College Debt Growing Faster than Inflation

Student loan debt exceeds credit card debts leaving many Americans strapped for cash.

A new report by USA Today finds that Americans’ student loan debt is 850 billion dollars, which actually exceeds the total amount of Americans’ credit card debt. What does that mean for our newest generation heading off to college?  Basically the debt they create in the next four years is going to substantially curtail other aspects of their financial lives.  With mounting student loan debts, students who would have graduated and moved out of their parents’ homes are now returning to the nest and staying – sometimes for years after earning a bachelor’s degree.  With unemployment still hovering at 9 percent, college graduates are taking lower-paying  jobs in retail and other fields, rather than in the areas in which they were educated.  Without a good paying job and steady benefits, graduates are delaying other important decisions in their lives as well.  There are fewer automobile purchases, less home buying and travel and well, simply less consumer spending – unless of course, credit is being used.

A more important underlying factor in this discussion is that student loan debt, unlike credit card debt, survives a bankruptcy and is nearly impossible to remove.  An 18-year old high school graduate is facing four years of undergraduate school tuition and possibly an additional two to four years of Master’s work in order to be ‘marketable’ in today’s economy.  The average undergraduate student loan debt for this student will be approximately $22,900. For graduate school,  tuition is currently averaging $30,000 per year for in-state public schools, while private institutions cost  30%  more.

According to the Project on Student Debt, “out of the colleges surveyed, students graduating in the District of Columbia and New Hampshire had the most debt — carrying average loads of $30,033 and $29,443 respectively.”  That data isn’t a big shock to those of us from New Hampshire.  We’re faced with a very limited state college system and the highest state tuition in the country.

Once they graduate, these post-baccalaureate students are earning less than those who graduated even four to five years ago.  According to a study released in May from Rutgers University, “graduates of four-year colleges in 2009 and 2010 earned a median starting salary of $27,000, down from $30,000 for those who entered the work force between 2006 and 2008.”

So the question arises, is a college degree still worth it? I would have to answer in the affirmative with a few caveats.  First, a college degree is always worth the effort, but it makes good sense to shop around.  Where you obtain your degree (as long as it is an accredited program)  isn’t nearly as important as the grades you receive and what you do with the degree.  Which leads me to my second point, be sure that your post college career choice will enable you to earn a salary that will make paying off those college loans feasible and manageable.  A study by the Brookings Institution backs up my logic.  According to the study, “a college degree is the best long-term investment – by far, promising higher returns than stocks, bonds, housing and even gold.”  But, if you’re taking $50,000 in student loans to become a pre-school teacher, just know that you’ll never make enough money to realistically pay down your debt in just ten years.  Lastly, working through school isn’t just the poor student’s answer to paying for college debt.  A 20-hour  a week,  part-time job during the school year, with more hours in the summer, can make all the difference in paying for a degree or going into debt.  Working hard in your late teens and early 20′s is well worth the sacrifice of less social time so that you aren’t burdened with suffocating debt into your 30′s or even your 40′s.

So if at all financially possible, seek out that college degree, but use common sense when deciding which institution to attend and how much, if any, debt you are willing to assume in the process.   It IS possible to graduate college debt-free if you are willing to work hard, give-up the ‘dream’ school for a 2-year community college program and then transfer to a 4-year college, and aggressively look for the best financial aid packages available.  When you’re pining away for ivy covered walls, just remember that your ‘dream’ college may end up costing you nearly $75,000 in student loans totaling nearly $1,400 a month in repayments for ten years or longer.  Is that vision really worth starting your adult life in such overwhelming debt?

Emergency Homeowners Loan Program Ending a Brief and Unsuccessful Run

Introducing Kids to Budgeting Basics

Istockphoto.com

Every day in our practice, we see the devastation that financial insolvency creates not only for the client, but also the ripple effect that it has on the rest of the family.  One way to prevent financial disasters for the next generation is to teach our kids better ways to understand and manage money. We’ve gathered some of the best advice educators and financial experts have to offer to help you with the basics of teaching money management and budgeting to your kids.

Lesson #1 – Start Early

Your children see you handle money every day.  From simple decision making at the grocery store about sale products versus the family favorites to stopping by the bank to make a deposit, your children are learning about money and its use in daily living.  Make a point to help your children understand that using money is a cause and effect process.  As early as age three, “children begin to understand that objects have different values,” says the Sesame Street Workshop’s special magazine supplement, “Talking Cents.”  By age four, “children understand that coins have different values and that those coins can be exchanged for different objects.”  As you go through your daily activities like the grocery store remember that no opportunity is too small to start making a good impression about money with kids.

