The income-based repayment plan (IBR) will be available on July, 1 2009 to graduates with Direct or Guaranteed loans. Repayment on private loans or Parent Plus Loans is not included. IBR will figure monthly loan payments using a sliding scale based upon income and family size. Based on the required annual applications, some individuals will not need to make any monthly student loan payments for a year at a time. After 25 years of repayment on the IBR, the borrower can apply to have the remaining principle and interest completely forgiven.

 

As bankruptcy filings mount, attention turns again to reform

By Christine Dugas, USA TODAY

 

 

Cash-strapped families are seeking bankruptcy protection at nearly the same rate and in the same manner as they did before the much-debated 2005 bankruptcy law reform, a trend critics say proves the reform was a failure.

Congress wrangled for eight years before passing a reform act aimed at curbing abuse and ending an alarming rise in bankruptcy filings. With the economy in tatters and personal fortunes often in even worse shape these days, the bankruptcy law is beginning to undergo scrutiny again.

For now, Congress is focused on efforts to stem home foreclosures by altering the law so that bankruptcy court judges will be allowed to modify certain mortgages to help people keep their homes. But once that's settled, attention will turn to the 2005 bankruptcy reform.

"There is continuing concern about the bankruptcy-reform bill and what its effects have been," says Sen. Sheldon Whitehouse, D-R.I., who leads the Senate Judiciary subcommittee that oversees bankruptcy law. "We are looking at a number of things that we can do to address the problems."

On Tuesday, Whitehouse will hold a hearing that will discuss legislation he has introduced that would allow families burdened by exorbitant credit card rates and fees to more simply discharge their debt under bankruptcy. He is considering several other proposals.

Critics of the 2005 reform say filing is more tedious, more difficult and costlier for ordinary debtors. They also believe the reform benefited banks over consumers. An independent study says the reform has helped contribute to the surge in home foreclosures. Supporters, however, say the reform has helped reduce fraud and has not trampled on debtors who really need to file for bankruptcy.

One aspect critics and supporters agree on: The national economy depends on consumer spending, and bankruptcy helps debtors rebuild access to credit so they can again contribute to the economy.

"One of the primary purposes of the bankruptcy law is to provide a way to grant debt relief to the honest-but-overextended debtor, who through no fault of his own is burdened by more debt than he can pay," says Sam Gerdano, executive director of the American Bankruptcy Institute, an independent research and education organization.

Personal bankruptcy filings started increasing dramatically in 1996 and continued to climb until 2005, when they hit a record 2 million. After the reform passed, filings dropped dramatically, as Congress had hoped, but in part because many debtors had rushed to file before the law changed. But last year, filings increased 32% to 1.1 million, according to AACER, a bankruptcy-court-data company.

This year, filings are expected to grow to nearly 1.4 million, although if layoffs continue and consumer credit continues to be hard to come by, they may reach 1.6 million, says Robert Lawless, professor of law at the University of Illinois. In February, filings surged to the highest rate since the law changed.

Before the reform, a family overwhelmed with home mortgage and credit card debt most often filed for Chapter 7, which would allow them to have all unsecured debts, including credit card bills, discharged. That might have freed the family to pay the mortgage and keep their home.

But a major goal of the reform was to force such families to rely on Chapter 13 bankruptcy instead, which requires them to repay debts in full, or in part, over several years.

That doesn't seem to have happened. Last year, Chapter 7 filings — accounting for 76% of personal filings — continued to outpace Chapter 13 filings. Chapter 7 filings made up 80% of the total filings in 2005; 72% in 2004.

The incomes of families who have filed for bankruptcy since 2005 are indistinguishable from those who filed before the law changed, according to a study by six university professors, including Lawless. The study, "Did Bankruptcy Reform Fail?" was published last year by The American Bankruptcy Law Journal.

A major provision of the reform affected higher-income debtors. They now have to undergo a means test. "The law now requires that an individual filing for bankruptcy furnish a copy of their most recent tax return and their last two pay stubs," says Philip Corwin, an outside bankruptcy counsel for the American Bankers Association. "That's to prove that their income is really their income."

The new requirements are more onerous than that, some experts say. The means test requires pages of paperwork for income, tax returns and pay stubs, which many people don't keep, says John Pottow, professor of law at the University of Michigan Law School, who participated in the study. Debtors also must provide a detailed budget of their expenditures. Those who don't pass the means test are not allowed to file for Chapter 7.

The families who have filed under the new law owe more debt, particularly more unsecured consumer debt, according to the law journal study. "All we have done with the law is to delay the inevitable and possibly made situations worse," says Pottow.

Shirley and Steve Morse, who live in Prescott, Ariz., say credit card bills buried them in debt and made them unable to cope with unexpected problems.

