While my practice is primarily geared to consumers, and I have certainly been known to share an opinion or two about consumer debt and bankruptcy, there are some opinions on related topics that should be shared. In today’s Globe, columnist Steve Bailey comments on the most recent Chapter 11 filing by Malden Mills.

Our American economy is a wonderful thing, but no one called it fair. And nowhere is it harder to sometimes watch than in bankruptcy court, the ultimate scrum for capitalism's leftovers. Malden Mills is a case in point.

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This month, a ruling in a Chapter 13 case, the US Bankruptcy Court struggled with the issue of whether a bankruptcy debtor can retain their homestead rights if they have moved out of the home. Based on these interesting facts, the Bankruptcy Court ruled that the Debtors’ interests were protected.

The Facts
The Debtors were having difficulty making their monthly mortgage payments and opted to avoid foreclosure by placing their home on the market. They bought their home in 1998 and in 2000, they acquired their homestead by recording the required Declaration of Homestead at the local Registry of Deeds. By 2005, the Debtors found a buyer and had signed a purchase and sale agreement.

About a month after signing the purchase and sale agreement, the Debtors moved out of their home to accommodate the buyer. The Debtors moved to an apartment. However, because the buyer could not obtain financing, the sale fell through. While the Debtors continued to try to sell the property, they were not successful, and ultimately filed for bankruptcy protection.

At the creditor’s meeting, the Debtors admitted that even though they owned the property, they did not reside there, and did not intend to return to the home because they had vacated it to accommodate a buyer and to facilitate a sale. A few months after the creditor’s meeting, the Debtor’s tenancy at the apartment unexpectedly ended, and they returned to their home. By the time the court heard the objections, the Debtors were back in the property.

The Objections
The Debtors sought to protect their homestead under Massachusetts law. Barring any exceptions to the rule, the Massachusetts homestead statute protects up to $500,000 in the net equity of their home for its owners who occupy that home, and intend to do so as their principal residence.

A number of parties objected to the Debtors attempt to protect the homestead from creditors. They ultimately maintained that because the Debtors did not live in the residence at the time of filing, and did not intend to return there, that they abandoned their homestead interest.

The Court’s Struggle
In Massachusetts, the homestead protections can only be acquired by the recording of the Declaration. Likewise, under Massachusetts law, the termination of a homestead requires a writing. Whether abandonment constitutes a termination of homestead is not “finally settled in this district.”

Two other Massachusetts bankruptcy judges have offered their conflicting views on the abandonment of the homestead. In a case before the US Supreme Court on a different issue, one bankruptcy judge ruled that a homestead may be terminated by abandonment. However, a different bankruptcy judge “expressed reservations regarding termination by abandonment.” Because the Massachusetts statute provided for three methods of termination of the homestead that all required a writing, it was believed that the “Massachusetts legislature likely meant to preclude termination by simple abandonment.”

Even assuming one could terminate their homestead through abandonment, this Bankruptcy Court found that there must be evidence of the Debtors’ intent to abandon.

The Court’s Analysis
For there to be any abandonment under Massachusetts law, the intent to abandon must be voluntary, informed and unconditional. This was not the case. While the Debtors relocated to an apartment, they did so based on the premise that they were doing so to sell the home and accommodating the prospective buyer. The relocation was “inextricably connected to [and conditioned upon] that act.” Therefore, there was no intent to abandon. The Objectors lost, and the Debtor’s homestead estate was preserved.

What if….?
As foreclosures continue to rise, some homeowners consider selling their property. This case clearly shows that this important area of the law is not set in stone, and may require rulings from appeals courts who may interpret the statute and determine once and for all whether a homestead can be abandoned (and if so, how or under what circumstances). Until that happens, this area of the law must be considered murky. For now, financially distressed homeowners thinking of putting their property on the market, and considering moving out of their homestead should seek and be guided by legal counsel.

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In recent years, the Massachusetts housing market has been – in a word – ridiculous. Prices of modest homes have not been in line with income. In other words, owning a home in Massachusetts has been unaffordable for many. As a way around this, mortgage companies (and brokers) came up with creative mortgages. For example, a borrower could pay interest only for a few years, while paying nothing towards principal. The thought of getting a 100% mortgage did not seem so daunting at the time because homeowners have believed that they could refinance later when the values of their homes increased with the market. Those prospects are looking slim.

Home prices in Massachusetts are falling and 2006 saw the worst one-year drop in prices since 1993. As reported in the Boston Herald:

The median price -- the point where half of homes sell for more and half sell for less -- dropped 5.8 percent, from $345,000 in 2005 to $325,000 last year, according to a report by The Warren Group, a Boston-based publisher of regional real estate data and other financial information.
That price had grown 12 straight years, beginning in 1994.
"You have to realize that that was a wonderful decade," said Timothy Warren, CEO of The Warren Group, referring to the last 10 years of home sales. "I think we have to take our medicine and realize that it can't go up forever."