Lesson #2 – Encourage Your Child’s Business Sense

Children have a tremendous sense of entrepreneurialism and love to pretend.  Incorporate these concepts by encouraging business play themes.  Start by setting up a small grocery store in your kitchen or an auto repair shop in your living room.  Let your child’s imagination soar as he negotiates purchases and schedules repairs of your giant plastic buggy. As children mature, expand on these themes by allowing a lemonade stand or some other form of small business.  Give them simple tools like a notebook and a calculator to track expenses, sales and even calculate profits for their business.

Lesson #3 – Teach that patience pays off.

Impulse buying is big business in retail markets.  According to the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA), Americans spent approximately $10.3 trillion dollars in 2010 on personal consumption expenditures.  With industry estimates of 40% of all purchases being impulse buys, defined as those purchases that are unplanned or unnecessary, the simple math adds up to a staggering $4.2 trillion dollars on impulse purchases alone. Teaching our children to wait to make a purchase can provide a much-needed safety net allowing for more rational decision making.  For example, ABC personal finance correspondent Mellody Hobson recommends offering your 5-year-old daughter a Barbie doll today or $20 next week.  Which do you think she would choose?  “Explain that if she waits the week she could buy three Barbie dolls with the $20 instead of having just one Barbie doll today,” continued Hobson. The same lesson can be taught using a savings plan and real money where you might match her savings dollar for dollar over the course of a year. Lessons on delayed gratification can teach patience, financial planning, and how to save for bigger items.  These lessons are  necessary during the teen years and into adulthood when the financial stakes for major purchases such as college student loans, a car, or a home become even greater. 

Lesson #4 – Remember to give back.

Teaching money skills is also a great opportunity to teach generosity and build a sense of community.  Not only can you donate money to a cause, but you can teach your children that donation of time and talents also have value.  So often the latter two contributions are overlooked for the convenience factor of donating money to causes.  Ways to encourage community while still teaching money skills can include raising money for a local charity walk, working car washes, or even stocking items at food bank shelves.  All of these opportunities coupled with the ‘value’ of donating time and talents can add up to a great financial lesson in what it means to be a good community citizen.

Lesson #5 – Keep up the good work.

As you know with all other life lessons, teaching life skills to children isn’t a one-shot deal.  It takes time and repetition in order to make skills a permanent habit. If you have a component of fun mixed in with your lessons, they’ll be even more memorable ways to reinforce good behaviors.

How are you teaching your kids about money?

The High Cost of Surviving

While cancer cure rates continue to rise, the cost of survival may be deadly.

A recent report came out a few days ago linking federal bankruptcy court records with cancer survival rates.  For many Americans the findings were shocking, but for those of us who work in bankrupcty, the numbers were not all that unexpected. 

“On average, bankruptcy rates increased fourfold within five years of diagnosis” of a life-threatening disease.  The study, by the Fred Hutchinson Cancer Research Center, went on to report that “compared to the general population, bankruptcy rates were nearly twice as high among cancer patients one year after diagnosis, and that the median time to bankruptcy was just two and a half years after diagnosis.”  That is not a prognosis that anyone suffering from a life-threatening illness wants to hear.  The good news – cancer cure rates are rising.  The bad news – if you’re a cancer survivor you’ll more than likely have to file bankruptcy just to make ends meet during and after the treatment regime.

Medically-related banktupcties have been on the rise since the mid 1980′s.  Catherine Arnst of Business Week reported in her story, “Study Links Medical Costs and Personal Bankruptcy” that “in 1981, only 8% of families filing for bankruptcy cited a serious medical problem as the reason.  In a 2001 study of bankruptcies, five states studies by researchers found that” illness or medical bills contributed to 50% of all filings.”

Reasons for the spike in medical bankruptcies are related directly to the proportion of costs now being thrust upon the insured rather than paid by the insurance company.  While medical premiums, coinsurance and copayments are at the highest levels ever, patients and their families are enduring a labrynth of legalese, loop holes, and paper work that leaves them confused about their coverage and fighting with insurance company voicemails, case workers, and appeals processes in order to have their claims paid – all while enduring countless hours of chemotherapy, radiation and the ill effects of their diseases.  Add to that the potential for job loss due to illness and subsequent loss of medical insurance, and you have the perfect storm of financial disaster.

