Too Big to Fail? It hardly appears so.

What really bothers me about the argument that some banks were simply “too big to fail” is the utter predictability that through their policies they would continue to make money regardless.  Now that the taxpayers have safely bailed them out they are repaying that charity with actions like those described in this article from Business Week.  Wow.  Simply astonishing.

Overdraft Fees: The Dough Keeps Rolling In

Despite reforms, overdraft charges continue to stoke bank profits

By Karen Weise

Banks have spent much of the past year howling about revenue lost after financial reforms limited consumer fees, especially the billions they reaped from charges for covering overdrafts on debit cards. Those programs, though, remain highly profitable. While fee revenue will be down about 16 percent this year from its peak in 2009, it will top $16 billion, predicts Moebs Services, a banking consultancy. “Consumers are still getting hit really hard by overdraft fees,” says Rebecca Borné, an attorney at the Center for Responsible Lending, a consumer advocacy group.

As banks pushed a shift from paper checks to debit cards over the past decade, they began enrolling customers automatically in overdraft protection plans, with charges of as much as $35 for each overdrawn transaction. Banks say that lets the 185 million Americans with debit cards make emergency purchases even if their account is short. Consumers, though, soon discovered that a slice of pizza could cost almost $40 after overdraft fees. Last year the Federal Reserve barred banks from offering overdraft protection on debit-card transactions without prior consent from consumers.

A few banks, including Bank of America (BAC) and HSBC (HBC), have since stopped offering overdraft protection on debit-card purchases. (BofA in September announced a $5 monthly charge for debit cards to make up for lost fee revenue.) Others introduced or expanded overdraft programs. An informal survey by Impact Financial Services, which advises small and midsize banks, polled 150 community banks and found that 70 percent of them now offer overdraft protection, up from about half before the rules went into effect.

Many banks that offer the services have launched aggressive marketing campaigns to get customers to sign up. The banks sent letters and e-mails explaining the changes, at times with alarmist warnings that if they didn’t sign up their card might be rejected when they most need it. Some banks called customers who’d had transactions denied to persuade them to opt in. “We were surprised at the success rate,” says Jefferson Harralson, a bank analyst at research firm Keefe, Bruyette & Woods (KBW).

The marketing campaigns also succeeded in sowing confusion. A survey by the Center for Responsible Lending showed that 60 percent of consumers who chose overdraft protection did so in part to avoid penalties if their debit cards were denied, even though such fees don’t exist. Similarly, two-thirds said they signed up to sidestep charges for bounced checks, which actually are covered under different programs.

Many banks still engage in one highly criticized overdraft practice: reordering purchases to process the largest ones first, instead of in chronological order. That means a big purchase may be approved, but customers could face overdraft charges for several small transactions. Banks that do this say consumers prefer the reordering because larger transactions are often the most important. A federal judge in California shot down that logic last year in a class action against Wells Fargo (WFC), calling it “utterly speculative.” He ordered the bank to pay consumers $203 million for what he called the “bone-crushing multiplication of additional overdraft penalties.” Wells Fargo says it is appealing the ruling, and it now processes transactions in the order they happened.

The bottom line: Despite last year’s rule change on overdraft protection fees, the programs are expected to bring in $16 billion this year for banks.

More Bankruptcys to Come?

As more and more lower income folks can’t pay those usurious credit card bills, more bankruptcy filings may be in the offing.  This news story lays it out for us.

Consumers in U.S. Relying on Credit as Inflation Erodes Incomes

By Anna-Louise Jackson and Anthony Feld – Jul 20, 2011 11:00 PM

Consumers in the U.S. are increasingly using credit cards
to pay for basic necessities as income gains fail to keep pace with rising food
and fuel prices.

The dollar volume of purchases charged grew 10.7 percent
in June from a year ago, while the number of transactions rose 6.8 percent,
according to First Data Corp.’s SpendTrend
report issued this month. The difference probably represents the increasing
cost of gasoline, said Silvio Tavares, senior vice president at First Data, the
largest credit card processor.

“Consumers, particularly in the lower-income end, are
being forced to use their credit cards for everyday spending like gas and
food,” said Tavares, who’s based in Atlanta.“That’s because there’s been no
other positive catalyst, like an increase in wages, to offset higher prices.
It’s a cash-flowproblem.”

Rising costs of food and gasoline are leaving Americans
less money to spend discretionary items, slowing the pace of the recovery,
Tavares said. Household spending accounts for about 70 percent of the world’s
largest economy.

After-tax income adjusted for inflation fell 0.1 percent
from January through May, according to figures from the Commerce Department.
The drop came as Labor Department data showed energy prices rose 8.2 percent
and food climbed 2 percent during the same period.

‘Dramatic’ Swings

The swings in purchases of fuel and food have
been“dramatic,” Tavares said. The volume of gasoline purchases placed on credit
cards jumped 39 percent last month from a year earlier, compared with a 21
percent increase in June 2010, he said. Food shopping increased 5 percent after
falling 7 percent last year.

