Bankruptcy Article of the Week
Suspension of Debtor Audits - What Happens When the Leash Breaks?
By Tiffany Sanders
Most of us have watched honest debtors suffer—and suffered more than a few headaches of our own—as a result of demands for documents that didn't exist and painstaking accounts of small amounts of cash spent weeks or months earlier in the ordinary course of life. So it was good news when the EOUST announced on January 14 that debtor audits were being suspended. But the EOUST didn't make that decision voluntarily, and the relief may be short-lived.
The EOUST didn't see the light and think, "Hm…maybe we should take at least a little bit of the time, energy and funding that we're pouring into scrutinizing debtors and look at a creditor or two!" Oh, no. The program simply didn't get funding for debtor audits.
The EOUST might have had an inkling that something was afoot when the House Judiciary Committee on Administrative and Commercial Law scheduled a hearing called "The United States Trustee Program: Watch Dog or Attack Dog?"
And Judge Jay Cristol's testimony suggesting that the proper answer to that question ran more toward "a pack of dogs" should have given the EOUST pause.
Most importantly, the EOUST should have taken seriously the concerns of its many honest and able trustees in the field; those trustees had the opportunity to see the operation of the EOUST policies firsthand and convey how unworkable they often were, how often they imposed unreasonable burdens at unreasonable cost while serving little or no purpose.
But the office stood firm—and just a few short months later found itself with no budget for debtor audits. Unfunded mandates are tricky things, and the EOUST is in an unenviable position. But the office's focus has apparently not shifted one little bit in the face of this very strong message; perhaps that's not surprising given the way the Committee testimony rolled off without leaving a mark. All indications are that Cristol was correct in his assessment that the current EOUST leadership seems to "view all debtors with suspicion through prosecutorial eyes as dishonest crooks trying to beat the system and to perceive debtor's lawyers as disreputable and untrustworthy."
In the wake of the testimony last fall from respected bankruptcy judges, consumer advocates and a former UST trial lawyer saying essentially the same thing—that the EOUST mandates tied the hands of good people in the field and placed difficult and pointless burdens on honest debtors while virtually ignoring creditor abuses—the EOUST responded to the zero-funding of debtor audits with reassurance that the program was seeking alternate ways to fund those audits and would resume debtor harassment as soon as possible.
It looks like Judge Cristol's pit bull analogy was dead on.
Credit Crunch to Crunch Students?
Incoming college students could be the latest victim of the credit crunch, according to a recent Wall Street Journal story explaining how student loans may be more difficult to come by this fall.
The WSJ reports that in the midst of the subprime collapse many investors are staying away from asset-based securities that are often major sources of capital for student lenders. As a result of this development, lenders warn that they may not be able to offer certain types of student loans, possibly leaving many students unable to fund their college educations, according to the story.
Student loan lenders have called for the major banks to step up their lending, which, in our opinion, may be wishful thinking, considering that banks have recently been trying to pass more of the risk associated with troubled loans onto the government:
And speaking of banks…
Don't Be Fooled by Bank of America Name!
While incoming college students may be innocent victims of the credit crunch, Bank of America seems to care less about current credit problems in the country than about its bottom line.
A February 7th story in BusinessWeek details how Bank of America recently jacked up the interest rates of some responsible card holders whose credit scores did not decrease.
BusinessWeek reports that Bank of America sent letters to card holders in mid-January indicating that interest rates would double to as high as 28 percent. And when some consumers called a telephone number for an explanation to the rate increase—as suggested by Bank of America in the letters—they could not get a definitive reason for the change, once again according to the BusinessWeek story.
A Bank of America spokesman said in the story that some bank cardholders could face higher interest rates as a result of being a higher credit risk—whatever that vague explanation means—but analysts say that this move is solely motivated by profit.
We'd have to agree, especially when considering that Bank of America reported a 95 percent decrease in fourth quarter earnings, as detailed in the BusinessWeek story.
In our opinion, such self-motivated and irresponsible actions by the Bank of Americas of the world are a contributing reason to why so many Americans struggle with credit card debt.
The Numbers Game - Credit Debt Further Examined
Keeping with the credit debt theme, Adam Levitin recently examined bankruptcy filings on the enlightening Credit Slips Blog and was amazed by the amount of credit card debt that showed up.
According to Levitin, one debtor had a whopping $175,862.27 in debt incurred from 25 credit cards, with no less than nine of those cards from Bank of America.
While Levitin expressed his surprise at these levels of such credit card debt, he also posed a question similar to what we've asked in the past: what does such credit card debt say about lending practices in the Untied States?