Unless you are one of America’s billionaires, your family may be just one catastrophic illness away from bankruptcy, too.  Having health insurance is no guarantee that you’ll financially survive your disease either.  Families with private insurance (not Medicare or Medicaid) reported that the average out-of-pocket medical costs were $17,749 while uninsured families faced $22,658 in medical costs.  The current proposals to boost coverage to the uninsured is a step toward alleviating some of this damage, but still leaves the hard-working American holding the financial burden for financing a government medical plan as well as devising a way to pay their own medical expenses in the event of a serious illness.  That’s a heavy price and an even heavier burden to bear.

What happens next is something that we may have all considered when faced with a financial crisis – families begin to put the medical costs onto one or more revolving credit cards, which they cannot repay.  The debt continues to snowball until an avalanche strikes effectively wiping out the family’s financial house.  While this debt is difficult to quantify during a bankruptcy proceeding and is one of the reasons why so many in Congress and the Senate are able to deny the cause, we have seen first-hand how an illness serves as the impitus for a downward financial spiral resulting in bankruptcy.

Bankruptcy is the Cost of the Way the Credit Card Industry Does Business

Reprinted with permission from Huffington Post 7-13-11

One newspaper article in 1997 told me all I needed to know about the business model for the credit card industry. Beneficial National Bank, the credit card lender for BJ’s Warehouse, notified 12,000 of its customers that it was revoking their credit card privileges. A logical guess would be that they were bad customers, paying late or not at all. In fact, their crime was paying the balance off in full every month, avoiding the assessment of interest and fees. Rather than find ways to encourage such behavior, credit card industry executives denigrate this type of customer, actually referring to them as ‘deadbeats.’ Despite the risk of default, the industry prefers to target ‘revolvers’ — or those who carry a balance forward from month to month — because this is where the real profit is. Considering that a minimum payment only reduces the amount owed by 4%, targeting ‘revolvers’ is a lucrative proposition as it can take 11 years to pay off as little as $5,000 depending on the interest rate. The real bonanza , however, begins when a ‘revolver’ suffers a default, permitting the assessment of “vig” that would make Tony Soprano jealous. Credit card fees make companies like Citibank more profitable than Microsoft. Like the mob, once the credit card industry gets their hooks into you, the intricate system of fees and higher interest rates is designed to get them in so deep you’ll never escape.

Just as the tobacco industry used to target teens to replace older smokers who died, the credit card industry now targets college students to replace older debtors who may file bankruptcy, following the same maxim — ‘you have to start ‘em young.’ A Sallie Mae study found that 82% of college students fit the preferred profile as being ‘revolvers.’ Since 2004, the percentage of freshman with at least one credit card has risen from 15% to 69%. College students have an average of 4.6 cards with eighty-four percent having at least one. An increasing number of college students now use credit cards to supplement student loans for tuition and books. Credit card companies became so aggressive in targeting college students that in 2009 Congress outlawed the practice of offering preapproved credit cards to students with no income absent a co-signer, and also banned credit card solicitors from campus. Undaunted, companies continue to circumvent the intent of the law by bombarding college students with credit card offers that are not preapproved. A study by Professor Jim Hawkins of the University of Houston Law Center found that 76% of undergraduates have received at least one credit card offer in the past year, and two-thirds of students report seeing credit card solicitors set up just off campus. Indiscriminate approval of credit card applications led Capital One recently to approve a $500 credit line for a five year old girl in Wallingford, Connecticut. This wasn’t surprising as one of my clients told me his 5-year-old daughter had just received her first credit card offer in the mail.

There is a method to the industry’s seeming madness in relentlessly targeting college students with little or no income. In my opinion, the credit card industry targets ‘revolvers’ not in spite of the risk of default, but — at least in part — because of it. Credit card companies know full well that a ‘revolver’ at some point will suffer a life catastrophe — a job loss, a drastic reduction in income, a medical problem or family breakup. Shrewdly lying in wait, they are poised to reap a financial windfall when this occurs — raising the interest rate and tacking on as many fees as possible, so the balance doesn’t move — the exact opposite of what a customer needs at that point. For proof, one need look no further than the recent announcement by Bank of America, the nation’s largest bank, that it intends to increase interest rates to 29.99 percent for any customers missing even one payment. Prior to 1978, virtually all states had usury laws that made it illegal to charge exorbitant rates of interest. In Minneapolis v. First of Omaha, however, the US Supreme Court essentially deregulated bank lending rates, authorizing any interest rate as long as legal in the state where the bank was incorporated. Banks began flocking to incorporate in South Dakota, and later, Delaware, due to the bank friendly laws there which did away the limits on how much interest a bank could charge. In 1996, in Smiley v. Citibank, the US Supreme Court also prohibited states for regulating the fees of national banks, further unleashing this business model on American consumers.

