Some States Are Not Using Their Foreclosure Settlement Funds to Help Homeowners

States recently received $2.5 billion from the major banks for foreclosure prevention and related help for homeowners.  But much of that is not being used for those purposes.

 

A relatively small part of the $25 billion settlement by the federal and state governments against the five major banks announced with big fanfare back in February involved actual money paid by the banks. (Most is in the form of credits the banks get for doing mortgage modifications and such.)

But one such direct payment is $2.5 billion from the banks straight to the 49 states that had joined in the settlement (all except Oklahoma). So what is supposed to happen to that money?

The answer to that should be found in the Consent Judgment, the document signed by all 49 states, the federal government and the banks, AND by the federal judge approving the settlement. Actually there are five consent judgments, one for each of the banks, but all containing identical language for our purposes. This language says:

"To the extent practicable, such funds shall be used for purposes intended to avoid preventable foreclosures, to ameliorate the effects of the foreclosure crisis, to enhance law enforcement efforts to prevent and prosecute financial fraud, or unfair or deceptive acts or practices and to compensate the States for costs resulting from the alleged unlawful conduct of the Defendants. Such permissible purposes for allocation of the funds include, but are not limited to, supplementing the amounts paid to state homeowners under the Borrower Payment Fund, funding for housing counselors, state and local foreclosure assistance hotlines, state and local foreclosure mediation programs, legal assistance, housing remediation and anti-blight projects, funding for training and staffing of financial fraud or consumer protection enforcement efforts, and civil penalties."

(See pp. B-2 and B-3 of Exhibit B of the Consent Judgment.)

But the money is not being used for these purposes in many states, according to two different sources.  

A report by Enterprise Community Partners called $2.5 Billion: Understanding How States are Spending their Share of the National Mortgage Settlement says that “despite the language contained in the settlement, a number of states have diverted the settlement funds away from housing and foreclosure prevention activities.”

A more recent article by ProPublica, the independent investigative organization, is titled “Billion Dollar Bait & Switch: States Divert Foreclosure Deal Funds.” Its analysis concludes that “[s]tates have diverted $974 million from this year’s landmark mortgage settlement to pay down budget deficits or fund programs unrelated to the foreclosure crisis... . That’s nearly forty percent of the $2.5 billion in penalties paid to the states under the agreement.” This interactive map and table shows each state’s use of the funds.

More about Dealing with Very Aggressive Creditors in Bankruptcy

Most creditors don’t challenge your write-off of their debts in bankruptcy. But if one does, the system is poised to resolve that challenge relatively quickly.

 

The last blog, and this one, are about what happens when a creditor raises one of the few available arguments to try to prevent its debt from being legally discharged. (This is separate from debts that by their very nature are excluded from being discharged—child support, most student loans, for example.) As emphasized last time:

• Most potentially dischargeable debts DO in fact get discharged. In most consumer bankruptcy cases, no creditor raises any challenges. To avoid any particular debt from being discharged, the creditor has the burden of establishing that the debt arose out of a very specific sort of bad behavior by you, one that is on a list that is in Section 523 of the Bankruptcy Code.
• Your creditors have a very firm deadline—usually about three months from the filing of your bankruptcy case—for formally raise such a challenge, or else lose the ability ever to do so.
• The challenge is raised by filing a “complaint” stating the facts and law under which the debt should not be discharged. This starts an “adversary proceeding,” a lawsuit focused only on this question.

Avoid Losing by Default

After a creditor files a complaint, THE most important thing to realize is that it will automatically win if you and your attorney do not file a formal answer at the court within the stated deadline. So contact your attorney immediately if you receive a complaint. Depending on the circumstances, you may have discussed this in advance and so could be expecting it. But sometimes it will come as a total surprise. Either way, get in touch quickly with your attorney to determine your game plan and begin acting on it.

Most Discharge Challenges Don’t Go to Trial

The adversary proceeding can go through all the steps of a regular lawsuit. After filing the answer, there can be “discovery”—the process of requesting and exchanging any pertinent information and documents, and holding depositions (questioning witnesses under oath, usually focusing on you and your alleged behavior in incurring the debt). And there could be various kinds of motions, pre-trial hearings, and a full trial. But these kinds of adversary proceedings rarely go through all these step and get to trial, because the amount of money at issue usually does not justify the cost involved for either side to pursue it that far.  So after both sides get a clear picture of the facts, there is usually a settlement. Sometimes one side or the other sees that the facts are not looking good and mostly or completely gives in. The debtor may concede that his or her actions fit the legal standards to prevent the debt from being discharged, or the creditor sees that it’s wasting its time and will dismiss the adversary proceeding. Or else the two sides come up with some sensible compromise.