A realtor told the Standard-Times that the market is not crashing at all. He “likened the market to being at the top of a pyramid, about to roll over into a plateau of moderation and consistency.” This is not a particularly good metaphor since the only pyramids I have ever seen with a “plateau” are those from the Mayan era, and what happened on those “plateaus” was rather heart-wrenching (pardon the pun). Also, I have noticed that the the other side of the “plateau” goes down.

Even though the articles end on an upbeat financially distressed homeowners need to be proactive. Contact a professional. Learn more about your options. Listen carefully and choose wisely. And don't assume that because people are whispering things like "soft landing" and "plateau" that the news will be any better tomorrow.

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From tomorrow’s Providence Journal:

Nationally, the spike in delinquencies and foreclosures, experts say, is fallout from the downturn in the real estate market. For years, rising house prices have far outpaced income growth — making owning a home ever more unaffordable.

“New England looks like the roughest area of the country after the Midwest,” said Karl E. “Chip” Case, a housing economist at Wellesley College. “It’s expensive up here, [home] prices are high, there are a lot of exotic mortgages and people are stretching themselves.”

Due to many other circumstances (click the link above to read about them) the homeowners are now in Chapter 13. If things work out, they may be able to keep their home.

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Last year I had to ask my vet to euthanize one of my cats. I had Cissie for more than 16 years. I got her my third year of law school. The decision was not a particularly easy one. She had been ill for a period of time, and it had come to a point of no return. As my vet said, the only thing that we could do would have ultimately lead to more bandages. To an extent, the decision to seek help for debt relief is much like that of having to put a sick pet to sleep. It’s not easy. It’s painful and gut-wrenching. But at some point, it has to be done. Deciding when to do it is the hardest part of that decision.

Cissie first started getting sick in the summer of 2004. She was not well at all and after a visit to the vet, we decided to try some new food. That ultimately worked for a period of time. But by November 2005 she started losing weight. Her attitude was okay. She still harassed the other cats and demanded to be recognized as the head of household. She ate normally (translated: a lot) but the weight kept coming off. We tried this medication, and that medication. We tried this test and that test. But for her, she was getting sick because she was old. When her liver and kidneys started failing, I knew I had to make a decision. And I did.

Of course, even though I knew I had no choice, and even though I knew it was the best thing for her, I could not help feeling awful. I felt like I had failed as a responsible pet owner. No, actually I felt I let my little girl down. There were so many “what ifs.” What if I did this? If only I had done that. What could I have possibly done to avoid this? Were there answers to those questions? Yes, frankly there were. Was there anything I could do to change it? No.

On more than one occasion, after looking at income, expenses and debt, I have told clients that enough is enough: robbing Peter to pay Paul isn’t working. Since a vast majority of my clients are neither farmers nor equestrians, I often say something along the lines of “it’s time to take the horse behind the barn and put it out of its misery.” In other words, it’s time to admit there is a point of no return, and head off to Bankruptcy Court.

As there would be with a horse, there are “what ifs” that folks might ask themselves. What if you bought this house, instead of that one? What if you didn’t refinance last year, or the year before? What if you didn’t lose your job or get sick? What if there really never was a divorce? Are there answers to those questions? Yes, frankly there are. Is there anything you can do to change it? No. All you can do is what is ultimately the last, best and right thing to do.

I do not regret that ultimate decision. I do miss Cissie, and always will. As a kitten she played with my highlighters while I was studying, and as she got older she would wake me up if I dared to ignore the alarm clock. But it all came to an end one chilly February day last year for one simple reason: it had to. It’s a day I am not fond of recalling. Yet if I can remind readers that there really is a life after those dark and difficult days, I’ll do it.

Foreclosures continues to rise. People continue to lose their homes. Debt continues to climb. I hear the stress and strain in the voices of people that call me daily asking me for help, and always saying "what can I do?" For everything there is a time, and for many there is a time to say “enough is enough.” When that is said, you will find the strength to do what you need to do: get through it, and move forward. And yes, you can move forward.

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Legal fees are pushing some people into foreclosure, according to a report in this morning’s Boston Globe. Many of the comments following the article on www.boston.com had a smidgen of indignation. Many people suggested that folks promptly call the lender if they see financial difficult coming down the road. Sage advice. However, many of my clients tell me that they did call the lender when they saw financial difficulty coming down the road and their lenders (or mortgage servicers) told them “sorry, we cannot help you until you’re actually late with a payment.” I’ve heard the same tale often – it’s no anomaly.

Imagine calling a dentist with a toothache and being told “sorry, we cannot help you until it starts to abscess and you’re walking around in excruciating pain.” Or imagine going to your mechanic and telling them that you hear a noise when the car goes over 30 MPH and being told 'why don’t you give us a call when you have smoke coming out from under the hood.'”