Consumers are taken aback when they learn that years of faithful payments count for nothing when they need help. The vast majority of my clients report that lower monthly payments are not an option as the phone calls become relentless. To stop the harassment, many consumers ‘tread water’ for as long as they can, paying the minimums. My clients often liquidate 401ks, saving accounts and kids’ college funds, trying to infuse cash into a situation that is spiraling out of control. I regularly meet with clients who have done this for a year or two, slowly dissipating retirement monies that may never be replenished, but regarding this as preferable to filing bankruptcy. I feel bad when I meet with clients that have done this because I know they could have kept their pension in its entirety in a bankruptcy. Bankruptcy, however, is not on anyone’s list of fun things to do. As a last resort, people consider a bankruptcy only when the alternative is worse. With ordinary Americans making less and paying more for things like gas, many become tapped out, and enter the next stage of the crisis — having to juggle payments, often having to choose between paying a mortgage or paying the credit cards. To prevent ‘revolvers’ from escaping through a bankruptcy, the industry spent more than $100,000,000 lobbying Congress to toughen the bankruptcy laws in 2005 through things like mandatory credit counseling. A study by the US General Accounting Office in 2010 criticized this requirement, finding that consumers are usually too far gone by the time they consider a bankruptcy to make credit counseling an effective alternative. The industry couldn’t outlaw bankruptcy, so they made the process more expensive.

It isn’t surprising that the targeting of ‘revolvers’ doesn’t stop with the filing of a bankruptcy. In my own practice, clients are incredulous to receive credit card offers within months of discharge in a bankruptcy. One client told me that Capital One had offered him a new card even though Capital One had been included in his bankruptcy. Having learned his lesson, he declined, as do virtually all of my clients, refusing to let the credit card industry entice them back onto that treadmill of revolving debt again. They understand that there will never be a bailout for the little guy, and that a bankruptcy is the closest they’ll ever get to one. Unlike the credit card industry though, bankruptcy clients have no desire to ever repeat the process that got them there in the first place.

Suggestions:

(1) If you are a ‘revolver,’ don’t assume that credit card defaults can never happen to you. Even in the most well-intentioned life, things have a way of spiraling out of control at some point. I have represented doctors, lawyers, judges, bank vice presidents, and debt collectors. No one is immune. Unless you exercise caution by refusing to spend as much as you’re making in the good times, the credit card trap will likely spring shut on you in the bad times. Pay more than the minimums if possible, and avoid cards that have high penalty interest rates.

(2) If the worst has already happened, look for a global solution for all of your debt. People in crisis often lose perspective, putting out ‘brush fires’ with individual creditors, rather than looking for a solution to their debt as a whole. Placating one nagging creditor may lessen your aggravation, but makes no sense if you’re still left with overwhelming debt. It is understandable to hope your situation is only temporary. One sign you’re gone beyond that into the danger zone is if you’re using cash advances to stay up to date on all your payments or putting food or gas onto the cards. This constructs a ‘house of cards’ that will eventually topple over of its own weight. The sooner you come to grips with your situation, the more likely it is you can make a controlled rather than a crash landing. If your ‘take home’ pay is insufficient to pay all your debt, prioritize payments towards that which is most important to you — your house, your car to get to work, etc. It’s surprising when clients tell me they’ve gotten behind on their mortgage trying to keep their credit card companies happy.

(3) Draining a 401k or pension. Make a hard decision before you liquidate pensions — not only for the obvious reason that you will need that money to retire, but also because if this doesn’t solve the problem, and you still have to file bankruptcy, you could have kept your pension in its entirety.

(4) Avoid home equity loans. If you’re one of the lucky few who actually has home equity, taking out an equity loan to pay credit cards is rarely a good idea as it places your home in jeopardy if you default. In New Hampshire, the first $200,000 of home equity for a married couple is exempt from creditors even in a bankruptcy unless you choose to share it with them. Bankruptcy is not on anyone’s top ten list of fun things to do, but people consider it when the alternative has become worse.

