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South Florida Paralegal Blog

The Truth About Bankruptcy

September 1st, 2007 12:56 PM

Recently, in a response to a posting about credit card company practices being examined by Congress, a reader posted a comment regarding bankruptcy. While "cadillacjoe" often makes some solid, well-thought-out points, I have to disagree with a few comments he made.

I think I have a pretty good idea of the consequences of filing bankruptcy. First of all, I have typed approximately 5,000 Chapter 7 cases between 1994 and 2007. I have spoken to thousands of my clients who have called me months after their discharge, happy to report that they had new credit and even some car loans and mortgages with decent interest rates.

Secondly, I have personal experience with this issue, as I was forced into filing bankruptcy almost a decade ago after my ex-wife lost the home and vehicle I purchased for her while we were married. The fact that her ex-husband didn't pay a dime of child support for their four kids didn't help either.

Third, as a mortgage broker, I can personally attest that I have helped several post-bankruptcy clients obtain loans at decent rates (approximately 1 - 1.5% over what somebody with good credit would pay) in as little as seven months after bankruptcy.

Joe states: "I don't think the housing market in Palm Beach County really has anything to do with going bankrupt or the amount of people that are going into bankruptcy"

Joe, I have to disagree. Why? Because I am averaging 15-20 calls a week from people who are filing bankruptcy precisely due to the housing market. The stories are similar but it all boils down to a few scenarios:

1. The client purchased investment property at the point when prices were sky high, just before the market crashed. They are holding a property that is worth $50,000 to $100,000 less than they paid a year ago. They can't sell it, can't rent it. What are their choices? If they do a short sale or deed in lieu, they will be taxed on the deficiency balance, as the IRS considers this forgiven debt as income. Jonathan Alper, Esq. explains on his great Florida Asset Protection Blog.

2. The client purchased or refinanced their primary residence with some type of adjustable loan and now the payments have jumped $200 - $300 per month. Coupled with the fact their home is worth less than they owe, they don't have many options either.

Joe goes on, stating "Bankruptcy will often remain on your credit report for as long as 10 years. During this time it can be next to impossible to obtain loans or any type of credit."

Joe is right, a Chapter 7 stays on your credit for exactly ten years, but speaking from personal experience, it doesn't prohibit your ability to get credit. I had three new credit card accounts within six months after my bankruptcy discharge. In my experience and those reported by my clients, bankruptcy will generally not affect your ability to get credit, but it will affect your interest rates for approximately 18-24 months.

Unfortunately, Joe has fallen victim to the inaccurate news reporting on the changes in the bankruptcy law when he asserts "Also in 2005 a new federal bankruptcy law went into effect making it much more difficult to erase credit card debt by filing for bankruptcy."

In reality, the 2005 changes had nothing to do with one's ability to discharge credit card debts in bankruptcy. It's amazing how many people say this to me. The 2005 changes had more to do with the fact that the credit card companies bought and paid for this law. Their multi-year campaign to "reform the bankruptcy laws" was vetoed several times by President Clinton. The credit card companies (after making billions of dollars on ridiculously high interest rates and bogus fees) were whining that it was too easy to file bankruptcy and that a large number of bankruptcy filers actually had the ability to pay some of their debt.

Guess what? A recent study confirmed what I already knew; the majority of bankrupts do not have the ability to pay even a portion of their debts, after taking into account their regular living expenses. In fact, this study revealed that over 97% of people who qualified under the old rules still qualify under the reforms.

Finally, Joe states "Before you restrict yourself to bankruptcy you should explore other options. Quite often, lawyers/ paralegals are quick to suggest bankruptcy and they don't always explain how damaging bankruptcy can be. Why would they do this? The answer is simple; if you don't file for bankruptcy, they don't get paid. Another opinion would be a Debt Settlement program. However if a bankruptcy is unavoidable I would find a licensed bankruptcy attorney one who specializes in Chapter 7 and Chapter 13 cases."

I agree with Joe that bankruptcy should be a last resort and that people should explore other options first. That is why I have always encouraged people to do so, even before pre-bankruptcy credit counseling became a requirement. However, there are many "credit counseling" companies out there who don't deliver on their promises and some are downright crooks. If you are interested, I would encourage you to check out the originator of the entire credit counseling concept, Consumer Credit Counseling Services. They are a United Way agency and they don't play games.