The value of an average transaction on credit cards
outpaced the gain for debit cards, showing consumers
are increasingly relying on borrowing to pay for gasoline and other
necessities, Tavares said.

The figures are in synch with data from the Federal Reserve. Revolving credit, primarily credit
card balances, increased by $3.37 billion to $793.1 billion in May from an
almost seven-year low of $789.8 billion in April, figures from the central bank
showed. The gain was equivalent to a 5.1 percent increase at an annual rate.

The use of credit cards is a “smoking gun” that indicates
some consumers, including the long-term unemployed who have lost jobless
benefits, are resorting to other sources of cash flow just to “get by,” said David Rosenberg, chief economist at Gluskin Sheff
& Associates Inc. in Toronto.

“People on the margin are putting necessities on their
credit cards and this is a trend that’s very consistent with what lower-end
retailers have been saying about their paycheck cycles,” Rosenberg said.

‘Cash-Strapped’

Core customers of Bentonville, Arkansas-based Wal-Mart Stores Inc. (WMT) are “cash
strapped,” William Simon, U.S. stores chief, said at a June 15 conference
hosted by William Blair & Co. “The paycheck cycle is severe.”

Similarly, customers of Matthews, North Carolina-basedFamily Dollar Stores Inc. (FDO) are living
“paycheck-to-paycheck,”so when gas or food prices go up, “they don’t have the
cushion that many others might have,” Chairman and Chief Executive Howard
Levine said on a June 29 conference call.

Changes within the industry may account for some of the
recent stabilization in outstanding revolving credit as several banks have
ended incentive programs for debit cards, while increasing credit-card
solicitations this year, Tavares said.

A possible bright spot is that inflation may moderate as
prices of commodities stabilize, Fed Chairman Ben S. Bernankesaid July 13 in his semi-annual
testimony to Congress. As of July 19, the average price of a gallon of unleaded
gas had dropped 7.6 percent from May 4, when it reached an almost three-year
high.

Bernanke’s View

“The anticipated pickups in economic activity and job creation, together with the expected easing
of price pressures, should bolster real household income, confidence, and spending,” Bernanke
said.

Confidence has a long way to climb for those in the
lower-income brackets. The sentiment gauge for those making less than $15,000 a
year was minus 66 in the week ended July 10 and was minus 69.6 for those
earning $15,000 to $24,999, according to the Bloomberg Consumer Comfort Index.
The comparable reading for households making more than $100,000 was minus 1.4.

“For people to think that this rebound in credit-card usage is
actually a sign of resurging consumer confidence, I think they’re
looking at the situation backwards,” Rosenberg said.

Source:  Bloomberg

http://www.bloomberg.com/news/2011-07-21/consumers-in-u-s-relying-on-credit-as-inflation-erodes-incomes.html

CALLING ALL BANK OF AMERICA CUSTOMERS IN NEED OF MORTGAGE MODIFICATION!!!

Bank of America Offers Legislators Secret Phone Number (Here It Is…Please Share)

Written on March 14, 2011 by Editor in Uncategorized

0

Abigail Field at Daily Finance regularly presents clear, revealing analyses of the games mortgage servicers, banks and other predators in the mortgage industry play, but she outdid herself this week.  She dug into Bank of America’s effort to make life easier for the important folks by issuing a special telephone number for legislators, their families, staff and constituents reaching out to them for help.

In short, Bank of America confirmed Halperin’s story: It is empowering legislators with the seemingly godlike power to get BofA to fix a homeowner’s mortgage modification. But in order to preserve the godlike nature of that power, no one else can have access to the number, not even people who most need it — like lawyers representing people struggling to get modification problems with the bank solved. It’s worth noting BoA’s press releases didn’t say anything about the special hot line number.

Apparently, Ms. Field didn’t think the bank was playing fair, because she closes her article this way:

BofA’s letter to legislators concludes: “Your constituents, our customers, deserve a direct response to their concerns regarding their mortgage needs. This communication is just another effort on our part to ensure that we service their needs in an appropriate and timely fashion.” I couldn’t agree more. With that in mind, here’s the special hot line number and e-mail address that the company reserved for legislators (and specifically requested I not publish): 888-655-7622, poinquiry@bankofamerica.com.

It seems safe to assume that number won’t be operational for long…so pass it along quick.  Maybe a few more people can get the personal attention the big boys apparently rate before BoA finds another way to hide from homeowners and their attorneys. 

Once More With Feeling…BAPCPA is Bad Law!

New York Fed Economists Say Bush-Era Bankruptcy Law Fueled Over 200,000 Foreclosures By Zach Carter

HuffingtonPost.Com 2/13/2011

WASHINGTON — Economists at the New York Federal Reserve have concluded that a controversial 2005 law backed by banks and credit card companies pushed more than 200,000 people into foreclosure and exacerbated the subprime mortgage crisis.

Consumer advocates fought hard against the law, which made it much more difficult for individuals to alleviate credit card debt in bankruptcy. This inability of homeowners to eliminate other debts, the New York Fed economists conclude, in turn made borrowers unable to pay off their mortgages, spurring foreclosures.

