Tuesday, October 31, 2006

Sue up or Shut up!

Have you ever received a letter threatening to sue to collect $388? Those fortunate souls who are unfamiliar with the court system might believe someone would actually sue to collect $388. But it is just not worth it and debt collectors know it. Here's an interesting article from Time regarding debt collectors who threatened to sue even when they knew suit was unlikely.

A class action was brought against the debt collectors alleging violation of the Fair Debt Collection Practices Act ("FDCPA"). The FDCPA prohibits debt collectors from making false or misleading statements in attempting to collect a debt. The debt collectors' letter stated that failure to pay the debt "could" result in a lawsuit. Thus, they claimed, the letters did not speak of an imminent lawsuit and did not violate the FDCPA. The District Court agreed with this reasoning and dismissed the claims. The Third Circuit Court of Appeals, however, did not agree and reversed the District Court, holding that the District Court must use a "least sophisticated debtor" standard of review in determining whether the statements were misleading.

Thursday, October 26, 2006

Wall Street Journal on New Bankruptcy Law

The Wall Street Journal posted an article claiming (or at least inferring) the new bankruptcy law is a success and denigrating those who opposed the law.

Henry Sommer, president of the National Association of Bankruptcy Attorneys (and co-editor of Collier on Bankruptcy) posted the following response:

"I was not surprised to see the Journal's editorial page echo the financial services industry's talking points on the recent bankruptcy legislation. Unfortunately, you have your facts wrong. You don't state the source of your figures supposedly showing a decline in debtors' incomes, but the numbers most frequently being reported for debtors who have
filed in the last year reflect those debtors' "current monthly income," a new statutory term that excludes various types of income and therefore cannot meaningfully be compared to the income reported in cases filed before the legislation was enacted.

"In fact, our members report that the vaunted new means test is having negligible effects in terms of pushing higher income debtors into chapter 13 for the simple reason that there were never many debtors who could afford to pay their debts. The same types of debtors are filing chapter 7 cases as before the legislation. Consumer credit counselors, to whom every individual debtor must go before filing a bankruptcy case, also report that virtually
no debtors they see are able to pay their debts.

"The truth is that the biggest effect of the new law is the substantially increased cost of filing bankruptcy cases, borne by all debtors and acknowledged by everyone. These costs have limited access of lower income families to much-needed relief from financial problems caused by medical expenses, unemployment, and divorce. They are the result of unnecessarily
increased government bureaucracy and onerous new paperwork requirements, and would have been condemned by the Journal had they been imposed on businesses instead of struggling families."

My own view is that those who prophesied the end of bankruptcy before the bill took effect were engaging in a bit of hyperbole. The law has some serious problems and doesn't really fix a whole lot. It does make it harder and more expensive for people to file bankruptcy, simply because it creates more hoops to jump through. But (speaking from my own experience) the means test that the WSJ is boasting about in this article results in wildly inconsistent results. For example, let's say a salesman is paid on commission only. He usually makes about $12,000 a month. However, his commissions go down to about $6,000/month for five straight months before going back up to $12,000. The means test says he has to use $7,000 as his monthly income, even though he might make $12,000/month for the next year. Most likely, he will have expenses over $7,000/month and would satisfy the means test for Chapter 7 or have a low payment for Chapter 13. The WSJ's claim that the new law is successful is premature.

But, as anyone knows who has read something in the papers about their profession, newspaper reporters usually don't get deep enough into a topic to really understand it and consequently, they usually have at least some level of inaccuracy in their reporting.

Friday, October 20, 2006

Foreclosure Consultants Are Bad News

I have people come in my office frequently who have had this happen. They defaulted on their home loan and the house is going into foreclosure. They were contacted by someone who offered to help them get out of the default. They offer to help in different ways: (1) buying the house, (2) assuming the loan, (3) making payments until the borrower can refinance, and (4) getting a new loan for the borrower. Most of the time, however, they charge high (and hidden) fees and/or they buy the property for a fraction of what it is worth.

This is a group that was caught by the California Attorney General, but there are many more out there. Consumers need to know that there are laws protecting them against these predators. California Civil Code Sec. 2945, et seq. severely restricts what a foreclosure consultant can do and provides extensive remedies when a foreclosure consultant does not comply with the law. The Better Business Bureau provides an explanation of this law here.

If a foreclosure consultant has taken advantage of you, please call our office to arrange a free consultation (559.436.6575) or visit my website to schedule an appointment online.

Thursday, October 12, 2006

QWR's and RESPA

One thing I have been seeing a lot of recently is mortgage companies hiding the ball on consumer loans in bankruptcy. For example, a mortgage company might allocate certain payments from a Chapter 13 Trustee to a "suspense account" and not to principal and interest as they should. Or maybe there is a substantial "escrow shortage" when there was no escrow account to begin with. If you try to get information from the companies just by calling them, it is often like a shell game and sometimes, you just need documentation of what happened. And mortgage companies are required to provide such information under the Real Estate Settlement Procedures Act ("RESPA"). The procedure to request such information is by means of a "qualified written request." You can see a sample request here.