But if there is enough at stake, or else if one or both sides are unreasonable and insist on getting a decision from the judge (these cases do not go to a jury), the dispute does go to trial. These trials usually last a half-day, or a day, or two, very seldom longer. At the end of trial the bankruptcy judge decides whether the debt is discharged or not. Extremely rarely, this decision can be appealed, in fact theoretically all the way up to the United States Supreme Court!

What’s So Quick and Efficient about All This?

Any litigation is very expensive, so you hope to avoid any discharge challenges. But bankruptcy court is a relatively fast and efficient forum for a number of reasons:

1) Because creditors have the opportunity to review your finances beforehand, much of the time they will not bother to raise challenges at all, avoiding the issue altogether, along with avoiding that additional cost to you.

2) If a creditor does raise a challenge, the issues are narrow and so the fight is usually focused on just a few critical facts. Less facts to dispute makes for a less complicated process.

3) Adversary proceedings move along fairly quickly. Compared to most state court and regular federal court litigation which often takes a couple of years, these kinds of adversary proceedings tend to be resolved in a matter of few months

4) Because bankruptcy judges deal with these kinds of challenges all the time, they are extremely familiar with these legal issues. Compared to conventional trial courts where the judges often have to get into unfamiliar territory, and often deal with multiple parties with huge dollar amounts at stake, these adversary proceedings are quite straightforward.

Having a creditor object to the discharge of a debt can significantly complicate a Chapter 7 or Chapter 13 bankruptcy case. But these disputes are usually settled relatively quickly. Help this happen by informing your attorney about any threats made by creditors before your bankruptcy is filed, and then working closely with your attorney if a creditor follows through on its threat by filing a complaint.

 

Dealing with Very Aggressive Creditors Who Say You Can't Discharge Their Debts in Bankruptcy

Bankruptcy court is a relatively efficient place to determine whether or not you must pay a debt which the creditor says can’t be discharged.

 

One of the realities about filing a consumer bankruptcy case is that your case can get much more challenging if you have a very aggressive creditor. Most creditors take your bankruptcy filing in stride as a normal part of their business, figuring that you’re doing it for a sensible reason. But some creditors take it personally and react with more anger than good sense—often because they have some personal connection to you like an ex-spouse or former business partner. Or other more conventional creditors may honestly believe that they have grounds to prevent their debt from being discharged.

This blog, and the next one, are about what happens when there is such a creditor. The topic here is is not about creditors with rights to collateral, where the issues focus on what will happen to the collateral. It’s not about debts which will clearly not be discharged, like recent income taxes or child support obligations or most student loans. Rather this is about debts that would normally be discharged unless the creditor can prove that the debt arose of some bad behavior by you, usually involving some sort of fraud, theft, drunk driving, or such. Not just any bad behavior will do; it has to be one of a specific list that is in Section 523 of the Bankruptcy Code.

Creditors Have to Put Up or Shut Up

Before filing bankruptcy, you may be told by a creditor’s representative or collection agent that a debt can’t be discharged in bankruptcy or that they will fight you if you file bankruptcy. Most of the time they’re bluffing you. But for sure tell your attorney about the threat so that he or she can determine whether it has any merit. If it doesn’t, that will avoid unnecessary worry for you. In the unlikely event the threat does have merit, that will help your attorney prepare for a challenge by the creditor if it comes.

Even if a challenge has legal merit, a creditor may not pursue it for practical reasons, mostly to avoid putting out more money—in filing fees and attorney fees—to try to prove that you can’t discharge the debt, only to risk losing that battle and wasting its money. At least in theory the law has a “presumption” that your debts will be discharged, so the burden is on the creditor to show that a debt should not be.

And you don’t have to sit around wondering for long whether or not any creditor will raise a challenge. Except in very rare circumstances (such as forgetting to list the creditor in the bankruptcy documents), any creditor that has any objections to the discharge of its debt has only 60 days from your hearing with the trustee to formally file an objection or forever lose its opportunity to do so. Since that meeting (also called the “meeting of creditors” or “341 hearing”) usually happens about a month after your case is filed, this means that within about 3 months after filing you will know.