Regarding Debt Settlement, I'm not a big fan of the concept. Here's how it works: you pay every month into an account and when you reach, say 25% of your total debt, the Debt Settlement company will supposedly negotiate with all your creditors to accept less than you owe. I'm not a big fan after seeing many of these companies in action. Many charge huge fees, up front, so if you change your mind after a few months, they keep your money, sometimes thousands of dollars. Secondly, many promise to stop collection calls, but they simply can not. There is no law that says creditors can't harass or even sue you while you are paying thousands of dollars to these companies over a 3-5 year period. Third, your credit is ruined by the time the company actually settles the debt, if you actually complete the plan. Guess what? You could have filed bankruptcy and have been completely re-established in less time.

And lastly, not all attorneys or non-attorneys are more interested in making a quick buck than doing the right thing. I have talked more people out of refinancing during the boom than I have brokered loans for. Why? Because I didn't think it was in my client's best interest. Sure, my bottom line was lower, but I'm in this for the long haul. I'm proud to say that my company has never received one complaint in 14 years of business. I'm proud to say that over 85% of my clients were referred by a previous client.

Bankruptcy should never be anyone's first resort. Those experiencing financial difficulty should always explore other options first. But if you find yourself having to file bankruptcy, at least get accurate information from people who have been through it. It will hurt you in the short term, but you will see, life goes on.

Posted by David Uhlig on September 1st, 2007 12:56 PMPost a Comment (12)

Stop writing your autobiographies on life. The entire Real Estate Bubble was a result of the primal human emotion ... GREED! When about a dozen shows on TV are about flipping real estate ... These people are not going into bankruptcy because they tried to make the fast buck as flippers. Flippers are speculative investors and with any investment some times you win and some times you lose. Right now we have to depend on asset inflation to hold up stock prices, coupled with the boost that will come from a Presidential election approaching. I have no sympathy for those who are losing their properties. If you bought more than you really could afford, whether as a home or a get rich quick investment then now you get to pay the real price. Those of us who were conservative and did not go beyond our means should not have to take on the burden of your bailout. If you can't afford it; you shouldn't have bought in the first place. On a positive note the supply of single-family homes and condominium units for sale in Palm Beach County's Multiple Listing Service reached 32 months' worth in June. It’s amazing how many seemingly-intelligent people have said it’s a Buyers Market out there, now is a good time to buy. It also seems that mortgage rates will remain fairly steady during the next several months. "There are plenty of buyers! The problem is they cannot afford to pay those unrealistic prices. " If home prices drop, there's no more problem," 15-20 calls a week from people who are filing bankruptcy. Repeat business indeed......Maybe some of those loans you processed are coming back to haunt you. Have nice day.

Posted by Cadilac Joe on September 1st, 2007 3:13 PM

In response to # 1. The client purchased investment property at the point when prices were sky high, just before the market crashed. They are holding a property that is worth $50,000 to $100,000 less than they paid a year ago. They can't sell it, can't rent it. What are there choices? If they do a short sale or deed in lieu, they will be taxed on the deficiency balance, as the IRS considers this forgiven debt as income. OK here we go. Most foreclosures occur in the first 18 months of a mortgage. The reason that banks made these loans is because they are originators. They really don't care if you pay at all. Think about a car salesman. He wants to sell you the car; he doesn't care if you can afford it, only if you can get approved. Actually, if he sells you the BMW, then you don't pay, he gets to sell it again (and collect another "origination" fee), which actually works out better for him. But he doesn't give up the commission when you default! Now, before Dave jumps all over me, there are some cases where the MBS market can force the bank to buyback a loan (fraud, early defaults, etc) which is why (primarily) you are seeing some of the lenders go under. However, the reason's I described above, imho, are accurate enough to outline why banks suddenly stopped caring about someone's ability to repay a loan. When financial problems hit, borrowers should take immediate action, and not wait until they're behind a couple of months' payments. "Pay your mortgage first, before your credit cards" Refinancing remains an option for people who have lived in their homes for several years because fixed mortgage rates still are relatively low, "The equity these people accumulated over the past few years is a buffer that gives them some options without having to resort to foreclosure. For me personally I'm paid up and ready to move out of this shithole.

