Bloomberg News reported earlier today that regardless of any resolution reached between the Attorneys General and the major banks servicing distressed mortgages in the next few days, a threat still looms over whether various investors will commence litigation to block the deal. If such an impediment is put in place, it will once and for all show which entities truly control the mortgage markets.

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Most individuals or couples filing for protection under either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy are required to meet certain income eligibility requirements under the “Means Test.”

Under the Means Test, you must first determine if your average monthly income for the last six months is below the median income for your state, based upon the size of your household.

If your average monthly income for the past six months is below the median income in New York, you have passed the first hurdle, and so long as you meet the other eligibility requirements, you can file for protection under Chapter 7 Bankruptcy.

If your average monthly income for the past six months is above the median income in New York, you must proceed to the second hurdle – do you have the ability to repay a portion of your debt?

The second hurdle is the determination of your ability to repay a portion of your debt. Under the law, you are required to perform an analysis of your income and expenses (based upon certain Internal Revenue Service guidelines) – the Means Test..

With respect to expenses, some expenses are deducted on a dollar for dollar basis, others on an allocation basis, based upon family size and county of residence. The largest single deduction on an allocation basis for renters has always been housing/shelter expense.

Prior to November 1, 2011, renters who reside in Nassau and Suffolk Counties were required to deduct a ridiculously low amount for shelter expense as compared to homeowners who have mortgage obligations.

As of November 1, 2011, the playing field for Long island renters has now been leveled. Housing allowances for Nassau and Suffolk County residents have increased by 30% on average

The following is a chart of comparing the allowances:

Household              1                         2                         3                      4
                             Pre     Post      Pre     Post       Pre     Post        Pre      Post
Nassau County    1545   2027    1814    2300    1911    2508     2131     2796
Suffolk County     1385   1806    1626    2121     1715    2235     1911     2492

The net effect of this change is that, even if your income is above the median for the State, residents of Nassau and Suffolk Counties has been provided with an additional $6,000.00 allowance based upon the cost of housing on Long Island. This can make the difference between qualifying for Chapter 7 Bankruptcy and discharging all of your dischargeable debt and filing for Chapter 13 Bankruptcy and having to devote all of your net disposable income to a repayment plan of up to five years.

If you have been previously advised that you are “on the border” to qualify for Chapter 7 Bankruptcy, it’s time to look again and see if you qualify under the new housing allowances.

Special Note: Means Test Allowances are updated every six months.  The above allowances will only apply to cases for between November 1, 2011 and April 30, 2012.

In bankruptcy, you are allowed to protect various assets, such as cash or cash equivalent assets such as the right to receive a tax refund. This is called exempt property or exemptions.

When the exemption laws were overhauled in New York in January 2011, it proved to be a major benefit to homeowners and renters alike. Homeowners are now allowed to protect up to $150,000.00 in equity in their primary residence. Renters are now allowed to protect up to approximately $12,000.00 in any personal property, including tax refunds.

Despite the above benefits, there has always been, and still remains, a tradeoff for homeowners. If a homeowner must declare the “homestead” exemption, they can only protect $1,000.00 in cash or cash equivalent assets, such as a tax refund.

As we approach the end of the current tax year, homeowners must be wary of the timing of their Chapter 7 bankruptcy filing. Although the tax year has not yet ended, many Chapter 7 Trustees have taken the position that a pro-rata share of the current year’s tax refund may be considered property of a bankruptcy estate under Section 541 of the Bankruptcy Code. For example, if a homeowner filed on November 1st, the Chapter 7 Trustee may claim that approximately 83% of the tax refund for 2011 is property of the estate, and a homeowner may be required to be turn over that portion of the refund, when received, to the Trustee for distribution to creditors.

If you are a homeowner with equity in your primary residence and have traditionally received a substantial tax refund, you must ensure that this issue is discussed with your attorney. Your attorney’s job is to provide you with guidance to obtain the maximum protection under the law. It is hard enough to make the decision that a bankruptcy filing is necessary. You should not lose an asset that could be protected. Only an experienced bankruptcy attorney will raise this issue and help you work it through.

