It’s looking like 2005 all over again for credit cards….

The New York Times reported this week that credit card solicitations, particularly for those individuals who have tarnished credit or have previously filed bankruptcy, rose substantially during the fourth quarter of 2011. Credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up 12.3 percent from the same month a year earlier, according to Equifax’s credit trends report released in March. These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009, Experian, a credit scoring firm, said.

The reason for this trend is that it is becoming much easier to re-establish credit after bankruptcy, and the following outlines why:
1 You can now only obtain a discharge in bankruptcy once every eight (8) years
2. Lender’s bottom lines are suffering. They are constantly seeking new sources of business.
3. Most individuals who have filed for bankruptcy, unfortunately, have a craving for credit.
4. We live in a plastic society. Even if you have filed for bankruptcy, you must have at least one credit card, or a line of credit tied to a debit card, for emergencies.
5. Lenders know that if they extended a credit card offer to an individual after filing bankruptcy, and the offer is accepted, they love that individual because the lender knows that they cannot bail out again in bankruptcy for another eight years.
6. Unfortunately, despite everything that has been published on this topic, Lenders have already “built” a contingency into the pricing of credit cards. Lenders are not fools. They know that from day one, if they lender a dollar ($1.00), they are going to lose a nickel ($.05) – there will always be bankruptcies, slow payers, non-payers and the like. This is one of the reasons that many interest rates hover above 15-18% and higher.

Never say never in this world. Many of my clients say that they will never use credit again. This is an absolute fallacy . One of the goals of filing bankruptcy is to obtain a fresh start and begin to rebuild. Part of the rebuilding process is to re-establish credit. I am not advocating the re-establishment of multiple lines of credit but I do advocate obtaining at least one line of credit – just for emergencies.
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Over the past few weeks, I have read and noted a number of blogs and other commentaries from respected economists and authors touting the growing concern about the student loan crisis as the outstanding balances on student loans approach the $1 trillion mark.

Many pundits have commented about the value of college education relative to its potential return of investment. Some have noted the strain it has caused, both emotionally and financially, on students who have obtained degrees in the “liberal arts” and have been forced to accept positions outside of their field of study at salary levels which may not even cover the servicing costs of their student loan obligations.

The one area that few, if any, have commented on is the growing relationship between the student loan crisis and the housing crises. No one can deny that the housing crisis has devastated our economy, and, even though we now appear to be heading in a positive direction, the economy will not pick up speed at the grass roots level until sales of existing homes return to at least 2004 levels.

In past recessions, the housing market received “kick-starts” from first time home buyers. As a consequence of the growing student loan crisis, newly minted college graduates who, in the past, would have placed home ownership near the top of their financial priorities, have now replaced home ownership with the management of their student loan debts.

The more I read about this topic, the more I fear that we will end up with an entire lost generation – a generation that may never have the benefit of home ownership. Legislators must look at the relationship between the two and provide some relief in the student loan arena to provide a light at the end of the student loan debt tunnel – even if that comes in the form of partial relief through an amendment to the bankruptcy laws. This may be the only way that we may be able to fully emerge from the housing crisis….

Bank of America has announced that it is rolling out a test program in three states (including New York) in which the bank will accept a deed-in-lieu of foreclosure from homeowners in foreclosure and then rent the properties back to the homeowners for an unspecified period of time.

For those homeowners who have tried to modify, have been unable to do so, and remain too stubborn to file for bankruptcy, this may be an option – but it may come with strings attached.

First, BOA has not discussed anything about the tax consequences of the transaction. Even if a homeowner “surrenders” a property bank to a lender, the lender still has the right to issue a 1099C for that portion of the mortgage debt that it deems that it will be “forgiving.” Without having previously been discharged of the debt in bankruptcy, this could have crippling tax consequences – perhaps as high as $25,000-$50,000!!!

Second, BOA can only take a deed-in-lieu of foreclosure if there are no other liens on the property, including, but not limited to, second mortgages, home equity lines of credit (HELOCs) and judgment liens resulting from other, non-mortgage debt. The purpose of a deed-in-lieu is to save the bank the aggravation and expense of having to go through the foreclosure process. BOA is NOT going to deal with junior liens, unless, perhaps, THEY are the junior lien holder – and even then there is no guarantee

If this sounds appealing to you – CAVEAT EMPTOR!! In my estimation, if 10 homeowners in New York qualify for this program, I will be surprised…

After months of wrangling, the long-awaited foreclosure settlement between the government and the banks appears to be at hand.

