ARM could be lowered to match the house value and the remainder discharged.
"It's a very powerful tool and we've never had that power under the code, but now there's a move to change all of that," Williams says.While Obama hasn't specified whether he supports stripdowns, he does want to help homeowners to stop foreclosures, especially seniors. He has blamed opponent John McCain of siding with the banks and credit card companies in voting for the act. But his Democratic vice presidential candidate, Joe Biden, was its key mover in 2005.
Still, the communication is apparently resonating with voters, particularly those angered by government bailouts of financial institutions that pushed for a bankruptcy code so restrictive that some call it Draconian. She says bankruptcies are still artificially low in Louisiana's Eastern District because of Katrina assistance, but they're steadily climbing, and she says bankruptcies are "flying" in the Western District. The construction boom is fading, and electricians, plumbers and contractors have started declaring bankruptcy, which started in early summer and has gotten worse.
They're facing a humbling process, De Leo says. If they have an ARM or make above the median income, they can only file Chapter 13, keeping them in bankruptcy three to five years. "It's the middle-class, rich people who are getting killed on this," she says. For example, if a filer has a $300,000 mortgage but invests $298,000 in a business, it's considered a personal, not commercial, bankruptcy because most of the debt is not business-related.
Williams agrees the filings generally draw from the middle class, and the act is more oppressive on them. Bankruptcies hit record numbers just prior to the act's passage, dropped off drastically shortly after it took effect in October 2005 and are rising again. Although the act was aimed at reducing them by adding credit counseling, more legal hoops and complexity, and additional costs to file, 1.2 million bankruptcies are anticipated this year nationally. That's up from last year's 800,000 filings, and next year's filings are expected to be even higher. He also says the numbers could be low as more people can't afford to file bankruptcy.
"It doesn't matter how many hoops you create, people are going to end up in bankruptcy one way or another," he says. "In the end, it's a very awesome experience because when people need relief from their creditors, bankruptcy is what the government offers - even with the hoops."A matter of housekeeping
Neil
1 Response to "Short Sale Matters"
You can also take what you learned in the real estate investing sales seminars and use it on your own, without the program. Some people do become successful this way, though it is a lot more studying, research and hard work than if you had bought the real estate investing program in the first place.