Foreclosure Crisis Affects Churches

“We were kind of like that young married couple that really stretched for their first home,” said Bevan Unrau, the church’s senior pastor. “But I don’t think we’re completely unique.”

The era of easy credit has begun taking its toll on even the most sacred of borrowers, religious institutions.

Columbia, South Carolina and the recession

"As the American economy sinks deeper into one of the more punishing recessions since the Depression, frustration and fear color the national conversation."

Bush changes tactics - $17.4 Billion Bailout approved

Well, it looks like Bush ignored his advisors and the sense of the GOP Congressmembers yet again -- a $17.4 billion emergency loan and bailout package was approved today.

I find this turnabout to be particularly confusing since yesterday I blogged about Bush's thoughts about an auto-industry bankruptcy. Now he is saying, "Chapter 11 is unlikely to work for the American automakers at this time." A little confused here - although I doubt the Bush administration will address this "one position today, another tomorrow" tactic.

Here's an interesting piece on NPR; a tax attorney and bankruptcy attorney comment on a prospective GM bankruptcy. After listening to this, I'm not sure that a GM bankruptcy would result in a reorganization -- it might effectively end in a liquidation. Whether that's good or bad remains to be seen.

Prepacks and the Bush plan

A "prepackaged" or "prepack" bankruptcy case is a strategy that businesses use to adjust their debts in a Chapter 11 case. Normally, the majority of negotiation with creditors is done prior to filing the bankruptcy case, which can simplify what is otherwise a lengthy and complex process. The time spent in the Chapter 11 is shortened, and a business can focus on, well, business as usual more quickly.

Prepack bankruptcy cases have been used as a business strategy, to take potential asbestos defendants in and out of bankruptcy cases quickly, but some commentators believe that these "asbestos prepacks" largely benefit plaintiffs' attorneys and bankruptcy attorneys. I certainly believe that some of the behavior in these cases warranted closer investigation, and that such cases are breeding grounds for unethical and potentially illegal practices. Here's an interesting article about a doctor whose questionable x-ray review techniques were discredited by a federal judge as being "manufactured for money."

President Bush is indicating that an "orderly bankruptcy" would be best for the auto industry. His press secretary was quoted as saying, "There's an orderly way to do bankruptcies that provides for more of a soft landing. I think that's what we would be talking about." The article doesn't say, but his staff may be thinking about a Chapter 11 prepack. It will be interesting to see what role the president's administration plays in preparing for such a bankruptcy case, which would undoubtedly be among the most-watched commercial bankruptcies this year.

State unemployment funds drying up; tough times for retirees

It is a frightening truth that states' unemployment funds are being exhausted around the U.S. This is worrisome - unemployment insurance makes up part of Americans' "safety net" that includes bankruptcy. Mercifully, Washington (state) appears to be doing fine - although with the reports of a budget deficit during the governors' campaign, we are not immune.

Times are tough for everyone, even retirees. Here's an article in the Seattle PI talking about the double or triple whammy for retirees - a decline in house values and retirees' inability to sell their homes, the disappearing act by investments that retirement plans were built on, and then the money that retirees may have put into a retirement home or village, which often was a substantial sum and may or may not be refundable.

I'm glad I help people access the "safety net" when they are in dire financial circumstances, but it doesn't make the economic pain any easier for those who are mired in it right now.

Bankruptcy for GM?

Now that the auto industry bailout appears to have stalled in Congress, can a bankruptcy filing by GM be far behind? I agree with this article in the NY Times which says that a Chapter 11 case might not be so bad. Although it would be painful and a tragedy for the workforce of GM to lose their jobs, the article points out that most of the value for shareholders has already evaporated. And most of GM's pension obligations have already been funded or financed, according to the article -- which could mean a GM bankruptcy wouldn't have the catastrophic and nightmarish effects on retiree and employee retirement benefits as, say, the United Airlines Chapter 11.

Lately I've been learning that I'm actually much more conservative than I thought when it comes to some economic theories. I believe that market forces should be allowed to play out, although I do believe that the role of the government is to protect its citizens from things like pollution, unsafe work environments, and the like. I think that, even if GM's reorganization failed and the company liquidated, the auto industry could become more efficient.

My family shares the same story as many Americans. We owned several American cars, but we were largely dissatisfied with their reliability, design, and quality and eventually only bought Japanese cars (Toyotas, which we found to be rock-solid reliable). It is no surprise to me that the American auto industry is having extreme financial difficulty. Giving huge rebates to your customers can help sell cars in the short term, but over the long term a car company has to produce cars that its customers actually want. Wouldn't it be good to see an American auto industry that really made products that not only Americans want to buy, but that the rest of the world wants to buy? Maybe some streamlining of the auto industry could help make this happen.

The mortgage companies aren't willing to work with you

Remember the $300 billion foreclosure prevention package passed last summer? It was supposed to help up to 400,000 homeowners stay in their homes. Well, the New York Times reports that due to the various requirements, fewer than 200 people have applied for the program since it started in October. Yet another program unveiled by the FDIC was supposed to help over 65,000 homeowners whose loans were held by IndyMac, the failed bank taken over by FDIC. But that program benefited only 7,500 people.

