Alabama Consumer Lawyer Blog

Bankruptcy and consumer lawyers in Alabama and elsewhere should be aware of American Express’s attempt to subvert bankruptcy laws with respect to preference payments. American Express has announced a plan to pay some of its card members $300 to pay-off their cards and close their accounts. American Express says its offer is to help consumers “simplify” their finances. However, it is clear; American Express is trying to induce consumers to pay it first.

As many remember, the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” was expected to stem losses for credit card companies. But in practice, the bill has actually increased the percentage of credit card debt that is being discharged in bankruptcy. You may have noticed the difference in your mail box. You probably no longer receive three offers for “pre-approved” credit cards in the post each day.

“What AmEx is trying to do is move to the front of the line in terms of getting paid back” by customers who owe debts to multiple lenders, said Micheal Talano, an analyst at Sander O’Neill & Partners. “They clearly grew loans faster than their competitors in the years leading up to this financial crisis.”

American Express is shedding customers as rivals reduce credit lines, raise interest rates and cut back on mail solicitations to brace for future losses. Consumers have fallen farther behind on credit card payments as U.S. unemployment reached 7.6% last month, the highest rate since 1992.

American Express said that charge-offs or loans that it deems uncollectable, rose to 8.29% in January from 7% the month before, while payments that are over 30 days overdue climbed to 5.28% from 4.86%.

I encourage all bankruptcy lawyers to review their clients’ files to ensure that American Express was not paid-off shortly before the client sought your legal services. This will not affect the client’s filing per se but American Express may have to pay some of the money it received back to the bankruptcy court for distribution to other creditors.

One final note, American Express recently received $3.39 billion from the U.S. Treasury to boost its capital. But apparently it had no intention to use that money to increase lending.

As an Alabama consumer lawyer I see more and more clients who are “over-extended” and having tough times economically. Deciding whether or not to file bankruptcy is one of the most difficult decisions a person can make. However, bankruptcy no longer carries the stigma it once did. This is especially true during these particularly dire economic times. Many of the country's largest and most prestigious institutions, like Lehman Brothers, have fallen on hard times and sought relief in bankruptcy.

If you’re trying to hold onto a house then you might want to consider filing a petition under Chapter 13. If you want to discharge all your debts and get a fresh start then you may wish to consider filing a petition under Chapter 7.

There are pros and cons to filing bankruptcy. The pros include:

• It can wipe out or “discharge” all or some of your debts;
• It can give you a chance to “catch your breath” by temporarily prohibiting creditors from foreclosing or repossessing your home or car;
• It can temporarily prohibit wage garnishment or disconnection of utilities;
• It will stop harassing creditor phone calls and letters;

The cons include:

• It puts a blemish on your credit report that will remain there for 10 years;
• Can be a source of embarrassment and may be seen by potential employers, insurance companies and such.

Exemptions are laws that exempt, protect or withhold a certain amount of property from creditors. These exemptions are applied in bankruptcy cases. Under Alabama law a person filing bankruptcy is entitled to exempt up to $5,000 in real property (house or mobile home) from creditors. The $5,000 real property exemption is doubled for husband and wife. Therefore, a couple filing bankruptcy in Alabama may exempt $10,000 in home equity from their creditors. If they have more than $10,000 in equity in their home then they will have to file a Chapter 13 and pay some or all of their unsecured creditors.

For example, if Mr. and Mrs. Smith’s home is worth $100,000 and their mortgage has an outstanding balance of $80,000, then they have $20,000 in equity in their home. The first $10,000 in equity is exempt. The remaining $10,000 will have to be paid to their creditors over the course of their bankruptcy. Most bankruptcies have a term of 60 months. Therefore, they will have to pay their creditors $167 per month. And they get to keep their home.

However, nowadays, with the mortgage crisis and the high foreclosure rate, most homeowners are not worried about the amount of their equity. Many, as I have reported numerous times, are upside-down in their mortgages and owe more than the value of their home. Recently, my office has seen a new attitude from some mortgage lenders which are now willing to negotiate new mortgage terms in some cases.

Continue reading " The Bankruptcy Option " »

Borrowers Who Are Current on Their Mortgage Are Asking:

1. What help is available for borrowers who stay current on their mortgage payments but have seen their homes decrease in value?

Under the Homeowner Affordability and Stability Plan, eligible borrowers who stay current on their mortgages but have been unable to refinance to lower their interest rates because their homes have decreased in value, may now have the opportunity to refinance into a 30 or 15 year, fixed rate loan. Through the program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they hold in their portfolios or that they placed in mortgage backed securities.