The above is not intended as legal advice for your particular situation. Questions should be addressed to attorneys admitted to practice within your state. Richard Gaudreau is a consumer bankruptcy attorney admitted to practice in New Hampshire (NH) and Massachusetts (Ma) and may be reached through his website at attorneygaudreau.com, by email at Richard@attorneygaudreau.com, or by calling 603-893-4300.

Are Low Credit Score Credit Cards Really an Answer?

If you’re struggling with the economic recovery since the 2008 recession, it may be very tempting to sign up for one of the numerous low credit score credit card solicitations you’ve received in your mailbox.  But do a little research into what these cards offer and you may discover that they’re not such a deal after all.

Offered by the industry’s big boys like Citigroup, American Express and Capital One, low credit score cards arrive with all the bells and whistles of their lower-interest brothers but have a series of hidden fees, rising interest rates and dangers.

Fifteen percent of your credit score is dependent on your past credit history. If you’ve had late payments, over credit limit balances or credit card defaults, then a lower credit score will occur.  The lower your credit score, the less likely it is that you’ll be receiving offers for a respectable interest rate.  Now ask yourself, if I’m having difficulty paying off my current debt, is it really wise to assume more? NO!  Run, don’t walk, to your nearest shredder and get rid of those credit card offers!

Will the new credit card offer allow you to consolidate your current credit card debt onto a lower interest rate card? Even if you’re offered a low ‘teaser’ rate, keep in mind how adept the credit card industry  is in justifying a higher interest rate once you’ve accumulated a balance.  Will the lower interest rate remain in effect indefinitely or will it expire after, 3, 6 or 9 months after which time the rate may skyrocket?  The credit card industry usually does not  care about whatever financial problems may occur in the future.  Indeed, they usually use your difficulties as a justification to raise your rates and hit you with fees so that your future payments will not reduce the amount you actually borrowed.

Is there a right way to use credit cards?

Using credit cards for the right reason can be a good thing.

Americans are changing how they use credit.

According to a national survey by Javelin Strategy and Research, credit card spending is down, especially in the 18-24 age market.  Does that mean that we Americans aren’t spending or are we doing it differently?

According to the NY Times report, the survey showed that “fifty-six percent of consumers said they used a credit card in the last month.”  That number is down from nearly eighty-seven percent in the same time period from 2007.  According to James Van Dyke, Javelin’s president, the reason for the change is that consumers are shifting away from credit card use and instead turning toward bank debit cards and re-loadable cards in an effort to better control their spending. The most noticeable downward shift is in the 18 to 24 year-old demographic where recent changes in the CARD Act now require a parental signature on credit card applications for college aged youths.

Because of this shift, the credit card industry is increasing its direct mail efforts and sweetening the pot by offering lower interest rates, reduced or zero fees and rewards programs.  Review these offers with great caution, especially the sections regarding increasing APR.  Credit card companies use the lure of low interest rates with a quickly escalating rate over nine or 12 months.  Often these rates can start as low as nine percent and skyrocket upwards to twenty-three percent or higher.  Also examine the late payment penalties as one missed or late payment can nearly triple the interest rate the bank can charge not to mention an excessive late payment fee.

Using a credit card can be part of a successful monthly financial plan if you are smart about your spending and follow a few easy rules:

1.  Spend only what you can repay in one month.  Yes, credit cards allow for a revolving balance, but that doesn’t mean that you should carry a balance for long periods of time and purchase outside your financial means.

2.  Use the credit card for travel and emergency purposes only.  Again, if you must charge an emergency expense, have a plan for rapid repayment of the debt. By making over the minimum monthly payments, you’ll avoid snowballing interest charges and quickly pay down your charges.

3.  If you are giving the credit card to a college student, set a dollar limit on the card, or even better pre-load the card with a set amount, say $500.00.  Before you hand over the card, have a serious conversation about financial responsibility and what it means to ‘charge’ expenses and how long it could take to repay them at the minimum monthly payment.

Are you noticing a shift in your behavior with regard to credit card use versus cash or bank debit cards? Are you spending less overall because of the slow economy?

Student Loan Changes Causing More Headaches

FAFSA forms will require a little more work and timely deadlines in order to be considered for aid

As spring peeks just around the corner, so does the slew of high school seniors making final selections for college enrollment.  Whether it’s Harvard or the local community college, each choice comes with an equal amount of decisions for their parents regarding how to pay for their child’s post-secondary education. 