A $26 billion settlement was announced Thursday morning between the federal government, state attorneys general and the five largest banks in the mortgage market: Ally Financial (GMAC), Bank of America, Wells Fargo, JP Morgan and Citigroup.

While many of the details still have to worked out, the major points are fairly clear:
(a) The settlement will only impact mortgages that were held by the five banks. If a loan was sold to Fannie or Freddie it may not be part of the pool that may be eligible to share in the pot.
(b) Five ($5b) Billion has been earmarked for payments to homeowners who may have been improperly foreclosed upon between September 2008 and December 2011. Borrowers could receive up to $2,000.00, depending on the number of claims filed nationwide
(c) Seventeen ($17b) Billion has been earmarked for various principal writedowns and other relief up to $20,000.00 per household
(d) Three ($3b) has been earmarked for refinancing mortgages currently underwater.

According to various reports, there are at least 1.5-2 million households who could be eligible for the $2,000.00 payouts. In addition, there are an additional 1-2 million homeowners who could be eligible for some relief under the remaining prongs of the settlement.

The major questions still to be answered are:
(1) How does the pot get split up between the states – rumors have been circulating that California alone could get up to eight (8%) percent of the pool; and
(2) What are going to be the eligibility requirements – who will be lucky and who will not?

Stay posted – The banks have up to three (3) years to implement and fulfill the requirements of the settlement. It will still take another couple of months at a minimum to begin to get clear direction on how it will be implemented.

In bankruptcy, you are allowed to protect various assets, such as cash or cash equivalent assets such as the right to receive a tax refund. This is called exempt property or exemptions.

When the exemption laws were overhauled in New York in January 2011, it proved to be a major benefit to homeowners and renters alike. Homeowners are now allowed to protect up to $150,000.00 in equity in their primary residence. Renters are now allowed to protect up to approximately $12,000.00 in any personal property, including tax refunds.

Despite the above benefits, there has always been, and still remains, a tradeoff for homeowners. If a homeowner must declare the “homestead” exemption, they can only protect $1,000.00 in cash or cash equivalent assets, such as a tax refund.

As we are now in tax season, homeowners must be wary of the timing of their Chapter 7 bankruptcy filing. Although the tax year has just recently ended, many Chapter 7 Trustees have taken the position that a pro-rata share of the current year’s tax refund may be considered property of a bankruptcy estate under Section 541 of the Bankruptcy Code. For example, if a homeowner filed on November 1st, the Chapter 7 Trustee may claim that approximately 83% of the tax refund for 2011 is property of the estate, and a homeowner may be required to be turn over that portion of the refund, when received, to the Trustee for distribution to creditors.

If you are a homeowner with equity in your primary residence and have traditionally received a substantial tax refund, you must ensure that this issue is discussed with your attorney. Your attorney’s job is to provide you with guidance to obtain the maximum protection under the law. It is hard enough to make the decision that a bankruptcy filing is necessary. You should not lose an asset that could be protected. Only an experienced bankruptcy attorney will raise this issue and help you work it through.

Most individuals or couples filing for protection under either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy are required to meet certain income eligibility requirements under the “Means Test.”

Under the Means Test, you must first determine if your average monthly income for the last six months is below the median income for your state, based upon the size of your household.

If your average monthly income for the past six months is below the median income in New York, you have passed the first hurdle, and so long as you meet the other eligibility requirements, you can file for protection under Chapter 7 Bankruptcy.

If your average monthly income for the past six months is above the median income in New York, you must proceed to the second hurdle – do you have the ability to repay a portion of your debt?

The second hurdle is the determination of your ability to repay a portion of your debt. Under the law, you are required to perform an analysis of your income and expenses (based upon certain Internal Revenue Service guidelines) – the Means Test..

With respect to expenses, some expenses are deducted on a dollar for dollar basis, others on an allocation basis, based upon family size and county of residence. The largest single deduction on an allocation basis for renters has always been housing/shelter expense.

Prior to November 1, 2011, renters who reside in Nassau and Suffolk Counties were required to deduct a ridiculously low amount for shelter expense as compared to homeowners who have mortgage obligations.

