New Blog Address

I have finally made the leap to a Wordpress blog on my website--www.fresnobklaw.com. You can access the blog by going to http://www.fresnobklaw.com/fresnobankruptcyblog. I will no longer be blogging at this address.

Bill would limit municipal bankruptcies in California

The almost unfettered power that unions possess in California takes one's breath away. One place that is not the case is in Chapter 9, a.k.a., municipal bankruptcy. In Chapter 9, a city can renegotiate union contracts in a fair and open forum. But the California Senate is trying to limit the right of municipalities, including hospitals and water districts, to file Chapter 9.

The Senate Local Government Committee on Monday approved legislation that would require cities to first secure permission from an obscure appointed state agency before they could file for bankruptcy.

That panel would have the authority to force cities and local districts, including those providing water service and hospital care, to slash budgets elsewhere before seeking bankruptcy protection.

“It’s a bad idea,” Jay Goldstone, the city of San Diego’s chief operating officer, said in an interview. “The state should not be dictating whether a local government does or does not qualify for bankruptcy. … That’s what the courts should be for.”

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Coincidentally, Goldstone is one of the appointees to the California Debt and Investment Advisory Commission, which would be granted the new oversight power. The commission now provides local governments with advice and technical assistance on debts and investments.

Bankruptcy is not a job for the commission, Goldstone said.

“This just adds another bureaucratic layer at a time when we probably need less bureaucracy, not more,” he said.

Senate Considers Allowing Small Businesses to File Chapter 12

The Senate Judiciary Committee held a hearing entitled Could Bankruptcy Reform Help Preserve Small Business Jobs on March 17, 2010. The ideas presented at the hearing included a proposal to add a new category of entity that could file Chapter 12 (formerly reserved for family farmers and fisherman)--"small business enterprises."

A small business enterprise would be defined as a small business with $10 million or less of debt where at least 50% of the debt had been incurred for business purposes. An exhaustive analysis of the proposal and proposed bill langauge can be found at http://judiciary.senate.gov/pdf/3-17-10%20Small%20Report.pdf.

This kind of proposal makes a great deal of sense for many reasons. First, it is rare indeed to find a Chapter 11 case that can be completed for less than $30,000 in attorney fees. A Chapter 12 case, on the other hand, might be able to be done for half of that on a fairly regular basis. Second, Chapter 13 would also be an inexpensive route, but the debt limits for Chapter 13 are so low that many small businesses do not qualify and Chapter 13 only applies to individuals, not LLC's or corporations. Consequently, many small businesses that are incorporated (even those under the debt limits) do not qualify to file Chapter 13.

Opening up Chapter 12 like this makes a great deal of sense and the Senate should be encouraged to take up such a bill and to pass it.

Mr. Fear Quoted in Article on Debt Consolidation/Negotiation

I was recently quoted in an article in The Business Journal entitled: Local attorney cautions against debt consolidation. The reporter in this story was trying to do a story setting out the pros and cons of debt negotiation/consolidation. I highly encouraged him to try to contact a debt negotation company for an interview. I even gave him quite a few questions to ask. Apparently, he was unable to get anyone to give him an interview, because they are not quoted here.

New Bankruptcy Judges' Bill Proposes New E.D. Cal Judgeships - HR 4506

Congress is considering H.R. 4506, a bill to add new bankruptcy judgeships. The bill passed the house nearly unanimously and is expected to pass the Senate. Under the new "pay-go" standards, the bill must be revenue neutral. It achieves this by increasing the Chapter 7 filing fee by $1 and Chapter 11 by $42.

The bill would add two (2) new bankruptcy judgeships to the Eastern District of California and make permanent the temporary judgeship currently in place, bringing to nine (9) the total number of bankruptcy judgeships in the Eastern District of California.

The Eastern District of California has one of the highest judicial workloads in the country and adding two new bankruptcy judges to the Eastern District would be a significant step toward relieving that workload.

