By Mike Hinshaw

Although October personal bankruptcy filings nationwide were down from the same period a year ago, says the Wall Street Journal, “[a]nother 132,173 consumer bankruptcies were filed last month, up 1.4% from September,” which puts the number of filings “on pace to reach their highest level in five years.”

A November 2 post from the “On the Money” blog at TheHill.com sources the same info from the American Bankruptcy Institute:

The American Bankruptcy Institute said Tuesday that . . . filings are on pace to hit a five-year high, according to data from the National Bankruptcy Research Center.

So far this year, about 1.3 million bankruptcy cases have been filed, ahead of the 1.2 million through the first 10 months of 2009.

Analysts are predicting that filings could reach 1.6 million this year, the largest number since 2005, when there were 2 million filings after Congress made changes to the bankruptcy system that were aimed at making it more difficult to file.

Chapter 7 filings common despite ‘reforms’ of 2005

The credit-card industry’s lobbyists fought hard back in ‘05 change the bankruptcy code in such a way as to steer those filing for bankruptcy protection away from Chapter 7 toward Chapter 13.  Chapter 7 is often called “straight bankruptcy” or “liquidiation,” because non-exempt assets are sold and the proceeds divvied up among creditors. The filer chooses whether to take federal or state exemptions, such as household goods, a certain amount of  homestead property, and tools of the trade. The new law requires a “means test,” which prevents most high-income earners from filing under Chapter 7. (You can read BankruptcyHome’s into to Chapter 7, and the US Courts’ explanation, plus  a description of the means test at Nolo.com.) Often, Chapter 7 filers have very few non-exempt assets, so there’s little or nothing to liquidate.

Under Chapter 13, the filer needs improved means, usually a regular income, to make monthly payments that repay creditors as much as possible. This is what the credit card lobby had in mind in order to prevent people from “walking away” from unsecured credit card debt. However, the folly of Wall Street has been so large and the resultant unemployment so widespread the housing crash so profound that Chapter 7 filings have skyrocketed to about two-thirds of all consumer bankruptcies.

As one law professor said last year: “”That suggests it was largely ineffective,” Ronald Mann, a law professor at Columbia University, said of the 2005 overhaul. “I don’t think anybody who’s knowledgeable about the bankruptcy system thought the statute was well crafted.”

However lacking or misguided certain portions of the code have become–most notably the lack of a bankruptcy judge’s power to modify terms of a loan on a primary residence–the code still offers significant protection.

Bankruptcy judge halts Wells Fargo action

For example, one of the 1.3 million filings this year was that of Tandala Mims of the Bronx, New York.

According to an Oct. 28 article in Bloomberg Businessweek, “Tandala Mims was allowed to keep her two-family brick home in Bronx, New York, after Wells Fargo Bank NA’s bid for foreclosure was rejected by a bankruptcy judge who said the bank’s paperwork was ‘questionable.’

“U.S. Bankruptcy Judge Martin Glenn in Manhattan ruled yesterday that Wells Fargo can’t bypass the automatic shield against legal claims triggered by Mims’s filing for personal bankruptcy in July. Wells Fargo couldn’t document how it acquired the rights to Mims’s mortgage, which originated with another lender, the judge said.”

Wells Fargo, described as the nation largest home lender, proceeded with foreclosures even as other large lenders temporarily stopped, at least in certain states.  Bank of America and Ally/GMAC have resumed foreclosures and JP Morgan Chase says it will begin again soon, in forty states.

Attorneys general press on

Although seventeen of the fifty attorneys general investigating the foreclosure scandal and “robo-signing” did not win re-election, the staffs won’t change much, so the investigation is not expected to be hampered by the January changes in leadership, according to Diana Olick’s Nov. 4 column, – which also says the attorneys general may be looking at pushing the lenders to capitalize loan modifications rather than pay huge fines.

Bussinesweek reported that the 49-year-old Mims had not been contacted by her lawyer and so was unaware of the judge’s ruling against Wells Fargo. She filed for bankruptcy protection in July, following the loss of her job which resulted in inability to keep up with mortgage payments. She got another job, apparently in a different field, and said, ” ‘I became a truck driver, but it’s taking longer to get from point A to point B financially.’ ”

Wells Fargo’s ownership clouded

Mims’ original loan was with Lend America and “loan papers contained a stamped endorsement ‘Paid to the Order of Washington Mutual Bank FA, Without Recourse Lend America,’ according to court records.” It wasn’t clear, at least to the bankruptcy judge, how Wells Fargo ended up with the right to foreclose. Part of the problem may have been the introduction into chain of history of the troubled MERS program, a consortium assembled by big banks to keep electronic tabs on all the shuffled, sliced-and-diced loans.

“Records showing that Mims’s loan was assigned by Mortgage Electronic Registration Systems Inc. a week before Wells Fargo moved in court to foreclose on her home didn’t mesh with the history of the loan’s transfers, Glenn found,” according to Businessweek.

“ ‘Wells Fargo has not supplied the court with any evidence that the note was physically delivered or assigned,’ Glenn wrote.

“The judge said that while the timing of the MERS transfer may not mean the bank acted in ‘bad faith,’ it raised questions about the validity of the mortgage transfer.”

Furthermore, “The judge said Wells Fargo’s counsel was unable to answer any questions about the supporting documents at an Oct. 20 hearing.”

MERS ’suffers no injury, lends no money’

MERS contends it has rights to foreclose when the borrower grants it title and because it “serves as an agent for the noteholder.”

However, the article says that “In March 2009, U.S. Bankruptcy Judge Linda B. Riegle in Las Vegas decided MERS wasn’t a true beneficiary under a trust deed. Since March 2009, supreme courts in Arkansas, Kansas and Maine have found that MERS had no standing in foreclosure proceedings under their states’ laws. The company suffers no injury and lends no money, the panels said.”

*******************************************************************

The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too.

Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. If you think your home is a candidate for a short sale, be sure to ask your attorney about it–it could greatly affect your standing and strategy for starting over.

For bankruptcy basics, please see:

Bankruptcy FAQ

Introduction to Chapter 7

Introduction to Chapter 13

Similar Posts:

Share