As of November 1, 2011, the playing field for Long island renters has now been leveled. Housing allowances for Nassau and Suffolk County residents have increased by 30% on average

The following is a chart of comparing the allowances:

Household                 1                2                  3                      4
                             Pre   Post   Pre   Post   Pre  Post    Pre  Post
Nassau County    1545 2027 1814 2300 1911 2508 2131 2796
Suffolk County     1385 1806 1626 2121 1715 2235 1911 2492

The net effect of this change is that, even if your income is above the median for the State, residents of Nassau and Suffolk Counties has been provided with an additional $6,000.00 allowance based upon the cost of housing on Long Island. This can make the difference between qualifying for Chapter 7 Bankruptcy and discharging all of your dischargeable debt and filing for Chapter 13 Bankruptcy and having to devote all of your net disposable income to a repayment plan of up to five years.

If you have been previously advised that you are “on the border” to qualify for Chapter 7 Bankruptcy, it’s time to look again and see if you qualify under the new housing allowances.

Special Note: Means Test Allowances are updated every six months. The above allowances will only apply to cases for between November 1, 2011 and April 30, 2012.

Earlier today, I was listening to a business report on the radio in which an economist actually recommended that homeowners who purchased a home in the mid-2000′s with little or no money down, who are now at least 12 months behind on their mortgage and have been unable to modify their mortgage because of insufficient income, actually file for Chapter 7 bankruptcy and GET IT OVER WITH – MR. OBAMA IS NOT GOING TO SAVE YOUR HOME!!!

Unfortunately, this mantra is going to going to get louder in the coming months as (a) banks may have already modified the vast majority of those who can truly afford to make timely mortgage payments, and (b) State Courts are now beginning to allow more foreclosure actions to move forward.

One of the ways that the economy can get moving again is to allow these remaining foreclosure actions to begin to again flow through the system. There are too many properties in the pipeline that are being stalled by my brethren without any legitimate financial grounds – namely – THESE HOMEOWNERS CANNOT AFFORD TO PAY ANYTHING NEAR WHAT MAY BE REQUIRED TO ADEQUATELY SERVICE THEIR DEBT.

Even if some are successful in modifying, has anyone really looked at the terms. In many cases, while the payment may become affordable in the short term, the payment of a modified mortgage has become the equivalent of indentured servitude or glorified rent (whichever cliche you may choose). Banks are not reducing principal balances – they are merely deferring them. A homeowner will may minimal payments over the next 30+ years and at the end of the period, could still owe the bank in excess of $100,000.00.

Doesn’t it just make more financial sense to file bankruptcy, begin to save what you would be paying for a mortgage (or rent), and let the bank foreclose? At the end of the process, when it is time to make the transition to new housing, you will hopefully have a small nest egg to allow you to start over again. ISN’T THIS WHAT BANKRUPTCY IS ALL ABOUT?

Now I am not advocating intentional or structured defaults on mortgage obligations, I am just asking those whose situations have gotten beyond the “point of no return” to temper their expectations and be more realistic in viewing their financial futures. Think about it before you spend more money paying consultants that make unrealistic promises….

I know this sounds completely bizarre, but it may start happening more frequently in the near future.

In the past 30 days, I have encountered three new clients who have been “informally” advised by their mortgage lenders to file bankruptcy to deal with their unsecured debt PRIOR to completing a mortgage modification.

Lenders, in addition to the 31% rule (previously discussed in another post), are now taking a closer look at a homeowner’s total debt ratio – also known in the banking business as the “back end number.”.

In the cases I have encountered thus far, each client had a total debt ratio (mortgage payments, auto payments and credit card minimum payments) of in excess of 50% of their monthly gross incomes. It is my understanding that lenders may now not consider a homeowner for a modification unless their total debt ratio is less than 40% of their gross monthly income. For many homeowners, bankruptcy may now be the best alternative to eliminate credit card debt BEFORE applying for a mortgage modification.

As a former banker, I know that although the two ratio formula has been around forever, it has shifted over the years. Back in the early ‘90s (before mortgages began to be sold en masse), the rule of thumb was that mortgage debt should not exceed 28% of homeowner’s gross monthly income, AND that their total debt ratio should not exceed 34% of income. In the early 2000′s, the ratios shifted to as high as 35%/45% (and this was in addition to all of the other types of mortgages that were available, such as “liar” loans).

The pendulum now appears to be swinging back to the more “traditional” guidelines. If you are attempting to modify your mortgage, I suggest that you first calculate your total debt ratio and then speak to your lender . Instead of wasting valuable time processing an application for a modification which could be doomed from day one, it may be a good strategy to be proactive with your lender and ask whether they would be willing to consider you for a modification if you agree to deal with your unsecured (credit card) debt in a bankruptcy proceeding. In this environment, anything is possible….