Despite opposition from public interest groups, the 2005 law easily cleared both chambers of Congress and was signed into law by President George W. Bush. In a paper released Tuesday, New York Fed researchers Donald P. Morgan, Benjamin Iverson and Matthew Botsch determined that the law sparked about 116,000 additional subprime mortgage foreclosures a year after going into effect.

What’s more, they note, these foreclosures pushed home prices down, which may have lead to additional foreclosures. When the value of a home drops below what a borrower owes on the mortgage, it becomes nearly impossible to get out of the loan by selling the house or refinancing, making foreclosure more likely if they become unable to afford the monthly payment.

“By making it harder for borrowers to avoid paying credit card debt, [the 2005 bankruptcy law] made it more difficult for them to pay their mortgages, so foreclosure rates rose,” the economists wrote.

Although borrowers have been unable to alleviate mortgage debt in bankruptcy since 1993, they remain able to discharge credit card debts by filing for bankruptcy. But the 2005 law made it much more difficult for consumers to file for bankruptcy at all — and then limited their ability to reduce credit card debt burdens once they did.

By contrast, banks had long been able to dramatically increase consumer debt burdens without a borrower’s consent at the time the bankruptcy law was passed. Through a practice known as “retroactive rate increases,” a borrower could accumulate credit card debt at a low interest rate only to see the bank raise the interest rate on that debt later. Congress passed new rules governing the credit card market in 2009, banning this practice, among others.

Story continues below

The bankruptcy bill had substantial bipartisan support. In the Senate, 18 Democrats, including current Vice President Joe Biden, then a senator from Delaware, joined unanimous Senate Republicans in endorsing the legislation. Biden represented a state dominated by credit card interests, and his son Hunter Biden is a former executive for credit card behemoth MBNA, now owned by Bank of America. During the debate over the 2005 bill, Hunter Biden was a paid consultant for MBNA. New York Democratic Sen. Hillary Clinton, now Secretary of State, missed the vote on the Senate floor because Bill Clinton was undergoing heart surgery, but had supported earlier versions of the legislation. Then-Sen. Barack Obama (D-Ill.) opposed the bill on final passage.

But while the New York Fed economists noted that the increase in foreclosure rates was predictable at the time the law was passed, they stopped short of calling for its repeal. The economists contended that since people now know that consumer debt is hard to discharge in bankruptcy, they will not take on as much debt and end up in financial distress.

“Once borrowers have learned that the bankruptcy rules have changed, they can be expected to reduce their demand for unsecured debt,” Morgan, Iverson and Botsch wrote.

But if consumer financial problems are being driven by factors relatively difficult for consumers to control — such as a loss of income following a layoff — the 2005 law may well continue to promote foreclosures. Longtime critics of the 2005 law, including then-Harvard University Law School Professor Elizabeth Warren, who is currently charged with setting up the Consumer Financial Protection Bureau, have emphasized that consumption binges do not explain the high levels of consumer debt and financial distress seen in recent decades.

In an article published by The Boston Review shortly after the 2005 law was passed, Warren argued that flat wages and higher essential household expenses were squeezing the middle class into bankruptcy– more expensive mortgages due to rising home prices, alongside higher health care costs and higher tax burdens.

“[Household spending data provide] powerful evidence that excessive consumption is not why families are going broke,” Warren wrote. “There is no evidence of any ‘epidemic’ of overspending.”

Articles published by economists at regional Fed offices are not endorsed by the Fed’s Board of Governors, the dominant policymaking arm of the central bank.

Sad News From North Arkansas

Long time bankruptcy attorney Claude Jones of Harrison recently passed away.  The following are some excerpts from his Obituary published in the Harrison Daily newspaper:

“Claude R. Jones, Sr., 77, of Harrison, died Thursday, February 10, 2011, at Skaggs Hospital, Branson, Mo.  He was born July 22, 1933.  He attended the University of Arkansas, earning a degree in agriculture in 1954.  After graduation, he was commissioned as an officer in the United States Air Force in July 1954.  After a 20 year miliary career as a fighter jet maintenance officer, he retired as a Lt. Colonel in 1975.  He returned to the University of Arkansas and earned his JD in 1978.  He then embarked on his second career as an attorney, setting up practise in Harrison in 1980.  From 1980, until his death, he specialized in bankruptcies, even having one of his cases argued before the United States Supreme Court.  He served as an officer in the Boone County Bar Association, as well as being a member of the Retired Military Officers Association.  Both he and his wife were members of the United Methodist Church in Harrison.”

I had occasion to have several cases over the years with Claude.  I always found him to be very professional and just an all around nice person.  The small bankruptcy bar of Arkansas, and especially North Arkansas, I’m sure will miss him deeply.

Reaffirming Mortgages

Affirm or Reaffirm Mortgage After Bankruptcy, It’s Trouble Whatever It’s Called

by L. Jed Berliner, Springfield & Marlborough, MA Bankruptcy Attorney · Posted in Bankruptcy Myths

You’re told you need to “affirm” or “reaffirm” your mortgage loan to keep your home despite your bankruptcy.  Don’t do it.  Here’s why.

