Bankruptcy Questions Answered

Rescission: A Foreclosure-Fighting Tool in Peril

The Federal Reserve has proposed a troubling change that could all but eliminate one tool homeowners have to fight mortgage foreclosure, a recent post from Credit.com blog highlights. The tool is called rescission. Here’s what it is and what might happen to it.

What Is Rescission?

Rescission is a process that more or less offers homeowners a chance to get out of a mortgage if they can prove it was fraudulently or deceptively originated. Specifically:

• Deceptive & fraudulent mortgage lending: One phenomenon reported frequently during the subprime housing boom of a few years ago was lenders who allegedly lied about specific terms of mortgage loans (whether that meant concealing balloon payments, misrepresenting the nature of adjustable rate mortgages or something else), or encouraged borrowers to do so (usually by inflating their income level). Unsurprisingly, many borrowers who signed such mortgages ended up unable to make payments at some point.
• Beginning of the foreclosure process: After a few months of failing to make mortgage payments, most homeowners will receive notice from their lenders of foreclosure proceedings. Naturally, this is not pleasant for anyone and can lead to serious stress and financial trouble for affected families.
• Limited protections in Chapter 13 bankruptcy: While some homeowners are able to find relief from foreclosure proceedings in bankruptcy court, many others find that bankruptcy only addresses some of their problems – after all, the bankruptcy court cannot modify the terms of a mortgage loan.
• Rescission’s foreclosure prevention: One of the few options available to many homeowners facing foreclosure, then, has been the process of rescission, which works like this: if a homeowner provides a written statement to his lender that his loan was originated fraudulently and can prove as much in court, the court may rule to cancel the terms of the current mortgage. The borrower can then take on a different loan from a different lender to repay the balance to the original creditor.

Essentially, the process of rescission allows homeowners to trade out fraudulent mortgage loans for more affordable, honestly originated ones.

The Fed’s Proposal to Change Rescission

But, as CreditBloggers reports, the Federal Reserve has proposed a change to the rescission laws that would require mortgage borrowers to repay the entirety of their fraudulent mortgage loans and only then challenge the loan’s legality.

As many consumer advocates have pointed out, this would remove much of the foreclosure-prevention potential the current rescission process offers and would prevent most ordinary homeowners from hanging on to their houses.

To learn more about the proposed rule change and the consumer advocates fighting against it, please visit the article linked to above. To learn more about your potential for relieving your mortgage debt with rescission, contact a lawyer in your area.

Posted in Bankruptcy Law, Chapter 13 Bankruptcy, Foreclosure, Mortgage Foreclosure | Comments Off

Supreme Court Considers Means Test Case

The Case Ransom v. MNBA appeared before the Supreme Court last week and raised interesting questions about the role of the means test bankruptcy filers must pass in order to qualify for protection under Chapter 7 of the U.S. Bankruptcy Code. Here's a look at what's involved in the case and what it might mean for future bankruptcy filers.

Car Payments and Income in the Means Test

The court case involves the bankruptcy petition of man named Jason Ransom.

• No car loan: Sources note that Ransom has a car that he owns fully – that is, he is no longer making payments on the vehicle.
• Ownership deduction: In his bankruptcy petition, Ransom reportedly claimed an ownership deduction of $471 per month for his vehicle.
• Court rejection: Because he had no car payment, though, the bankruptcy court rejected this deduction in his initial case filing. An appellate court upheld the decision. The Supreme Court must make a final decision.
• IRS definition: Apparently, both the district court and the appellate court denied Ransom's deduction claim based on the Internal Revenue Service's definition of an allowable deduction for car owners, which limits such deductions to people who are currently making payments on their vehicles.

So the issue at hand is whether or not a Chapter 13 filer (that is, a bankruptcy petitioner who has above-median-income levels and so does not pass the Chapter 7 means test) can keep money each month (instead of paying it to creditors) under the car ownership deduction if he or she is not currently making payments on a car.

Why It Matters: Your Money in Chapter 13 Bankruptcy

The issue may sound fuzzy, but the Supreme Court's decision could have real impact on future bankruptcy cases. Here's a look at why and how.

• The language of the Bankruptcy Code: While the language of the U.S. tax code is clear that an ownership deduction is only available to those still making payments on a vehicle, the language of the U.S. Bankruptcy Code is a bit fuzzier.
• The cost of owning a car: As Ransom's lawyers are reportedly arguing, the "ownership deduction" should be available to those who own their cars outright because such vehicles require maintenance and repairs – especially if they're older.
• The expensive car loan argument: One of the reasons that this issue is so interesting is because it essentially rewards people who have expensive car loans and newer cars and punishes those who are (perhaps more fiscally responsibly) driving older vehicles they've already paid for.
• The freedom of extra money: If the Supreme Court decides to grant the ownership deduction to people who own their cars outright, it could mean greater financial independence for car owners who file for bankruptcy. Because they'd be able to save more money each month, they could potentially catch up on other payments more easily and possibly even build savings, thus preparing themselves more fully for post-bankruptcy life.

Posted in Bankruptcy Courts, Bankruptcy Filing Requirements, Bankruptcy Law, Bankruptcy News and Events, Chapter 13, Chapter 7, Means Test, Supreme Court | Comments Off

Senate Passes Financial Oversight Bill

Last December, the U.S. House of Representatives passed a financial oversight bill that would address many of the problems on Wall Street that led to the stock market collapse that touched off the Great Recession. Last week, as the New York Times reported, the Senate passed a similar bill.

