Blogging Your Bankruptcy

When President Obama told Congress this week that his stimulus package wasn’t about helping banks but about helping people, he could have been talking about a former sound designer in Hollywood named Bob.

Bob is bankrupt. He went bust in September, and this month he began a blog chronicling his own economic recovery.

The U.S. might be too big to fail, but are you?

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  1. Dylan Golden says:

    Chapters 7 and 13 of the Bankruptcy Code have gotten stingy over the past few decades. Now here is an idea, discussed in Bob’s blog, that would loosen the strings a bit:

    Under the proposed law, a bankruptcy judge could reduce the balance of a first mortgage to fair market value and re-amortize it, reducing the monthly payments and making it easier for financially distressed homeowners to keep their homes.

    This proposition would stick the cost of the under secured note on the lender who originated it. This would create an incentive for lenders to be more careful in valuing the security for their loans in the future. (Unfortunately the recipient of the proceeds of that loan, being either lucky or an adept market timer, cannot be gone after). This idea has a degree of bi-partisan support, and perhaps it should be expanded.

    Although bankruptcy is frequently brought on by periods of protracted unemployment, most people seem to fall into one of the following categories: consumer debtors only, homeowners with declining home values, and students who have amassed debt while attempting to navigate the early years of their lives. Former students felt the sting of bankruptcy reform in 1998 when §523(a)(8) of the Bankruptcy Code was amended to prevent the discharge of most educational loans for almost all debtors. Other debtors got their turn in 2005 when Congress enacted severe income limits affecting the rights of those filing for bankruptcy protection, in many cases barring Chapter 7 liquidation.

    The former rationale for the bankruptcy code seemed to be that in our competitive society, in order to move on with life, debtors are entitled to a fresh start, to compete without the burden of debt albeit with poor credit. The new philosophy seems to endorse the role of debt as a straight-jacket, subject to the caveat that everyone needs to eat.

    Growing up in Berkeley in the last quarter of the 20th century, people didn’t seem so obsessed with money. Increasingly, it seems that everyone is on the hunt. Age informs perception, but it seems as though the stakes are higher as jobs become increasingly temporary and people are squeezed out of areas they once called home. Globalization and the effect that technology has had on productivity are playing a complicated role in this. One function of the law is to soften the harshness of the free market and preserve a free and compassionate culture.

    Education is thought to secure above average future income. There is a substantial amount of evidence to back this up. The evidence, however, rarely accounts for the correlation between obtaining a high level of education and coming from an affluent background, which is likely to assist in locating desirable jobs. In reality, there are a number of former students who can’t get jobs in their fields who have over six figures in student loan debt. Many of them are incapable of understanding what they are getting themselves into when they take out this debt. Difficult way to start adult life.

    Why not allow students who meet the income guidelines for a liquidation bankruptcy and who also meet a statutorily defined waiting period (by way of example ten years for any amount over $100,000; fifteen years for any amount of $150,000; twenty years for any amount over $25,000; adjusted to COLA), discharge their student loan debt. If it is true that these students have seen substantial career success as a result of their education, then they will not have need of this provision. For those who aren’t so lucky, having done their time, they can exercise their right to a fresh start if that is what they want. Incidentally, such a provision would cost taxpayers very little, if anything, because of the vast number of below market rate student loans that are deferred for decades by students who can’t afford to pay them off.

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  2. frankenduf says:

    quite the contrary- the TARP program early on, and now continued by the Obama administration, is simply a giveaway to the banks- the only way to help people would be to give the people a stake in the banks- that way, when the banks’ colossal debt is finally contained, the public stake can be sold back to private investors, thereby getting their money back

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  3. Rian says:

    Dylan,

    Great comment. Thanks. I agree wholeheartedly.

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  4. Joanne says:

    Before filing for bankruptcy, you should know the laws in your state. Here is a set of the US state laws – http://money.lessonstudio.ca/Bankruptcy-Laws-871.html
    Here are alternatives to bankruptcy – http://money.lessonstudio.ca/Bankruptcy-Alternatives-574.html

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  5. F. DiCesare says:

    Dylan:

    One thing that isn’t being discussed is why the modern bankruptcy code (adopted 1978) doesn’t already allow the BK Courts to modify mortgage loans on debtors’ residences. That was explicitly prevented by 11 U.S.C. Sec. 1322(b)(2). To now introduce residential loan modifications would be a reversal of an explicit policy.

    What was the policy? Back then, loans were made by local lenders, and even if a bigger player was involved, the borrower met with the party extending the loan. Due diligence was done up front.

    The mortgage was then often sold into the secondary market. FNMA (now “Fannie”) or FHLMC (“Freddie”) would buy the loan at a small discount, and the purchase price would give the “on-site” lender funds to make more loans.

    The idea behind keeping home mortgages intact through Chapter 13 (where just about every other creditor can be “crammed down to value”) is that the due diligence was done up front, and to allow the loan to move through the secondary market easily, a future holder of the mortgage wouldn’t have to do new due diligence on every mortgage when the secondary market buys bought hundreds or thousands of loans at a time. And all of this would minimize the cost of the lenders, and keep home mortgage interest rates lower than other consumer debts, etc.

    This idea fell apart when loans were made that should have never been made, and the people working in the secondary market became complicit in allowing cruddy mortgage assets to become common. Lenders would close anything, and people in the secondary market would buy anything – often splitting them into the small pieces into various trusts that is now in the media’s attention.

    So now we’re left with a bunch of mortgages that have a real value less than their face value. In a perfect world (or the one contemplated in 1978), that should not have happened. I note this history only to show that the non-modication of home mortgages had a reason, once, and that to remove it is a reversal of an explicit policy.

    As someone who works in the Chap. 13 field, I won’t (and can’t) take a public position here as to whether changing Chapter 13 is the best way of cleaning up (through forcing real-world valuations) mortgage assets. What I will say in favor of such an action is that a mechanism to value the assets exists in the bankruptcy courts. On the other hand, if such legislation passes, politicians should not be allowed to complain when the bankruptcy courts ask for more judges and a higher budget. You’ll be reqiring the judges to sit through a lot of trials over the valuaion of real properties while many real estate markets are in free fall – not a job to be envied.

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  6. Kevin Porter says:

    I think any person or company can fail if they’re not careful. Creditors don’t care about your life situation, all they want is there money back. Which is why it’s so important to be careful when borrowing. You get in too deep and next thing you’re attenting bankruptcy counseling.

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  7. Lucas says:

    Most people are a pay check away and creditors are busier then ever. Hopefully, people are seeking proper financial advice now and will take the right approach to climbing out of debt. http://www.sikorskilaw.com

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  8. Bankruptcy says:

    First of all this blog is great. Blogging bankruptcy is shows how powerful bankruptcy when people are going to bankrupt.

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