Change in Credit Card Rules

While medical problems may be the number one reason that forces people to consider bankruptcy, credit cards clearly create the debt that is listed most often on the paperwork. This listing is often the “end game” of a seductive trap that the
banks set for the financially unwary.

Earlier this year, the “Credit Card Accountability,Responsibility & Disclosure Act” (the 2009 CARD Act) started to create changes in which Americans and the purveyors of plastic relate to each other. In February, our credit card bills began to show the sobering length of time it would take to pay off the debt if only the minimum payment was made as well as how much it would take per month to pay it off in three years.

Some of the other major changes that began in February(allowing a big “loop hole” for variable rates tied to an index)include:

1) More notice prior to raising rates – unlike the prior 15 days, banks must now give you 45 days notice before raising your rates and must allow you to pay the balance at the old rate;
2) Over-the-Limit Fees: Now you must “opt in” before you can go over the limit;
3) If you pay more than the minimum, the extra goes to the balances with the highest-interest rate first;
4) On new cards, the rate cannot go up in the first 12 months, and,if it goes up after that, it applies only to new charges.

The second phase that happens next week includes the following:

1) Inactivity fees have been eliminated;
2) Late fees cannot be more than the minimum payment that was due that month;
3) Multiple fees (e.g., late fee and over-the-limit fee) cannot be assessed against the same transaction.

Every time a new multi-page, incomprehensible, fine-typed “contract” arrives in the mail, you are reminded that this relationship with the credit issuer is not even. Every time I see honest people drowning in debt, I recognize that plastic is the bank’s highest profit maker. Perhaps the 2009 CARD Act changes things, just a tiny bit. Perhaps, but I doubt it.

-- Allan H. Rosenthal

The Myth of Mortgage Modification

The phone call came late one afternoon, with a painful and familiar message: “I need to file for bankruptcy – fast. My home is about to be foreclosed and I thought I was arranging a loan modification with my mortgage company.”

Though you often read about all the various government programs designed to help homeowners keep their houses, the truth is quite upsetting: Mortgage modification is, by and large, an elusive dream, in large part due to a huge, but hidden, conflict of interest.

The big mortgage servicers – Chase, Citibank, Wells Fargo and Bank of America – take in the payments and distribute them to the entities that actually own the loans (often pension funds or mutual funds). They’re supposed to act only in the interests of their agents and, in good times, no conflict readily appears.

Trouble occurs when homeowners start to default on those mortgage payments and the same banks that service the primary mortgage also happen to own a home equity loan on that same house. The banks thus have an interest in insuring that the second loans get paid, even when the first does not. According to the New York Times (Aug. 15, 2010), “2/3 of all primary mortgages are serviced by banks who hold accompanying seconds.” That conflict of interest -- $450 billion!

The banks are suppose to take a back-seat role with their second mortgages, but, given their role in making the decisions on the first as servicers, they have little motivation to act in a way that renders their own holdings worthless.

There was a time when Congress was attempting to force modifications under judicial review in bankruptcy. That effort failed, unfortunately, due to the huge lobbying effort of the big banks. However, it was a good idea then, and it still is a good idea.

Until that day arrives, I’ll stop a foreclosure; I’ll eradicate a wholly unsecured second mortgage; I’ll handle arrearages over 5 years, but the modification of the first mortgage will remain an elusive dream.

An Ode to Elizabeth Warren, Consumer Protector

Getting Congress to create the new Consumer Protection Agency was a major accomplishment of President Obama and Elizabeth Warren is at the top of the list of individuals who may be appointed to lead it. Last week, Wall Street (and the Republicans)increased their rhetoric against her, while a number of Democrats in Congress came out to support her. As the New York Times said in its editorial on July 24th, “The banks don’t oppose Ms. Warren because she doesn’t get it. They oppose her because she does.”

Well, I for one, cannot sing her praises loud enough. This 61-year-old Harvard
bankruptcy professor has got my heart (so much so that my wife is starting to get suspicious). She first came to my attention in 1998 when the banks were first starting to push their “Bankruptcy Reform Bill” (which finally got passed eight years later in 2005). The banks hired skilled lobbyists to portray the individuals who filed for bankruptcy as cunning scammers who were gaming the system and causing the poor banks to raise their interest rates on the rest of us. Unfortunately, there was no corresponding debtor’s lobby (Although NACBA, The National Association of Consumer Bankruptcy Attorneys,tried, only to be hopelessly out-gunned financially). All that our political leaders – including President Clinton – heard was the bank’s side, so all were in favor of stemming this so-called “abuse.”