First, I’ll put on my lawyer hat.  It’s called “reaffirm”, although it’s a weird word and people often only remember “affirm”.  It means that you want to re-agree to the loan agreement after your bankruptcy case was filed.  (Re-agree = reaffirm, get it?)

Now, a mortgage loan actually has two parts.  The first part of a mortgage is the loan itself, no different than a credit card debt.  We call this the personal loan, or personal obligation, or personal debt.  You don’t pay, you get sued and you can get your wages garnished and your assets seized - unless you filed a bankruptcy case.  That stops enforcement of the personal loan part.

The second part of a mortgage is the lien on your home that you agreed to.  The bankruptcy case does not affect your that mortgage lien on your home (unless your home is totally underwater or a multifamily home where another unit is rented out, but that’s another discussion).   If you don’t pay the mortgage loan, that lien means that you lose your home.  This is called foreclosure.

Since there are two parts to  a mortgage loan, the loan itself and the lien, and since bankruptcy does not affect the lien, what’s left is bankruptcy getting rid of the loan part.  You file a bankruptcy case and you cannot get your wages garnished or your non-home assets seized. 

Remember, that lien on your home was not affected by bankruptcy so you still lose your home if you don’t pay the mortgage.  But that’s all you lose.  You do not lose any wages or other non-home assets.  If you pay your mortgage, you get to own your home just as if there was no bankruptcy.

Reaffirmation looks at that first part of the mortgage loan, the personal loan itself.  Like all other personal debts, including credit cards, the bankruptcy stops the mortgage lender from garnishing your wages or taking your non-home assets.   Reaffirmation means that the personal loan is once again enforceable even though you filed bankruptcy. 

Reaffirmation is a one way street.  There’s no benefit to you.  It gives the creditor the right to sue you if you default in the future, and therefore it gives the creditor the right to grab your wages and non-home assets which it cannot do if you refuse to reaffirm. 

You cannot be forced to reaffirm.  You get to keep your home without a reaffirmation so long as you make all your payments on time. 

The mortgage lenders may be vague on this last point, so I’ll say it again.  You cannot be forced to reaffirm.  You get to keep your home without a reaffirmation so long as you make all your payments on time.

The lender wants you to reaffirm.  It wants that right to take your wages if you default later.  So it may refuse to send you monthly statements and stop accepting online payments.  There’s a simple way to deal with this, and that’s to remember to write a check each month on time. 

I think this behavior by the lender belongs in a kindergarten sandbox.  Don’t let the lender push you into something that does not help you.

Here’s my final thought.  You may really need that freedom to walk away from your home even years after your case is over.  You might get sick, or hurt, or divorced, or laid off.  Terrible things happen.  I’m sure you never thought you would have needed a bankruptcy in the first place.  Refusing to reaffirm preserves your opportunity to walk away from the house if you need to, at any time in the future, and it still lets you keep the home if nothing bad happens and you make all the payments.  You get the best of both worlds.

Are “Debt Management” Programs a Scam?

Are “Debt Management” Programs a Scam?by Brett Weiss, Maryland Bankruptcy Attorney ·

You’ve seen the ads for “Debt Management Programs”–”Settle $10,000 in credit card debt for as little as $2,000!” But do they really work? Do they make sense? Or are they scams?

Yes, they work. But only rarely do they make sense. And as for whether they are scams…it depends on your definition of a scam.

First, what are they? A Debt Management Program generally has you stop paying your credit cards and instead pay them a monthly payment for a period of time, usually a couple of years, until they have a nice pot of money. Then, they work out a lump sum settlement with your creditors, often at a substantial discount from the original amount due.

“Sounds good,” you may say. “So what’s the problem?”

The problem is that the actual savings are pretty much smoke and mirrors. Here’s why:1. They don’t do anything that you can’t do yourself. Debt, particularly credit card debt, doesn’t stay with the credit card company for long. As soon as it goes into default (typically when it hits 90 days past due), it’s sold to a debt buyer for pennies on the dollar. The debt buyer then sends you a letter offering you a huge discount for a lump sum settlement of the account. You pay the amount asked (or negotiate an even lower amount), send a check, and the account is settled, all without paying the Debt Management Program a penny in fees.

2. You may have to pay 1099-C taxes on the amount of forgiven debt. So if you have a $10,000 account and settle it for $4,000, you’ll be issued a 1099-C and have to pay taxes on the $6,000 in “income” you received.

3. By the time the firm has been paid enough to work out lump sum settlements, the additional interest, overlimit fees and late fees charged between when things start and when there is a settlement usually are about the same as the “savings”.

4. The overwhelming majority of folks never stick with the payments for long enough, which means that the debt management program charges obscene fees for doing *nothing*.

5. Creditors trash the client’s credit and often sue; none of this is stopped during the payment period.

I have had clients pay tens of thousands of dollars to these companies and ended up with very little benefit, when for a fraction of the cost they could have filed for bankruptcy, stopped the calls, letters and suits, and moved on with their lives.