Posted by Cadilac Joe on September 2nd, 2007 12:25 AM

Thanks Joe. I agree with you that "you" (or I) shouldn't have to bail out people who made bad financial decisions. Many of the amateur "investors" who tried to make a quick buck during the boom were motivated by greed, the very foundation of capitalism. Many were lured by news articles about quick profits, home flipping shows (as you note) and saw their neighbors paying for their children's entire college education in one deal. I believe in less government and I think in this case, those investors as well as the banks, have learned their lesson, at least for now. Maybe things will return to a more "traditional" lending environment; one in which borrowers are forced to save some money and prove they have the ability to pay for the loan. Perhaps that will be the one positive result of all this. And I'm happy to report that none of my borrowers has ever defaulted on a loan. Why? Because I did my job. I think the mortgage brokering industry needs much higher standards. All brokers should be doing more than "bringing lenders and borrowers together". I feel we have a moral obligation to both parties to examine a borrowers financial situation and use our experience to truly determine if a loan is appropriate in any given situation. When I discuss industry oversight with my fiancee, who is a Realtor/Broker, I always marvel at how much stricter the real estate boards are than the mortgage industry. This needs to change and considering the atmosphere these days, I think it will.

Posted by David Uhlig on September 2nd, 2007 8:36 AM

And P.S..... last time I checked, this is my blog, so if I share some of my own life to make a point, I'm sure the world (or at least the few people who actually read me) will forgive me. In fact, most of my clients tell me that they appreciate what I have learned after going through my own hard times.

Posted by David Uhlig on September 2nd, 2007 8:44 AM

To Joe, A huge number of these loans did not originate with banks but were provided by unregulated mortgage companies. Banks don't give out these liar loans b/c for the most part they cannot due to the regs that restrict banks. Mortgage companies are not banks, are not regulated by banks and many of these companies have been involved in predatory lending that has led to this huge problem. These mort. company execs should be put in jail. Lets get back to the basic reason for a home -to live in! Put some heavy duty tax burden - or some such penalty -on those wanting to use the housing market as a tool for "making money" ie flipping , etc. Every time those slick money -men flip a home , the next price becomes more inaccessible for the true home buyer. I'm not talking about those with the 6 months here and the 6 months there type. These people are part of the reason for the escalation of prices. When the RE person does the comps, he has those higher prices to compare of those places that have been "flipped" making the next place justifiable higher.

Posted by John Russell on September 2nd, 2007 11:46 AM

Dave you mentioned that your fiancee is a realtor/broker. Let me give you my take on some of these "Greedy Realtors". Realtors lie to get deals done. Most brokers will tell you that prices can only go up and use scare tactics to get people to pay unreasonable prices. These brokers are helping people make the biggest financial decision of their life and guaranteeing money will be made. If they were stockbrokers, they would be put in jail. The problem is the real estate industry has NO standards. Anyone who can pass a simple test and pay their desk fees is in. They have diluted the quality of brokers to make a few bucks in desk fees. Short term thinking which will destroy the industry. Nobody trusts brokers anymore, prices are falling, mortgage money is harder to get. It is obvious what is happening. When things come back again in years to come (and they always do) people will be smarter and use their own information which the internet is making more accessible and the real estate industry will die the same death as travel agents. As the saying goes BUYER'S BEWARE!

Posted by Cadillac Joe on September 3rd, 2007 6:41 PM

You schmuck your comment about it being the "Greedy Realtors" fault for bank forclosures shows how ignorant you are to the actual facts for mortgage failures. Realtors do not control buyers and sellers decisions. Realtors do not control who can and cannot obtain a mortgage. The realtors have nothing to do with the fact that these loans were available up until a few months ago. They have nothing to do with property values no longer going up. Realtors only help to facilitate a sale, they have no say so in who can afford a mortgage. Anyone who would believe a realtor saying "you cant lose money in the market" is an idiot anyway! Get your facts straight before you start blaming innocent parties to a home sale! The greed here is in the purchaser not the realtor. If a realtor is showing you homes outside of where you feel comfortable, let them know. If they continue, move on to another realtor. It is the banks that made these loans available and the people who took everything out of their homes thinking the equity would continue to go up at 20%-30% a year. People were taking all the equity out of the home and living day to day on it. I have seen it many times. They would refi, pay off all their bills and then run the bills up again only to come back and refi again a year or two later. Now there is no equity left in their home and the lenders who made these loans available are going to be stuck with the property. It's easy to point the finger and complain, but it isn't going to change the facts.

