Mortgage Fees in Chapter 13: Rules to the Rescue?

In a February post to Credit Slips, Katie Porter pointed out a recurring problem for U.S. debtors trying to deal with mortgage defaults through a Chapter 13 plan.  They can make all of the payments needed to cure their pre-bankruptcy defaults and all of the principal, interest, and escrow payments that become due while the case is pending, but still end the case substantially behind on their mortgages, due to additional fees and charges claimed to have accrued during the case, such as mortgagee’s attorneys fees, inspection fees, and late charges.  Professor Porter voiced support for  proposed legislation—the Foreclosure Prevention Act of 2008—that would require mortgagees to give notice of such post-bankruptcy fees while the bankruptcy case was still pending, so that debtors could either challenge the fees or provide for their payment under bankruptcy protection.  But the fee-notice provision was only one part of the proposed legislation.  The legislation also provided for modifying the terms of home mortgages in bankruptcy, and with opposition from mortgage providers, it failed to survive a filibuster threat. 

Perhaps a new bankruptcy rule on disclosure of mortgage fees—unconnected to mortgage modification— could deal effectively with the problem. Like the proposed legislation, a rule could require mortgagees to give reasonable notice of extra fees or charges that arise during the course of a Chapter 13 case and could provide that if the required notice is not given, the fees may not be assessed.  A streamlined procedure for resolving any disputes over the fees could also be implemented by rule.  Although the process of adopting a rule is long—generally at least three years—it has the advantage of being insulated from much of the political pressure brought to bear on Congress.  Moreover, in contrast to their response to mortgage-modification legislation, mortgage providers might support a rule on notice of post-bankruptcy mortgage fees.   Currently, local courts and individual judges have adopted a variety of methods for dealing with such fees (for example, Section B.2(b) of the model plan for the Northern District of Illinois).  A uniform rule on the question would offer reduced costs of compliance for mortgagees, as well as a level of protection for debtors.

Student Loans and U.S. Bankruptcy Law: Hard to Understand

Student loan debt in the U.S. is a growing problem, with college students graduating with an average debt load of nearly $20,000 as of 2006.  In my last post, I pointed out a recent opinion suggesting a bankruptcy approach that might help students with these loans, even though the debts are nearly always nondischargeable.  Comments to this post suggested that there is an underlying problem in the way U.S. bankruptcy law treats student loan debt.  The comments are right: this treatment of student loans is very difficult to understand.

Bankruptcy Help for Students and Their Lenders?

Yesterday, the President signed into law H.R. 5715, the “Ensuring Continued Access to Student Loans Act of 2008.”  The law responds to a perceived liquidity crisis in student lending by allowing government purchases of privately-issued student loan portfolios, so that the lenders will have funds to re-lend. The law is characterized as a useful first step in the lead editorial of today's New York Times, but the Times urges a broader remedy: greater use of direct governmental student loans.

From the perspective of bankruptcy, though, the question is not how students can best get into educational loans, but how they can get out of them.  Under current U.S. bankruptcy law, all student loans are nondischargeable unless the debtor can establish “undue hardship” under a test that requires proof (among other things) that the debtor will not be able to repay the loan in the future—i.e., permanent disability—a very tough standard.  However, for at least some student debtors an easier way to get bankruptcy relief may be the suggested by In re Orawsky, a recent decision from a Philadelphia bankruptcy court.

One More Means Test Problem

Another example of questionable legislative drafting in BAPCPA--the 2005 amendments to U.S. Bankruptcy Code--appears in an opinion of the Ninth Circuit BAP issued last month, In re Weigand.   At issue is whether “current monthly income” (CMI) includes the gross receipts from a debtor’s business or rental property or only includes the net income--gross receipts reduced by business or rental expenses.  There can be a big difference between the two possibilities.   One Mary Kay saleswoman, for example, reported net income of $150 on weekly gross receipts of $620.  On an annual basis, that would be $32,240 in gross receipts versus $7,800 in net income.  The difference matters.  If a debtor’s CMI is greater than the median household income for the debtor’s state, there are two negatives.  First, the debtor has to fill out a complex statement of deductions from income to determine whether a means test presumption prevents the debtor from obtaining a Chapter 7 discharge.  Second, in Chapter 13, the debtor has to propose a five-year rather than a three-year repayment plan.  $7,800 doesn’t come close to any state's median income; $32,240 actually exceeds some of them.  It's pretty certain that counting gross business and rental receipts would make many debtors "above median" who otherwise wouldn't be.  So, are gross receipts part of CMI?

Lawyers Make Good Laws?

I attended last weekend's University of Illinois/ABI Symposium on Debt—a tour de force, as readers of Credit Slips can glean from Mechele Dickerson's recent reports. My main interest in attending was to gain insights about how to improve U.S. consumer bankruptcy law, and I got one insight in particular from an unexpected source--a paper on international corporate bankruptcy. The insight?  Bankruptcy lawyers really may be the best source for good bankruptcy laws.