Enter Elizabeth Warren, who had the opportunity to describe what was happening to Hilary Clinton one afternoon (Elizabeth later claimed that Hilary was her quickest student ever). She saw the banks predatory lending ploys (in which a 9.9% teaser rate on credit card balances quickly became a whopping 29.9%) as the true threats to our country’s middle class. Convincing Hilary (who, in turn, brought awareness of the issue to Bill), delayed the bank-inspired “Bankruptcy Reform” for eight years.

And for that, she will always have my heart.

--Allan H. Rosenthal, Legal Assistant

Bankruptcy and Our New Gun Rights

Last week, the U.S. Senate (aided by the National Rifle Association) took a bold step toward safeguarding our 2nd Amendment rights in considering the companion bill to H.R. 5827 – “Protecting Gun Owners in Bankruptcy Act.”

This legislation creates a $3,000 federal exemption for firearms, meaning that the list of assets that a Trustee cannot take and sell to pay creditors will now include the pistol, rifle and shotgun.

This was political grandstanding and has little to do with how bankruptcy cases actually operate. First, only sixteen states and Washington D.C. allow you to use the federal exemptions on the list – the other states have “opted out,” creating their own set of exemptions.

Second, the federal exemption list also includes a $21,625 “wildcard,” above and beyond household goods and furniture. It is the rare case where a Chapter 7 case is filed and the wildcard is used up on other property, creating an “asset case.” Perhaps, we’re talking about 1,000 people a year who are (1) allowed to use the federal exemptions; (2) have firearms and (3) will file asset cases.

Of course, it allows one to game the system a bit. When a person is contemplating filing bankruptcy and has assets beyond the exemptions, it is common to convert an unprotected piece of property (e.g., bank account above the limit) to a protected category (depositing those funds into an IRA or a whole life insurance policy). Thanks to the N.R.A. and Representative Boccieri (whose Ohio constituents already were granted a firearm exemption under state law!), we now have yet another $3,000 category coming our way.

The New "Purchase Money" Definition in California

People shopping for a bankruptcy attorney are often stymied trying to figure out whether or not a lawyer is competent. Well, as of last week (at least for the western part of the U.S.), the courts have inadvertently handed down a simple test.

If you mention over the phone to the prospective lawyer that you have a car loan, he or she will ask you to come in with the original car contract (typically, a group of thin, 18” yellow sheets with incomprehensible legalese) or with a recent bill (which typically includes the payoff balance and monthly payment). The lawyer who asks for the original contract can potentially save you thousands of dollars.

Federal bankruptcy law states that if you bought your car less than 910 days(30 months)ago and the debt was the “purchase money” used to buy the car for your personal use, you would have to pay the bank back in full.

A critical question concerning the definition of purchase money arises in 40% of Chapter 13 cases. When someone trades in a car with a negative equity (owing more on the car than what a dealer would offer on a trade-in), the new lender typically offers a fat loan which includes the payoff for the old trade-in car’s negative equity as well as the cost to finance this year’s shiny new model. Does the “purchase money” mentioned in the law mean this total loan package or just the money that will purchase the new automobile?

This issue was litigated all across the country. (The car companies have billions of dollars riding on the outcome.) The courts ruled, time and again, that it was all “purchase money.” Last week, however, the Ninth Circuit ruled differently from the other eight Circuits that have spoken on this topic and, once again, has decided to go its separate way.

So, make sure that the bankruptcy lawyer you hire asks for sufficient information to thoroughly evaluate your case.

Bankruptcy Dangers to Domestic Partners

A bankruptcy lawyer I know (one with a pretty good reputation), was complaining over a beer that the Chapter 7 court Trustee was "going after" his client's home.


He though he had asked all the correct questions ("Do you own a house? Have you ever owned a house? Are you married? Have you ever been married?) In each case, the client honestly replied "No."

Surprisingly, the home the Trustee was going after was the one whose title was solely in the name of the client's registered domestic partner!

California, like a great number of states, is a "community property state." That means that whatever assets have accumulated in a marriage (with some exceptions) are owned together by the husband and wife. California has extended property rights to same-sex couples who register as "domestic partners."

When considering property to list in a bankruptcy, the Trustee can have issues with a spouse or partner's real estate, even if the house was acquired before the marriage (or registered domestic partnership) or was acquired by a spouse (or partner) via inheritance (a notorious exception to the community property rule). For example, if a mortgage is paid during the marriage (community assets are used to build equity) or the couple pays someone to cut the grass (assets are used to maintain and repair the property), the spouse or partner has (at least a minimal) interest in the property.

A good rule in bankruptcy (beyond adding "registered domestic partner" to the list of questions about marital status) is to ask the client "Is there any real estate in any country on this planet that someone might think you have an interest in?"

It helps to anticipate potential problems before the bankruptcy petition is filed.