Written by Craig D. Robins
What consumer bankruptcy petitioners have dreaded for the last seven years has finally happened. Congress has implemented a new set of bankruptcy laws designed to make it decidedly more difficult for consumers to discharge their debts. On April 20, 2005 President Bush signed the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” also known as S. 256. This is the most sweeping reform of U.S. bankruptcy law in twenty-five years.
The bill is a major victory for the Bush administration’s economic and political agenda. For years, bankruptcy has been a boon for consumers. Now the pendulum is shifting the other way in favor of creditors.
The new law will prevent many individuals from being able to eliminate their debts in a Chapter 7 proceeding, instead forcing them to pay a portion of their debts through a Chapter 13 plan. The law will also impose many hurdles on those seeking to file. For example, it will require consumers to complete credit counseling prior to filing, and it will prevent debtors from receiving a discharge until they complete a personal financial management course. Debtors will also be required to file proof of income, a new requirement.
One major aspect of the new law will be the Chapter 7 means test. Debtors will have to meet specific income requirements to be eligible for Chapter 7 bankruptcy status. If a debtor’s income exceeds the state’s annual household median and the debtor can make payments of at least $100 a month for a period of five years, they will be forced to seek Chapter 13 status instead, which requires a payment plan.
Those debtors who would have filed Chapter 13 in any event, will also face a tougher situation. Instead of being able to finish their Chapter 13 obligations in just three years, they will be obligated to make payments for five years.
The new filing requirements will also mean more paperwork and potential court time, which translates to higher legal fees. In addition, a very controversial provision of the bill provides that debtor’s attorneys can be held liable for fraud if their clients withhold information and assets in hopes of qualifying for Chapter 7 status. The new laws impose a steep due diligence requirement on consumer bankruptcy attorneys.
We can expect a surge of filings as cash-strapped consumers try to get a jump on the new laws that will make filing much tougher for people to erase their debts through existing bankruptcy proceedings. Middle-income families who comprise the majority of filers, will be affected the most. It will now take much longer for families suffering serious illnesses, unemployment, divorce or other economic calamities to get a handle on their debt situations.
Although some provisions of the new law became effective immediately upon signing, most provisions will not become effective for six months. Effective immediately is a provision limiting the homestead exemption in states other than New York, and some other provisions that should not impact most cases filed in this area during the next six months.
It would prudent for all clients who are contemplating bankruptcy to file as soon as possible, certainly before October 2005. Accordingly, you should advise your bankruptcy clients to hurry up and file immediately without haste. Not only will the new laws will make it tougher for your clients; the laws will make your consumer bankruptcy practice more complicated and difficult as well. In future columns I will address how to modify your consumer bankruptcy practice to cope with the new laws.
About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a frequent columnist for the Attorney of Nassau, published in Nassau County New York for members of the bar. This article appeared in the April 2005 issue of the Attorney of Nassau. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, pill Esq.
For the last six years, there have been vigorous efforts to drastically alter the Bankruptcy Code to make it more difficult for consumers to discharge their debts. Up until now, these efforts have not succeeded. There wasn’t even much legislative activity regarding bankruptcy last year. That is, until November 2, 2004. Election Day. On that day, this Country re-elected George W. Bush.
During President Bush’s first four years of office, he made it abundantly clear that he would sign any bankruptcy overhaul legislation that was placed on his desk. One can assume that he wouldn’t even bother to read a bankruptcy reform bill before signing it into law.
However, Mr. Bush did not make any mention during his numerous campaign speeches of his proclivity to sign a new, much tougher bankruptcy statute. Why? The notion of bankruptcy reform would not sit well with many of his supporting constituents. The hard-working, middle-class, middle-aged, middle-Americans who are struggling from lay-offs or exorbitant health care costs would not find Mr. Bush’s position on bankruptcy reform too appealing. Ironically, large numbers of Americans who will eventually need bankruptcy protection actually voted for Mr. Bush, unaware that in his next four years of office he will likely sign into law a much stricter Bankruptcy Code that may prevent them from being able to discharge their debts and easily get a fresh new financial start.
To make matters worse, the Senate Democrats lost five seats including that of Senate party leader Tom Daschle. One of the reasons that bankruptcy legislation was not previously enacted was because of the relative balance of Republicans and Democrats in the Senate. Although bankruptcy reform does share some bipartisan support, it is overwhelmingly supported by Republicans, big business, and the banking and credit card industries. It will now be easier for the Republican-majority of legislators to pass a bankruptcy reform bill.
For years, the banking industry has pumped tens of millions of dollars into lobbying and election efforts, seeking to persuade legislators to enact new bankruptcy reform. Lobbyists for these groups have been toasting the success of Mr. Bush’s re-election and the election of Republican congressional candidates. Now they plan to collect on that investment.
According to recent news reports, the consensus in Washington is that the bankruptcy reform legislation will be re-introduced in Congress soon where the bill is expected to move quickly through the House, barring other legislative issues taking priority, most likely before April. Then the fight will shift to the Senate. However, according to Senate rules, the majority cannot force issues as easily or as quickly, as 50 votes are needed to break a filibuster. Sources suggest that there is a 60/40 chance that bankruptcy reform will be eventually signed by the President and become law this session.
Therefore, expect to see a new round of proposed bankruptcy reform legislation in the very near future. Expect a high possibility that this legislation may be quickly signed into law by our President. And then expect to see a number of down-and-out financially-troubled middle-Americans wondering why they can’t get a fresh new financial start.
