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A Settlement between the 50 State Attorneys General and the Big Mortgage Lenders–Or Not?

Is the most infamous home mortgage story of late 2010—the “robo-signing” of foreclosure documents—finally coming to closure in early 2012?

For those of us who keep an eye on this stuff, we’ve wondered throughout all of 2011 whether the states’ attorneys general could do what the federal banking and housing regulators seemed unable to do: hold the mortgage lenders responsible for their glaring problems in loan servicing and foreclosure processing.  “Robo-signing” itself involved loan servicing company employees signing countless foreclosure documents in which they asserted personal knowledge about essential facts, when in fact those employees had no knowledge whatsoever of those facts. This then led to the uncovering of one major set of irregularities after another, including the giant MERS fiasco involving serious challenges to the legal authority of mortgage lenders and servicers to foreclose under any circumstances.

When all 50 of the states’ attorneys general got together in late fall of 2010 to address this set of problems, there was hope that they would be able to accomplish what the national regulators could or would not. They were seen as being closer to Main Street than Wall Street, and experienced with dealing pragmatically with both consumer abuses and business concerns. Indeed within a few months detailed draft settlement terms were drafted and being circulated. But then major rifts quickly arose. Last spring, eight Republican attorneys general—from Virginia, Texas, Florida, Oklahoma, South Carolina, Alabama, Georgia and Nebraska—announced that they did not support the draft settlement as being too tough on the banks and unfair to people who were paying their mortgages. Around the same time, the watchdog National Institute on Money in State Politics issued a report stating that the “campaign war chest” of the Democratic attorney general Tom Miller of Iowa

“got a dramatic boost after he announced his leadership of the 50-state attorneys general investigation into foreclosure irregularities. Out-of-state law firms and donors from the finance, insurance, and real estate sector gave $261,445-which is 88 times more than they had given him over the previous decade.”

And now more recently, as the settlement again seems to be finally reaching a close, some of the more liberal attorneys general, from among the most populous and influential states, such as New York and California, as well as perhaps Massachusetts, Nevada, and Delaware, seem to be backing out of the deal because they say that their homeowners would simply not be getting adequately compensated by the banks.

So is there going to be a deal or not, whether it covers all 50 states or not? It certainly now looks highly unlikely that a universal 50-state agreement will happen. And if some of the largest states—such as California and New York—and some with the worst foreclosure problems—such as Nevada and Florida—are not participating, then the banks lose a great deal of incentive to stay in the deal either. There continues to be some indication that a settlement will come together—here’s a very recent Time magazine blogger’s summary of its anticipated terms, which he figures will be “finally unveiled” as early as January. You can read about them there it you want—I won’t be telling you more about any deal terms here until I think there’s a better chance that it will ever come to pass and have any practical impact on my clients.

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The Amazingly Powerful “Automatic Stay”

Don’t take for granted the extraordinariness of bankruptcy’s automatic stay. That’s the federal law that stops creditors from pursuing you, your money, and your other possessions the moment your bankruptcy case is filed.

In my last two blogs, I told you about the relatively rare situations in which the automatic stay does not apply—situations in which certain special creditors, or sometimes even all creditors, can continue collecting their debts. But let me emphasize again–the vast majority of the time, as soon as your bankruptcy case is filed, all creditor efforts against you and your property come to an immediate stop.

The automatic stay is so powerful because it is 1) fast and 2) very broad in what it covers.

Very Fast

Very few legal procedures work as quickly and efficiently as the automatic stay. To get anything done in just about any court usually takes weeks, months or even years. A complaint or motion of some sort needs to be filed, the other side usually has the opportunity to respond, then often there is a hearing of some sort, and finally a judge makes a decision.

But not with the automatic stay. It operates as a one-sided and immediate court order, made effective by the very act of filing the bankruptcy case.  A judge isn’t even involved. The creditors have no immediate say about it. There IS a procedure for creditors to object and ask the judge for “relief from the automatic stay,” in other words, for permission to continue or start pursuing you or your money or property, but that’s after the fact. The automatic stay gives you an immediate breathing spell, whether your creditors like it or not.

