January 31, 2009
Bankruptcy Risk Score - the new FICO
Here is a good article by Jeremy Simon at creditcards.com about a new Bankruptcy Risk Score computed by Fair Issac and designed to help a lender "sharpen" its risk assessment. I am interested in this.
Some people cannot file bankruptcy irrespective of the financial mess they are in. That should be reflected in the credit decision.
1. Home equity. In the late 90s and the first few years of this century, many, many people wanted to file bankruptcy and get credit card relief but could not because of the equity in their homes. I told probably half the people who called me during those years - "you can't file. The trustee will sell your home and pay off the credit cards." (That's why its a little annoying to me, by the way, that the news pundits talk about soaring bankruptcys today. We are no where near the filings for the 2000-2004 period and that's when many people could not file because of the equity in their homes.)
2. The means test. Nearly everyone "passes" the means test but a person with good income, a small family, and no house payment is the candidate to fail. No matter how bad his credit is, he is not a likely bankruptcy candidate.
3. The chapter 13 limits. People whose debts exceed the chapter 13 limits, i.e., $1,010,000 in secured debts and $330,000 (roughly) in unsecured debts will have to file chapter 11 to save property (if that's the goal). The difference in cost to get a chapter 11 plan confirmed versus a chapter 13 is staggering. A simple chapter 11 is probably $25,000 in fees.
4. Business debts. On the other side, a person whose debts are "primarily business debts," doesn't have to worry about the means test. It is more likely that person will file irrespective of his income and good credit.
5. The luxury purchase and abuse. Also on the other side (and certainly ironically), if the debtor is buying a luxury vehicle or other item, he will likely not be filing soon because the UST will move to dismiss saying the purchase shows abuse under the totality of the circumstances.
6. Other assets. A person with a paid-off boat, or large luxury car, or a patent he is trying to sell, or is waiting for a lawsuit to settle (perhaps he was injured in an auto accident), or may be about to collect an inheiritance also cannot file. The trustee will take the asset. A chapter 13 won't work because the debtor will have to pay the value of the asset over the 3 to 5 year period.
Anyway, the point is that the decision to file often has nothing to do with the financial condition of the debtor. I'm not sure that is what this Bankruptcy Score does but the comments above must be part of it.
January 30, 2009
Great Analysis of H.R. 200 in its Present Form
From my friend Peter Lively. You can access his analysis here. This looks like a handful but it really helps understand the proposal. Printout the attachment and read it. Its a little easier to understand.
C1 Certification that D received N.
C2 Certification that D attempted to contact lender for loan mod within 15 days.
C3 Certification that D attempted to contact lender for loan mod (no time required).
E Effective date of new law.
F Current FMV of R.
I Prevailing interest rate on petition date.
L Loan originating before E, secured by R, subject to N.
M All debt secured by R up to FMV.
N Notice that D receives from lender that it may commence foreclosure against R.
P Premium added to I for “risk”
R Debtor’s principal residence.
T Total debt secured by R; T = M + U.
U All debt secured by R over FMV and also debt formerly secured by R (due to TS or surrender).
X Proceeds paid to lender if property sold within 4 years of loan modification.
Y Maximum years of modified loan < or = (40 years - # years paid on existing loan).
Proposed Changes to Code:
109 Debt NOT include T, if F < $1,010,000 (plus CPI adjustments)
109 If C1, then no required CBC
502 If T subject to TILA then not an allowed claim
1322 Where petition not yet filed:
If D provides C2 (or, if TS date within 60 days of petition date) and T is ARM loan,
then Court may prohibit, reduce or delay adjustment of interest rate; OR
modify T under 506(a)(1) into M and U, then modify M over Y at I + P
Where case pending:
If D provides C3 before filing Plan or Plan Modification Motion, then Court may prohibit, reduce or delay adjustment of interest rate; OR
modify T under 506(a)(1) into M and U, then modify M over Y at I + P
BUT, if Debtor sells R, then lender gets X = the lesser of the allowed unmodified claim, and [100% - (20% * # years since loan modification)] * [Sale Price - (M + COS + Improvements)]
January 29, 2009
Marc Dreier Indicted
January 28, 2009
Judge Peter Bowie in San Diego Opines re Whether a Significant Mortgage Which Allows the Debtor to Pass the Means Test can be the Basis for a Finding of Abuse and Dismissal
In re Johnson, ---- B.R. ---, 2008 WL 5265740 (Bkrcy, S.D. Cal. Dec. 2008, Bowie. J.)
Issue: Can the debtor’s large mortgage payment be the basis for a finding of abuse even though the debtor has passed the means test?
Holding: Not here on these facts.
The debtors own an “approximately 4,000 square foot Residence [they built] in May of 2003. Unfortunately for Debtors, shortly after the Residence was completed, Mr. Johnson, an airline pilot, had to accept a $60,000 cut in pay. The Debtors list the value of the Residence at $900,000, and the debt secured by it at nearly $1,100,000. The monthly mortgage expense for the Residence is $6,060, and total expenses associated with the property are scheduled at $8,286.” The debtors passed the means test. The UST moved to dismiss under 707(b)(3) arguing that “Debtors' expenses to pay their mortgage and to maintain their Residence are unreasonably high. If they would give up the property they could purchase or rent at substantially lower expense, and in so doing they would free up income for the benefit of unsecured creditors.” Judge Bowie ruled in favor of the debtors.
