Bankruptcy and the Mortgage Crisis – One Small Tale

                I wrote the following epistle to a Chapter 13 Trustee regarding a loan modification and I thought I would share it on my blog.

                I am a bankruptcy attorney. This summer marked twenty years of filing bankruptcies in the Southern District of Illinois. I have filed around 7,000 cases in my practice. At one point in the late 1990s, I accounted for 1% of all bankruptcies filed in the state of Illinois. Not the firm I worked for, me. I’m pretty proud of that.

                I could write pages upon pages about bankruptcy but for now I will only give some background information as to the following letter:

                A Chapter 13 bankruptcy is a consolidation of all debt under one payment. There are some exceptions – you can pay rent-to-own furniture directly, child support directly and your house payment directly if you are current. Otherwise all debts are included in the payment.

                You pay a trustee and the trustee pays all your creditors. After five years (or less) of payments, most of your debt is discharged.

                If you are behind on your house, the house payment and the arrears owed are also in the Chapter 13 plan. At the end of the payment term, the arrears owed are paid off and the mortgage is “contractually current”. You resume paying on your house directly and you are no longer behind.

                The bulk of Chapter 13s are filed because people are behind on their house and want to stop a future or current foreclosure. The trouble is, finding out the arrears owed is a guessing game. The mortgage company is entitled to their attorney’s fees, inspection costs, filing fees; you name it. It gets pretty expensive and some of the costs are ridiculous. As a Debtor’s attorney, I have the right to object to these claims, but the odds of winning are very small. I explain it by using the term “blank check” in my email to the Trustee below.

                The email came about because a Debtor of mine did a loan modification with the mortgage company. We filed the loan modification with the court for approval and the Trustee asked my opinion of it. My “take” on it.

                He does not approve of the modification – it adds $20,000.00 to the principal, but makes them contractually current – there will be no more arrears owed. If he does not approve the modification, the Debtor will be forced to pay on the old mortgage or surrender the house in the Chapter 13.

                That’s why he asked what “my take on it” was. Here was my reply.  Italics indicate additions to this blog to help explain legalese…

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                For the past 70 years Americans have been bullshitted into thinking they HAVE to have a house. THIS house.

                In twenty years of filing bankruptcies I have come to the realization that convincing an average Debtor to give up their house is hopeless. I would have better odds convincing them to lop off a toe.

                Bank of America (or whoever has bought them out this week) has added $20,000.00 to their mortgage per the modification. In the past ten years mortgage companies have seen bankruptcy as a blank check. They can file any amount of fees and costs without fear of a sustained objection. Secretarial costs otherwise disallowed by Wiedau (this is an old case in my district that sets out what is and is not appropriate charges when applying for attorney’s fees – signing a letter is not, paralegal and secretarial work is not, meetings and phone calls with clients are acceptable, etc.), inspection fees for inspections never performed (I once objected to inspection fees and asked for copies of the inspection reports. There were none, so I argued no such inspections happened), and attorney’s fees for documents signed with a stamp; all have been allowed. The odds of winning such arguments are the same as a Toddler T-ball team winning the World Series.  And who is going to give the Debtors the thousands of dollars needed to appeal? Those judges will likely roll over in favor of the mortgage companies, too.

                So until judges decide to stand against the mortgage companies outrageous fees, they can charge as much as they want.  Why isn’t the Bank asked to account for the additional $20,000.00? Why must the Debtor defend their acceptance when the Bank does not have to defend its offer? The answer to the question (if there is one) only proves the point. The actions of mortgage companies are sacrosanct.

                The extra amount is just about what their arrearage claim is, by the way.

                Is this in their best interest? No.

                Will we be able to convince the client this is not in their best interest? No.

                If this is not approved by the Court will they likely voluntarily dismiss their bankruptcy case? If Bank of America will honor the agreement outside the bankruptcy, yes.

                We-the-People will do anything, ANYTHING, to keep these albatrosses around our necks. They will be willing to pay an extra $20,000.00 later to keep their payment down now. That’s how Wall Street wants it. If this extra $20,000.00 was filed as an amended claim for costs and fees, no one but the Debtor’s attorney would blink. And unfortunately that is all a Debtor’s attorney can do about it - blink. Objection is futile.

                Debtors file a Chapter 13 to keep their house. They would likely then dismiss a Chapter 13 to keep their house. If the Bank told them they had to stand naked on an Interstate and sing “Rue Britannia” to keep their house, they likely would. Dance, injun, dance!

                We might as well let them keep their split-level-two-car-garage-picket-fence-2.5-kids-and-a-dog-gotta-run-the-PTA-meeting-starts-in-an-hour house. Keeping THIS house has been indoctrinated into our DNA.

                Otherwise what is their option? If they dismiss, no one gets anything, other than the Debtors get to keep their house. We may as well help them get rid of the rest of the dischargeable debt and when they die of old age, let their kids worry about a house that still has a $50,000.00 mortgage on it.  If they are lucky.

                It’s the American Dream.

                But that’s my take on it. J And now you know, the REST of the story… Good day.

Copyright 2013 Michael G Curry