Proposed FTC Rule Bans Up-Front Fees for Modifications

California law already prohibits upfront fees for loan modification services. Now the Federal Trade Commission has prposed a similar rule.

The Federal Trade Commission has proposed a new rule that would prohibit third parties, including loan modification specialists and loss mitigation attorneys, from collecting payment for foreclosure prevention services until after they obtain a documented offer from a lender or servicer for a modification or other form of mortgage relief.

Interestingly, the rule would apply to attorneys as well, with a limited exception for attorneys representing a consumer in a bankruptcy or other legal proceeding.

“Homeowners facing foreclosure or struggling to make mortgage payments shouldn’t have to contend with fraudulent ‘companies’ that don’t provide what they promise,” FTC Chairman Jon Leibowitz said. “The proposed rule would outlaw up-front fees so companies can’t take the money and run.”

The FTC has brought 28 cases against companies suspected of foreclosure rescue and mortgage modification scams, and state and federal law enforcement partners have brought hundreds more. According to the agency, generally these cases charged that companies do not provide the services they promise and that they misrepresent their affiliation with the government and government housing assistance programs, including the Making Home Affordable program.

Apparently, this has become a big enough problem that the FTC in Washington has heard about it.

Beware of Southern California Loan Modification Lawyers

This article in the Fresno Bee should give pause to anyone thinking about hiring one of the Southern California loan modification mills. What generally happens is the client sees an internet or other advertisement, calls the number and reaches a call center. They then are asked to put down $1,500 - 5,000 to get a loan modification. Sometimes, a loan modification can be achieved, but oftentimes, the client could have obtained a loan modification without the significant cost incurred. The California State Bar has been actively investigating these cases, providing news releases tracking their progress (See July 15, 2009, August 15, 2009, September 18, 2009, October 21, 2009, and November 10, 2009). The article also notes the following:

The loss to the public from loan-modification cases is in the millions of dollars, State Bar officials say. Most of the attorneys under investigation are from Southern California, but many of the victims live in the central San Joaquin Valley, enticed by loan-modification companies that advertised on the Internet.

I have seen that happen time and time again. I have also seen similar lawyers from Southern California try to represent clients in Bankruptcy Court in Fresno and they almost always make a mess of the case, especially in Chapter 13. If you are thinking about filing a bankruptcy, hire a local lawyer.

Major Asset Manager Proposes Allowing Mortgage Modifications in Bankruptcy

BlackRock, the world's largest asset manager, has proposed creating a bankruptcy option that allows modification of home loans in bankruptcy. Interestingly, BlackRock is not proposing that it be done in Chapter 13, but rather through some other bankruptcy route that allows all of the unsecured debt to be discharged so that home owners can focus on making the new payment on their mortgage. I think that Chapter 13 is still the best place for allowing loan modifications, especially in districts where there is no set minimum that has to be paid to unsecured creditors. Chapter 13 trustees, debtors' attorneys, creditors' attorneys and bankruptcy judges are the best-equipped people to handle these types of modifications, because they do it every day with every other type of collateral.

The Real Message of the Massachusetts Senate Election

Everyone is trying to figure out the meaning behind Republican Scott Brown's mind-numbing 5-point victory to fill Teddy Kennedy's seat in the U.S. Senate. Most people think it has something to do with the health care legislation, and I would agree with that. I think people don't believe that government can actually keep health care costs down. But I think the real issue is that people are so upset the health care bill has taken up almost a year of legislative work, when the big issue is the economy and legislative action on the economy has been either non-existent or completely ineffectual. Instead of wasting all this time on health care, why don't you put your heads together to come up with some economic reforms, voters are saying.

I think Congress thought they had done somethink like that with the stimulus and loan modification program passed early in the year. But neither of those programs have done anything to put a dent in the economic situation. The stimulus is a pork-laden and bureacratically-entangled mess, which is incredibly inefficient at getting money back into the economy. And the loan modification program has proven a collosal failure. Only a small percentage of the estimated loan modifications have taken place. President Obama indicated he wanted to use a carrot and stick approach to loan modifications. Well, Mr. President, we have tried the carrot and it has not worked. Its time for the stick.