Only a fraction of those in need file for bankruptcy

By Christine Dugas, USA TODAY

 Bankruptcy filings are nearing the record 2 million of 2005, when a new law took effect that was aimed at curbing abuse of the system. Filings could reach 1.7 million this year, says law professor Robert Lawless, but few experts believe that debtors are now gaming the system.

Instead, concern exists about a growing number of Americans who need bankruptcy protection but cannot get any benefit from it or simply cannot afford to file. As their financial problems worsen, that hurts everyone because it can hinder the economic turnaround.

“It’s shocking that we are back to the 2005 level,” says Katherine Porter, associate professor of law at the University of Iowa. “And the filing rate doesn’t even begin to count the depth of the financial pain.”

Bankruptcy laws changed in 2005 because filings skyrocketed and credit card companies and banks wanted to weed out deadbeat borrowers. The law made it harder — more expensive and more restrictive — for individuals to file Chapter 7 bankruptcy, which erases most debts.

Instead of seeking protection from bankruptcy, a number of debt-laden Americans have gone into a “shadow economy,” or informal bankruptcy, according to some experts.

The signs are there: Student loan defaults and home foreclosures are rising, and bank card loan defaults have increased from 7.7% in March to 9.1% in April, according to S&P/Experian Consumer Credit Default Indices. But during the same two months, bankruptcy filings fell by 4%.

Bankruptcy is supposed to provide a fresh start to people who are in serious financial distress. But only a fraction are filing, Porter says.

‘My future is gone’

Carmen Gardiner, 25, a 2007 graduate of Louisiana State University, is weighed down by her private student loans. Her debt is now about $80,000, and her monthly payments are more than $600. Gardiner’s undergraduate degree is in psychology. She lives with her husband, who is still in college, and earns $13 an hour at a call center in Atlanta. They have a 6-month-old daughter.

She hasn’t defaulted on her student loan. But she doesn’t see much hope. Bankruptcy would not discharge her debt.

“I’m completely sour about the whole idea of going to college,” she says. “My future is gone before I have a chance to make one. But if I could discharge this using bankruptcy, it would be better than winning the lottery.”

There is little information about unregulated private student loan debt. But during an investor meeting, Sallie Mae, the USA’s largest private student lender, recently projected that 40% of $6 billion in subprime private student loans will default, according to Student Lending Analytics, an independent research company. That means 360,000 to 540,000 borrowers are likely to default on their loans, SLA said.

The only way that people with private student loans can get help in bankruptcy is if they can prove undue hardship. And to do that they have to go through a separate trial, which is an extra cost, involves witnesses, legal assistance and extra expertise, says Deanne Loonin, staff attorney at the National Consumer Law Center. It is a huge barrier.

But in April, both the Senate and House introduced legislation to allow for private student loans to be dischargeable in bankruptcy. Before the bankruptcy law changed in 2005, only government-issued-or-guaranteed student loans were protected during bankruptcy.

“The high interest rates on private student loans have made them incredibly profitable for loan companies and saddled students with crushing debt,” said Sen. Dick Durbin, D-Ill., who first introduced this legislation in June 2007.

Filers pay now or pay later

Only a fraction of those in serious financial distress are filing for bankruptcy, Porter says. In January, she and Ronald Mann, a professor of law at Columbia University, released a paper, “Saving up for Bankruptcy,” that probed why that is happening.

For starters, it’s simply expensive to file. Attorney and filing fees have risen, and under the new law additional forms, paperwork and attorney liability have added to the cost, Porter says. In the first two years after the law changed, the attorney fees for filing Chapter 7 bankruptcy rose from $712 to $1,078, according to a study by the U.S. Government Accountability Office. And the filing fees increased from $209 to $299.

Many debtors have no choice but to delay filing for bankruptcy. Some wait until they receive a tax refund, and others cash out their retirement savings to pay for a lawyer.

But postponing filing is not good for debtors. It’s similar to delaying going to the doctor, because you’ll just end up with more problems, says Lawless, professor of law at University of Illinois.

The system is not just more costly, it is more complex. It requires pre-bankruptcy credit counseling. It requires six months of income information and two years of tax returns. And if the debtor holds off filing, a lawyer has to continue to gather new information.

“The paper chase gets greater, and then the fee goes up,” says William Brewer, a bankruptcy lawyer in Raleigh, N.C.

Hanging onto their homes

Another reason: Many Americans who are trying to save their homes do not file for bankruptcy. Under the bankruptcy law, filers can protect their summer home and yacht, but they can’t protect their primary residence, says John Taylor, president of the National Community Reinvestment Coalition, a non-profit organization.

That wasn’t such a big issue when home values were rising. But during the recession, many homeowners are seeing values plummeting and their mortgage payments rising.

Home foreclosure filings have outstripped bankruptcy filings, Porter says. And foreclosure shows no sign of slowing down. In the first quarter of the year, foreclosure filings were 16% higher than the same quarter in 2009, according to RealtyTrac. And March was the highest month since RealtyTrac began issuing reports.