The “Adversary Proceeding”

The creditor may tell your attorney in advance about an intended challenge, usually in an effort to get you to settle the matter by agreeing to pay part or all of the debt. But much of the time the creditor just files a formal complaint at the bankruptcy court. This begins what is in effect a mini-law suit, called an adversary proceeding, focusing only on whether the creditor can prove the facts that the law requires for the debt to be excluded from discharge. This issue is usually NOT on whether you owe the debt in the first place—that’s usually assumed and admitted. Rather the issue would be whether, for example,  you incurred the debt by falsifying a credit application, by never intending to pay it through bounced checks, by coercing a relative to change their will on your behalf... behavior of this sort.

Please come back to the next blog in a couple days for the rest of the story about what happens in these adversary proceedings.

AARP Report Says More Older Americans Now Still Have Morgage Debt, Larger Mortgages, and So--Surprise--More Foreclosures

Not only is the foreclosure rate climbing for older mortgage holders, it is climbing faster than it is for younger ones.

 

The last blog described two very significant changes in home mortgages among older Americans in the period from 1989 to 2010: a much larger percentage of them have mortgages on their homes, and these mortgages are much larger. Now almost twice as many 65 to 74 year olds continue to have a mortgage to pay, and nearly three times as many 75+ year olds do so. And the median amount of mortgage debt has nearly tripled in this time period for 55 to 64 year olds, while the amount has increased about four and a half times for 65+ year olds. These are the results of a report released earlier this month from the AARP Public Policy Institute.

This report also showed that, although the foreclosure rate for older American mortgage holders is consistently less than for younger ones, the older mortgage holders’ foreclosure rate is climbing faster. Take a look at this data tabulated in the report:

Foreclosure Rates by Age	2007	2008	2009	2010	2011	% Change 2007–2011
<50	0.42%	0.97%	1.84%	2.83%	3.48%	729%
50+	0.30%	0.66%	1.32%	2.27%	2.92%	873%

Notice that in every single year, the foreclosure rate was lower for those 50 years old or older than for those under 50. But also notice that the increase in the foreclosure rate was greater for the older Americans.

It makes sense that older homeowners would have a fewer foreclosures as a group. On average they’ve presumably owed their homes longer, bought them when prices were lower, and have had more time to pay down or pay off their mortgages. They would tend to have more income stability, and have had more time to accumulate savings and other resources with which to make mortgage payments if their income was reduced. And more of them would have sold their homes before the bubble burst when they cashed in their home equity for more modest homes.

As for why the foreclosure rate has increased more for older Americans, this flows directly from the two main conclusions of the last blog: because they are much more likely now to be carrying a mortgage at all, and because those mortgages are larger. Instead of no longer having a mortgage from having paid it off, or instead of owing a small balance in the final years of a mortgage with a modest payment, more are stuck with a sizeable obligation into the future.

So, older Americans are vulnerable month-to-month because of higher monthly mortgage obligations. And they are vulnerable long-term because they have less equity in their homes or none at all.  They are in the period of their lives when it’s more difficult to get hired or re-trained, when they are more likely to have health issues, and when they are on fixed incomes while expenses continue to rise. So it’s not surprising that more of the current AARP generation is ending up in foreclosure.

 

"Nightmare on Main Street," the AARP's Report on Older Americans Coping with the Continuing Foreclosure Crisis

This new AARP study reveals shifts in mortgage patterns with huge immediate and near-future consequences.

 

You'd think that older Americans as a group would be more secure in their homes than younger Americans.

Common sense says that a larger percentage of older Americans would have no mortgage debt at all, having had more time to pay off their mortgages.

And those who had mortgages would owe less on them, because they bought their homes when they were less expensive, and have had more time to pay them down.

Some of this is accurate, as revealed by the AARP study released last week.

Families Carrying Mortgage Debt

The percentage of families who owe any mortgage debt is indeed lower for older Americans. Specifically, families in which the head of the household is 55 or older are less likely to have mortgage debt than families in which the head of the household is 35 to 54 years old. About 60% of the younger families are carrying mortgage debt while 56.6% of families headed by 55 to 64 year olds are doing so, 40.5% of families headed by 65 to 74 year olds, and 24.2% of families headed by 75 year olds or older. The older the age category, the less had mortgage debt. As expected.

But, hidden behind this expected result is an extremely problematic development. From 1989 until 2010, the percentage of families which carry mortgage debt hardly changed at all for the age categories 54 and younger. In contrast, for older Americans this percentage has skyrocketed.

For 55 to 64 year olds, the percentage paying mortgage debt has gone up from 37.0% in 1989 to 53.6% in 2010, a 45% increase, for 65 to 74 year olds from 21.7% to 40.5%, an 87% increase, and for those 75 years or older, from 6.3% to 24.2%, a 284% increase.

