How to Get Out of Debt With the Get Out of Debt Guy » bankruptcy reform

Bankruptcy Filings Spike With Tax Refunds

Steve Rhode — Tue, 17 Apr 2012 14:00:04 +0000

A recent paper from the National Bureau of Economic Research has found that tax refunds create a spike in bankruptcy filings by as much as 7 percent.

The reasoning behind this spike is due to households needing to file bankruptcy but not having the cash on hand to actually declare bankruptcy. The tax refunds actually help to fund that process.

Nearly four percent of bankruptcy filers would have been able to file bankruptcy if the tax refunds had not been available.

The authors correctly note that in the absence of any governmental safety net for consumers facing financial trouble that bankruptcy acts as a social insurance program to help rescue consumers from situations they would otherwise not be able to escape and rebuild from.

While bankruptcy can often provide consumers with a quicker way to deal with difficult financial problems, there is a barrier of mandatory filing fees and in the case of most chapter 7 bankruptcy cases, paying the attorney in advance of filing. Tax refunds and rebates provide a sudden influx of cash that can be used to address and dispose of the financial situation promptly.

In contrast, chapter 13 bankruptcies where bankruptcy attorneys are generally paid over the course of the bankruptcy, showed less influence with the injection of tax rebates and refunds. This seems logical considering that other than the mandatory bankruptcy filing fee, most chapter 13 bankruptcies already provide for an installment plan when paying bankruptcy attorney fees.

The paper notes:

We find that tax rebates cause a significant, short-run increase in consumer bankruptcies. This evidence is consistent with the hypothesis that legal fees force liquidity-constrained households to delay filing. These results highlight the importance of liquidity constraints in the optimal design of the consumer bankruptcy system.

A recent USA Today article by Christine Dugas quoted one of the papers authors on the subject of 2005 bankruptcy reform simply making filing bankruptcy more expensive.

The law was changed to prevent bankruptcy abuse. It was thought that too many people who could afford to pay their debts were taking advantage of the system.

“But if you want to curtail abuse, raising the cost is not a good way to do it,” says Jialan Wang, assistant professor of finance at Washington University in St. Louis and an author of the NBER study. “The people who really need bankruptcy are the ones who will be unable to pay for the fees.” – Source

According to Kim Coleman, a bankruptcy attorney in Philadelphia, “I definitely think that tax refunds are used to provide consumers with cash to file bankruptcy when they otherwise cannot. In fact, many of our clients use tax withholding which typically becomes a refund as a sort of savings account that they withdraw during tax season. They might use this as a vacation fund in better financial times, but in these rough times some use it to file a bankruptcy case or get caught up on their mortgage. We even mention in our direct mail marketing that they can use their refund to pay for filing a bankruptcy to get out of debt.”

She also mentioned some key advice I’ve given in the past as well, if you are getting big tax refunds you are probably having too much taken out of your paycheck when you need it most, each month.

Coleman said, “Sometimes though I advise clients to change their withholding to help them meet their bills as they come due during the year. Or, if they are getting a large refund and planning to file bankruptcy, we have to try to protect the refund from becoming an bankruptcy asset that can be distributed to their creditors by “exempting” the refund in their bankruptcy case.”

@GetOutOfDebtGuy

Bankruptcy Becoming More Common Among Upper Middle Class Out of Necessity

Steve Rhode — Thu, 19 Nov 2009 14:04:55 +0000

From How to Get Out of Debt

For the past few years I’ve been suggesting bankruptcy more and more as a solution to people in trouble. I’ve written about my position, “I Suggest Bankruptcy Too Often, So Say Some“, and I receive my fair share of criticism about the amount of times I suggest bankruptcy.

An article out today, full of data, and experts I respect supports my observations and has observed the same phenomenon I have. The need for bankruptcy protection is spreading up the economic food chain.

Bankruptcy rates are skyrocketing again after the misguided and foolish bankruptcy reform of 2005. A reform I remind you that was allegedly aimed at stopping bankruptcy filings by people taking advantage of the ‘system’. There never were any such people. In the reform of 2005 banks and creditors simply bought themselves a new bankruptcy law they felt treated them more favorably. The end result, more consumers punished by making bankruptcy more expensive and cumbersome but the filings are right back to where they were.

“Carrying debt is like carrying a backpack full of bricks,” says James Doan, a bankruptcy attorney in San Clemente, Calif. “It weighs people down. They feel like failures. The are embarrassed and ashamed.”

Those words of James Doan from the story have always rung true, before and after the bankruptcy reform. They are emotions experienced by people facing money troubles today. There are just more of them.

A new study by Elizabeth Warren, Harvard Law School Leo Gottlieb professor of law, and Deborah Thorne, Ohio University associate professor of sociology, finds that personal bankruptcy has become a largely middle-class phenomenon led by filers who are college-educated and owners of homes. According to the study, “The Vulnerable Middle Class: Bankruptcy and Class Status,” the shift occurred even before the Great Recession.

“The bankruptcy filings are a warning about the risks now facing middle-class Americans,” says Warren, chair of the Congressional Oversight Panel on the Troubled Asset Relief Program (TARP). No longer can they count on a college education, a good job and homeownership to protect them from financial collapse.

“It’s horrifying for people who are not used to anything but an upward trajectory,” says Bob Anderson, a bankruptcy lawyer in Wilmington, N.C. “They are used to calling the shots.

Middle-class families were encouraged to spend. But that often turned into a disaster when their bills increased and wages dwindled.