Daniel Gross recently reported on Yahoo Finance that there is one ray of light in the mortgage modification mess – Boston Community Capital. Here are some excerpts from his report…

Five years after the housing market peaked, the mortgage mess remains a significant drag on the economy. Banks, policymakers and investors have yet to figure out a way to stop the cycle of massive foreclosures and the fire sales that inevitably ensue. In September, foreclosures and short sales accounted for 30 percent of existing home sales.

The calls are rising, from all points of the political spectrum, for mortgage modification — i.e., figuring out a way to let people stay in their homes even if they can’t afford the current mortgage payment. While banks, the Obama Administration and the taxpayer-owned mortgage giants Fannie Mae and Freddie Mac dither, one non-profit lender is taking matters into its own hands.

Boston Community Capital, which has been active in the region for 30 years, last year set up the Stabilizing Urban Neighborhoods (SUN) initiative. The plan? Buy properties back from banks who aren’t willing to modify, then resell them to the owners who were in danger of defaulting or who had already defaulted —- at a much lower price and with a better mortgage. And all while delivering 4.25 percent annual returns to investors. The goal, aside from keeping people in their homes, is to stabilize neighborhoods.
Since 1985, BCC has invested more than $650 million in low-income communities, and financed more than 11,100 affordable homes. To raise funds, BCC in May 2010 sold $20 million in five-year bonds that pay 4.25 percent annual interest. Of the $20 million raised in the bond, $4 million immediately went into loan loss reserves.

In other words, of the $20 million raised, BCC will lend out only $16 million, at 6.25 percent. BCC also takes other steps to ensure repayment. BCC takes a diametrically opposed approach. It approaches the bank and offers to buy it at the market price. Here is an example:

In 2006, Lydia Smith and her husband, who were both full-time workers, bought a two-bedroom cape in Hyde Park, Massachusetts. Upon closing, they had two mortgages for a total of $329,000. “We didn’t know we were getting two separate loans,” Smith says. “When I asked about it at the closing, they gave us a runaround.” One of them had a large balloon payment. The couple was able to make the $2,550 monthly payments for a couple of years, but when Lydia’s husband, a custodian, got injured and was unable to work, they began to fall behind. America’s Servicing Company, the Wells Fargo unit that serviced the loan, wasn’t particularly responsive to efforts to modify.

BCC bought the house from the bank in February 2010 for $165,932. Then it turned around and wrote a new mortgage to the Smiths for $214,000 —- the price of the home plus a 25 percent loss reserve, plus a several thousand dollar reserve for repairs. The upshot: The Smiths now pay $1,685 per month for the mortgages, taxes and insurance, a 44 percent reduction.

The house is still underwater, but the homeowner —- and hence the neighborhood — is more stable. And while it gives borrowers a break, BCC also asks plenty of them. It requires people to make 26 bi-weekly mortgage payments instead of 12 monthly ones. The 26 weekly payments force borrowers to make an extra month’s payment each year, which they can use either to write down the principal or place in a reserve for a rainy day.
There’s a final piece that helps protect BCC from some of the charges that it is simply encouraging and abetting moral hazard. If the homes appreciate over time, the mortgage agreement provides that BCC received 50 of the gains. BCC has committed to use any such gains to spruce up neighborhood parks, or fund college scholarships.

Of course, to a degree, such efforts can be seen as rewarding irresponsible behavior. But proponents insist we take a broader view, and think less about the individual and more about the impact of foreclosure on neighborhoods.

Mortgage modification is a messy, complicated business. Groups like BCC are trying to solve a problem that was created on a wholesale level – mortgages shoveled out by machines – on a retail level. Serious obstacles remain. The first is scale. So far, BCC has returned 125 homes to owners through its SUN program, with only one default. It would like to expand in Boston, and in other cities, but there’s a funding issue. BCC is only borrowing for five years and lending for 30, so there will be a need for match funding/recapitalization down the line. The second problem is more daunting. It will come as no surprise that one of the institutions with the most to gain from mortgage stabilization simply isn’t interested in BCC’s effort. Freddie Mac will not modify any of its guidelines to accommodate the SUN program at this time. As a result, only 13 of the 125 homes have been funded through Freddie Mac programs..

Kudos to Boston Community Capital and simply another bad for Freddie Mac….

When you owe money to a bank or credit union and also have money on deposit with the same institution, the bank/credit union has a right to setoff the debt owed to it against the funds on deposit. This right is based on the contract with the bank the debtor signed when he or she first opened the account as well as the general common law.