Why don't these programs work? In my opinion, the short answer is that banks and financial institutions are quick to extend their paws to receive government and taxpayer money, but when it comes to their own being generous and helping individuals and families in financial distress, they act as nothing more than simple hypocrites. There's a famous saying that "a banker is someone who lends you his umbrella when the sun is shining, then wants it back the instant it starts to rain." MBA types in bank management must realize that dreaming about expected profits is like dreaming about the proverbial "pie in the sky." Banks could cut their losses if they were actually willing to work with borrowers and help them afford to keep their homes. Everyone would benefit. Keep in mind that the research shows that even borrowers who qualified for prime rate mortgages were often put into subprime mortgages simply because mortgage brokers made larger commissions on subprime loans.

Still, I believe that Congress must pass legislation allowing bankruptcy judges to modify the terms of mortgage loans, or we will continue to see no real relief from the mortgage and housing crisis.

100 new bankruptcy cases a day in Washington

If there is any doubt that bankruptcy filings are a symptom of tough economic times, the Seattle Times reports that there are over 100 new filings a day in Washington State. King, Clark, Pierce, and Snohomish counties accounted for 60% of the increase in bankruptcies in Washington.

Tribune files for bankruptcy protection

Article in the Seattle PI here: Tribune files for bankruptcy protection

Can I keep my car?

Many of my clients want to know if they can keep their car if they file for bankruptcy. The general answer is, "yes, usually." The real answer depends on a number of factors. Most importantly, whether there is a loan against the car, who the lender is, and the value of the car.

If you are filing a Chapter 7 case, the bankruptcy trustee will sell your car if s/he would end up with money for your creditors. Say you own a used Toyota worth $10,000, but you owe Bank of America $7,000. We'll pretend your exemption is $3,000 -- the trustee will not sell your car because there will be nothing left for your creditors after paying Bank of America and paying you your exemption. However, to keep the car you must remain current on your payments or reach an agreement with the bank to get the payments current.

If you own the Toyota free and clear, then the trustee would probably sell the car, as even after paying you your exemption of $3,000, there will be $7,000 with which to pay your creditors. The trustee will incur some costs to sell the car, but nonetheless there would be some recovery for your creditors.

If you are filing a Chapter 13 case, the bankruptcy trustee does not sell or liquidate your property for you. However, your unsecured creditors must receive at least as much as they would get if you had filed Chapter 7. This is in section 1325(a)(4) of the bankruptcy code and is called the "liquidation test." You don't have to actually be eligible for a Chapter 7 as the test assumes a hypothetical Chapter 7. So, in our example above where you own the Toyota free and clear, your unsecured creditors must receive at least $7,000, possibly reduced by the costs of selling the car. Chapter 13 repayment plans last from 3 to 5 years.

One wrinkle on secured debt and cars is that some creditors will repossess a car post-bankruptcy even if the payments are current. Some purchase and loan agreements have what is called an "ipso facto" clause. These provisions say that if you file for bankruptcy, it is considered a default of the loan agreement, and the lender can take the car back. Most lenders are smart enough to realize that they will lose a lot of money if they enforce this clause after bankruptcy. Ford Motor Credit, Chrysler Financial, and GMAC are, however, reported to be taking cars back after a bankruptcy filing.

In some states, "ipso facto" clauses are not enforceable, or state law may say that lenders can't repossess cars for a non-monetary default (i.e., a lender can only take the car back if you are behind on payments). In any event, if you are thinking of filing for bankruptcy you will want to definitely consider whether keeping a financed car is in your best interest anyway.

What is the Automatic Stay?

STOP! That's basically what the automatic stay does when someone files for bankruptcy. Section 362 of the bankruptcy code stops all collection action (lawsuits, collection calls and letters, repossessions, foreclosure sales, garnishments) or action against the debtor or her property, prohibits contact with the debtor, and essentially means that creditors need to pay attention to the bankruptcy case, as their sole remedy at least while the bankruptcy case is pending will be through the bankruptcy court. In Chapter 13 cases, the stay also protects a codebtor. The stay is much like a temporary injunction -- and the debtor doesn't need to do anything but file a bankruptcy case. The filing of the bankruptcy case invokes the protection of the automatic stay. Creditors who willfully violate the automatic stay (knew about the bankruptcy case but took action anyway) will be subject to sanctions.

There are some exceptions to the stay, such as for child or spousal support proceedings, or in certain cases where the debtor has filed for bankruptcy before. Creditors can also request that the stay be lifted, or terminated, for a variety of reasons. Normally there must be no equity in the property (above and beyond exemptions and costs of sale), and the property must not be necessary for the debtor's reorganization. Generally in a Chapter 7 case, there is no legal defense to a motion to lift the stay, as a Chapter 7 is fundamentally a liquidation proceeding.

I have handled several cases involving creditors who refuse to hire legal counsel and do not understand the importance of respecting the automatic stay. Creditors who violate the stay -- beware!

Once a debtor receives a discharge, creditors must pay careful attention not to violate the discharge injunction. Section 524 of the bankruptcy code essentially takes the concept of the automatic stay and makes it permanent -- creditors cannot ever take action against the debtor or the debtor's property, generally, to collect on a pre-bankruptcy debt.

The provisions of the automatic stay and the discharge and they way they operate are somewhat complex, but the basic concepts are simple -- creditors must STOP once a bankruptcy case is filed, and stop forever once a discharge is entered.