Debt Repudiation – On the Table

[Joanne98]

In the Week in Review section the NY Times had a piece by David Streitfeld titled “When Debtors Decide to Default”. I thought it was an important story. The NY Times put the issue of Debt Repudiation on the table. Exactly where it belongs. The author also contributed a new adjective to describe many of America’s troubled borrowers, “Ruthless Defaulters”. This definition comes to us from the “lending” side of the equation. I think that is a misguided definition by the industry. I don’t think they know what they are up against. Yet.

I disagreed with one premise of the article and wrote Mr. Streitfeld.

BK
"I disagree with you that 'a small handful' are involved. I talk with people who have debt trouble every day. More than half of them are going to walk away from their debts. You say there is a downside to this:"

"Ruthless defaulters today face different perils. Delinquency destroys credit scores, can prompt a lawsuit and guarantees a very large number of hostile calls from collection agencies."

"People do not care about credit scores any longer. What does that give you? Nothing. The lenders are canceling lines left and right. Most people do not qualify for a mortgage. Stores are no longer giving out their CCs. There is no more credit available for those that are near the edge. There is no downside to walking away any longer. Debt repudiation is the biggest systemic risk we face. It is staring right at us."

DS:
"I wondered if it might be more than a small handful, but I have to go with the evidence I have -- no one publishes numbers on this. Where are you talking with these people?"

I was going to respond to this privately but thought it might be interesting to throw this out for discussion. Neither Mr. Streitfeld nor I can say conclusively that the number of Ruthless Defaulters is either, (a) A small handful or (b) A significant number that is growing rapidly. In the blog world I can throw out some data and some anecdotal information and draw a conclusion of what it means to me. The readers will make up their own minds. My response:

I follow default rates through Realtytrac. (And others) The numbers for June were terrible. In the first six months of this year there were an additional 1.5mm homes in default. Not all of these borrowers are Ruthless Defaulters. A significant majority were just fed up with the nightmare of home ownership.

The personal bankruptcy rate is also soaring according to aacer (automatic access to court electronic records). They described July 09 as, “The hottest month for filings in three years”. From their report:

Consumer bankruptcy filings also remain on the uptick, increasing by 48% last month over the previous year, reported the American Bankruptcy Institute. Using data from the National Consumer Bankruptcy Research Center, the ABI said the 94,124 new consumer bankruptcy filings in July also marked a nearly 14% increase from the 82,770 filings in June.

A 50% rise year over year has nothing to do with Ruthless Defaulters. For $3,000 you can go chapter 7 and just say, “The hell with it all”. There is no downside. They are not ruthless, they are just defaulters.

I have lived in a small town for 30 years and know a diverse group of people. I give free advice. Business has been booming for the past two years. I spend, at most, one hour with and individual or a couple. By the time they get to me there are typically only two possible outcomes:

-“Your situation is perilous. It is not clear that you will be able to forestall these debts. You can no longer re-fi them away. Your net worth and cash flow are negative. You must renegotiate with all of your creditors. If they do not listen to you, stop paying them. You have six months before you are out of your home. You need to plan for that possibility. You will meet with headaches at every step. Prepare for a very difficult time ahead.”

-“Your situation is hopeless. Do the right thing. Contact the lender and tell them you are vacating the home. Send them the keys and don’t destroy what is left. Sign papers for a “Deed in Lieu” transaction. As for the CCs, you have to walk on those too. You have no assets or excess income to pay those either. You are a cash payer and a renter for the next five-years. Get a pre-paid cell phone and pre-paid credit card. You will need them.”

Admittedly, my narrow exposure to this is not indicative of anything on a broader scale. That said, the data on foreclosure rates and bankruptcy filings coupled with my neighbor's calls, tells me that the default rate on mortgages in excess of $500k is going to explode this fall. That timing is driven by the end of the ‘selling season’. With that, the CC numbers would follow. Broad based debt repudiation is a distinct possibility. It is the biggest systemic risk that we face. There is no fix to this.

BBQ Talk:

Joe: “I just settled with the bastards at Capital One. I owed $50k. Half of that was % and fees. We settled at 50 cents on the dollar:

Lou: “I had a First and Second mortgage with Morgan Stanley. I didn’t pay them for nine months. Then I sent them the keys. They are going to take a bath when they go to sell it. Now I am in a rental down the street at half the monthly cost!”