How does a setoff work?

Setoff means that the bank has the right to offset the debt owed to it against the funds it holds on deposit in any account of the debtor, including checking, savings, money market, and certificates of deposit (CDs). The bank is not required to provide advance notice to the debtor of its intention to exercise its right of setoff. The bank deducts the funds from the debtor’s account and credits them against the debt owed to the bank. Once the bank has setoff the debtor’s funds against the debt owed to the bank this may cause the debtor’s account to overdraft because the account will have insufficient funds to cover outstanding checks after the bank has setoff. For people whose paycheck is directly deposited to their bank, an additional problem is that they can find their funds swept up by the bank on an ongoing basis for more than one pay period.

Which debts can a bank exercise its right of setoff to pay?

A bank will typically exercise its right of setoff for any debts to the bank that are delinquent and have not been paid after demand has been made on the debtor. Such debts may include loans that the debtor has borrowed directly from the bank (such as under a line of credit, overdraft accounts, or car loan), loans the debtor has borrowed from bank affiliates (such as a department store charge card issued by the bank), and third-party loans that the debtor has guaranteed (such as a loan from the bank of a friend, relative or business with which the debtor is affiliated). Some banks are very active credit card lenders – particularly for store charge cards. Two current examples are HSBC and Citibank, both of which have extensive credit card operations for store charge cards. In the minds of most consumers, however, the store (such as Best Buy) rather than the bank (HSBC) is the lender, not the bank. In reality, the bank is the lender, not the store. The right of setoff can be exercised by a bank against both accounts owed by individuals and accounts owned by businesses. However, the account owner or co-owner must be obligated on the debt as well.

What happens if I file bankruptcy?

When you have funds on deposit with a bank and also owe money to the bank, the bank has the status of a secured creditor (at least as against the debtor) for the funds on deposit. This secured status arises from a “possessory lien” because the bank holds the funds. A bankruptcy filing by a debtor will not entirely eliminate the bank’s right of setoff. However, the automatic stay that you are afforded upon filing by the debtor a bankruptcy petition will bar the bank from exercising its right of setoff until it has the automatic stay lifted. The U.S. Supreme Court in a 1995 decision called Strumpf (Citizens Bank of Md. v. Strumpf, 516 U.S. 16) held that a bank may temporarily freeze a debtor’s bank account after a bankruptcy filing while it applies to the Bankruptcy Court for an order lifting the automatic stay to allow the setoff. Please note however that this ruling is subject to any exemption that you may be entitled to claim against those funds as part of your bankruptcy filing.

What You Can Do If You Are Considering Bankruptcy?

If you are considering bankruptcy and have a checking or savings account with a bank or credit union that you also have an outstanding balance on a loan or credit card, I encourage you to change banking relationships BEFORE filing. It is prudent planning and simply makes good sense. It’s your money and you have the right to bank at any institution of your choosing. This will also alleviate the need to work out this issue with your bank or credit union upon filing and keeps all of your funds available at all times for when you need them.

Earlier today, I was listening to a business report on the radio in which an economist actually recommended that homeowners who purchased a home in the mid-2000′s with little or no money down, who are now at least 12 months behind on their mortgage and have been unable to modify their mortgage because of insufficient income, actually file for Chapter 7 bankruptcy and GET IT OVER WITH – MR. OBAMA IS NOT GOING TO SAVE YOUR HOME!!!

Unfortunately, this mantra is going to going to get louder in the coming months as (a) banks may have already modified the vast majority of those who can truly afford to make timely mortgage payments, and (b) State Courts are now beginning to allow more foreclosure actions to move forward.

One of the ways that the economy can get moving again is to allow these remaining foreclosure actions to begin to again flow through the system. There are too many properties in the pipeline that are being stalled by my brethren without any legitimate financial grounds – namely – THESE HOMEOWNERS CANNOT AFFORD TO PAY ANYTHING NEAR WHAT MAY BE REQUIRED TO ADEQUATELY SERVICE THEIR DEBT.

Even if some are successful in modifying, has anyone really looked at the terms. In many cases, while the payment may become affordable in the short term, the payment of a modified mortgage has become the equivalent of indentured servitude or glorified rent (whichever cliche you may choose). Banks are not reducing principal balances – they are merely deferring them. A homeowner will may minimal payments over the next 30+ years and at the end of the period, could still owe the bank in excess of $100,000.00.