Before their finances fell apart, they had used Steve's 401(k) retirement savings to buy a new home and furnishings. Because he had a full-time job and Shirley worked part time, they thought that they could cover their two car payments and mortgage. Rising home equity, they figured, would help rebuild their retirement savings. But in 2007, Steve needed emergency gall bladder surgery. He charged what insurance didn't cover on credit cards. Then Shirley became sick and lost her job. While she was ill, Steve was fired.

Late last year, the Morses filed for Chapter 7 bankruptcy, which cost them about $2,560 in fees.

"Not cheap for people in trouble money-wise," Shirley says. And filing didn't exactly wipe the slate clean for them: They've moved in with a family member after losing their house and have given up one car.

"Their health care cost precipitated the bankruptcy filing, and the job loss in the midst of that was the final blow," says their bankruptcy lawyer, Monte Rich. It's unclear if filing under the old law would have helped save their home, he says. But filing would have been easier, faster and less expensive, he says.

Filing fees have gone up, and because the process is more complex and time-consuming, associated legal fees are costlier. And many debtors must pay for credit counseling and debtor education courses that are required to complete filing.

It all leads to delays in filing for bankruptcy, consumer experts say. "That means somebody with credit card debt is kept longer in what some call the 'sweat box,' " Whitehouse says. His legislation would eliminate the means-test requirement for those who have been hit by excessive rates.

Credit card fees pile on profits

Credit card fees and interest rates were at the center of the reform debate. During a multiyear, multimillion-dollar lobbying effort by credit card companies to change the law, Americans were told that they had to pay higher credit card fees because bankruptcy filings had caused the industry to lose about $40 billion a year. "Congress should do as much as possible to reduce the $400 hidden tax on every American family due to the increasing number of bankruptcies that are filed in this country," said then-Rep. Steve Chabot, R-Ohio, during a House subcommittee meeting in 1997 at the outset of the eight-year battle for reform.

Since the reform passed, the credit card industry's profits have grown. It earned $19.9 billion from penalty fees in 2008, up from $14.8 billion in 2005, according to R.K. Hammer, a consulting firm. The industry's pretax profit climbed to about $39 billion in 2008 from $30.6 billion in 2005, according to CardTrak, a credit card research firm.

But there has been no rollback on credit card fees, says Robert McKinley, founder of CardTrak.com. Punitive rates are just as aggressive as they were before, even though the prime rate has dropped dramatically. In 2005, the punitive rate was 30.99% as the prime rate was up to 7.00%, McKinley says. Last year, the punitive credit card rate was 30.88%, but the prime rate was only 4.00%, which he calls an unprecedented rate spread.

In addition, credit card payment grace periods have continued to fall since the bankruptcy reform, according to a report by Michael Simkovic, a former Olin Fellow at Harvard Law School. "The data is unambiguous: 2005 Bankruptcy Reform benefited credit card companies and hurt their customers," says the report, released in July.

Generally positive

Not so, says the banking industry. "We never promised that the average family would save $400 a year," says Corwin. "We just said that it costs money if dishonest people are not paying debts that they can repay. Then, for the honest people, it's reflected in their cost of credit."

The bankruptcy-reform bill generally has been positive for average Americans by providing lower fees and rates, and better rewards programs, says Scott Talbott, chief lobbyist for the Financial Services Roundtable.

The best customers have seen their credit card rates go down. But it's not because of the change in the bankruptcy law, McKinley says. Rather, the decline is related to the decline in the prime rate.

Not everyone saw their rates go down, however, because credit card interest rates are based on an individual's risk profile, Talbott says. And more people are falling behind on bills now.

Even if it is harder to seek bankruptcy protection, the financial industry says a major goal was reached: the prevention of bankruptcy fraud and abusive behavior. Last year, 76 federal bankruptcy fraud cases were filed, compared with 112 in 2007, 102 in 2006 and 107 in 2005, the Department of Justice says. DOJ provides no data about why fraud declined last year, only noting that fraud fluctuates for various reasons. "We think the anti-fraud benefits more than outweigh the very negligible burden on individuals filing for bankruptcy," Corwin says.

Not everyone agrees.

"The new law was unfortunately overzealous," says Karen Gross, president of Southern Vermont College and visiting professor of law at New York Law School. "In today's economic environment, it should be abundantly clear that people are not filing bankruptcy lightly or easily. We're in a deep economic crisis."

On March 5th, 2009 the House of Representatives approved H.R. 1106, legislation that will allow for mortgage modification in chapter 13 bankruptcy.   The vote was 234-191, with seven Republicans breaking party ranks and supporting the bill, and 24 Democrats voting against the measure.  It is now on to the Senate, where the bill may be considered as early as next week!

