The Mortgage Bankers Association which represents the real estate finance industry is apparently not pleased with a report by the Center for Responsible Lending which urges reforms to the US Bankruptcy Code. According to David Kittle, the Chairman Elect of the MBA:

Policymakers should ignore this report as it is more rhetoric than fact. Bankruptcy reform is not the answer for consumers having trouble making their mortgage payments. It will drive up the cost of credit in the form of higher rates, larger down payments and greater closing costs.

Further, bankruptcy is a logistical and financial nightmare for consumers. Filing for bankruptcy is expensive and approximately two-thirds of all bankruptcy plans fail. Nobody should be holding it out as a better alternative to working with your lender to try to find a mutually agreeable resolution.

But the CRL is responding with a report that shows that voluntary loan modification fall short. You'll find a link to the PDF report, and the statistics here.

As for Kittle’s comments, I have no idea where the uncited reference to “two-thirds of all bankruptcy plans fail.” Where does that factoid come from? There are lots of reasons why bankruptcy cases fail, but there is no magical statistic that I am aware of. That's flat-out misleading. And as for a "nightmare", oh come on now. While none of my clients want to be in bankruptcy, they would rather keep their home and put food on the table, than live with the proposed "resolutions" offered by their lender.

And unfortunately, for Mr. Kittle, the sad news is that for an increasing number of homeowners, filing bankruptcy is the better alternative to working “with your lender.” The fact is, some lenders are unwilling (or for their own reasons unable) to “work” with a homeowner. When there can be no “mutually agreeable resolution”, bankruptcy is the better alternative. And until lenders start getting serious about modifications, and about their lending practices that got the country into this mess, that alternative will only appear better and better.

Posted by Bill McLeod at 5:11 PM | Permalink | Comments (1) | TrackBacks (0)

The Dow has dropped 10 percent since January 1.

Some of the victims of the sub-prime mortgage mess are bigger than a bread box, have more than two legs and are very innocent.

Ohioans are wondering the government is to blame for the sub-prime foreclosure mess. Canadians are wondering if the housing storm will creep over the border. According to one report, forecasts are mixed.

Posted by Bill McLeod at 6:47 PM | Permalink | Comments (0) | TrackBacks (0)

The Executive Office of the US Trustee announced that it has suspended designation of bankruptcy cases subject to audit. The reason? Congress provided no funding in the FY 2008 Consolidated Appropriations Act.

Read more here.

Posted by Bill McLeod at 11:01 AM | Permalink | Comments (0) | TrackBacks (0)

Thinking about filing bankruptcy? Do you have a paper shredder or know a friend with a dumpster? You should know that a US Bankruptcy Court judge in Boston recently ruled that a Chapter 7 debtor was not entitled to a discharge because documents had been destroyed.

The case involved a carpenter and homebuilding contractor who operated under a corporate entity. The corporation had employees and handled large projects involving hundreds of thousands of dollars. While perhaps a good contractor, the debtor was not a savvy business person but that did not stop him from being the record keeper for the company.

The business records were kept in a large plastic bin which included canceled checks, copies of contracts and even some personal records. He did not maintain a cash flow ledger for the company.

In 2004, the company started to face cash flow problems which eventually snowballed. He and his company were forced to abandon projects they had been paid on and he expected to be sued. The debtor consulted a bankruptcy attorney. By 2005, the debtor became seriously depressed about the company’s financial problems so much so that the mere site of the plastic bin made him sick. The Court noted that “sometime between December 2004 and February 2005, he relieved himself of this immediate problem by driving the bin to, and depositing it in, a dumpster belonging to a roofing contractor friend.”

Probably Not the Smartest Thing to Do

The Chapter 7 Trustee sought to deny a discharge. He argued that by destroying the records, the debtor was trying to “hinder, delay or defraud” the creditors. The Court did not find any evidence supporting that contention. “Seeing no way out, [the debtor] finally buckled under the pressure by destroying the records, which, as a human reaction (though not a business practice) is understandable enough.”

Notwithstanding that understanding, the Court noted that some of the records could have been obtained by the banks by subpoena, but others would not have been easily obtained without incurring much cost. If all of the records could have been recovered in such a way, “perhaps their destruction would be deemed justified in the sense that the destruction was inconsequential.” But that was not the case here. Some of those records reflected the debtor’s personal notes which would be lost forever, and other records would never be recovered. In addition, the debtor expected to be sued, and those records could have been necessary and relevant in those law suits.

Under Section 727(a)(3) of the Bankruptcy Code, a debtor will not receive a discharge if the debtor has destroyed documents “from which the debtor’s financial condition or business transactions might be ascertained, unless such act ….was justified under all of the circumstances of the case.” The Court noted that “the necessity of the records makes their destruction unjustified.” The debtor’s discharge was denied.

The Court understood, and it’s difficult not to appreciate how the debtor could be so overwhelmed by his financial pressures that he remedied it by taking the records out of his sight and tossing them in a dumpster. Very often, clients will come to me with piles of documents – bills, tax returns, collection notices, etc. and when I am retained, I ask for them. Virtually every time, they are relieved to hand them over to me. I see it in their face, or they simply tell me so.

By coincidence, just today I received a call from someone who presented me a rather complex set of circumstances that I knew documentation would be required (and likely sought once the case was filed). For a variety of reasons, this caller did not have it. I instructed him to get it. This caller was hoping to start at the process of working through bankruptcy and moving on, but instead, is now faced with having to retrieve a number of documents that have been lost or destroyed; a process which will take months, and will likely be costly. This caller might be frustrated at my recommendations, but I’d rather the caller be frustrated than denied a discharge.

Posted by Bill McLeod at 2:40 PM | Permalink | Comments (0) | TrackBacks (0)

Today’s New York Times is reporting that Countrywide Financial “fabricated documents related to the bankruptcy case of a Pennsylvania homeowner.” Apparently, the documents were letters addressed to the homeowner claiming that $4,700 was owed. Countrywide’s local counsel told the bankruptcy court that the letters were “recreated.”

“These letters are a smoking gun that something is not right in Denmark,” Judge [Thomas P.] Agresti said in a Dec. 20 hearing in Pittsburgh.

Read more here.

For an interesting take on this, please check out Tanta's entry early this morning over at Calculated Risk: "Turns Out Judges Don't Like 'Efficient' Servicers.'"

Posted by Bill McLeod at 11:16 AM | Permalink | Comments (0) | TrackBacks (0)