FTC Cracks Down on Phony Mortgage Relief Schemes

Consumer Bankruptcy News recently reported the following:

The Federal Trade Commission has filed three separate actions in federal court to halt the allegedly deceptive tactics of three operations that preyed on distressed homeowners by falsely claiming they could save their homes from foreclosure and then charging them thousands of dollars up-front, while delivering little or no help and often driving them deeper into debt.

Since 2008, the FTC has brought more than 40 cases against companies peddling fraudulent mortgage relief schemes, which caused hundreds of millions of dollars in consumer injury.  These law enforcement actions have helped tens of thousands of consumers who were victims of these scams and have prevented tens of thousands more from becoming victims.

In November, 2010, the FTC issued the Mortgage Assistance Relief Services Rule, which provided new protections and banned mortgage foreclosure rescue and loan modification services from collecting fees until homeowners have a written offer from their lender or services that they deem acceptable.

In all three cases, the FTC took action against defendants who allegedly peddled bogus mortgage relief services, in violation of the FTC Act and the MARS Rule.  The agency also charged that two of the operations violated the Telemarketing Sales Rule.

More on this in future posts.

Foreclosure Crisis

  Consumer Bankruptcy News reports in its August 8th issue, that more than 1.5 million Americans age 50 and over have lost their homes since 2007, citing a new study by AARP's Public Policy Institute.  The study also found that the percentage of seriously delinquent loans - those in foreclosure, and loans 90 or more days delinqent - increased from 1.1 percent in 2007 to 6 percent as of the end of last year for homeowners age 50 and older.

  The article states that, as those percentages indicate, the foreclosure crisis for older homeowners is far from over, and that the numbers behind those percentages show just how far from over it is.  According to the report, 600,000 loans are in foreclosure and another 625,000 are seriously delinquent.  In addition, 3.5 million loans held by people age 50 and older were under water.

  "The collapse of the housing market has been especially painfull for older homeowners," said Debra Whitman, AARP Executive Vice President for Policy.

  "Older homeowners often rely on their home equity to finance their needs in retiremenet - things like health care, home maintenance and other unexpected needs.  The fact that so many older Americans have no equity at all is troubling."

  The report noted that the serious delinquency rates are lower for those aged 50 and older than they are for those under age 50; however, serious delinquencies went up faster for the older population over the past five years.  The study also found that people age 75 and older have a higher foreclosure rate (3.2 percent) than those age 50 to 64 (3.0 percent) or age 65 to 74 (2.6 percent).

  "More older Americans are carrying mortgage debt than in the past, and the amount of that debt is also increasing," Whitman continued.  "Because before-tax income has decreased on average for people age 75 plus, while spending for mortgage interest, property taxes, utilities and health care have increased, their economic situation is worsening."

  (The AARP study is available at www.aarp.org)

Some Rules Regarding Ongoing Mortgage Payments!

The bankruptcy court in Austin has issued rules regarding how mortgage payments are addressed in Chapter 13 cases.  If a debtor owes an arrearage claim on a mortgage, all post-petition mortgage payments must be paid through the Chapter 13 Trustee as part of the Chapter 13 Plan.  If the debtor has no arrearage at the time the case is filed, then they can continue making their mortgage payments directly to the mortgage company.

If there is an arrearage, the debtor has certain obligations to the Trustee regarding information about the mortgage.

The idea is to catch up on the arrearge by the time the Plan is completed, so that when the debtor comes out of the Chapter 13 case, no arrearage is owed.

Are Student Loans Next Debt Crisis? Part 2

This is a continuation from Part 1 of this article.

  NACBA has called on Congress to immediately eliminate the nondischargeability of private student loans.  "There simply is no reason to allow private student loans to be treated differently from other types of unsecured credit.  In fact, exempting these loans from discharge is likely to cause even more harm for borrowers since there are no interest rate limit or limits on fees charged for private student loans," the NACBA report states.

  NACBA also recommends restoring the ability to discharge federal student loans after they have been owing for five years.  Student loans owed for less than five years could be discharged based on a showing of undue hardship.

  "Restoring bankruptcy protection for student loan debt is not the same thing as simply forgiving these loans.  The 2005 changes to the Bankruptcy Code ensure that debtors who enter bankruptcy with funds to repay debts are not able to simply liquidate them through Chapter 7," the NACBA report states.  "In addition, there are significant new barriers to access, including higher filing fees and mandatory counseling and education requirements.  Any question about the existence or extent of past abuse of the bankruptcy system should be put to rest by the new system.  The discharge should be restored for students who truly need the bankruptcy safety net."

  Finally, the NACBA recommends restoring a reasonable statute of limitations for collecting student loans.  "Just as student loans are among the few unsecured debts that generally are not dischargeable in bankruptcy, student loan borrowers have the unenviable distinction of holding debt with no statute of limitations.  The Higher Education Act Amendments of 1991 eliminated the statute of limitations within which suits could be filed, judgments enforced or offset, garnishment or other actions initiated, to collect federal student loans.  This lumps student borrowers with a very small number of law violations, such as murder and treason.  Despite the governmental and societal interest in pursuing criminals, statues of limitation apply to nearly all federal criminal actions.  The rare exceptions exist for those crimes that are punishable by death, including espionage and treason, and now, student loan defaults."


This the Part 2 of a 2 Part article.