You can make your voice, and that of colleagues, family and friends heard in the Senate. Contact your Senators early Monday morning.

In the meantime, I encourage you to see how your Member of Congress voted by going to http://clerk.house.gov/evs/2009/roll104.xml.  If your Member supported H.R. 1106, you should think about putting in a quick phone call or fax a letter thanking him or her for standing up for homeowners.  Members were under intense pressure from banks, securities firms, credit unions and community banks to oppose this legislation.  It is nice for them to hear a thank you.

Hopefully,  we will be successful and we will watch President Obama sign bankruptcy mortgage modification into law sometime soon!

The House of Representatives is scheduled to vote on House Bill 1106 titled Helping Families Save Their Homes Act of 2009.

The Act amends federal bankruptcy law governing a Chapter 13 debtor (adjustment of debts of an individual with regular income). Excludes from computation of debts the secured or unsecured portions of: (1) debts secured by the debtor's principal residence if the value of the residence as of the date of the order for relief is less than the applicable maximum amount of noncontingent, liquidated, secured debts; or (2) debts secured or formerly secured by the debtor's principal residence that was either sold in foreclosure or surrendered to the creditor, if the property's value as of the date of the order for relief was also less than the applicable maximum amount of noncontingent, liquidated, secured debts.

Declares the credit counseling requirement inapplicable to a Chapter 13 debtor who certifies that he or she has received notice that the holder of a claim secured by the debtor's principal residence may commence a foreclosure on it.

Requires the court to disallow a claim that is subject to any remedy for rescission under the Truth in Lending Act, notwithstanding the prior entry of a foreclosure judgment.

Authorizes reduction of a claim secured by the debtor's principal residence, but only in specified circumstances, particularly if the debtor sells the residence.

Permits a Chapter 13 bankruptcy plan to: (1) modify the rights of claim holders with respect to a claim for a loan originated before the effective date of this Act and secured by a security interest in the debtor's principal residence that is the subject of a foreclosure notice; and (2) deny debtor liability for certain fees and charges incurred while the bankruptcy case is pending and arising from a debt secured by the debtor's principal residence, unless the claim holder observes specified requirements.

Adds to conditions for court confirmation of a plan in bankruptcy that: (1) the holder of a claim secured by the debtor's principal residence retain the lien securing the claim until the later of the payment of the claim as reduced and modified or the discharge of a debtor from all debts; and (2) the plan modifies the claim in good faith and the court does not find that the debtor has been convicted of obtaining by actual fraud the extension, renewal, or refinancing of credit that gives rise to a modified claim.

Excludes from the final discharge of a debtor from all debts any unpaid portion of such a claim as reduced.

Amends the federal judicial code to prescribe standing trustee fees regarding certain payments received under a Chapter 13 bankruptcy plan.

Expands federal procedures governing default on veterans' housing loans. Authorizes the Secretary of Veterans Affairs, in the event of a modification in bankruptcy, to pay the holder of the obligation the unpaid balance due as of the date of the filing of the bankruptcy petition, plus accrued interest, but only upon assignment, transfer, and delivery of all rights, interest, claims, evidence, and records regarding the loan.

Amends the National Housing Act to authorize the Secretary of Housing and Urban Development (HUD) to: (1) pay Federal Housing Administration (FHA) mortgage insurance benefits for a mortgage modified under federal bankruptcy law; and (2) implement a program solely to encourage loan modifications for eligible delinquent mortgages through the payment of insurance benefits and assignment of the mortgage to the Secretary and the subsequent modification of the terms of the mortgage according to a loan modification approved by the mortgagee.

Amends the Housing Act of 1949 to authorize the Secretary of Agriculture to pay: (1) the guaranteed portion of any losses incurred by the holder of a note or the loan servicer resulting from a modification in a bankruptcy proceeding; and (2) for losses incurred by holders or servicers in the event of a modification pursuant to a bankruptcy proceeding.

Declares unenforceable as contrary to public policy certain investment contracts between servicers and securitization vehicles or investors that require excess bankruptcy losses that exceed a certain dollar amount on residential mortgages.

Shields servicers from liability for implementing mortgage loan modifications or loss mitigation plans if they are in compliance with fiduciary duties mandated by the Truth in Lending Act.

Amends the National Housing Act to amend the HOPE for Homeowners Program (HOPE) to: (1) require mortgagor certification to HUD that the mortgagor has neither intentionally defaulted on an existing mortgage, nor provided false information; (2) ban from HOPE those mortgagors whose net worth exceeds $1 million; (3) authorize HUD to establish a payment to the loan servicer of the existing senior mortgage for every loan insured under HOPE that does not exceed $1,000; (4) direct HUD to establish, if feasible, an auction to refinance eligible mortgages on a wholesale or bulk basis; and (5) reduce Troubled Asset Relief Program (TARP) funds to offset costs of program changes.