Doesn’t it just make more financial sense to file bankruptcy, begin to save what you would be paying for a mortgage (or rent), and let the bank foreclose? At the end of the process, when it is time to make the transition to new housing, you will hopefully have a small nest egg to allow you to start over again. ISN’T THIS WHAT BANKRUPTCY IS ALL ABOUT?

Now I am not advocating intentional or structured defaults on mortgage obligations, I am just asking those whose situations have gotten beyond the “point of no return” to temper their expectations and be more realistic in viewing their financial futures. Think about it before you spend more money paying consultants that make unrealistic promises….

In these difficult times, many homeowners have faced the prospect of being unable to maintain their mortgage payments and they have turned to their mortgage lenders for assistance to modify their mortgage(s).

If you have been fortunate enough to modify your mortgage, I now ask you to answer the following questions:

Did it solve all of your problems?
Is there stilll too much month left at the end of your money, and each month you need to purchase necessities with a credit card?
Are you afraid to answer your telephone, even if you have Caller ID, or you dread opening your mail each day?
Are you at the maximum limits on your credit cards, and can barely make the minimum payments each month?
Are you borrowing from one credit card to make your minimum payments on other cards?
Are you borrowing from your retirement benefits to make payments on your credit cards?
Are you living paycheck to paycheck or with the fear that if either you or your spouse lost your job, you will be in financial hot water?
Are you constantly fighting with your spouse over money matters?
Are your bills are weighing on your mind to the point where you are constantly anxious, and it is now affecting your ability to sleep soundly or to perform your function day-to-day tasks normally?

If you answered YES to any of these, you are still not yet out of the woods…

Bankruptcy is an option for individuals in their time of need. Filing Bankruptcy is a right under Federal Law. It is a financial safety net to rid you of the weight of the burden of your credit cards and other unwanted debts.

Bankruptcy is not painful – You do not have to lose your home, your car or your retirement savings when you file for bankruptcy.

Let’s be practical – No one wants to file for Bankruptcy – No one even wants to be reading this, but if you are, you should consider Bankruptcy as part of your personal arsenal to get you financial house in order and get a fresh start.

All it takes is a phone call or e-mail. You owe it to yourself to get the facts – Contact an experienced bankruptcy attorney today – It could be the best call you may ever make…Do it TODAY!

The Street reported on August 5, 2011 that banks are stepping up their efforts to facilitate short sales of properties in which the outstanding balance on the mortgage exceeds the present market value of the property (also known as being “Upside Down” or “Underwater”). Basically, the banks have finally realized that they have to get these toxic mortgages off of their books in order to satisfy their shareholders. This may be all well and good for the banks, but what about the homeowners??

A short sale has traditionally been, and remains, an appropriate strategy for an extremely small segment of the homeowners who are underwater – those who either have other assets to protect or, in the rare instance, those who have little or no other debt.

The majority of homeowners that I encounter in my practice are not only underwater on their first mortgage, they may also have a second mortgage as well as other obligations such as credit cards, and medical bills. The banks, for the most part, as they have done time and time again in the mortgage modification process (the 31% rule as an example), are not taking into account the overall financial health of the homeowner.

Homeowners who are underwater are being bombarded by both their Lenders and local Realtors with solicitations to sell their homes in a short sale. In fact, as mentioned in The Street, some banks are allegedly offering financial incentives to homeowners (also known as “Cash for Keys”).

If It Looks Too Good – It Usually Is…A financial incentive may not be the best answer. .

A quick payday offered by a lender may only prove to be a drop in the bucket. If you sell in a short sale, you will required to immediately incur the costs of relocating, and most likely, be required to begin to pay rent. This will eat up most, if not all of the incentive provided by the lender. In addition, it does not take into account any of your other debts. I have seen numerous instances wherein a homeowner has completed a short sale only to have to file for Chapter 7 bankruptcy a few months later when they realize that the short sale did not solve all of their financial issues.