Effective July 1, 2010, new student loan legislation enacted as part of the Health Care Bill eliminated the Federal Family Education Loan Program, which gave private-sector institutions permission to offer federal student loans.  Now, students seeking loans must apply through the Federal Direct Loan Servicing Program.  That puts the federal government squarely in charge of a majority of student loans.  What that means to parents who are desperately searching for college loan dollars, is that money is harder to obtain and interest rates will be climbing.

Why the change?

Money, of course. The federal government estimates that it will save between $6 billion and $7 billion annually in payments to private banks in the form of subsidies used to encourage private lending.  The savings, say proponents, will be funneled back into Pell Grants, which was slated to run out of money this year, and to pay down the deficit.

Pell Grants are scholarships offered primarily to some 8 million low income students.  The new funding will allow Pell Grants to continue and even increase from $5,550 this year to $5,975 by 2017.

Included in the bill are provisions for loan repayment.  Starting in July 2014, borrowers will be allowed to cap payments at 10% above their basic living allowance, instead of the current 15%.  Also, if payments are consistent and on time, balances will be forgiven after 20 years instead of 25 or after 10 years if the borrower is in a public service profession such as teaching, nursing or in the military.

Tips for student loans:

1.  Start with federal loans first.  Uncle Sam has backed student loans with the explicit intention of helping struggling students find a way to pay for college. The interest rates are lower and the loan itself is backed by the federal government removing the middle man banks and their charges.

There are three types of Federal loan programs:

• Stafford – for students with and without financial need
• PLUS – for parents and graduate and professional students
• Perkins – only for students demonstrating financial need

2.  Private loans. These loans will still be available from small banking institutions but will come with higher interest rates and more stringent repayment plans.

3.  Try local credit unions. Loan programs via the Credit Union Student Choice Program can be a good option. Average rates on existing loans are 6.25% with no origination fees.

Bear in mind that while backed by the federal government that these are still LOANS and not GRANTS.  Student loans must be repaid the same as any other car loan, credit card, or mortgage payment.  Student loans are also not included in most bankruptcy proceedings which means that they are debts that will not be forgiven or wiped away in a financial restructuring.  If you opt for private student loan funding, be aware that the interest rates will be considerably higher than the federally backed program and that again, there is no consumer protection under current bankruptcy laws.

My best advice is to assume student loan debt only if your child’s future career will allow them to safely repay the amount being borrowed.  If you and your child amass $100,000 in student loans, you had better be anticipating a future career that will pay substantially more than the minimum repayment amount in a given year. For professions such as doctors, lawyers and even veterinarians remember that those professions don’t earn what they used to and a graduated repayment plan will follow your child for decades after the schooling is completed.

Foreclosure Sale – Buyer Beware!

Shopping for a foreclosure is harder than you think.

Buyers of property at foreclosure are looking for a bargain, but that risk now must include the possibility that the title will be defective. One unsuspecting family purchased a home at foreclosure, intending to sell it to their daughter, only to have a title company question whether they acquired good title after they’d already invested $100,000 in renovations. (Nightmare in Land Court, Mass. L.J.) In the wacky world of securitized mortgages, who owns the mortgage is a ‘shell game’ worthy of the most accomplished back-street hustler. How securitized mortgages caused the collapse of the American economy is an oft-told tale that needn’t be repeated here. Suffice it to say that during the housing bubble lenders packaged thousands of mortgages together into each securitized trust, selling shares off to Wall Street investors much like selling shares of stock. Since banks no longer intended to hold their own mortgages, the incentive to avoid ‘bad mortgages’ gave way to greed because these now would be someone else’s problem. The days when your local bank owned your mortgage and had an incentive to work with you to save you both from a foreclosure are, by and large, over. Given the preference of lenders for foreclosures instead of loan modifications, one can only assume that lenders view a foreclosure as a cleansing process that purges a bad mortgage from the books and provides some sort of closure. The recent case of US Bank National Association v. Ibanez demonstrates that foreclosures aren’t the end of a bad loan, and that securitized mortgages can be as hard to kill as cockroaches in a rundown apartment.