“My wife and I were great at lubricating the economy,” says Rock Macke, who lives with his wife and two children in Rancho Santa Margarita, Calif. “We loved to spend money, as is the middle-class thing to do.” Source“

And for the record, I have never suggested bankruptcy when a need did not exist for the protection and relief it offers. I am by nature a compassionate soul and always believe people deserve a second chance when faced with traumatic events.

@GetOutOfDebtGuy

Consumer Bankruptcy Attorneys Stand Behind Government Plan to Allow Bankruptcy Judges to Modify Mortgages

Steve Rhode — Thu, 19 Feb 2009 13:26:20 +0000

From How to Get Out of Debt

The following statement was issued today on behalf of the 3,500-member National Association of Consumer Bankruptcy Attorneys (NACBA) by bankruptcy attorney and NACBA president Carey Ebert of Fort Worth, TX:

“At a time when an estimated 6,600 American families are losing their homes to foreclosure every day, we welcome the Obama Administration’s support for changes to existing bankruptcy laws that will allow for judicial modification of home mortgages.The Obama Administration is the latest major player in this national debate to recognize the fact that judicial modification must be part of the solution to today’s worsening home mortgage foreclosure crisis.

It is painfully clear that the continuing, and indeed worsening, foreclosure crisis is perhaps the single largest impediment to this country’s economic recovery. We call on the banking industry to impose a moratorium on foreclosures until the Obama housing plan, including and in particular bankruptcy reform, has been fully implemented.

Just as important as forbearance by the banking industry is the need for action by Congress NOW. We agree with consumer advocates and others who say that Congress and the Administration should move with the same sense of urgency on curtailing this threat as they did with the economic recovery bill just signed into law.

Ever since the mortgage foreclosure crisis erupted into the public view in 2007, a broad array of consumer, civil rights, housing, community, labor and other organizations, as well as economists, have advocated judicial mortgage modification relief as an effective approach to stemming the growing tide of foreclosures – a solution that, unlike every other solution being considered in Washington, comes at absolutely no cost to U.S. taxpayers. This is one solution we know will work. The infrastructure already is in place. It is something the bankruptcy courts do every day with other assets. And, estimates are that this solution alone could cut foreclosures by at least 20 percent.

Data released by NACBA and others make it very clear that the foreclosure crisis will not be resolved through top-down voluntary efforts on the part of the financial services industry alone, no matter how many carrots or incentives are given. Judicial mortgage modification cuts through the impediments to sustainable mortgages. Courts must be empowered to implement economically rational loan modifications where the parties are unwilling or unable to do so on their own.”

ABOUT NACBA

The National Association of Consumer Bankruptcy Attorneys (http://www.nacba.org) is the only national organization dedicated to serving the needs of consumer bankruptcy attorneys and protecting the rights of consumer debtors in bankruptcy. Formed in 1992, NACBA now has more than 3,500 members located in all 50 states and Puerto Rico.

SOURCE National Association of Consumer Bankruptcy Attorneys, Washington, D.C.

Bankruptcy Judges Should Have the Power to Modify Mortgages

Steve Rhode — Sat, 29 Nov 2008 21:40:25 +0000

From How to Get Out of Debt

The sagging home values are drawing attention to a gaping hole in bankruptcy protection, the ability for U.S. bankruptcy judges to be able to modify the terms of a mortgage to keep people in their homes that want to pay.

A couple of recent article really caught my eye, “Delahunt: Empower judges to modify mortgages” and “A Win-Win Bankruptcy Reform“.

Bankruptcy judges have the power to change the term of loans for vacation retreats, business and car loans, but no authority to keep you in your home. Silly.

Homeowners facing trouble today or headed to foreclosure will often file bankruptcy to stop the foreclosure on their home. But that won’t save the home if you can’t afford the mortgage.

Under existing law, bankruptcy courts cannot modify the terms of home mortgages. To keep her home, this debtor needed to demonstrate sufficient income not only to make her ongoing payments at 14 percent but also to cover, during her five-year repayment plan, the payments she had defaulted on. Her proposed plan was clearly not feasible based on her salary, so I had no choice but to lift the stay and allow the foreclosure to continue.

However, homeowners could easily be allowed to remain in their homes if the loans were modified either in length or to return the interest rates charged back to a fair and reasonable amount.

When mass foreclosures occur, as they are now, nobody wins. The homeowner, banks and investors win if they can keep the proud and emotionally attached homeowner in the property, making payments, and properly caring for the home. This allows neighborhoods to flourish that would otherwise have vacant and unkempt bank REO homes just sitting there.

If we can’t give bankruptcy judges the authority to modify these loans in specific situations and under specific guidance then who can we trust to do the right thing, lenders?

This gap in bankruptcy authority seems to be perpetuated because the mortgage industry feels it would be detrimental to the mortgage industry but I have to agree with Judge Leonard when he writes:

No one has been able to explain to me why it is not better for mortgage holders to get a fair return of principal back, albeit at a lower interest rate, than to take a lump sum through foreclosure that is probably much less than the value of the note.

It does not make sense.

Not allowing bankruptcy judges to have authority to modify mortgage terms only tosses people out on the street. People who will eventually get new mortgages when the economy improves.

It seems that the costs passed on to us, the consumers are not because mortgage defaults, but because logic does not prevail.

How to Get Out of Debt With the Get Out of Debt Guy » bankruptcy reform

Bankruptcy Filings Spike With Tax Refunds

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Bankruptcy Becoming More Common Among Upper Middle Class Out of Necessity

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