2. I owe more than my property is worth, do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.

3. How do I know if I am eligible?

Complete eligibility details will be announced on March 4th when the program starts. The criteria for eligibility will include having sufficient income to make the new payment and an acceptable mortgage payment history. The program is limited to loans held or securitized by Fannie Mae or Freddie Mac.

4. I have both a first and a second mortgage. Do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible to refinance under the Homeowner Affordability and Stability Plan. Your eligibility will depend, in part, on agreement by the lender that has your second mortgage to remain in a second position, and on your ability to meet the new payment terms on the first mortgage.

5. Will refinancing lower my payments?

The objective of the Homeowner Affordability and Stability Plan is to provide creditworthy borrowers who have shown a commitment to paying their mortgage with affordable
payments that are sustainable for the life of the loan. Borrowers whose mortgage interest rates are much higher than the current market rate should see an immediate reduction in their payments. Borrowers who are paying interest only, or who have a low introductory rate that will increase in the future, may not see their current payment go down if they refinance to a fixed rate. These borrowers, however, could save a great deal over the life of the loan. When you submit a loan application, your lender will give you a "Good Faith Estimate" that includes your new interest rate, mortgage payment and the amount that you will pay over the life of the loan. Compare this to your current loan terms. If it is not an improvement, a refinancing may not be right for you.

Continue reading " Frequently asked Questions for Borrowers about the Homeowner Affordability and Stability Plan " »

Alabama Consumer Lawyers will soon have another avenue to help embattled homeowners fight and avoid foreclosure. On Wednesday, February 18, 2009, the White House announced President Obama’s “Homeowner Affordability and Stability Plan” earlier this week. The plan presents a comprehensive program designed to help families stay in their homes. The Administration estimates that the plan will assist as many as 9 million homeowners whose homes are now worth less than the amount of their mortgages.

The plan will assist two main groups of homeowners: (1) those whose homes are financed with Fannie Mae or Freddie Mac and who owe up to 105% of the fair market value of their home, and (2) homeowners with other lenders who are at risk. Complete eligibility guidelines will not be issued until March 4, 2009.

The program will help both homeowners who are current on their payments but find that their homes are worth less than their mortgage balance and homeowners in default and behind on their payments.

Many homeowners who are not behind in their payments find that the current mortgage crisis and high foreclosure rate has lowered their home's fair market value and they are "upside-down" in their mortgage. The president's program will assist these people.

The plan changes Fannie Mae and Freddie Mac eligibility guidelines so that as many as 5 million homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac may refinance their mortgages at lower rates. Under current rules, refinancing is not an option for most homeowners who owe more than 80 percent of the value of their homes.

Removing this restriction “will allow millions of families struck with loans at a higher rate to refinance,” Obama said. “And the estimated cost to taxpayers would be roughly zero; while Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures.”

An additional 3 million to 4 million homeowners will be able to avoid foreclosure through a new $75 billion mortgage modification program. The Homeowner Stability Initiative will be available to homeowners who are at imminent risk of default, even if they are now current on their payments.

Lenders will be responsible for reducing interest rates on these loans so the monthly payment would be no more than 38 percent of the homeowner’s income. Government funds would match further reductions in interest rates to bring the payment down to 31 percent of income.

“If lenders and homebuyers work together, and the lender agrees to offer rates that the borrower can afford, we’ll make up part of the gap between what the old payments were and what the new payments will be,” Obama said in a speech to be delivered Wednesday in Phoenix.

Mortgage servicers would receive an upfront fee of $1,000 for each loan modification that meets the program’s guidelines and would continue to receive up to $1,000 a year in fees for three years as long as the borrower remains current on the loan.

As an additional incentive to boost the program, mortgage servicers also will receive a $500 bonus if they modify at-risk loans before they fall behind. Mortgage holders will receive a $1,500 bonus to do this.

The administration’s goal is to stabilize the housing market saying “the Homeowner Affordability and Stability Plan will support a recovery in the housing market and ensure that these workers can continue paying off their mortgages.” This is good for everyone. Even homeowners who are not in distress will benefit from fewer foreclosures in their neighborhoods.

Additionally, this is only one part of the Administration plan. The foreclosure relief bill or bankruptcy "cramdown" bill I discussed in my January 27, 2009 posting is working its way through Congress.