In Ibanez, Massachusetts’ highest court voided a foreclosure sale, finding that US Bank never owned the note and mortgage at the time it conducted the foreclosure sale, and, therefore, never acquired good title. The mortgage industry was so concerned about this type of problem that in the Fall of 2010 it took the extraordinary step of trying to ram through Congress a bill that would have validated foreclosures by ‘rubber stamping‘ the shoddy documentation behind securitized mortgages. President Obama vetoed that legislation. US Bank was supposed to have been assigned the Ibanez mortgage years earlier as trustee of a securitized trust, but amidst the thousands of mortgages changing hands every day, that little detail was overlooked. Realizing its chain of title was flawed, US Bank attempted to ‘paper over’ the problem by executing an assignment of the mortgage 14 months after the foreclosure sale. The Massachusetts Real Estate bar association filed an amicus brief, declaring the corrective assignment met local title standards, admitting this problem was in fact very common. While obviously intended to be helpful, one can only wonder at the arrogance of a position that attempts to justify an error by pointing out how often it occurs. The court remained unpersuaded, and the rejection of this title standard calls into question the legitimacy of innumerable other foreclosure sales. The Ibanez holding has left banks wondering whether it’s even possible to correct this type of problem, particularly if one of the assignors has filed bankruptcy. In my bankruptcy practice, it is not at all unusual to see lenders file a corrective assignment prior to commencing a foreclosure action trying to ‘paper over’ the problem. Indeed, the New Hampshire Bankruptcy Court now requires mortgage holders to include written proof of assignment as part of a lender’s request to foreclose.

A big culprit in this convoluted mess is MERS, an organization created by various lenders, and one of the foundational blocks of the securitized mortgage market. MERS operates a private recording system where lenders can assign a mortgage outside of the chain of title in county land records, thus, avoiding recording fees. By avoiding the transparency of the public recording system, MERS makes it difficult to follow the chain of title of who has acquired your note or mortgage. Since the typical securitized transaction involves the transfer of a mortgage several times to insulate the trust from liability, MERS lawsuits nationwide have challenged its legitimacy, particularly the intentional avoidance of local recording fees. MERS claims to register more than 60 percent of the mortgages in the United States within its system. The Ibanez problem may be just the tip of the iceberg. The FDIC Chairman recently warned mortgage servicers not to let MERS conduct foreclosures, a common practice in years past. He also advised mortgage servicers to disclose the full chain of mortgage assignments in any Notice of Default sent to a homeowner prior to a foreclosure.

If you have a MERS mortgage and are looking for information, you can find it at the MERS Servicer Identification website. If you no longer know who owns your mortgage because your mortgage has been transferred several times, your servicer is required to provide you that information upon written request under the Truth in Lending Act. Send a request for this information to your mortgage servicer pursuant to Section 131(f) of the Truth in Lending Act, 15 USC 1641(f), requesting the name, address and telephone number of the owner of the promissory note signed by you and secured by your mortgage loan. Finally, for the overly ambitious who have a securitized mortgage and want to view the legal requirements for transfer of the note and mortgage to the trust, you can generally find that information in Section 2.01 of the Pooling and Servicing Agreement (“PSA”) at the SEC’s Edgar database. Be forewarned that the length of the typical PSA caused one judge to jokingly warn me that if I made him wade through the hundreds of pages of fine-printed legalese, I might regret it someday.

The above article was reprinted with permission from Huffington Post and is not intended as legal advice for your particular situation. Questions should be addressed to attorneys admitted to practice within your state. Richard Gaudreau is a consumer bankruptcy lawyer admitted to practice in New Hampshire (NH) and Massachusetts (MA) and may be reached through his website at attorneygaudreau.com, by email at Richard@attorneygaudreau.com, or by calling 603-893-4300.

How to get rid of a Second Mortgage without a Loan Modification

 The following article released on January 3, 2011 has been reprinted with permission from Huffington Post.

Following the maxim that drastic times call for tepid measures, the banking industry continues to pay “lip service” to loan modifications while doing little. On Dec. 15, the Congressional Oversight Committee admitted the government’s Home Affordable Modification Program (HAMP) loan modification program has failed to help enough homeowners to stem the tide of foreclosures. The vast majority of loan modification requests fail, in part, experts believe, because banks have balked at offering a reduction in mortgage principal, the most effective way to halt costly foreclosures. Trying to revive HAMP, the administration in December announced new regulations designed to push banks into offering more reductions in principal than they have in the past. Fannie Mae and Freddie Mac immediately proclaimed, however, that they remain opposed to making this option available to struggling homeowners. Protecting the interests of the banking industry over the consumer, the Federal Reserve also blocked new foreclosure regulations that would have reined in foreclosure abuses. Although the economic collapse of 2008 has caused the tide to rush in on everyone, there has been no bailout for the “little guy.” Left to fend for themselves, increasing numbers of homeowners are turning to a little-known provision in the federal bankruptcy law, which permits the discharge of a second or even third mortgage in its entirety in a Chapter 13 bankruptcy. The American Bankruptcy Institute recently reported that Chapter 13 bankruptcies have risen by 9 percent in 2010 compared to last year.

