James Molleur's Maine Bankruptcy Blog

Loan Modifications Increase Options

Congress recently passed a law to address the problems in the subprime mortgage market.  The proposed solution did not include changes to the Bankruptcy Code which would have permitted a Bankruptcy Judge to modify residential mortgages in a Chapter 13.  The mortgage industry heavily lobbied Congress against these changes to the Bankruptcy Code, arguing that mortgage modifications in bankruptcy would seriously damage the mortgage industry.  Whether the mortgage industry's fears are well founded is debatable.  Certainly, members of Congress listened to mortgagees who claimed that the mortgage industry could solve many of the problems on their own by voluntarily modifying their mortgages for homeowners in financial distress.

The loan modifications, to date, have only benefitted a small percentage of the homeowners in financial trouble.  Nonetheless, it is important to understand the circumstances under which a mortgagee would consider a loan modification and the ways in which the loan may be modified.  Loan modifications are being promoted by mortgagees to homeowners who have fallen behind in their mortgage payments or are in bankruptcy.  Mortgagees are not using uniform criteria as to when the loan modification proposals are offered; often, the modifications are offered at a time when the homeowner is in such financial trouble that the modification is too late to help.  Even if mortgagees aren't pursuing homeowners with an offer to modify the mortgage, homeowners can take the initiative by persistently communicating with the mortgagee and insisting on a loan modification.  I assist homeowners in Chapter 13 to save their home from foreclosure, as well as dealing with other financial problems.  The additional option of seeking a loan modification for a homeowner can make Chapter 13 plan more successful by solving non-mortgage debts in the Chapter 13 plan, but solving the mortgage problems with a loan modification outside of the plan.

The usual loan modifications attempt to turn adjustable rate mortgages into fixed rate mortgages.  Mortgagees considering a loan modification pay attention to a homeowner's ability to afford the modified loan, because the mortgagee doesn't want to make the effort to modify if the chances of homeowner success are not strong.  The loan modifications also try to make the loan payment include both interest and principal payments (interest only loan payments only delay inevitable loan default), and also include escrow payments for taxes and insurance.  The combination of interest, principal, and escrow maximize the likelihood of payment of a homeowner's major expenses associated with home ownership.

 Homeowners having trouble staying current with their mortgage payments should aggressively pursue their mortgagees to seek a loan modification along with using bankruptcy as another means of addressing other debts which could impede a homeowner's ability to afford his or her home.  There are usually more than one financial problem bothering a homeowner, in financial trouble,  and a combination of solutions may produce the best results.

permalink  |  digg this!  |  del.icio.us

Vehicle Negative Equity Permits Cramdown

The Bankruptcy Court in Maine recently decided a case which may eventually result in a decision from the First Circuit Court of Appeals on an issue of interpretation of a section of the Bankruptcy Code enacted in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act.  The case was In re Look and the Bankruptcy Court held that where a consumer bought a vehicle and financed not only the purchase of the vehicle, but also rolled into the purchase price, debt from the vehicle loan which was traded in by the consumer at the time the new vehicle was purchased, the consumer could cramdown the vehicle loan down the value of the vehicle.

Prior to 2005, the Bankruptcy Code routinely allowed a debtor in Chapter 13 to only pay the value of his or her vehicle in a Chapter 13 in order to keep the vehicle, rather than pay the amount owed on the vehicle loan.  For example, if a debtor owed $10,000 on a car which was only worth $6,000 at the time of filing a Chapter 13, the debtor only had to pay the $6,000 value of the vehicle over time in order to keep the vehicle.  In 2005, Congress changed the Code to prohibit cramdown of vehicle loans used for personal purposes if the vehicle was bought 910 days before filing the Chapter 13 petition. 

One of the first challenges to that 910 day rule was the circumstance where a debtor combined the cost of the new vehicle in the new vehicle loan with the remaining loan cost of the traded-in vehicle.  In re Look will give the First Circuit an opportunity to decide this important issue soon after the Second Circuit decides the case of In re Peaselee which addresses the same issue.  If the First Circuit upholds the Bankruptcy Court, debtors will have additional reasons to seek relief under Chapter 13 to deal with their financial problems.

permalink  |  digg this!  |  del.icio.us

Credit Crunch Affects Small Businesses

The subprime mortgage meltdown is affecting other segments of the economy.  Not only are consumers with less than perfect credit harmed by the tightening of lending standards, but small businesses are feeling a credit pinch as well.  Small businesses rely upon lending institutions to expand or simply stay afloat.  The Federal Reserve issued a report recently acknowledging that approximately one third of banks in the United States had tightened their lending standards for small business loans.

The National Small Business Association conducted an online poll several weeks ago and learned that more than half of the respondents claimed that their business had been impacted by the credit crunch. Even the Small Business Adminstration, which guarantees numerous business loans, has experienced a 15% decline in the number of business loans which are guaranteed through its principal loan program, according to a report by the American Bankruptcy Institute. 

The lack of adequate lending standards in the subprime mortgage market which helped create a climate of greed and overreaching by lenders and mortgage brokers is continuing to complicate lending to other segments of our economy.  As lenders retreat from losses in the subprime market, they attempt to call in other investments to assure their own liquidity.  The overall effect is a contraction in the lending markets generally, notwithstanding the Federal Reserve's recent efforts to infuse more capital in lending institutions on a short term basis.  Small businesses currently find themselves with few remedies to alleviate their credit needs. 

If you are a small business owner who is experiencing short term cash flow problems of a serious nature, but believe your business can recover, if provided capital on a timely basis, your business might benefit from a reorganization bankruptcy (Chapters 11, 12, or 13).  Reorganization bankruptcies can stop immediate creditor collection efforts and give a business time to refinance its debt on terms approved by the Bankruptcy Court, thereby saving the business and benefitting creditors generally.

permalink  |  digg this!  |  del.icio.us