“[T]he presumption of § 707(b)(2) does not arise in this case. When the presumption does not arise (or is rebutted), § 707(b)(3) sets forth two alternate considerations for assessing abuse. Under § 707(b)(3) the Court is to consider whether the petition was filed in bad faith (§ 707(b)(3)(A)), or whether an abuse exists based on the ‘totality of the circumstances ... of the debtor's financial situation.’ No allegations of bad faith have been presented. Accordingly, the Court must evaluate the Trustee's motion to dismiss based solely on the ‘totality of the circumstances ... of the debtor's financial situation.’ This brings us to the issue at hand.”
“In a nutshell, the issue is whether Congress, by allowing secured claims to be included without limitation in the Means Test of (b)(2), has limited the courts' discretion to consider them under the totality of circumstances test of (b)(3).” “[T]his Court is persuaded there are circumstances that warrant dismissal under § 707(b)(3) although a debtor may have ‘passed’ the Means Test.” “In the minds of many, including this Court, there is a point at which allowing an individual debtor relief from unsecured debt while sinking most income into maintaining the debt service on such a property seems egregious.”
[But] “If Congress determines that there should be no cap on secured debt obligations on a debtor's primary residence for purposes of the Means Test, and therefore no presumption of abuse arises under § 707(b)(2), can Congress properly be understood to intend that that same primary residence secured obligation can, by itself, be the basis for a finding of abuse under § 707(b)(3)?” “[I]t would seem quite ironic if Congress went through all it did to establish the assertedly more objective Means Test in place of individual discretion, only to turn around in § 707(b)(3) and hand the same discretion right back.”
Judge Bowie looked at the Price factors. Two Price factors appear to be relevant; “whether the debtor has a likelihood of sufficient future income to fund a Chapter 11, 12, or 13 plan which would pay a substantial portion of the unsecured claims....” and “whether the “proposed family budget is excessive or extravagant.” But the determination of future income in chapter 13 and 11 for an individual comes from 707(b)(2) which permits unlimited mortgages to be deducted. As to the extravagance, “we are back to the core issue of whether that can be considered under the new § 707(b)(3) given the policy decisions Congress made in § 707(b)(2).”
Bowie concluded, “Assuming that the size of the mortgage payment can be considered notwithstanding § 707(b)(2), the Court is comfortable in concluding that the mortgage payment in this case is neither sufficiently excessive nor extravagant as to warrant dismissal on a totality of the circumstances basis under § 707(b)(3).”
Manager's Proposed Amendments to HR 200
You can access the proposal here. The right to modify a home mortgage would be limited to existing mortgages. If the debtor sells the residence during the plan period, the creditor would get some of the excess proceeds if any. The amendment will still apply to existing bankruptcy cases.
January 27, 2009
US Trustee Openings for Chapter 7 Trustees in Rhode Island and North Dakota
January 26, 2009
Opposition to New Mortgage Bill Lining Up
According to an Associated Press Article yesterday,
The chief lobbyist for the Mortgage Bankers Association, Steve O'Connor, said new homebuyers would end up paying higher interest and bigger down payments if lenders are saddled with the risk that a judge could change mortgage terms.
"We're going to defend the industry" against "bad public policy," O'Connor said.
The association's 23-member government affairs team is trying to persuade lawmakers to kill the bankruptcy legislation. The team includes six lobbyists and nine policy experts who double as lobbyists, said O'Connor, senior vice president of government affairs.
Great Status Report on Proposed Legislation re Chapter 13 Modifications
Thanks to David P. Goch:
At yesterday's [1/22/09] House Judiciary Committee hearing on 2 bankruptcy bills, H.R. 200, the "Helping Families Save Their Homes in Bankruptcy Act of 2009," and H.R. 225, the "Emergency Homeownership and Equity Protection Act," intended to help families save their homes, all but one witness supported the bills put forth; and, for the most part, the Members in attendance were divided along party lines.
Witnesses including Reps. Miller (D-N.C.) and Marshall (D-Ga.); David M. Certner, legal counsel and legislative policy director of AARP; Matthew J. Mason, assistant director of the UAW-GM Legal Services Plan; and Adam J. Levitin, associate professor of law, Georgetown University Law Center all supported the bills. The lone dissenter was Christopher J. Mayer, the Paul Milstein Professor of Real Estate and Senior Vice Dean, Columbia Business School.
Summarizing the position of the supporters, Mr. Levitin said "voluntary, private-market efforts to address the foreclosure crisis have all failed...bankruptcy is the only method that can fully address
the...problems." Levitin went further postulating that bankruptcy mortgage loan modifications will not cause either higher mortgage interest rates or less credit availability.