Flying under the media radar, the right to discharge a second mortgage in a Chapter 13 bankruptcy provides a glimmer of hope to homeowners stuck with a foreclosure because they own a home they can’t afford and can’t sell. With one in 10 Americans out of work, while others have suffered a pay cut as a condition of keeping their jobs, the amount of disposable income available to pay a mortgage is not what is used to be. Getting rid of a 2nd mortgage payment can sometimes make the difference between keeping a home and losing it to a foreclosure. How then does a homeowner qualify? Quite simply, when a home is worth less than the balance of a first mortgage, federal bankruptcy law — at least in most states — permits a homeowner to treat a second mortgage like an unsecured credit card and discharge it in a Chapter 13 bankruptcy.

Housing prices dipped for the third straight month in October, and hope for a recovery in 2011 has started to fade. According to Corelogic, an industry researcher, 11.8 million homes, or more than one out of five mortgages in the United States are “underwater” — i.e. the total mortgage debt exceeds the value of the home. The U.S. Department of the Treasury estimates eight to 13 million foreclosures will occur from December 2010 through 2012 unless something intervenes. Ironically, the HAMP requirement that a homeowner generally be at least 60 days behind on a mortgage in order to qualify has led to foreclosures on homes where the mortgage payment had been up to date. In fact, a recent National Consumer Law Center’s survey of 96 foreclosure attorneys in the US found that mortgage servicers began foreclosure proceedings against 2,500 of their clients even though a loan modification request was pending. Loan servicers do make more in fees from the foreclosure process than from the loan modification process, so this is not surprising.

Bankruptcy is a business decision, no less for a homeowner than it was for General Motors when it filed a Chapter 11 bankruptcy. This economy has sent clients to my door that I seldom used to see — attorneys, physical therapists, nurses, college professors, and scores of people dependent on the real estate market for their livelihood. A bankruptcy is usually preceded by a loss of income, a divorce or medical issues, sometimes all three. Bankruptcy is not on anyone’s list of fun things to do, and clients only consider it when the alternative, like a foreclosure, is worse. Many have tried to do a short sale or loan modification to no avail and have found that the bank would rather foreclose. In New Hampshire, a homeowner will be responsible for a mortgage deficiency for 20 years. These problems will persist until the powers that be decide to offer more than half-measures to address the foreclosure crisis.

For those facing the loss of their home and wondering whether a Chapter 13 bankruptcy may help get rid of a second mortgage, the following information may be helpful:

(1) It is disingenuous of banks to lull homeowners into a false sense of security by scheduling a foreclosure auction when a loan mod request is pending. If this happens to you, don’t be too trusting when your bank tells you not to worry about the foreclosure because they’ll continue the auction if there’s no answer by the auction date. What they are really saying is if you are denied, the foreclosure will happen. One client told me that Bank of America won’t even consider continuing a foreclosure auction due to a loan mod request until it was 72 hours before the auction date. I regularly receive panicked calls from homeowners denied a loan mod just before the auction occurs. While a Chapter 13 stops a foreclosure automatically, given how busy most bankruptcy lawyers are these days, finding one who has time to do a court filing at the last minute may be difficult.

(2) If you decide to see if you can get rid of a second mortgage, ask a broker to give you an opinion in writing of what your house is worth. Brokers will usually do this as a courtesy, figuring if you ever do decide to sell your house, you’ll go through them. Make sure you ask for the potential sales price rather than a list price, which may be somewhat inflated. If the estimate is less than the balance of your first mortgage, then removing it in a Chapter 13 bankruptcy is possible.

(3) Even if you can get rid of a second mortgage, however, a Chapter 13 is not for everyone. Removing a second mortgage only works if you have enough income to complete the plan successfully. If the real problem is that you don’t have enough monthly cash flow to pay your first mortgage and other expenses, Chapter 13 won’t solve that problem.

(4) Chapter 13 will permit strapped homeowners to discharge most or all of their credit card debt. It usually won’t discharge certain debt like taxes and student loans.

(5) Before making a decision, you want to be sure you can keep all property. Most states have exemptions sufficient to permit a homeowner to keep a house, vehicles, and other assets, however, some states are more generous than others.