Sally: “But doesn’t that hurt your credit rating?”

Lou: “So what? The banks cut our lines to zero. There is no credit to get anymore so who cares about FICO scores for the next five years?

Joe: “I never had any credit. I was a no doc. borrower. They deserve what they get.”

Sally: “So how do we get in on this?”

Joe/Lou: “It’s easy. Just stop paying for six months. The lenders will roll over.”

Chorus: “Yeah! Down with the banks. We are going to stop paying next month too!”


This is by no means a joke on my part. I was at the party.

http://www.zerohedge.com/article/debt-repudiation-%E2%80%93-table

[patrice]

1. I will have everything but the house paid off in one year. Will there be anyone left who I am paying

to?

[safeinOhio]

2. Use to be banks could not come after your

pensions and SS. Now, with direct deposit only, they just wait until it is in the bank and take it. They can take it all. Banks win retired loose.

[happyslug]

4. Banks and other creditors can NOT touch Social Security.

Under Federal Law, Social Security can NOT to touched by anyone other then the recipient without that person's permission (a word of caution, I use the term "with permission" some banks say you gave permission to them to empty your bank account when you borrowed money from them and stop paying them, thus NEVER deposit any money into a bank you own money to, thus avoiding that whole situation).

As to pensions, that varies from state to state, but most states FORBID taking them. Attachments of wages is permitted in 48 states (Pennsylvania and Texas do NOT permit such attachments, and in those two states it is permitted for Student Loans and Child Support) but you have the two Federal Restrictions:

1. No Attachment of wages of more then 25% of total wages
2. The Wage Earner must be left with at least 30 times the hourly wage on a weekly pay period after taxes and attachments are done. Generally if you are on Minimum wage you are attachment proof in most states.

Now your wages can be attached once it is deposited into a bank account even on Pennsylvania and Texas. In such situations I recommend you have a relative or a friend open an account in their name and then give you power of attorney over that account only. It would be hard for your creditors to find out about it since your name will NOT be on the account nor your Social Security number, through if the creditor do find out about it, they can grab it (Please note I am NOT talking about Joint accounts, your name can NOT be on the account, the Power of Attorney is a paper signed by the person whose name is on the account that you can deposit or withdraw money from that account, the bank know you have the power but your name is NOT on the account). Please note the account will only be opened by a person who trusts you, so go with a relative or friend who you trust.

If you are married, and your spouse has no debts (Some people have this, it is rare but not unheard of) then have your direct deposit into an account with your spouse's name on it. There is no law that says your pay has to go into an account with your name on it.

Another way to protect your check is just deposit it into someone else's account and have that person withdraw the money as you need it. Make sure both you and the person who agrees to the arrangement both agree on it AND is someone you trust.

Remember a bank will only take money out of your account they have access to, such as your checking account is in the same bank you own money to. Avoid that situation like the plague. Right now, banks want all the cash they can get, and as such will gladly work with you to prevent other banks from grabbing your money if it is legal to do so (and the above are all legal in most states, I persistent to say all states for with 50 states some state may have made the above illegal so check with your local lawyer first).

[safeinOhio]

8. Thanks

My friend is in foreclosure in Michigan. She was trying to do a "deed in leu", but that fell thru. She has a lawyer. Now trying to do restructure. I'm getting this second hand. She said the lawyer told her the mortgage bank can go to court and attach her account at her savings and loan once the money hit the account by direct deposit, it is no longer SS or pension, it's just funds in a bank. She got the papers today from the bank saying they will try a restructuring. Has to make 3 payments in a row on time. House is worth 60 grand and she owes $138,000, 68 years old. They will do the restructuring because her payment is more than 31% of her take home.
I thought, why not open an offshore account for her direct deposit in a bank that the American bank couldn't get a court order?

[elehhhhna]

3. rec #3 !!! zero hedge has some of the smartest bloggers, ever

it's my new fave.

Go Tyler Durden!

[sendero]

5. If I had bought a house....

.... that was now worth substantially less than the outstanding mortgage balance, I'd walk without a second thought, unless it was a "recourse" mortgage which very few are.