Are Student Loans the Next Debt Crisis? Part 1

  In its March 13th edition, Consumer Bankruptcy News reports that student loan debt now exceeds credit card debt in the United States with more than $1 trillion (yes, that's with a "t") in student loans now outstanding.  The article states that America faces the very real possibility of another major economic threat on a par with the devastating home mortgage crisis, according to the new survey and report from the National Association of Consumer Bankruptcy Attorneys ("NACBA").

  "Take it from those of us on the frontline of economic distress in America:  This could very well be the next debt bomb for the U.S. economy," said NACBA president William E. Brewer Jr.  "The amount of student borrowing crossed the $100 billion threshold for the first time in 2010 and total outstanding loans exceeded $1 trillion for the first time last year.  The reason:  Students and workers seeking retraining are borrowing extraordinary amounts of money through federal and private loan programs to help cover the rising cost of college and training.  In many cases, parents responsible for the student loans are in or near retirement years and facing repayment demands."

  It's a concern shared by lenders.

  FICO's most recent quarterly survey of bank risk professionals found growing concern for the stability of the student loan market and deepening fears.  In FICO's survey, 67 percent of respondents expected delinquencies on these loans to rise.  That is 19 percentage points higher than last quarter.  Only 8 percent of respondents expected a decline in delinquencies.

  "Evidence is mounting that student loans could be the next trouble spot for lenders," said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO labs.  "A significant rise in defaults on student loans would impact lenders as well as taxpayers, who could be facing big losses due to these defaults.  Our survey results underscore the ongoing challenges that millions of American households face as they try to cope with their debt during these uncertain times."

  Concern that the student loan debt burden is becoming too great was also reflected in the anecdotal experiences of 860 bankruptcy attorneys from across the country who responded to NACBA's survey.  Their survey found that -

*  More than four out of five bankruptcy attorneys (81 percent) say that potential clients with student loan debt have increased "significantly" or "somewhat" in the last three to four years.  Overall, about half (48 percent) of bankruptcy attorneys reported significant increases in such potential clients.

*  Nearly two out of five of bankruptcy attorneys (39 percent) have seen potential student loan client cases jump 25 to 50 percent in the last three to four years.  An additional quarter ((23 percent) of bankruptcy attorneys have seen such cases jump by 50 percent to more that 100 percent.

*  Most bankruptcy attorneys (95 percent) report that few student loan debtors are seen as having any chance of obtaining a discharge as a result of undue hardship.

  Student loans are necessary to make sure that every person who wants to earn a college degree has a way to pay for it.  However, the student's financial need should not become a lifetime of stress and financial hardship, NACBA says and recommends policy reforms "intended to help build a better and more equitable system for student loan borrowers who encounter financial difficulties."


This is Part 1 of a 2 Part article.

Current Bankruptcy Law Drives Up Cost

Consumer Bankruptcy News reports in a January article that the changes made to the Bankruptcy Code in 2005 (known as BAPCPA) significantly increased the cost of filing for bankruptcy for consumer debtors without producing a statistically significant increase in creditor recoveries, according to a recent study cited in the article.

Lois R. Lupica, Maine Law Foundation Professor of Law at the University of Maine School of Law measured the impact of BAPCPA by looking at what it cost a consumer to file for bankruptcy before and after the changes took effect.  Her data came from a random sample of over 11,000 cases between 2003 and 2009.

The study found that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 hit no-asset Chapter 7 debtors the hardest with their out-of-pocket costs increasing by an average of over 50%.  Chapter 13 filers saw over a 20% increase.

Lupica also developed a body of data to answer the 'why' question.  She conducted focus groups over the next 18 months, made up of consumer debtor attorneys, trustees and judges.  She says that those folks repeatedly observed a disconnect between the time it takes to responsibly represent a consumer debtor in a Chapter 7 case and the legal fee.  Because of the complexities added by BAPCPA and attempts by the courts to work around some of the changes, they reported that there are few simple cases any more.

"It takes more skill and experience to responsibly and professionally represent consumer debtors - especially in this economic climate - than it used to.  There is a greater need to have a nuanced understanding of the dissonance between how the system is designed to work in theory and how it works in practice.  Lawyers consistently report working harder that ever before and experiencing higher stress levels that they directly attribute to practicing in the new consumer bankruptcy environment," Lupica reported.

"Moreover, the system is less tolerant of mistakes and yet there are so many more opportunities presented by BAPCPA for even seasoned attorneys to make errors . . . Efficiency coupled with a high level of skill, while important in every area of law practice, is crucial to the success of a consumer bankruptcy practice.  'Best practices' for consumer bankruptcy lawyers requires finding a balance between comprehensively addressing a financially distressed client's interests and doing so in a time sensitive and efficient manner."

(Thank You to Consumer Bankruptcy News for the information used for this article.)

Don't Do This!

Consumer Bankruptcy News reports that a man named Viengkham Virasak of Corvallis, Oregon, has been sentenced to two years in federal prison for fraudulently incurring $384,000 in debt in the names of his mother, father, sister and brother.  He then attempted to discharge this debt by filing bankruptcies in their names and impersonating them at court hearings.

According to court documents, Virasak used the money obtained on more than 50 credit cards to fund his gambling addiction.  When his family discovered the fraud and confronted him, Virasak asked them to help him conceal the fraud.

In addition to two years in prison, Virasak was also sentenced to three years of supervised release and ordered to pay $384,036 in restitution.