Cordell Brooks, 47, who lives in Temple Hills, Md., may soon lose his home to foreclosure. During the recession he was laid off from his job as a graphics designer. Since then, he has worked as a substitute teacher and now is a contractor with Prince George’s County Housing.

“I’ve gone from earning $40 an hour to $17.50,” he says.

Brooks, who has owned his home since 1989, applied for a federal program known as Home Affordable Modification Program (HAMP) but was turned down. He has few options. He doesn’t want to file for bankruptcy. But even if he did, it wouldn’t help him save his home.

“Bankruptcy is not very useful at solving this particular type of financial distress,” Porter says.

Homeowners who applied for loan modifications could have been turned down if they also have filed for bankruptcy. But as of this month, a debtor who requests loan modification cannot be discriminated against because they have filed for bankruptcy, says John Rao, an attorney at the National Consumer Law Center, which specializes in consumer credit and bankruptcy issues. And that will help homeowners who are also overwhelmed by other debt.

Is it time for a change?

When the bankruptcy law changed in 2005, barriers were erected to prevent abuse. But it seems that many honest Americans who are in financial crisis are now running into obstacles. That raises questions about what can be done to prevent debtors from falling through the cracks.

Congress is considering legislation to help college graduates weighed down by private student loan debt. If passed, the legislation could roll back the bankruptcy law so that private student loans can be discharged.

The Treasury Department has agreed to revise the federal mortgage modification program so that people can’t be turned down for HAMP just because they have filed for bankruptcy. But some say that this is just a Band-Aid. And now few homeowners are getting permanent mortgage modification.

The 2005 bankruptcy reform did not change mortgage debt. “Debt secured by a principal residence has not been dischargeable since 1978,” says Philip Corwin, an outside bankruptcy counsel for the American Bankers Association.

Recent efforts to introduce legislation to allow bankruptcy judges to modify home mortgages have failed. “If Congress had had the wisdom to pass that three years ago we would have forced all the parties to the table to work out reasonable solutions,” Taylor says.

The financial industry says that the bankruptcy law is not causing the shadow economy. People can still file for it, and if they can’t afford the fees at least the court filing fees can be waived, says Scott Talbott, senior vice president of the Financial Services Roundtable. And people with student loans who have undue hardship are able to get financial relief.

But undue hardship is extremely hard and costly to navigate, says Lauren Asher, associate director of Project on Student Debt. There is no definition in the bankruptcy code of undue hardship, and the court decisions on it have been harsh, Corwin says.

Free legal services have been cut back during the recession and are not available for many debtors. It would help to roll back some of the changes that have increased legal paperwork and risk of personal liability, Lawless says.

The bankruptcy problems are not likely to go away anytime soon. If Gardiner’s career is stymied because she can’t afford to go on to graduate school and is burdened with student loan debt, doors may be closed to her.

“Not going on with her career and being stuck in a low-wage job hurts everyone and drags down the economy,” Porter says. “It is not surprising that the bankruptcy code is not a fit for the problems of today. The 2005 amendment was a move in the wrong direction, and I think it’s time to think about redesigning bankruptcy.”

From the National Bankruptcy Forum blog:

Are You an Appraisal Away From a Mortgage Modification?

PROBLEM: MORTGAGES AREN’T BEING MODIFIED

Oh, how much easier life would be for homeowners if all that was needed for a mortgage modification was an appraisal. In today’s troubled housing market it does seem equitable, doesn’t it? Demonstrate to your lender that you owe far more than your home is worth, and of course, that you’re experiencing legitimate financial hardship and…….problem solved…….mortgage modified. It sounds to good to be true, but chapter 13 bankruptcy can allow second and third mortgages liens to be removed entirely on the strength of a single appraisal. 

Unfortunately, under normal circumstances, mortgage modification doesn’t exactly work like chapter 13 bankruptcy. Actually it doesn’t come anywhere close to working like chapter 13 bankruptcy. The press is full of mortgage modification horror stories in which an inconceivable lending bureaucracy has effectively stonewalled all efforts at real relief. Foreclosures continue to skyrocket. Borrowers granted temporary mortgage modifications are shocked to find (1.) that their application for permanent relief has been denied and (2.) that they owe the entire difference between the modified mortgage amount during the trial period and their previously unmanageable regular payments. In many cases, these “trial” modifications actually push a teetering family into foreclosure. Fact is nothing much is getting done. Enter chapter 13 bankruptcy……..

SOLUTION: CHAPTER 13 BANKRUPTCY CAN FORCE YOUR LENDER TO MODIFY A MORTGAGE…….. PERIOD.