Moral? All I ask myself is "what would a banker do"? Why would I want to play "fair" when my opponent wouldn't think twice about playing dirty, their entire business model is based on it.

[happyslug]

7. And defeat the MAJOR reason for the Bankruptcy Reform Act of 2005???? How Can you!!!!!

One of the Major Changes that occurred when the Bankruptcy Reform was passed as you could no longer reduce a lien on any property down to the value of that property. This was a Chapter 13 action which then permitted people then convert the action to a Chapter 7. You an NOT longer do this, if you want to keep the house you MUST pay off ALL mortgages on the house. When passed this was one of the things the banks wanted more then anything else. Now that they have it, they are finding more and more people are just walking away from such "upside down loans" i.e. turning the keys over to the banks instead of trying to pay off the mortgage.

[happyslug]

6. A few years ago I there was a thread on how to avoid creditors

So I posted it here:
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x9184#9222

I wrote the following on that thread in regard to PA law:

BASIC CONCEPTS IN DEBT COLLECTION AND BANKRUPTCY, By: Paul H. Mentzer, 2/20/2002.

Debt Collection is done either "Pre-Judgment" or "Post-Judgment". A Judgment is a judicial finding that a Debtor owes money to a Creditor. A judgment is only entered by a Judge or District Justice (Called a Justice of the Peace in other states) upon a filing of a lawsuit claiming that a Debtor owes money to a Creditor. Attachment of wages, bank accounts and Sheriff Sales of Property can only be done "Post-Judgment".

PRE-JUDGMENT DEBT COLLECTION
Federal FAIR DEBT COLLECTION PRACTICES ACT (15 U.S.C. § 1692)

Pre-Judgment debt collection is an attempt to collect on a debt without having to go through legal process (i.e. without having to sue you in court). Pre-Judgment debt collection activity is occurs when a debtor fails to pay on a debt. Such a Debtor has three choices:

(1) First the debtor can pay on the debt.

(2) If the debtor can not pay than the debtor can try to make a payment arrangements with these creditors, (Something creditors will do, but most often when it is to the benefit of the CREDITOR not the Debtor).

(3) The third option that can be done is NOT to pay the creditor and tell them you do not want to hear from them except by legal service (i.e. when the creditor sues you for the money).

Unless a debtor can pay the debt the best option for debtors is not to pay the creditors. If a debtor selects the option of not paying the creditor, the creditor can sue the debtor in a court of law and get a judgment against the debtor. (See the following pages for details).

Now the Federal Fair Debt Collection Practices Act and similar state acts covers HOW debt collectors are to act when trying to collect a debt. Under these acts many collection activity are prohibited and WHAT a debt collector can do are restricted. The most important two restriction are the following:

1. The Debt Collector can only contact a Debtor once a week, and

2. The Debt Collector must stop contacting if the Debtor inform the Debt Collectors, in writing, that the Debtor does not want to hear from them except by legal service (i.e the Creditor is suing the Debtor) or is being represented by a Lawyer in the action.

I always advise my clients to keep a log of how often Creditors call my clients and WHAT they say to my clients. Often the Debt Collectors commit violations of the "Fair Debt Collection Practices Act" (FDCPA) (and similar state acts), but the only way to catch them is to keep a log. Please note that the "Fair Debt Collection Practices Act" (FDCPA) permit the Debtor to collect for violations of the act by a Collection Agency. My experience has been that most Collections Agencies resort to the illegal tactics because they have no intention to sue and thus not worried about any counterclaims under the "Fair Debt Collection Practices Act" (FDCPA). Among the prohibited activities are the use of any "harnessing, unfair or deceptive collection practice". Other violations are also possible but that will have to be addressed based on the facts if and when you are sued. Please note the FDCPA only applies to Debt Collectors, not to the person you owe money to.

If you believe you have been treated unfairly by the debt collector you can call the Pennsylvania Attorney General, Bureau of Consumer Affairs at [phone] in Ebensburg Pennsylvania;
or the Hotline at 1-800-441-2555, and file a complaint.