Thinks about it: instead of being secure in their homes, almost twice as many 65 to 74 year olds continue to be burdened by having to pay a mortgage, and as are nearly three times as many 75 year olds and older.

Amount of Mortgage Debt

A similar change is happening with the amount of mortgage debt owed by each of these age groups. Although younger families owe more mortgage debt, older Americans' mortgage debt has increased much more.

For 55 to 64 year olds, the median mortgage debt amount has nearly tripled, from $33,800 in 1989 to $97,000 in 2010.  While for 65 to 74 year olds and also 75 year olds and older, that amount has increased about four and a half times, from $15,400 in 1989 to $70,000 in 2010, and from $11,800 in 1989 to $52,000 in 2010, respectively. These increases make the homes of older Americans much more vulnerable.

Conclusion

Older Americans are facing a

difficult struggle: falling average incomes coupled with rising mortgage payments and property taxes; increasing medical expenses; more debt; and increased longevity. The increases in mortgage borrowing and foreclosures indicate that many older homeowners have been relying on their home equity to finance their needs in retirement and may be running out of options.

Your Bankruptcy Rights vs. Creditors' Rights to "Not be Deprived of Property without Due Process of Law" under the Fifth Amendment

The U. S. Constitution doesn’t talk about it, so how does filing bankruptcy give you the power to stop a foreclosure?

As you’ve probably heard, bankruptcy is explicitly covered in the Constitution. But not much.  All it says is that Congress has the power “to establish... uniform laws on the subject of bankruptcies throughout the United States.”  (Article 1, Section 8, Clause 4.) Not a word about the rights and obligations of the person filing bankruptcy. Nor about the rights and obligations of creditors.

The Fifth Amendment talks about the rights of creditors when it says that a person shall not “be deprived of... property, without due process of law.”  So let’s say you have entered into a contract to pay a loan taken out on the purchase of your home, and that contract includes a condition that the creditor can take your home when you don’t maintain the payments on the loan.  If indeed you do not make payments, the creditor’s contractual ability to take your home is a property right it then owns. It bargained for that right with you when it lent you the money to purchase the home.

But you've heard that bankruptcy DOES have the power to stand in the way of your mortgage holder’s right to foreclose on the mortgage. Where does that power come from?

According to the U. S. Supreme Court, which dealt with this issue a number of times during the Great Depression in the 1930s, that power “incidentally to impair or destroy the obligation of private contracts... must have been within the contemplation of the framers of the Constitution.” Continental Bank v. Rock Island Ry., 294 U.S. 648, 680-81 (1935). The Court’s rationale was that because Congress was given “the express power to pass uniform laws on the subject of bankruptcies,” delaying the exercise of creditors’ rights “necessarily results from the nature of the power.”

But, showing this isn’t so straightforward, later that same year the Supreme Court struck down an amendment to the bankruptcy law that had been enacted in 1934 to address the massive number of farm foreclosures. One of the reasons the law was ruled unconstitutional is because it took away from the mortgage-holding bank a property right: the “right to determine when such [foreclosure] sale shall be held, subject only to the discretion of the court.” Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 594 (1935).

So Congress quickly changed the law that same year to try to meet the Court’s objections. When that new law came before the Court, this time it was upheld, in an opinion written by the same justice, the eminent Justice Louis Brandeis, who had written the above opinion striking down the earlier law.

This time the bank holding the farmer’s mortgage based its argument that the law was “unconstitutional... mainly upon the... assertion is that the new Act in effect gives to the mortgagor [the farmer filing bankruptcy] the absolute right to a three-year stay; and that a three-year moratorium cannot be justified.”

After listing numerous ways in which the three-year stay was conditioned for the protection and benefit of the creditor, Justice Brandeis concluded that this stay, and the entire new law, was constitutional, as follows:

The power here exerted by Congress is the broad power "To establish... uniform Laws on the subject of Bankruptcies throughout the United States." The question which the objections raise is... whether the legislation modifies the secured creditor's rights...  to such an extent as to deny the due process of law guaranteed by the Fifth Amendment. A court of bankruptcy may affect the interests of lien holders in many ways. To carry out the purposes of the Bankruptcy Act, it may direct that all liens upon property forming part of a bankrupt's estate be marshalled; or that the property be sold free of encumbrances and the rights of all lien holders be transferred to the proceeds of the sale. Despite the peremptory terms of a pledge, it may enjoin sale of the collateral, if it finds that the sale would hinder or delay preparation or consummation of a plan of reorganization. It may enjoin like action by a mortgagee which would defeat the purpose of [the new law] to effect rehabilitation of the farmer mortgagor. For the reasons stated, we are of opinion that the provisions of [the new law] make no unreasonable modification of the mortgagee's rights; and hence are valid.