Now, the two houses plan to work to unify their bills into one that can be signed into law.

Reforms Addressed

In the version of the bill that passed the Senate, changes to the current financial system would include:

• Provisions to curb abusive lending practices, especially in the mortgage industry
• Safeguards that would guarantee that large and complex companies could be liquidated - possibly in bankruptcy - without having taxpayers foot the bill
• Requirements that would force large banks to detach some of their profit-rich derivatives operations into separate entities (though this provision was not in the House’s version of the bill)
• The introduction of a “Financial Stability Oversight Council,” which would be charged with highlighting troublesome trends that could prove dangerous for the whole economy
• The introduction of new rules for derivatives traders
• The requirement that hedge funds and similar companies register for regulation with the Securities and Exchange Commision (SEC)

The Senate’s passage of the bill is seen as a victory for the Obama administration, which has blamed the recession largely on a lack of oversight and accountability on Wall Street.

The Next Step for Finance Bill

In the coming weeks, as the Washington Post reports, a group of senators and representatives will work together to reconcile the differences in content between the two bills, aiming for a version that Obama could sign into law.

While the two versions are reportedly very similar at this stage, sources indicate that the main differences between the two include:

• Plans for regulating the complicated derivatives market
• Whether to ban banks’ current practice of trading on their own accounts (proprietary trading)
• Whether to require a $150 billion fund from financial industry coffers to allow for emergency dissolution of any struggling firm
• Whether to create a separate agency charged with matters of consumer financial protection

According to sources, leaders in the House and Senate hope to reach a consensus on the provisions included in the legislation by July 4th of this year.

Posted in Bankruptcy Law, Financial Literacy, financial protection | Comments Off

Supreme Court: Bankruptcy Law Doesn’t Violate Lawyers’ Rights

A case decided by the Supreme Court this week settles a question of attorneys' free speech rights raised by a Minnesota law firm concerned about restriction in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), according to the Washington Post.

Here are the pertinent details:

• The law states that bankruptcy lawyers are prohibited from advising clients to take on more debt before filing for bankruptcy. In theory, the restriction is meant to prevent advice that would lead to actions that might constitute fraud under U.S. bankruptcy laws.
• The question raised by the Minnesota law firm was one of free speech for lawyers. Apparently, the firm suggested that the aforementioned restriction amounted to an unconstitutional violation of the free speech rights of bankruptcy lawyers.
• The court decided that the law was not, in fact, unconstitutional, and that lawyers can give their clients any advice that does not promote defrauding the bankruptcy court.
  • Filing incomplete or inaccurate information
  • Attempting to pay a "favorite" creditor in full before filing for bankruptcy
  • Failing to disclose assets or expected income
  • Attempting to “give away” assets before filing

The Broader Issue

While the law firm’s concern with free speech may seem piddling here, in the context of bankruptcy cases, it has merit. In some cases, as the WSJ article points out, taking on certain kinds of debt immediately before a bankruptcy filing could benefit both the filer and his or her creditors.

For example, refinancing a troublesome mortgage to better allow a debtor to make payments could benefit all parties. The Supreme Court Justices reportedly acknowledged the truth of this and agreed that taking on more debt can, at times, be the wisest decision for a potential bankruptcy filer.

But, the court noted, the law can be read to mean that bankruptcy lawyers are restricted only from giving their clients advice that would lead to bankruptcy fraud.

What Constitutes Bankruptcy Fraud?

Bankruptcy fraud is a serious matter – in fact, it can lead a court to throw out your case (and thus eliminate your chances at receiving a debt discharge) and earn you fines and jail time. This is one reason why working with a bankruptcy lawyer can be helpful.

Bankruptcy fraud includes:

Posted in Bankruptcy Law, Bankruptcy Lawyers, Filing Bankruptcy, Setting the Record Straight about Bankruptcy, Supreme Court | Comments Off

New Bankruptcy Chapter Proposed by Congress

A new amendment to the U.S. bankruptcy code could help troubled financial institutions reorganize their debts more effectively and eliminate the status of "too big to fail" that has prompted government intervention over the past two years.

H.R. 3310, introduced by Rep. Spencer Bachus (R-AL), is called the Consumer Protection and Regulatory Enhancement Act, and would create a Chapter 14 bankruptcy under which institutions to file bankruptcy without disrupting the nation's financial stability.

The bill is in response to the government's inconsistent reaction to the collapses of financial holding companies such as Lehman Brothers, Bear Stearns and AIG.

At the American Bankruptcy Institute's 2009 Legal Symposium in Washington, D.C., this week, Congressional staffer Daniel Flores spoke on a panel about the need for the new chapter, according to Reuters.

"No one trusts the bankruptcy bar and the courts. That's the problem," said Flores. "We don't need to abandon bankruptcy, we need to abandon government intervention that can seem inconsistent and panicky."

Most importantly for taxpayers, he bill would completely remove the option for government bailouts, leaving troubled businesses with no other safety net besides bankruptcy.

Rep. Bachus' bill, which is currently under committee consideration, would have no effect on consumer bankruptcy laws.

If passed it would be the first amendment to U.S. bankruptcy laws since the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005.

Posted in Bankruptcy Law, Bankruptcy News and Events, Business Bankruptcy, bailout, bankruptcy chapters | Comments Off