Emphasizing this point, Mr. Mason testified that giving bankruptcy judges the power in Chapter 13 to modify mortgage loans on personal residences is "necessary."
Mr. Mayer, although agreeing that the mortgage crisis needed to be immediately addressed, stated the bill would "exacerbate problems" and would likely "bankrupt taxpayers and our financial system." Mayer's
suggestion was a three-pronged approach:
* Creating an incentive fee program to lien holders to avoid foreclosures coupled with legislation stating existing agreements can be modified by lien holders if modification is deemed to be better economically than foreclosure;
* Implementation of financial incentives for second lien holders to cooperate with any primary mortgage modification; and
* The federal government taking action to immediately reduce mortgage rates (possibly through issuing U.S. Treasury securities to fund new mortgages).
Ranking member Smith (R-Texas), taking Mr. Mayer's side in the debate, calling the legislation both "overly broad" and "open ended," and voiced his concern that the proposals "undermine personal accountability."
In related news, House Speaker Pelosi has indicated support for the proposals stating it is a "very high priority." It is possible that the proposal might be added to the economic stimulus package (although
President Obama, while supporting the proposal, has said his preference is to not include it in the stimulus). House majority leader Hoyer (D-MD) has stated the proposal enjoys wide support in both the House and Senate.
January 25, 2009
6th Circuit Rules on Discharge in Chapter 13 after Receiving Discharge in Previous Chapter 7
In re Sanders, --- F.3d ----, 2008 WL 5386525 (6th Cir. December, 2008)
Issue: When the debtor files a chapter 7 and later a chapter 13, does the four year bar on a second discharge in Section 1328(f) run from filing date to filing date or from discharge date in the chapter 7 to the filing date in the chapter 13?
Holding: Filing date to filing date.
“On July 29, 2002, Sanders filed a voluntary petition for bankruptcy under chapter 7. The bankruptcy court granted him a discharge on February 5, 2003. On January 5, 2007, Sanders filed a second bankruptcy petition, this time under chapter 13, seeking confirmation of his debt-repayment plan and a second discharge.” The chapter 13 trustee objected to the discharge. The bankruptcy judge denied the discharge in the chapter 13 on the basis that he had received a discharge in the chapter 7 within the previous four years. Section 1328(f)(1). The district court reversed.
The court of appeals affirmed the district court. “As we see it, the four-year prohibition began when Sanders filed his first petition, not when he received his first discharge.” Section 1328(f) states: “(f) Notwithstanding [chapter 13's provisions authorizing discharges], the court shall not grant a discharge of all debts provided for in the plan ... if the debtor has received a discharge- (1) in a case filed under chapter 7, 11, or 12 of this title during the 4-year period preceding the date of the order for relief under [chapter 13], or (2) in a case filed under chapter 13 of this title during the 2-year period preceding the date of such order.” The trustee argued that the debtor “received the discharge” within 4 years. The court's analysis is not too exciting.
9th Circuit Rules on CMI - Income Which is Not Income is Included in CMI
Blausey v. U.S. Trustee (In re Blausey), ---- F. 3d ----, 2008 WL -------- (9th Cir. January 2009)
Issue: Are receipts from a private disability insurance policy “income” for CMI purposes?
Holding: Yes, even though the receipts are not income under the IRC.
Direct appeal from bankruptcy court, Alan Jaroslovsky
Per curiam, dissent from Judge Gorsuch
The debtor was receiving $4,000 per month from a private disability policy she had previously purchased. “[T]hey did not include these benefits in their calculation of CMI.” The UST moved to dismiss under 707(b)(1) or (b)(2). Including the income caused the debtors to fail means test. The bankruptcy judge granted the UST motion and the case was dismissed. The court then certified the matter for direct appeal to the court of appeals.
The court of appeals affirmed. “The Blauseys’ chief argument is that ‘income’ in the definition of CMI should be interpreted as consistent with ‘gross income’ as defined in the Internal Revenue Code.” “The plain language of the Bankruptcy Code, however, does not support this interpretation.” “The phrase ‘without regard to whether such income is taxable income’ in 11 U.S.C. § 101(10A)(A) reflects Congress’ judgment that the Internal Revenue Code’s method of determining taxable income does not apply to the Bankruptcy Code’s calculation of CMI.” “In addition, the statute specifically excludes certain payments, such as Social Security payments and payments to victims of war crimes and terrorism, from CMI. 11 U.S.C. § 101(10A)(B). The general rule of statutory construction is that the enumeration of specific exclusions from the operation of a statute is an indication that the statute should apply to all cases not specifically excluded.” The debtors also argued that various dictionaries established that income does not include these benefits. The court rejected those arguments. “The purpose of the means test is to ‘help the courts determine who can and who cannot repay their debts and, perhaps most importantly, how much they can afford to pay.”
The dissent dealt with whether the debtors had properly perfected their direct appeal to the court of appeals. When the bankruptcy judge certified the direct appeal, the debtors were required to file “a petition requesting permission to appeal” within 10 days which they did not do. The majority was prepared to ignore that shortcoming.