Maybe you’ve grown tired of asking and you’re ready to start telling? Perhaps calling your lender four and five times a day trying to get your loss mitigation specialist on the phone is getting, well…..old? Try this: get an appraisal. Yes, you heard me get an appraisal, find out what your home is worth. If the balance on your first mortgage is greater than the value of your home, you can “strip” or remove second third and fourth mortgages through a chapter 13 bankruptcy. Once the appraisal demonstrates the fact that your home is underwater, there isn’t anything standing in the way of you and the mortgage modification you’re seeking. Your lender cannot tell you NO, as a federal court will now be telling them YES.

HOW IT WORKS………

It is the rare consumer who knows the full extent of their rights. Too bad because Congress has placed quite a few arrows in the consumer quiver. Chapter 13 bankruptcy is one of the most significant, allowing for the restructuring of secured debts such as mortgages and car loans. If you find yourself underwater on either, the amount of your loan that exceeds the value of your property can be stripped or removed, paid out at far less than 100% over the life of a repayment plan you create with the help of your bankruptcy attorney.

Let’s illustrate by way of example: You have two mortgages, the first with a balance of $150,000, the second with a balance of $50,000. An appraisal reveals that your home is worth $145,000. Once you file for chapter 13 bankruptcy, your attorney will file a lawsuit to remove the second mortgage. The debt will be paid as unsecured debt along with credit card and medical bills often at pennies on the dollar. Stripping the second or third mortgage has the potential to afford real relief, allowing a struggling homeowner or family to stay in their home with payments they can now afford. As long as you didn’t purchase your car in the last three years, the same principle applies to auto loans. Chapter 13 bankruptcy is a powerful yet complicated tool, if you have questions, consult an attorney.

The Mortgage Modification Lie

From the Home Page of John Orcutt, Esq.  (Bankruptcy Attorney, North Carolina)

Thinking you have a shot at modifying your mortgage? Think again.

On 12/5/09, the New York Times reported: “AFTER months of playing pretend, the Treasury Department conceded last week that the Home Affordable Modification Program [HAMP], its plan to aid troubled homeowners by changing the terms of their mortgages, was a dud. The 10-month-old program is going nowhere, the Treasury said, because big institutions charged with implementing it are dragging their feet.”

Let’s face it. There are only 2 resources for mortgage modifications: Scams and what now looks like a government sponsored scam. The obvious mortgage modification scams: The foreclosure crisis spawned a whole new kind of scam, this time worked on unsuspecting consumers who cannot afford their mortgages and who desperately want to keep their homes. Companies who claim to be able to get you a mortgage modification, but who just take your money and do nothing. Basically, it seems, the company is based out of Florida, Texas or California, it may well be a mortgage modification scam. You know the ones. Until recently, the tv and radio teemed with commercial promising you a mortgage modification. Fortunately, State and Federal governments have stamped out at least most of the biggest offenders and that’s why you see less commercials on tv and hear less commercials on the radio. But…beware. New scammers will always spring up as long as there are desperate consumers. That said, the sad truth is that there is very little in the nature of mortgage loan modifications out there to help you. Not what you want to hear? Sorry, but I’m not going to lie to you. Wish I had great news for you, news that would guarantee you get to keep your house and keep it for an affordable mortgage payment…but I don’t. The truth is that…for the time being…the banks have learned their lesson…that loose underwriting requirements for home mortgages are a recipe for disaster. Now, in order to get a mortgage, you just about have to be in a position where you don’t need one.

And it gets worse. HAMP: The less obvious, emerging government sponsored lie. So, along comes President Obama and the Home Affordable Modification Program (also known as “HAMP”). Sounded good on paper. Even fooled me. Supposed to help save homes for millions of Americans. It even got funding by the Treasury Department to the tune of an estimated $42.5 billion of the $50 billion in available TARP money. The HAMP goal: to provide financial support for about 2 to 2.6 millions mortgage modifications, to save homes and drive down the number of foreclosures. The reality: Another huge disappointment for millions of American families. Sorry. Just thought you ought to know. The problem is that the Home Affordable Modification Program has no teeth. It’s completely voluntary. Being completely voluntary, the banks don’t really have to do or modify anything. And…as it turns out as of 9/1/09, they haven’t. Instead, being voluntary, the banks can go on doing what they do best: putting their best interest ahead of yours…like always. Business as usual…greed over need. Under the HAMP program, you apply for a mortgage modification. Then, if approved, you are only ‘approved’ for a ‘trial modification’, not a ‘permanent’ modification. Being approved for a trial modification, you are given a lower “trial” mortgage payment, which they tell you, you must make on-time for 3 months. If we stop right here, it sounds like, if you pay the trial mortgage payment on-time for 3 months, the mortgage modification is yours. That’s what I thought too. Not so. Remember, the program is entirely voluntary. The banks don’t have to do anything….and they haven’t.

The following numbers speak volumes. As of 9/1/09, Fannie Mae (Treasury’s agent for HAMP) there were 362,348 loans ‘approved’ for a trial modification. Wow, that’s a pretty big number, right? That sounds great, right? Sounds like the banks are really trying to be a part of the solution. Right? Wrong. Here’s the kicker. As of 9/1/09, only 1,711 loans have been turned into ‘permanent’ modifications. That’s not 1,711 in your town. That’s not 1,711 in your County or even your State. That’s 1,711 mortgage modifications actually completed in the whole, entire United States. Think you will be the 1,718th permanent modification. Don’t hold your breath waiting for your modification. It ain’t gonna happen. Think about it. 1,711 permanent mortgage modifications out of a total of 362,348 loans ‘approved’ for a trial modification. Are you thinking what I am? This has scam written all over it.