Posted by John Russell on September 4th, 2007 12:20 PM

Boy, Joe… sounds like you’ve had some bad experiences with Lawyers and Realtors! If any broker or realtor, upon being asked for advice by a client, is claiming to have a crystal ball on real estate values, then shame on them and shame on any buyer/seller who bases THEIR investment decision on someone else’s opinion. I’ve never personally heard a broker/realtor giving guarantees, but obviously that would be a huge ethical violation. Regarding your statement that “If they were stockbrokers, they would be put in jail”, pardon me for not knowing much about stockbrokers, but don’t they spend all day calling people with “hot tips” in hopes of getting them to part with their money? I don’t know what State you’re in, but I have been at my fiancee’s side since she took her realtor test and her broker’s test (including doing the flash cards and practice tests with her, watching her study every day and night for two months) and IMHO, neither was an easy test. When I stated that the mortgage industry needed more regulation, like the real estate boards, what I meant is that in FL, there are tons of Real Estate rules and regs, codes of ethics, etc. that we don’t have with the mortgage business. Heck, as a realtor, you have to actually attend classes and take tests for your continuing ed. As a mortgage broker, all I have to do is pay some company $30, promise to them that I read some information online and they give me a certificate. My fiancée has relayed stories of realtors/brokers she knows that have been heavily fined and even a few who have lost their licenses over what I felt weren’t even serious violations that hurt either party in the transaction. In terms of the real estate industry going the way of travel agents, I don’t think it will happen. Good Realtors who actually spend money marketing properties effectively to get them sold quickly, handle contracts and contingencies well and truly act in their client’s interest provide a valuable service. How many people want to deal with showing their own home, making sure all the contracts are filled out correctly, verifying that the deposit has been received by the title company, going back and forth with some lender who keeps postponing the closing, dealing with inspections, apprasiers, etc. As a “non-attorney” who believes in power to the people, take the law into your own hands, etc, I used to feel exactly like you do about Realtors. But after seeing what my fiancé spends in terms of time and money, I think she deserves every penny of what she makes.

Posted by David Uhlig on September 4th, 2007 2:30 PM

Let me start off by saying an increasing number of people are successfully selling their own homes (FSBO), without the services of a realtor and are saving themselves thousands of dollars in realtors commissions. I have sold 2 homes (FSBO) and bought 3 without a realtor. I did hire a real estate attorney to review any contracts to be signed. I would also recommend educating yourself quickly on standard procedures in buying. Realtors are a joke. The title company does most of the work. The realtor just comes in with a big grin and some pre printed papers. 15 minutes later, your good faith estimate on what your payments would be are out the door and the realtors getting a huge chunk of change. It takes great skill to place the "For Sale" sign in front of a house and wait for another Realtor to sell it. Keep in mind, it is not in the interest of your realtor to help you negotiate a lower price - they get paid a % of the final purchase price so the higher the better. When they show a house, they say nothing, therefore, they won't say the wrong thing. For example....if a client asks "Gee, is that Berber carpet?" The realtor will say "well, it could be." See, I've learned that if they were to say "yes, that is Berber carpet" they run the risk of the client saying "oh, I hear that doesn't wear very good." So therefore, they say nothing. remember, real estate is a profession for people who can't make it at anything else. No one has ever grown up and said "Gee, someday I'd like to sell real estate." No one has ever gone to college so they could get a master's degree in realty. Realtors are people who got fired from other jobs and wound up working for the only place always hiring....the local Century 21 or Coldwell Banker. Has anyone ever heard of a realtor who could actually negotiate a decent deal? No one I know. Agents try to intimidate FSBO into believing you must be a licensed broker to sell YOUR OWN STUFF! Like I'm not intelligent enough to educate myself!! Whether you are buying or selling, most likely two Realtors will be involved, one representing the Buyer, and one representing the Seller. This also means that most likely there are two different real estate companies involved, thus two different brokers. The fact of the matter is they simply add additional cost to the buyer or the seller. It’s a redundant cost that hurts everybody. In South FL maybe a Female Real Estate Agent that has big plastic boobs might fare well but with the internet upon us, the days of Realtors are limited. Sooner or later, they will be extinct. Anytime you see a "middleman" in any business transaction think of him as a bloodsucker. They add NO VALUE to the real underlying transaction!??Dave I am originally from NJ. To let you know most states require a minimum number of hours to hold a real estate license - NJ, which is considered one of the more stringent, requires only 75 hours of training. John don't want to get into the flaming BS so I'll ignore that (remark you made) You also sound like a realtor to me. Just to let you know there’s a retard born every second..." ?Of, course most of them are either Realtors or Mortgage Brokers.?

