Too Big to Fail and Too Big to be Accountable: Banks Continue to Usurp the Law with a Mortgage Settlement

On February 9, 2012, five of the nation’s largest banks struck a settlement with federal officials and 49 state attorney’s general (Oklahoma excluded).  Under the agreement, Wells Fargo, JP Morgan Chase, Citi, Ally (formerly GMAC), and Bank of America will pay $25 billion to be spared further state or federal lawsuits regarding abusive and negligent foreclosure practices.  Included in those practices is the robo-signing issue, where mortgage companies signed false affidavits in order to speed up the foreclosure process.  The agreement does not cover the mortgages backed by quasi-government agencies Fannie Mae and Freddie Mac, which accounts for more than 50% of the nation’s current loans.

Who Gets Help?

Massachusetts’ estimated share of the settlement is $318 million, including: approximately $14 million in cash to Massachusetts borrowers; $257 million in mortgage relief, such as term modifications and refinancing; and about $46 million to the state for assisting homeowners.

Currently, 1 in 4 homeowners nationwide are underwater and approximately 4 million families have already been foreclosed on.  Under the agreement, most of the settlement money will go to reduce balances for approximately one million families who owe more on their homes than they are worth and are delinquent on their payments.  Some who are current but underwater could be allowed to refinance at a lower value.  The smallest amount of the settlement will go to those families already foreclosed on.  Because robo-signing or other false documents may have been behind their foreclosures, some 750,000 families who lost their homes between 2008 and 2011 could qualify for settlement payments of $1,500-$2,000, a token amount which would barely cover a month’s rent in most areas.

Who Wins?

While the settlement covers some illegal acts by the banks in foreclosing on families throughout the nation, the deal does not completely spare the banks from litigation.  Massachusetts Attorney General Martha Coakley, who has been one of the more outspoken attorneys general during the negotiations, reserved the state’s claims related to Mortgage Electronic Registration Systems, Inc. (MERS), and “Ibanez” claims.  However, despite the fact that the nation’s five largest banks made $46 billion in profits last year, they will only have to pay a combined $5 billion in cash.

The bottom line is that the banks have paid off the nation’s attorneys general to drop their lawsuits, leaving families across America grappling with the foreclosure mess the banks created.  In the end, the banks win, again.  By agreeing to what amounts to a legislative program, the banks have escaped the judicial process and any real opportunity to provide redress and prevent violations in the future.

In the meantime, something is better than nothing.  Borrowers are being advised to contact their mortgage servicer to obtain more information about specific loan modification programs and whether they qualify under the terms of the settlement.

Mass. AG’s dedicated mortgage settlement phone line – 617-963-2170

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Things to NOT Do Before Filing Bankruptcy

Things NOT To Do Before Filing Bankruptcy 

1.         Do NOT Transfer Money or Assets.

Sometimes people worry that they will have to give up all their personal belongings and they transfer assets to someone to hold for them before they file a Chapter 7 or Chapter 13bankruptcy petition.  While it is true that all of your property becomes property of the bankruptcy estate when you file bankruptcy, there are steps you can sometimes take prior to filing to improve your ability to retain your property.  A good bankruptcy lawyer will use the federal or State exemptions to help you keep your personal property.  However, to give valuable property to a spouse, family member or friend before bankruptcy could be considered a fraudulent transfer by the trustee.  Such conduct may result in a denial of a discharge, avoidance of the transfer, or in serious cases, criminal prosecution.           

2.         Do NOT Borrow From Your 401k, IRA, or Retirement Plan.

A frequent mistake my clients make is to borrow or withdraw from their retirement accounts to pay off credit card debt.  This is mistake for three reasons.  First, it is much easier to deal with credit card debt in bankruptcy than it is to repay a 401k loan because credit card debt is considered unsecured debt and is generally dischargeable in bankruptcy.  A 401k loan must be repaid.  Second, retirement funds are generally protected in bankruptcy.  Section 522(d)(12) permits the debtor to exempt retirement funds to the extent they are in a fund or account that is exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue code.  However, once funds are distributed or withdrawn from any qualified trust account, they may lose their protection.  Finally, the purpose of your 401k, IRA, or retirement plan is to fund your retirement.  By withdrawing from your retirement account now, you will not only face steep taxes and penalties, but you will impoverish yourself in retirement by robbing your retirement account to pay off credit cards.

3.         Do NOT Borrow Against Your Home to Pay Unsecured Debt.

Do not take unsecured debt (credit cards, personal loans, and medical bills) which is dischargeable in bankruptcy and turn it into a mortgage. It is far easier to deal with unsecured debt in bankruptcy than it is to pay off a mortgage or risk losing your home.

4.         Do NOT Pay Off Family or Friends First. 

One of the things many people do when they get into financial trouble and start considering bankruptcy as an option is to pay off debt owed to people they know first.  Under the Bankruptcy Code, all creditors must be treated equally.  This means that whether you owe your Aunt $500 or owe $500 to Visa, the law treats them equally.  If you pay off a loan owed a friend or family member between ninety (90) days and one (1) year before you file bankruptcy, the trustee could go to your friend or family member and demand they return the money that you paid them before you filed bankruptcy.  A safer choice is to talk to your lawyer before making any payments to creditors.   