If you are presently experiencing this ordeal, do not make a quick decision. You need to have as may facts available to you to make the best informed decision for your circumstances. I suggest that any homeowner in this situation should sit down with a experienced professional who can look at the overall situation independently and review all options, including the possibility of filing of either a Chapter 7 Bankruptcy or Chapter 13 Bankruptcy. An experienced bankruptcy lawyer deals with these situations on a day to day basis and knows how to assess the pros and cons of a short sale as it may relate to your individual circumstances. Don’t sell yourself short – make an informed decision…

I know this sounds completely bizarre, but it may start happening more frequently in the near future.

In the past 30 days, I have encountered three new clients who have been “informally” advised by their mortgage lenders to file bankruptcy to deal with their unsecured debt PRIOR to completing a mortgage modification.

Lenders, in addition to the 31% rule (previously discussed in another post), now appear to be taking a closer look at a homeowner’s total debt ratio – also known in the banking business as the “back end number.”.

In the cases I have encountered thus far, each client had a total debt ratio (mortgage payments, auto payments and credit card minimum payments) of well in excess of 50% of their monthly gross incomes. It is my understanding that lenders may now not consider a homeowner for a modification unless their total debt ratio is less than 40% of their gross monthly income. For many homeowners, bankruptcy may now be the best alternative to eliminate credit card debt BEFORE applying for a mortgage modification.

As a former banker, I know that although the two ratio formula has been around forever, it has shifted over the years. Back in the early ‘90s (before mortgages began to be sold en masse), the rule of thumb was that mortgage debt should not exceed 28% of homeowner’s gross monthly income, AND that their total debt ratio should not exceed 34% of income. In the early 2000′s, the ratios shifted to as high as 35%/45% (and this was in addition to all of the other types of mortgages that were available, such as “liar” loans).

The pendulum now appears to be swinging back to the more “traditional” guidelines. If you are attempting to modify your mortgage, I suggest that you first calculate your total debt ratio and then speak to your lender. Instead of wasting valuable time processing an application for a modification which could be doomed from day one, it may be a good strategy to be proactive with your lender and ask whether they would be willing to consider you for a modification if you agree to deal with your unsecured (credit card) debt in a bankruptcy proceeding. In this environment, anything is possible….

In the recent past, I have seen a trend develop that, even as a parent, I find extremely disturbing – parents seeking bankruptcy protection in mid-life or in preparation for retirement that will remain saddled with their children’s student loan obligations long after they have discharged of their other debts.

Here’s an example: A couple in their early-mid 50′s that rent an apartment, with a combined income of in excess of $80,000 per year has $50,000 in credit card debt. In addition, while their child was in college, they co-signed for an additional $50,000 in student loans. Their child, now is his/her late 20′s, is having difficulty getting their career off the ground and cannot meet their student loan obligations. Mom and Dad, as the joint obligors, begin to make student loan payments for their child that could be as high as $500/month. Dad’s job then gets downsized and his $60,000 income is now $30,000. Mom and Dad now seek advise from a bankruptcy attorney (me). I now have to deliver the good news and the bad news that (a) they qualify for Chapter 7 bankruptcy; (b) they can obtain a discharge of their credit card debt; but ( c) they will still be obligated for their child’s student loans.

The reason for this is that, despite the provisions contained in Section 523(a)(8) of the Bankruptcy Code, which state that certain student loan obligations may be discharged in bankruptcy, in reality, this is NOT the case.

The rule of thumb in the case law on this issue was provided in In re Brunner The Court in Brunner basically held that so long as an obligor on a student loan is able bodied, has some net disposable income above their usual and customary living expenses, and is capable of making some type of payment on a student loan obligation, that student loan cannot be discharged in bankruptcy.

As a parent and a bankruptcy attorney for over 20 years, I give every parent this word of advise: Love Your Children, But Don’t Sign For Them! I know that you want to do everything you can to help your child to succeed in life, and this includes providing financial support. Financial support, though, does not have to mean co-signing for your child’s student loans.

If your child needs student loans to supplement their college expenses, let your child sign for them, even if you can afford to make the payments. You can always help them to make the payments for as long as you can afford to do so. The key is to love your child, and help them any way you can financially – so long as it is within your means. I am seeing too many couples who put their children ahead of themselves and are being forced to pay their children’s student loan obligations well into their retirement years. This trend will have to be dealt with by Congress at some point, but unfortunately, I do not see it materializing until our present economic house gets put back in order.