So, what’s the deal? The deal is that apparently banks don’t really, really want to modify mortgages. Why would that be? What’s in it for them? Why do all the work of taking applications and approving trial modifications? There are a number of likely reasons: First off, there is more and more evidence that banks make more money just stringing you along than foreclosing on your house. With a lower payment in hand (the trial payment), they know you will keep paying, and as long as you keep paying they get what are called “servicer fees”. You see, most mortgage are held in big trusts, trusts full of thousands, if not tens of thousands, of mortgages. These trusts are owned by investors. However, someone needs to represent the trust owners in order to “service” all the loans in the trust, to collect and account for the payments, and to pass on the money (or what’s left) to the owners. In most cases, the servicers are large banks like JP Morgan Chase. Chances are that your mortgage is held by one of these trusts. For servicing the mortgages in a trust, these servicer banks get paid fees, lots of fees. We’re talking major money here, and banks being banks, they don’t want to kill off the golden goose. Allowing a mortgage modification to go through kills off some of these fees. Second, the servicer banks don’t want to get sued. You see, the servicer banks are supposed to be working for the owners of the mortgage trusts. If the servicer messes up or does something the servicer is not allowed to do (like modify a mortgage), the servicer can get sued by the trust owners. In most cases, the servicer does not have the authority to ‘modify’ your mortgage, and doing so could expose the servicer bank to lawsuit…a huge and expensive lawsuit. Approving only a trial modification that the servicer bank never approves doesn’t get them into trouble enough to get sued…appparently. Can you see why the ‘servicer’ banks, the ones you apply to for your mortgage modification, have no incentive to modify your mortgage?

So, you say, why bother taking all those applications for mortgage modifications? Well, I can think of a number of reasons. One, the banks have been handed a lot of your money by the government…I mean a lot of your money. Remember the bailout. Remember TARP. Well, when you have been given a lot of money to bail you out, you have to at least make it look like you are doing something in return. So, the banks take a lot of mortgage modification applications. And…why not? (1) By giving you false hope, the banks can keep you paying something on your mortgage. I mean, it’s a pretty cool scam. Keep you thinking they really do intend to approve a permanent, an impression fostered by Congress and the President, and, the result, you keep paying and paying, even in the face of the mounting evidence to the contrary; (2) To the government, it makes it at least ‘look’ like the banks intend to do massive numbers of mortgage modifications, even in the face of evidence that they apparently have no intention of doing so. Yeah, sooner or later, we will all catch on to the scam, but in the meantime, it looks like they’re doing something to help and raking in the money they need to stay in business. Remember all those servicer fees they get; (3) By keeping you paying something, they can put off finishing the foreclosure on your home, and that makes it look like, at least for the time being, that there are less foreclosures, making it look like the politicians are doing something to stem the foreclosure crisis; (4) By keeping you focussed on the false hope of getting a mortgage modification, they keep you distracted from the real solution…making the hard decision to give up a home you know in your heart you really can’t afford…or deciding to file bankruptcy to fully and finally get past the worst financial mess in your life, so that you and your family can get on with life. All that aside, all you have to remember is the number 1,711. As of 9/1/09, that was the total number of mortgage modifications completed under HAMP in the whole, entire country. It’s a joke. Unfortunately, the joke is on you and me.

So, what do you do? First, stop waiting on a mortgage modification. The evidence is in: “it ain’t gonna happen”. The mortgage modification promise is just a lie. Second, look at other alternatives….like bankruptcy. Bankruptcy is the real deal…and always has been. Bankruptcy is so powerful that the banks and other creditors will do everything in their power to keep you from finding out. If you can afford your home, but just need time to catch up on payments, a Chapter 13 bankruptcy can be the answer. And, if you can’t afford your home, bankruptcy can do 3 things for you: (1) Buy you some more time in your home “for free”, (2) Get rid of the debt you will owe when your house sells at foreclosure for less than what you owe. You see, when a house sells for less than what is owed on it, your mortgage lender can come after you for the difference. This is called a ‘mortgage deficiency’. Without bankruptcy to help you, not only will you lose your house, but you will still owe money on it. That’s no fun, and (3) In addition, as an extra bonus, filing bankruptcy can also get you out from under other debts like credit cards, unsecured personal loans, certains types of judgments, and medical bills. And, when I say “out from under”, I mean for good, forwever, without having to ever pay them back. That’s right. If you need to file bankruptcy, you might as well get the most out of it. God knows we all need as much help as we can get in this bad economy.

The bottom line: If you can’t pay all your debts. Bankruptcy isn’t right or wrong….it just is. Whatever you do, there is no use just sitting there doing nothing.