Sets limitations upon participation in origination and mortgagee approval.

Amends the Federal Deposit Insurance Act (FDIA) and the Federal Credit Union Act (FCUA) to: (1) increase deposit insurance coverage permanently to $250,000; and (2) increase the borrowing authority of the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA).

Amends the FDIA to: (1) extend to eight years the time period applicable to a Deposit Insurance Fund (DIF) restoration plan; and (2) revise requirements for special assessments to recover the loss to the DIF arising from actions taken to contain systemic risk with respect to certain insured depository institutions.

Amends the FCUA to direct the NCUA Board to establish a National Credit Union Share Insurance Fund Restoration Plan whenever the Board projects that the equity ratio of the National Credit Union Share Insurance Fund will fall below a minimum designated equity ratio.

    The United States House of Representatives is scheduled to vote, today, on House Bill 1106, which incorporates the bankruptcy "cram down" provisions of Senate Bill 61.  It is expected to pass.  The Senate is expected to attach its version to an appropriations bill to be voted on, March 7, 2009.  If identical to House Bill 1106, would expect President to sign ASAP.  Differences would need to be ironed out in a conference committee prior to going to the President for signature.
    Expected impact to be significant.  As written it will apply to all pending bankruptcy cases.  Chapter 13 could be modified to "cram down" residential home mortgages.  Chapter 7 cases would be converted to chapter 13 to obtain this benefit.  Hugh backlog expected just from pending cases.  New case filings also expected to take dramatic increase.

    

President Obama is scheduled to give a speech in Phoenix, Arizona today,  which will outline his foreclosure prevention plan.  The plan is estimated to cost 75 billion dollars.  It is expected to help 7-9 million home owners save their homes.  "Responsible home owners" will have access to low cost refinancing.  There will be home loan modifications for struggling home owners.  Fannie Mae and Freddie Mac will have increased funding to make new home loans.  Finally, the "cram down" of home mortgages through bankruptcy, as set forth in Senate Bill 61, is expected to incentivise mortgage companies to work out home loan modifications outside of bankruptcy.  Plan to stem expected 3 million plus foreclosures in 2009.   MORE TO COME ....... 

    On January 6th, 2009 Senate Bill 61 was introduced in the United States Senate.  Senate Bill 61 provides for the amendment of the Bankruptcy Code to allow for the “cram down” of mortgage debts.  What this means is that the Bankruptcy Court would be given the power to rewrite the terms of your mortgage.  Depending upon various factors, you may be able to remove second mortgages and home equity lines of credit.  The terms of any remaining mortgages can be modified to reduce the amount owed on the principle, lower interest rates, extend the term of the mortgage and thereby lower the amount of your monthly payment.
    For example, if your home is worth $100,000 and you owe a first mortgage of $125,000 with a 9% ARM and a home equity line of credit of $25,000, the Bankruptcy Court can remove the home equity loan, reduce the amount you owe on your first mortgage from $125,000 to the value of your home $100,000, and lower your interest rate.  The new principle balance can then be spead out over a period of up to 40 years.  This would eliminate the payment on your home equity line of credit.  Eliminate any amounts that were past due on your first mortgage and allow you to again start making your mortgage payments at a reduced amount.
    In order to qualify for home loan modification in bankruptcy you must first have made a “good faith” attempt to obtain a home loan modification through your lender.  Although few lenders are currently making a serious effort to provide for home loan modifications, it is believed that the threat of intervention by the bankruptcy court will encourage them to be more flexible.  The Senators who sponsored Senate Bill 61 believe it will encourage the vast majority of lenders to modify loans directly with the home owner, with bankruptcy being used as a last resort for a select few.
    Although Senate Bill 61 was just introduced, it is supported by President-elect Obama and appears to have a high legislative priority.  At a news conference on January 8, 2009 the sponsors of the bill indicated that Citifinancial had agreed to support it.  According to the sponsors, this virtually guarantees that it will become law.
       I initially believed this bill would be included in the Bail Out Bill presently pending before Congress, but now believe it will be included in a comprehensive Home Owners Relief Bill.  This is the home owners share of the bail out already given to banks and investment firms.  I will update my blog as any additional information becomes available.

    

This Blog is under construction.  Mark H. Knevel is the owner of Knevel & Associates Co. LPA.   Knevel & Associates Co. LPA is one of Ohio's largest consumer bankruptcy law firms, specializing in Chapter 7 and 13 Bankruptcies and Home Loan Modifications.  This site will be activated in conjunction with the firms redesigned web site  http://knevel.com/

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