Posted by Cadilac Joe on September 5th, 2007 3:34 PM

Cadillac Joe your are a POMPAS ASS. I have sold real estate for 25 years. Showing properties is the easiest part of real estate. NEGOTIATING is almost non-existent in regard to contracts for buying and selling, most buyers and sellers already have a mindset about what they want and what they will buy or sell for. Providing information and having up to date knowledge about prices, real estate ethics, changes in laws, etc. is where my expertise lies. In other words protecting my buyers and sellers from overpaying for their wants or underpricing on properties. I can't make their decisions. I inform them about the market, advise them of the requirements for buying and financing, show them their choices and avenues for acquiring the property they want or selling the property they have. I have been successful at making a living in real estate but never at the expense of my people. I used to average thousands of dollars a year in dues, thousands of dollars in supplies and several thousands for advertising. That advertising includes the Internet, local magazines, newspapers, periodicals, open houses, etc. True there are many unscrupulous and undesirable people in the business, however there are many more hardworking, honest and competent people like myself. We pay all of our own expenses as an independent contractor including car expenses, telephone costs and on and on. It is not a glamorous business as some might think. I actually showed property on Christmas Eve and have done so on many occasions when I would have preferred being home resting or being with loved ones. I have had calls as early as 5 a.m. in the morning and as late as 2 or 3 a.m. in the morning for people who have concerns such as "buyers or sellers remorse" You also mentioned FEMALE REALTORS who sometimes face danger in showing homes to unknown people. I am very careful and have never had a problem but there are those who have not been so fortunate. I am not lazy, I had 3 heart bypasses 5 years ago at the age of 49. I also have other chronic health issues. I work very hard and under intense pressure at times. I am not rich and I earn every single penny I make. I drive a 5 year old car and do my own yard work. The only reason I have stayed in real estate this long was because initially it offered me flexibility with time as it does now. So think again before you say all Realtors are a joke.

Posted by John Russell on September 7th, 2007 2:20 PM

Joe, Joe, Joe.... I enjoy a good intellectual argument as much as the next person, but I'll make you a deal... I'll spare you the "autobiographical" content in my blog if you'll spare me the drama. In response to your email: JOE: I was under the assumption that I could provide as much input as I wanted. I am reminded of First Amendment cautions: in order to have the freedom of speech we cherish, we must sometimes listen to speech that we find offensive. Perhaps this is the cost of free expression---even on your blog. DAVE: Um, Joe, put the flag down and step away from the ledge. Have I ever blocked one of your postings, even if they contributed nothing more than YOUR rantings about how everyone is a thief and loser except you. JOE: Everything here is a result of your original rantings. DAVE: Joe, this is my blog and if I want to rant, I will. Ironically, I never "badmouth" entire professions and I always thanked you for your comments, if you took the time to notice. JOE: Dave not everyone will agree with your views regarding real estate, mortgages, bankruptcy etc...I don't always succeed but I prefer to keep debates/discussions on a more formal/less personal level. DAVE: As in less personal, you mean that you don't like to use real-world examples from our own life, but you would rather make generalizations based on... based on... based on what? Perhaps if you shared a little about your profession and your experiences rather than just making unprovable accusations, your points would be better taken. JOE: I have used knowledge, facts, and maybe a little wit to back up my points. DAVE: Joe, I wholeheartedly disgree. I feel you've used very few facts and have instead expressed pent-up anger at Lawyers, Non-Lawyers, Realtors and Mortgage Brokers. JOE: I've made my arguments clearly, and clearly you don't accept it. DAVE: Which clearly stated arguments are you referring to? The ones in which you say anyone who goes into Real Estate is a loser? Sorry, Joe, that's not an "argument", that's just some guy who's trying to "stir up the pot" by making inflamatory comments. JOE: As a blog moderator I can respect you but how can you enforce anything when you do not even have site rules. DAVE: I'm sorry Joe that I didn't post the "rules" that I have the right to filter out spam and moronic comments. Perhaps I'll hire an attorney to write 800 words of legal dislosures that I post on my blog so that you won't be disapponted with the inequity of it all. JOE: My email address is legit. I made a typo (left out the e) when I submitted it to you. DAVE: Joe, you made that same typo five times, because every time you threw a tantrum that I didn't approve your comments instantly, I actually responded to you, as you contacted me from a form page on my site in which you provided your email address each time. Every time, my mail was bounced back. Nice try. Joe, you actually made a few good comments in the beginning. Even though some of it was factually incorrect or incomplete, I was happy that you took the time to respond and to voice your views. When you have something constructive to say in the future, please feel free to visit again.

Posted by David Uhlig on September 7th, 2007 8:39 PM