Judgment

A Judgment is a judicial finding that a Defendant owes someone (Called a Plaintiff) money. A Judgment can be only entered after a Pleading (called a "Complaint") is filed in either District Justice Courts, Common Pleas Court or Federal District Court. If a person dispute a debt, the best time to dispute the debt is in front of a Judge, Board of Arbitrators or District Justice. Except in District Justice Court a Defendant must respond in writing (Called an "Answer"). If you wish to defend contact an attorney whenever you receive a copy any Complaint.

District Justice Courts (Since renamed Magistrate District Judge's Courts):

In District Justice Practice a Complaint is filed by a Creditor and a hearing date is set. If the Defendant wants to contest the debt all a Defendant has to do is appear at the set time for the hearing. District Justice court are viewed as not giving "Due Process" for District Justice Courts do not provide an opportunity to supply a written answer (and no jury). For this reason there is an absolute right to appeal any decision of a District Justice. The appeal is to Common Pleas Court and must be filed within 30 days of the decision of the District Justice (10 days if possession of Rental property is in dispute). On how to Appeal please see an Attorney.

Filing In Common Pleas Court and Arbitration

In Common Pleas Court, once a Complaint is filed the Defendant has 20 days to file a written "Answer" to the Complaint. Once the Pleadings are done, the case (if less than $20,000) is assigned to a Board of Arbitrators who set a hearing date and hears both sides. Like District Justice Court, if either side dislikes the decision of the Arbitrators they may appeal for a hearing in front of a Judge and/or Jury.

Common Pleas Court Hearing

If the action is for more than $20,000 (or an appealed is taken from a decision of a Board of Arbitrators) than a trial in front of a Judge and/or Jury is permitted under Pennsylvania Law. This is the final hearing on the merits of a case, any appeal to Superior Court or the Pennsylvania Supreme Court will be on legal technicalities only.

Defenses against Entry Of Judgment.

Now in addition to any defense based on not owning the money, the law permits other types of defenses based on legal technicalities. The following are partial list of such technicalities:

1. Statute of Limitations

If a Creditor waits more than four years from the last time you made any payments before he sues you, the lawsuit may be dismissed under the statute of limitations. In Pennsylvania (and the Uniform Commercial Code in general) the Statute of Limitation is four years from the last time you made any payments.

Federal Fair Debt Collection Practices Act (FDCPA)

Please note your rights under the "Fair Debt Collection Practices Act"(FDCPA)(15 U.S.C.A. §§1692 to 1692o.), mention on page one of this paper are also enforced at this stage of any litigation.

Pennsylvania Consumer Protection Acts (Title 69 & 73)

Pennsylvania has several consumer protection laws, including the following, in any lawsuit you should discuss these with a attorney:

1. Pennsylvanian "Unfair Trade Practices and Consumer Protection Law", (73 P.S. § 201-1 et seq).

2. The "Plain Language Consumer Contract Act" 73 P.S. § 2201 et seq.

3. E-Commerce is governed by the "Electronic Transaction Act", 73 P.S. 2260.101 et seq.

4. The "Motor Vehicle Sales Finance Act" (MVSFA) (69 P.S. 601 et seq.), also has requirements that a creditor must perform before he can collect from a client who automobile has been repossessed. Please note the MVSFA does permit re-possession of an automobile even if you are one day late in payments.

Federal Consumer Protection laws

They are other Federal Consumer Protections laws that you should discuss with an attorney before you leave a Complaint go to Judgment, these include the following:

1. Consumer Leasing Act, 15 U.S.C. § 1667 et seq,

2. Consumer Credit Cost Disclosure, 15 U.S.C. § 1601 et seq.

3. "Unfair and Deceptive Practice Act" (UDAP), 12 U.S.C. § 45 et seq.

4. Regulation "Z" of the Federal Reserve System, 12 C.F.R. § 226 et seq.


Post-Judgment Debt Collection.

Once a Judgment is entered against a person, that Judgment is a lien on that person’s Real and Personal Property. Once a Judgment is entered the Plaintiff can ask for an "Execution Sale" of the Debtor’s Personal Property (We will not discuss the sale of Real Property in this Paper). Furthermore the Plaintiff can ask the Sheriff to "Attach" any bank accounts or other money asset of the debtor.

As a rule Pennsylvania exempts the following from Execution Sale:

1. Personal Clothing.
2. Wages.
3. A Bible
4. $300 in other personal property. ($600 for a couple if BOTH of them owes the debt.)
5. Pension funds.