It is time to look again at legislation allowing modification of home loans in Chapter 13 bankruptcy. You can modify car loans, boat loans, rental loans, farm loans, and just about any other kind of loans. But you can't modify a loan on the principal residence of the debtor. It is time to remove that favored treatment to let people keep their houses. This will stave off the next foreclosure wave that everyone is so nervously talking about, and the deleterious effect on home prices from the shadow inventory of foreclosed homes banks are holding, and allow the market to stabilize.

As I have discussed in numerous posts (see, e.g., one, two, and three), dealing with this problem in bankruptcy is the best place to do it for the following reasons:

1. Bankruptcy is a last resort. Nobody wants to file bankruptcy. So only those who are most desparate for the relief will file, thus limiting the number of people taking advantage of this relief.
2. Bankruptcy provides a built-in mechanism to determine if people should be eligible for the relief of modifying the loan. There is no better mechanism out there for determining what people should qualify for a modified loan.
3. All of these modifications would be supervised by the bankruptcy court. The bankruptcy court is pre-equipped with the knowledge and resources to properly vet requests to modify loans. The bankruptcy court does it all the time in contexts other than home loans. (And in Chapter 12, it even supervises modification of home loans.)
4. A Chapter 13 plan takes a lot of doing to finish. Debtors would have to comply with every provision and make every payment on time for 5 years to get the relief of a modified loan. Anything else would result in dismissal of the case and vitiation of the relief requested.
5. Almost all of the mortgages in this country are held in trusts. Each of these trusts has a whole panoply of parties responsible for various aspects of the mortgage, many of which have conflicting interests. Often, the various parties to the trust don't want to act for fear of being sued or don't want to act in a way that is in the interest of the investors because that is against that parties' interest. By allowing mortgages to be modified in Chapter 13, these sticky conflicts are avoided and the Bankruptcy Code can accomplish what it was intended to do: give the debtor a fresh start and treat all creditors fairly.
6. These trusts are known as REMIC trusts and are given special tax treatment. That tax treatment can be threatened if too many of the mortgages are modified.

And the best part about this solution is that it should be inherently palatable to both sides of the aisle. It is inherently free-market because it removes special protections for certain types of loans and would result in little, if any, increased government expenditure or regulation. It is also inherently populist, because it helps the little guy by giving him the same rights to modify a loan in a small bankruptcy that a big corporation has in Chapter 11. It is time to allow home loan modification in Chapter 13 bankruptcy.

The Problem of Loan Modification Assistance Providers

Clients and acquaintances often ask me if I can refer them to someone who can help get a loan modification. Unfortunately, I can't. I don't know of anyone who is going to do any better of a job than the client could do working directly with the lender. So I usually suggest that clients try to negotiate directly with the lender to obtain a loan modification. Almost all loan modifications now are done through the HAMP program, so I put together an article on the HAMP program that gives a basic framework of how that program works.
Recently, I noticed a press release from the State Bar identifying various loan modifications that were under investigation. (The release is dated 9/18/09.) I don't know what the current status of this investigation is, but I would highly suggest that individuals in California considering using a loan modification law firm contact the California State Bar to see if there have been any complaints regarding the firm they propose to use.

Personal Bankruptcy Filings Rising Fast - WSJ.com

This is an interesting article from the Wall Street Journal entitled, "Personal Bankruptcy Filings Rising Fast." The article states that in 2009 there was a 32% rise in bankruptcies over 2008. The question is, will this trend continue in 2010? Only time will tell, but I am inclined to think that it will level off a little bit in 2010. In the article, they state that bankruptcies had peaked, which is probably accurate. But I would not be surprised if they stayed close to that peak for quite some time to come.