Broad Coverage

This breathing spell protects you in just about every possible way from your creditors. It stops all phone calls and letters—“any act to collect, assess, or recover” a debt. The automatic stay stops all court and administrative proceedings against you from starting or continuing. Doesn’t matter if your bankruptcy is filed two minutes before the start of a civil lawsuit trial or the foreclosure of your house, the trial or foreclosure does not happen. If a judgment was entered against you in the past and the creditor is about to garnish your wages or checking account, these garnishments are stopped. If you’ve fallen a couple months behind on your vehicle loan payment and the repo man is looking for your car in the employee parking lot, the automatic stay sends him away empty-handed. If the IRS is about to record a lien against your home and vehicle to collect an income tax debt, the automatic stay stops the tax lien. Or if you already have a recorded tax lien and the IRS is about to grab your vehicle to pay the debt, your bankruptcy filing stops this enforcement of the tax lien.

This IS powerful medicine. 

As with other strong medicine, it should be administered with the right guidance, and with help for dealing with any potential side effects. Stopping your creditors with a bankruptcy would essentially be the end of the story for many of them. But for other creditors—those with rights against your home or vehicles, or with special kinds of debts such as taxes and student loans—the breathing space gives us the opportunity to address each of these special creditors.

Contact me to get the immediate protection you need, along with the long-term financial solution for dealing with all of your creditors.  

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Chapter 7 vs. 13–the Easy Choice, and the Not So Easy

Picking the right Chapter to file can be simple, or it can be a very delicate, even difficult choice. And appearances can be deceiving. A situation that seems at first to call out for an obvious choice can turn out to have a twist or two that turns the case upside down.  

That twist can come in the form of an unexpected disadvantage in filing a bankruptcy under the intended Chapter, or instead an unexpected advantage in filing under the other Chapter.

Let me be clear. The majority of my clients walk into their initial consultation meeting with me with a strong idea whether they want to file a Chapter 7 or a 13.  After all, there is a wealth of information available—like this blog that you’re looking at now. So lots of my clients come in having read up on their alternatives. Whether their inclination to file one or the other Chapter comes from their head or from their gut, it’s often correct.

But often it is not correct.

That shouldn’t be a surprise. Although the main differences between Chapter 7 and Chapter 13 can be outlined in a few sentences, there are in fact dozens of more subtle but often crucial differences. Many of them do not matter in most situations, but sometimes one or two of those differences can be decisive in determining what is best in your case. If you did not know about them, you would file the wrong kind of case. And pay the consequences for many years.

So that this doesn’t just sound like just a bunch of hot air, let me show you through one example. Imagine that you have a home that you have been trying to hang onto for years, but by now have pretty much given up on doing so. You’ve fallen behind on both the first and the second mortgage. Besides, with the decline in housing values the last three years or so, the home is now not even worth the amount owed on the first mortgage. And say you owe $80,000 on the second mortgage, so the home is “under water” by that amount. You have no good reason to think that the market value will climb back up enough to give you equity in the home for many years.  Your family would sure like to keep living in their home, so the kids could stay in their schools and close to their friends, but it sure sounds like it makes no sense to keep trying to hang onto something worth $80,000 less than what you owe. Besides, you just can’t don’t have the money to pay both mortgages. So you figure it’s time to give up on the home, and just start fresh with a Chapter 7 “straight bankruptcy.”

But then you learn from your bankruptcy attorney that if your home is worth less than the balance on the first mortgage, through a Chapter 13 case you can “strip” the second mortgage off the title of your home. It becomes an unsecured debt which is lumped in with the rest of your unsecured debt (like credit cards, medical bills). In return for paying into your Chapter 13 Plan a designated amount each month based on your budget, and doing so for the three-to-five year length of your Chapter 13 case, you would be able to keep your home often by paying very little—and sometimes nothing—on that $80,000 balance. At the end of your case, whatever amount is left unpaid on that second mortgages will be “discharged”—legally written-off—so you own the home without that mortgage and having no debt (other than the balance on the first mortgage.  

This “stripping” of the second mortgage is NOT available under the Chapter 7 that you initially thought you should file. Having Saving your home by lowering your payments on it and bringing the debt against it much closer to its value may well swing your choice in the Chapter 13 direction.

This is just one illustration of countless ways that the option you initially think is the better one might not be. So keep an open mind about your options when you first consult with your attorney. Communicate your goals to him or her, and be clear about why you think one Chapter sounds better to you than the other. In the end, after laying out your story and hearing the attorney’s advice, it IS ultimately your choice. But do yourself a favor and be flexible, because you might get a better deal by the end of your meeting than you thought was possible at the beginning of it.

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