In addition the following are exempt under Federal Law:

1. Social Security and SSI Benefits
2. Veteran’s Benefits

One of the main advantages of the Federal Exemptions from the state’s Exemptions is that the Federal Exemptions survive conversion of the exempt asset into a bank account. For example if your Social Security has direct deposit (and no other money is deposited into that account) the money is still exempt from attachment by the Sheriff. On the other hand wages are exempt under the State exemption but as soon as the wages are deposited into a bank account, the Sheriff can attach the money.

For the above reason I always warn my clients who have judgments against them, never to deposit wages or any other money into a bank account.

Personal Property Sheriff (Execution) Sale

Pennsylvania also permits the sheriff to sell your personal property, but only if such property exceeds $300 in value. Such sales are called Sheriff Sales (The Official name is "Execution Sale" but I will use the popular name in this letter) Under Pennsylvania Law if you are subject to a Sheriff Sale of personal property the Sheriff can sell ALL of your personal property.

Under Pennsylvania law the only exemption from Sheriff sale are personal clothing, a bible and $300 in other personal property. You get to select the items that make up your $300 exemption but it is still limited to only $300. Please note that trailers, automobiles and pets are "Personal Property" and thus can be sold by the Sheriff in a personal property Sheriff Sale.

The Sheriff can only sell the assets of the Debtor, not the Property of the Spouse of the Debtor.

Once a judgment is entered a creditor can request an execution sale take place and than only to the property of the person who owns the debt. i.e. the Sheriff or Constable can not sell the property of a debtor’s spouse’s for the debt nor sell marital property for a debt of one spouse (they can sell marital property for the debt of BOTH spouses, but not just one spouse). The Sheriff or Constable can not sell property owned by any one else for the debt of the debtor.
Now the law assumes all property is owned in the same nature as the real property is held, i.e. if a debtor rent (or own) a house with the debtor’s spouse, all property on the property is assumed to be marital property.

If debtor rent (or own) a house alone all personal property in the house is assumed to be the debtor’s alone.

If a debtor lives with someone else (i.e with debtor’s parents, or with any other person where debtor is not a tenant) the law assume all personal property on the real property is the same as the real property, i.e. the parents (or the person who has title to the real property).

Now the above is an assumption which can be overcome by evidence (including the testimony of the debtor). If a constable or sheriff deputy does tag property belonging to another person, that person must go to the District Justice that issued the judgment (if a constable is during the execution sale) or to the Sheriff (if a sheriff deputy is doing the sale) and file an objection to the levy on the grounds that the tagged property does not belong to the debtor. If the person filing the objection loses in front of the District Justice or Sheriff, that person can appeal the decision to Common Pleas Court. For this reason I always recommend if someone is subject to an execution sale they should call my office so we can open a file on the actual execution sale.

What I mean by the above is that the Sheriff can not sell the property of a debtor’s spouse nor any marital property. Marital property under Pennsylvania law is viewed as owned by both spouses with both spouses having an "Un-dividable Half Interest" in the marital property. "Un-dividable Half Interest" means that any marital property can not be sold for the debt of ONE spouse (It can be sold for the debt of BOTH spouses. If the SPOUSAL residence is in both spouses’s names it is marital property. Any vehicle own in BOTH names is also marital property. An argument can be made that a car in one spouse's name is still marital property if it was purchased during the marriage or in anticipation of the marriage. I always recommend to married couples to add each other’s names to their automobile’s title.

Also under Pennsylvania law there is an presumption that any personal property on real property is held in the same title as the Real Property. (See the next paragraph for details on this presumption.) Please note this is a presumption, like all presumptions can be overcome by evidence (including your testimony that something is your separate property).

The above presumption is that any personal property on real property is held in the same name as the real property, thus if the real estate is in both spouse’s name, the personal property on the real property is presumed by law to be marital property. On the other hand if the real property is only in one person's name the personal property in that real property is presumed by law to be that person's property alone.