About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a frequent columnist for the Attorney of Nassau, published in Nassau County New York for members of the bar. This article appeared in the January 2005 issue of the Attorney of Nassau. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, order Esq.
We have now seen several straight years of rapid real estate appreciation on Long Island. With the current real estate boom, most home prices have doubled in the past six years. Buoyed by low interest rates and a hot real estate market, the mortgage industry has become incredibly competitive and has relaxed many previous requirements that have acted as impediments to former bankruptcy debtors seeking to obtain a new mortgage or refinance an existing one. You can help your prior bankruptcy client purchase their first home, or take advantage of increased equity in their existing home by helping them with refinancing.
Homeowners with Bankruptcy Histories Are Often Able to Get Mortgages, Sometimes at Respectable Rates. With over a million and a half consumers filing bankruptcies each year, many mortgage companies have tapped into the lucrative market of offering mortgages to those who recently sought Chapter 7 bankruptcy protection, and even those still making payments in open Chapter 13 cases. Just a few years ago, debtors seeking to obtain mortgages under such circumstances found it difficult, if not impossible. Today, however, mortgage lenders actively solicit the profitable sub-prime market of recent home-owner debtors. A “sub-prime” mortgage is one where the borrower has a blemished credit history. Lenders, in their drive to maximize profits, have actually become quite lenient with the sub-prime market and have relaxed some previous requirements. Some lenders even specialize in providing financing to recent debtors. A former Chapter 7 filer can qualify for a mortgage one year after the bankruptcy is over.
Mortgage Companies Offer Various Mortgage Programs Depending on Financial History. Although the borrower may not qualify for the best rates (known as “A” paper) if there was a recent bankruptcy filing, they may nevertheless qualify for sub-prime rates, (known as “B, “C” or “D” paper). Lenders with programs for recent debtors will typically offer something like a two-year hybrid adjustable rate mortgage in which the mortgagor has the option of converting to a more conventional mortgage with better interest rates after a two year period of time, provided that the borrower makes timely payments and keeps his new credit history clean. Even former debtors who developed additional negative credit information after their bankruptcy was concluded can qualify for financing if they have a healthy loan-to-value ratio of 70% or less.
Debtors May Become Eligible for “A” Paper Mortgages Sooner Than They Think. According to some published guidelines, a former Chapter 7 debtor may be eligible for the best rate FHA mortgage just two years after the discharge if the borrower has re-established good credit or has not re-established any new credit. If more than two years have elapsed since the Chapter 7 bankruptcy was discharged and the borrower is applying for a VA mortgage, then the bankruptcy will not even be considered. If the borrower is applying for a conventional mortgage, then they will be considered for the best rate after four years, although some lenders will consider them after three years, if there is a good reason. For Chapter 13 debtors, the provisions are even better for FHA and VA mortgages. In such instances, debtors need only wait 12 months from the date of filing and may even be in an open case.
Debtors Should Consider Consulting a Mortgage Broker. Ordinarily, I steer my real estate clients directly to banks. However, when it comes to borrowers who have blemished credit histories or previous bankruptcies, I sometimes suggest that they consult with a mortgage broker, who will have access to many potential lenders, and who should be keenly familiar with the various sub-prime financing issues. As a variety of lenders offer different programs to borrowers with prior bankruptcies, a mortgage broker catering to this customer base should have a good familiarity with what program might be best for a particular borrower. Savvy brokers should also be able to give tips to clients in advance about improving chances for qualifying.
Chapter 13 Debtors in Open Cases Who Seek to Refinance Must Either Obtain a Court Order or Withdraw Their Case. If the borrower is still a debtor in a pending Chapter 13 case, refinancing a home will require seeking court approval of the refinance by bringing a motion. Consider discussing this issue with the Chapter 13 trustee if refinancing becomes a possibility. Alternatively, you may consider withdrawing the debtor’s petition, although you would only want to do this if the conditional mortgage commitment permits it, and the debtor can handle the unsecured debt after the case is dismissed. Also remember that the debtor loses the protection of the bankruptcy stay once the case is dismissed. Therefore, you should only withdraw a case if it appears absolute that all closing conditions have been met, and the closing will definitely occur.
Consumers Should be Cautious with Adjustable Rate Mortgages. Previous bankruptcy filers may have no choice other than obtaining an adjustable rate mortgage hybrid. At some point, the monthly payments for all adjustable rate mortgages increase. As your client previously got into a financial bind resulting in the prior bankruptcy filing, it is important that you advise them about preparing realistic future budget projections so that they do not end up in a future financial bind when the rate increases.
Many Abstract Companies Do Not Understand How Prior Bankruptcies Discharge Debts. Several times a year I deal with a lender or abstract company who insists, incorrectly, that certain discharged debts actually remain for various reasons. This usually happens when the client refinances without the aid of legal representation or uses an attorney who is unfamiliar with bankruptcy law, and I get a frantic call from the client while they are sitting at a closing table. In-house title examiners at abstract companies are notorious for their lack of knowledge about the implications of a bankruptcy filing. You should persuade former bankruptcy clients that it is advisable to utilize counsel for all real estate financing transactions. Then, if the lender’s abstract company raises a bankruptcy-related problem, insist on speaking directly with underwriting title company’s clearance department or legal department to clear up any bankruptcy-related title exceptions.
Practice Pointer for Helping Debtors with Mortgages and Re-financing: Be aware that financing is often available, advise your client of the options, and suggest that your client retains legal counsel for real estate transactions.
About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a frequent columnist for the Attorney of Nassau, published in Nassau County New York for members of the bar. This article appeared in the December 2004 issue of the Attorney of Nassau. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.