5.         Do NOT Wait to Seek Legal Advice.          

It can be difficult to admit that you need help.  However, I frequently see people who have ignored their finances for so long that the worst has happened – they have lost their home or have let the stress of their debt destroy their marriage.  It can be scary to talk to a lawyer about your finances, but a lawyer can help you plan ahead and strategize to preserve your assets.  Bankruptcy is not easy, but it does not have to be the end of the world.  It is much easier to move on with your life without the fear of debt collectors and creditors hounding your every step.

Student Loan Garnishment

With the unemployment rate slowly improving, a big concern among individuals is student loan debt.  Many students borrow money from the government or private loan companies such as Sallie Mae with the expectation that they will be able to repay the loans when they graduate from college.  However, the harsh reality is that post-secondary graduation rates are abysmal and often those who do graduate enter a depressed job market.  Frequently, graduates are either unable to find work or are underemployed, making it difficult to keep up with their loan payments.  These days education does not guarantee a job, but the government does not care and they can legally garnish your paycheck to collect on a defaulted loan.

The law allows the government to garnish up to 15% of your disposable income without the permission of the court or an official judgment.  “Disposable income” is whatever is left of your paycheck after all deductions which are required by law (such as taxes) are withheld. The government cannot take more than the equivalent of 30 times the current federal minimum wage, which is $7.25 an hour.  This means that 30 x $7.25/hour is $217.50 a week, which the government may take to repay your loans.

Unfortunately, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA, made education loans almost impossible to discharge in personal bankruptcy.  Thus, unless you can prove “undue hardship” the debt will remain intact after bankruptcy.  However, there are strategies for dealing with student loan garnishment and many people seek the protection of Chapter 13 bankruptcy.  Your bankruptcy lawyer will customize a plan to repay your debts over a three to five-year period.  By filing a Chapter 13 bankruptcy all collection efforts must stop and by including your student loan payments you may be able to reduce the amount of your monthly payments and make a sizable dent in your loan balance.  In the meantime, your bankruptcy lawyer will work hard to consolidate all of your education loans into one loan payment so that you will be on better footing when you emerge from bankruptcy.

Doubling Exemptions in Bankruptcy

Like all states, Massachusetts has its own set of exemptions that you may use when filing for Chapter 7 or Chapter 13 bankruptcy.  Bankruptcy exemptions determine what you are allowed to keep during and after Chapter 7 bankruptcy. If property (such as your home, car, or jewelry) is exempt, you may keep it. In Chapter 13 bankruptcy, exemptions determine how much you must pay certain creditors through your payment plan.

Some states “opt-out” of the federal exemptions, thereby prohibiting a debtor from applying federal exemptions.  However, in Massachusetts, an individual may choose from either the federal exemptions or the exemptions provided by state law.  Last year, Massachusetts modernized their state exemptions, making them broader and more beneficial to the average consumer, however there are times when choosing the federal exemptions is in the individual’s best interest.  For example, § 522(d) of the Code may be a better choice if you have expensive jewelry that you would like to keep, or if you expect a sizable recovery from a personal injury claim.  However, you cannot mix and match exemptions from Massachusetts state and federal law. Which exemptions will best work for you depends on the type of property you wish to protect.  Your attorney will determine which exemption scheme is better in your personal situation.

In cases where a joint petition is to be filed by a married couple, both spouses must agree to use the same exemption scheme; one cannot use federal law while the other uses state law. If you and your spouse cannot agree, you will be deemed to have chosen the federal law. You may also choose to file separately, in which case you will both be required to pay separate court filing fees. But, if you can agree to use the same law and you file a joint petition, it is generally possible to stack or double the amount of state law exemptions. Stacking or doubling an exemption is allowed in a joint bankruptcy case, but only if the property is jointly owned by both you and your spouse.  Filing for bankruptcy is a lot easier with the help of a local bankruptcy attorney.

Keeping Your Tax Refund in a Massachusetts Bankruptcy

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Many people depend on their annual tax refund to get caught up on bills or help pay for necessary living expenses.  Fortunately, here in Massachusetts, most people who file a Chapter 7 or Chapter 13 bankruptcy can keep their entire tax refund.

Like everything else in bankruptcy, it is important to be open and honest with your bankruptcy lawyer about whether you have filed you tax return and whether you have already received a tax refund or are expecting to receive a tax refund.

In bankruptcy, timing is everything.  If you file your bankruptcy case AFTER you receive your income tax refund and you spent your refund on things such as food, clothing, or to catch up on utility bills, your tax return will probably be safe.  However, if you pay off a loan from friend or relative, the Trustee could view the repayment as an insider preference and demand the money back from your friend or relative.

If you file your bankruptcy case BEFORE you get your income tax refund, it is important to disclose the anticipated tax refund in your bankruptcy schedules.  Your bankruptcy attorney will use the appropriate Massachusetts exemptions to help you keep your refund.  However, if the refund cannot be claimed as fully exempt, and it is not practical to delay filing bankruptcy until after the refund is received.

Tax refunds and bankruptcy can be tricky and it is important to consult with an experienced bankruptcy attorney to plan properly to help you keep your entire tax refund.