SPOUSAL NECESSITIES DOCTRINE

The above as to treatment of spousal debt has one exception, the "Spousal Necessities Doctrine". Under Pennsylvania law a spouse (For ease of understanding hereafter referred to a "Husband" but may be a wife) may be held liable for the debts of a dependent spouse (Hereafter referred to as "Wife" but may be a Husband) only if the husband co-sign for the debt or the debt is a "Necessity". Now if the husband co-sign for the debt he is jointly liable for the debt but if the husband did not sign for the debt he is liable only if

a. the creditor looked to the husband to pay for the debt when the wife incurred the debt and

b. the debt is for a "Necessity".

c. the burden of proof on both elements above is on the CREDITOR.

Now what is a "Necessity"? A "Necessity" is something a husband would be expected to pay for his wife, i.e. Clothing, food, etc., but not something a husband would not be expected to buy for his wife. In most cases if a creditor looked to the wife for payment they can not claim it is a "Necessity".

The "Spousal Necessities Doctrine" is a very old doctrine but still used in Pennsylvania. In my opinion, luxury goods, gifts, etc are not “necessities” but in any particular case it is question of fact up to a District Justice, Judge or Jury to decide. I warn my clients of this doctrine but also tell them I have only had one case in ten years involving the doctrine and that case was never resolved. Very rarely used in litigation but you never know when it will appear.

BANKRUPTCY

The Federal exemption under Federal Bankruptcy Laws are much more generous than the State Exemption from Execution Sale. For Example (The following are effective as of 2002, these change every year to reflect the inflation that occurred during the previous year):

1. You can retain $16,150 equity in your home (Now over S20,000, it is tied in with inflation)

2. You can have up to $2575 equity in one automobile (This also increases yearly based on inflation),

3. $425.00 in any one piece of personal property primarily used for household use. Total not to exceed $8,625 (again changed yearly to reflect inflation)

4. $1075.00 In Jewelry. (again changed yearly to reflect inflation)

5. $850.00 plus up to $8,075.00 of the amount set aside for real property exemption and not used as part of the real property exemption. (again changed yearly to reflect inflation)

6 $1,625.00 in tools of one’s trade. (again changed yearly to reflect inflation)

7. Im-matured life insurance policies

8 Other items

The down size of Bankruptcy are the following:

1. Cost is $299.00 (as of the reforms of 2005)
2. Can only file once every Eight years (as of 2005)
3. Extensive paperwork involved YOU MUST LIST EVERY DEBT AND ASSET YOU KNOW OF.
4. Under the Bankruptcy reform act of 2005 if your income is over the median income for your state you must go through a "Means tests" to see if you can file chapter 7, about 5% of the people who could filed Chapter Seven prior to the reform are denied under the reform act, but there are ways around it, for example buying a new car on credit to increase the amount of debt you own and is NOT discharge (Through be careful, only in limited situation does this help, see a lawyer for what is actually needed). If you are over Median Income for your state see an lawyers who practices in Bankruptcy for the details.

Please note the following can NOT be discharged in Bankruptcy:

1. Debts do to any criminal activity

2. Debts do to a Auto Accident involving alcohol or drugs

3. Debts secured by other property, i.e mortgage or Auto Loan, but only to the value of the item securing the loan. These debts are often referred to as "Secured Debts".

4. Municipal utility bill, these are viewed as a lien on the real property being served.

5. Other miscellaneous debts.

6. The Bankruptcy Reform Act of 2005 change much of the above, but only to the extent that about 5% of the people looking into bankruptcy are stopped by the reforms. One good thing that came out of the reform act is if your income is below 150% of the Federal poverty level you are exempt from paying the $299 filing fee.

7. One bad side of the Bankruptcy reform act is everyone must NOW go through Debt Counseling twice, once before the filing and another course after it is filed.

Web sites:

Means testing for filing Bankruptcy from the US Trustee Office:
http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm

150 % of Median Income by state:
http://www.usdoj.gov/ust/eo/bapcpa/20090315/bci_data/median_income_table.htm

Bankruptcy Forms:
http://www.uscourts.gov/bkforms/bankruptcy_forms.html#official

The "Means test", this is the form that must be filed to see if you can file Chapter Seven, Remember if your income is below Median Income that is all you have to mark on the form, if your income is above Median Income the rest of the form has to be completed.

http://www.uscourts.gov/rules/BK_Forms_08_Official/B_022A_1208.pdf