In the recent past, I have seen a trend develop that, even as a parent, I find extremely disturbing – parents seeking bankruptcy protection in mid-life or in preparation for retirement that will remain saddled with their children’s student loan obligations long after they have discharged of their other debts.

Here’s an example: A couple in their early-mid 50′s that rent an apartment, with a combined income of in excess of $80,000 per year has $50,000 in credit card debt. In addition, while their child was in college, they co-signed for an additional $50,000 in student loans. Their child, now is his/her late 20′s, is having difficulty getting their career off the ground and cannot meet their student loan obligations. Mom and Dad, as the joint obligors, begin to make student loan payments for their child that could be as high as $500/month. Dad’s job then gets downsized and his $60,000 income is now $30,000. Mom and Dad now seek advise from a bankruptcy attorney (me). I now have to deliver the good news and the bad news that (a) they qualify for Chapter 7 bankruptcy; (b) they can obtain a discharge of their credit card debt; but ( c) they will still be obligated for their child’s student loans.

The reason for this is that, despite the provisions contained in Section 523(a)(8) of the Bankruptcy Code, which state that certain student loan obligations may be discharged in bankruptcy, in reality, this is NOT the case.

The rule of thumb in the case law on this issue was provided in In re Brunner The Court in Brunner basically held that so long as an obligor on a student loan is able bodied, has some net disposable income above their usual and customary living expenses, and is capable of making some type of payment on a student loan obligation, that student loan cannot be discharged in bankruptcy.

As a parent and a bankruptcy attorney for over 20 years, I give every parent this word of advise: Love Your Children, But Don’t Sign For Them! I know that you want to do everything you can to help your child to succeed in life, and this includes providing financial support. Financial support, though, does not have to mean co-signing for your child’s student loans.

If your child needs student loans to supplement their college expenses, let your child sign for them, even if you can afford to make the payments. You can always help them to make the payments for as long as you can afford to do so. The key is to love your child, and help them any way you can financially – so long as it is within your means. I am seeing too many couples who put their children ahead of themselves and are being forced to pay their children’s student loan obligations well into their retirement years. This trend will have to be dealt with by Congress at some point, but unfortunately, I do not see it materializing until our present economic house gets put back in order.

You are constantly getting offered new credit card accounts but, it’s important to not have too many. If you open a new account because of a lower interest rate or a promotional offer, you should always close a current account you are no longer using or are replacing. Closing unwanted old credit accounts has many benefits including:

• Helps to keep track of credit cards
• Lowers the amount of revolving debt, helping you qualify for more loans
• Keeps your credit report cleaner
• Helps you avoid unnecessary fees
• Prevents identity theft

To help you understand what you should and should not do when closing old credit card accounts, here are a some dos and don’ts:

CLOSING YOUR CREDIT CARD ACCOUNTS DOs:

DO close unused and idle accounts – This prevents identity theft and being charged fees for unused cards.

DO cancel accounts with balances that you want to pay off – If you don’t want to use a card anymore that has a balance, you can close the account and just concentrate on paying off the balance.

DO be sure you still have several credit card accounts open – Creditors view signs of activity and responsible credit use positively.

DO always have one card designated for regular use and pay it off each month – This one card can be reserved for everyday spending while your other credit cards can be used for emergency or specific purposes, such as vacations, business trips, etc.

DO check your credit report – After closing an account, check your credit report to ensure that the accounts have been marked as closed and to determine whether there are any errors.

DO destroy any canceled credit cards – It is important to cut up closed credit card accounts by cutting through the account number.

CLOSING YOUR CREDIT CARD ACCOUNTS DON’Ts:

DON’T close your oldest credit card account – This could cause your credit history to appear shorter and could harm your credit score. Better to keep the account open and not use it or just use it infrequently. If you want to close it because of a higher interest rate, contact the credit card company to see about lowering the APR.

DON’T expect accounts to close automatically – The only way an account is closed is if you contact the credit card company and ask, preferably in writing, to close the account.

DON’T be pressured into canceling several accounts at once – It is better to gradually pay down and then close the accounts if you are unsure about the impact doing so will have on your credit score or you are uncertain as to the amount of debt you need to carry. You may need those credit cards again in the future.

DON’T over-consolidate balances onto one card – If your credit balances rise to above 50 percent of your available limits, you may see a drop in your credit score.

Remember, be smart when closing old accounts to ensure you get the best possible APR’s and benefits from your credit cards. If you have further questions about this, please don’t hesitate to contact our offices.