The Numbers Game, Part II - Foreclosure Updates
According to MortgageNewsDaily.com, Senate Majority Leader Harry Reid (D-NV) has estimated that more than 1 million people will get help to stay in their homes as a result of Senate Bill 2636, the "Foreclosure Prevention Act of 2008."
For some more context, HOPE NOW Alliance recently reported that approximately 545,000 subprime mortgage holders got help to stop foreclosure in the second half of last year.
On the Bankruptcy Calendar
In conjunction with the American Bankruptcy Institute, the University of Illinois College of Law will be holding "A Debtor World Conference" on May 2-3.
According to the University of Illinois College of Law website, the conference will explore the phenomenon of debt, a major theme in this week's newsletter.
James Scurlock will be the keynote speaker at the conference. Scurlock is known for producing the the award-winning documentary film, "Maxed Out," which will be shown for free on the U-of-I campus on May 1st.
We'll provide you with more details on this conference in upcoming newsletters. In the meantime, check out our past review of "Maxed Out."
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Kevin's Corner
Practice Management Tip:
Selecting Health Insurance Coverage
"Good employee benefit programs don't come from a cookie cutter – take the time to understand your employees and their needs and you may very well find that you can save money on benefits while providing just as much (or more) value to your employees.
"Medical insurance coverage is one of the most expensive benefits an employer can offer today, but it's also the most critical for many employees. With more than 40 million American uninsured and medical expenses continuing to climb, the quality of your medical insurance plan may well be a deciding factor for many prospective employees. It may even be a factor in employee turnover.
"Fortunately, it's often possible to cut the high cost of providing medical benefits to your employees without cutting the benefits themselves. The key is to understand the demographics of your workforce and their actual needs in terms of medical care.
"For example, if you have primarily young employees without dependents, you may be able to lower your premiums significantly by raising your plan deductible—and you may be able to do so without actually reducing the medical benefits you offer your employees. That's because with a young, relatively healthy workforce most of your employees will never reach their current deductibles.
"If that's the case, you can raise the deductible and cover the difference for any employee who reaches that level. For instance, if your current health plan has a $500 annual deductible per person, you can raise that deductible to $1500, but agree to pay the next $1000 in medical expenses for any employee who exceeds $500.
"The increase in deductible will likely decrease your premiums substantially. However, since most of your employees won't exceed the $500, the amount you pay out in actual medical expenses will be low. And your employees won't see any change at all; they'll be covered after the first $500 either way.
"The key is to understand the needs and characteristics of the people you're providing benefits for, and then adapting them in a way that suits their needs and yours."
- Kevin Chern
President, Start Fresh Today
Study Shoots Down Mortgage Lender Claims
Way back in Issues Five and Nine of The Next Chapter, we detailed legislation that would allow bankruptcy judges to modify the mortgages of bankruptcy petitioners in danger of losing their homes to foreclosure.
The Mortgage Bankers Association (MBA) has since opposed such legislation and argued that by lifting the current restriction on bankruptcy judges to modify mortgages and allow them to stipulate lower interest rates for homeowners than originally agreed upon, mortgage lenders will have lower overall income and be unable to offer mortgage loans with attractive interest rates.
With this question of how mortgages modified by bankruptcy judges would affect the mortgage market, Adam J. Levitin and Joshua Goodman of Georgetown Law recently studied data from the 1980s and 1990s and found that lenders would not be as affected as they have claimed.
More specifically, the authors indicated that foreclosure proceedings would be more expensive than mortgage modifications, seemingly invalidating the previous MBA argument that lenders would lose money.
Read the study in more detail below.
Legislative Roundup
Here are some key legislative developments that have taken place in recent weeks:
- On February 5, Representative Carol Shea-Porter (D-N.H.) introduced the Medical Bankruptcy Fairness Act of 2008, which would increase the federal homestead exemption in bankruptcy to $250,000 for "medically distressed debtors," according to a headline from the American Bankruptcy Institute (ABI).
- In relation to our earlier discussion about the credit crunch affecting student loan availability, the House of Representatives approved legislation on February 8 that would renew the Higher Education Act, call for tougher regulation of the student loan industry and make the process of filing for student aid much easier, according to an InsideHigherEd.com story.
A Politico.com story detailed that an amendment which would have made student loans dischargeable in bankruptcy was not included in this legislation's final package.
- President Bush signed the much-talked-about economic stimulus bill on February 13. Calling the bill a "booster shot for the economy," Bush and others in the government hope that it will prevent a recession, according to a CNN.com story.