The Globe article shines light on the growing problem with foreclosures in Massachusetts. Homeowners are paying a heavy price for the hype fueled by the real estate market. The issues in this article are just the tip of the iceberg.

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So says John Bitner, chief economist for Boston’s Eastern Bank and local housing market cheerleader who tells the Boston Herald that the Massachusetts real estate market should see an “uptick” come spring (which given the perplexing weather we have had here, coupled with blooming cheery blossoms on the Esplanade, some might argue is now). Another commenter, “Barry Bluestone, a housing expert at Northeastern University, agreed the housing market could hit bottom this year - but his hunch was that it might take until the summer” to reach an "uptick."

But there is no mention of the Center for Responsible Lending study that predicts 2.2 million foreclosures. There is no mention that the failures in the sub-prime mortgage market are only rising (and certainly no mention that mortgage companies and servicers are also heading into bankruptcy). There is no mention that these failures are only going to increase inventory which will have a negative impact on prices. As Michael Dawson from TheTimeAndMoneyGroup.com recently said that this all means that “…the value of your house is going down and its not stopping for awhile.” None of this is good news for homeowners who have refinanced over and over again, or recently purchased a home.

I cannot help but wonder if there is any harm to only glossing over what’s really going on out there in the housing market. For those who have sat through two days of rain on this weekend, and are awaiting the kick-off between the Chargers and the under-dog Patriots, I guess there’s no harm in hoping that the sun will come out tomorrow. However, I say that only with the hope that people remain prepared – emotionally and financially – for a lot more rain.

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Medical insurers are toying with a program that would let patients on their plans charge medical expenses that are not covered by insurance, such as co-payments and deductibles, or even medical services that are not covered. If patients cannot pay, the insurer will pay the bill, and then the patient will owe the insurer (with interest). Proponents are touting the program as working like a credit card and designed to “boost collection of unpaid medical bills, a major drag on hospital profit margins.”

Hospitals have been struggling to collect unpaid medical bills as rising numbers of Americans go without health insurance and those with coverage face steeper costs. Unpaid bills, also known as "bad debt," have been rising for several years and are seen worsening in 2007.

Now, patients can get even deeper into debt.

Read more here.

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People are finding out the hard way that filing bankruptcy without an attorney can be an unwise decision. If mistakes are made in a bankruptcy, the case can get dismissed. If the debtor files bankruptcy again, they can be considered a “repeat filer.” Under BAPCPA, this can pose real problems.

With BAPCPA, Congress amended the bankruptcy code to deter what it considered were “serial filers.” If a debtor files bankruptcy, and they have had a bankruptcy case pending in the one year period prior to filing, the automatic stay (an Order for Relief which becomes effective upon the filing of the petition) terminates 30 days after filing. It can only be continued if the debtor files a motion within the 30 day period and the court holds a hearing within the 30 day period. If the debtor doesn’t file the motion and have the court hear it within the 30 days, the stay terminates. Also, if at the hearing the debtor does not have an acceptable explanation as to how there has been a change in circumstances that justifies the new case, the stay may terminate. (This is also particularly problematic if a debtor has had two cases pending in the year prior: the stay does not go into effect at all).

The thing is, there are serial filers, and then there are serial filers. It’s one thing to file bankruptcy petitions for improper purposes and do it over, and over and over again. But there are others who file bankruptcy petitions that end up getting dismissed. So how can a case get dismissed?

Well, if you fail to file or amend schedules, a statement of financial affairs, or other important and mandatory documents the case may be dismissed. If you do not make plan payments or otherwise adhere to a confirmed plan, the case can be dismissed. A good attorney will ensure that this does not happen because a good attorney will know what needs to be done and when. I mention this because I have spoken to a few people this week who have started their conversations with “I tried filing bankruptcy myself and it (a) went bad, (b) went real bad or (c) went real bad and got dismissed and the foreclosure is next week….so now I think I need a lawyer.” After listening to the details, these dismissals were probably avoidable.

Is losing the protections of the stay a big deal? You bet. For most, the automatic stay is the one reason people actually look forward to filing bankruptcy to begin with. The stay stops all collection activity in its tracks. If the stay terminates, it terminates “as to the debtor.” 11 USC Section 362(c)(3)(A), (and see In re Jump (Jump v. Chase Home Finance, LLC, Bankruptcy Appellate Panel No. MW-06-031, decided on December 28, 2006 – I am happy to email the decision upon request). This means that civil law suits can continue, collection activity can start, and the phone will start ringing off the wall once again. Not fun. Not fun at all.

The best protection any debtor facing bankruptcy can get is to get a good bankruptcy attorney. You may not want to pay for an attorney, but the bottom line is, you do not want to pay the price for not having one who can help you keep your case from getting dismissed….and from reaping the benefits afforded by the automatic stay.

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