Wright v. Vinton Branch of Mountain Trust Bank of Roanoke, 300 U. S. 440, 470 (1937)(emphasis added, internal case citations omitted).

That why your bankruptcy filing powerfully stops a home foreclosure, even though the Constitution doesn’t say anything directly about this, and even though stopping that foreclosure impinges on a property right of your foreclosing mortgage lender.

More Good Examples of How Bankruptcy Really Helps Even When You Can't Write Off Every Debt

Three more very practical ways that bankruptcy works to let you take control of your debts, even those that can’t be written off.

Two blogs ago I gave six reasons why it’s worth looking into bankruptcy even when you can’t discharge (write off) one or more of your debts. Today here are the final three of those reasons, each one paired with a concrete example illustrating it.

Reason #4: Taking control over the amount of the monthly payments.

The taxing authorities, support enforcement agencies, and student loan creditors have extraordinary power to take your money and your assets if you fall behind in paying them. Because of that tremendous leverage, you normally have no choice but to play by their rules about how much to pay them each month. Chapter 13 largely throws their rules out the window.

Let’s say you owe $15,000 to the IRS—including interest and penalties—from the 2010 and 2011 tax years, resulting from a business that failed. You’ve now got a steady job but one that gives you very little to pay the IRS after taking care of your very basic living expenses. The IRS is requiring you to pay that debt, plus ongoing interest and penalties, within 3 years. And it calculates the amount you must pay it monthly without any regard for your other debts, or for your actual living expenses. Even if you did not have unexpected expenses during those 3 years, paying the required amount would be extremely difficult. But if your vehicle needed a major repair or you had a medical problem, keeping up those payments would become absolutely impossible.  But the IRS gives you no choice.

In a Chapter 13 case, on the other hand, the repayment period would stretch out to as long as five years, which lowers the monthly payment amount. And instead of a rigid mandatory monthly payment going to the IRS, how it is paid in Chapter 13 is much more flexible. For example, if in your situation money was very tight now but you could more each month later—for example, after paying off a vehicle loan—you would likely be allowed to make very low or even no payments to the IRS at the beginning, as long as its debt was paid in full by the end. Also, you would be allowed to budget for vehicle maintenance and repairs, and medical costs, and other reasonable expenses, usually much more than the IRS would allow. And if you had unexpected vehicle, medical, or other necessary expenses beyond their budgeted amounts, Chapter 13 has a mechanism for adjusting the original payment schedule. Throughout all this, you’d be protected from the IRS.

 Reason #5: Stopping the addition of interest, penalties, and other costs.

Under the above facts, if you were not in a Chapter 13 case, the IRS would be continuously adding interest and penalties. So that much less of your monthly payment goes to reduce the $15,000 owed, significantly increasing the amount you need to pay each month to take care of the whole debt in the required 3 years.

In Chapter 13, in contrast, unless the IRS has imposed a tax lien, no additional interest is added from the minute the case is filed. No additional penalties get added. So not only do you have more time to pay off the tax debt, and much more flexibility, you have also have significantly less to pay before you finish off that debt.

Reason #6: Focusing on paying off the debt that you can’t discharge by discharging those you can.

This may be obvious but can’t be overemphasized: often the most important and direct benefit of bankruptcy is its ability to clear away most of your debt burden so that you can put your financial energies into the one that remain.

Back to our example of the $15,000 IRS debt, let’s say the person also owes $20,000 in credit cards, $5,000 in medical bills, and a $6,000 deficiency balance on a repossessed vehicle. Discharging these other debts would both free up some of your money for the IRS and avoid the risk that those other creditors could jeopardize your payments to the IRS.   Entering into a mandatory monthly payment arrangement with the IRS when at any moment you could be hit with another creditor’s lawsuit and garnishment is a recipe for failure.

Instead, a Chapter 7 case would very likely discharge all of the credit card, medical and old vehicle loan debts. With then gone you would have a more sensible chance getting through an IRS payment arrangement.

In a Chapter 13 case, you may be required to pay a portion of the credit card, medical and vehicle debts, but in return you get the benefits of getting long-term protection from the IRS, a freeze on interest and penalties, and more flexible payments.

So whether Chapter 7 or Chapter 13 is better for you depends on the facts of your case. Either way, you would pay less or nothing to your other creditors so that you could take care of the IRS. Either way, you would much more likely succeed in becoming tax free and debt free, and would get there much quicker.