There's a sense of inevitability that Congress will amend the Bankruptcy Code to allow judges to modify home mortgages. Currently, in a Chapter 13, all a debtor can do is catch up on his or her back payments. In the meantime, he has to keep his ongoing payments current. Under proposals in both theHouse and Senate, Chapter 13 would be amended to permit a judge to write down the amount of a loan to the value of the house, if the house is now worth less than what's owed on it. This is a process called "cram down", from the phrase "cram it down the throat of the creditor", that is, force the creditor (who usually objects) to accept the lower value.
There's a good deal of debate about the wisdom of such a proposal. Those opposed say it will raise the lending costs to everyone. Banks will never be sure that they will get paid in full or that they won't have a lower value crammed down on them. As a result, they will raise lending rates to everyone to spread the risk of the relatively few bankruptcies over all borrowers. Thus, we'll all end up paying for those people who can't pay for themselves. But that's what we're all doing with the bailout anyway. Those people who were responsible are going to pay for the $835 billion in new assistance that was just signed into law by President Obama.
Friday, February 20, 2009
Tuesday, February 10, 2009
Bankruptcy
Today it's time for a change in topics. With the economy the way it is, bankruptcies are soaring in the United States. So we'll look at the different types of bankruptcy relief.
There are two types of bankruptcies avaialbe for individuals. The first is Chapter 7. This is also called a straight bankruptcy. In a Chapter 7, a trustee is appointed to take over all of the person's assets, sell them, and use the money to pay creditors. In reality, most Chapter 7s are what are called "no asset" cases, meaning there are no unencumbered assets for the trustee to sell. The trustee won't sell a house, for example, if it is worth less than the mortgage that is owed. Before a trustee can take any of the money he gets from selling assets, he first has to pay any secured creditors, those creditors, such as banks that hold mortgages, or credit unions that hold the title to a car, who have taken a pledge of property from the borrower. Only after secured creditors are paid can the trustee use any excess funds to pay other creditors. In most Chapter 7s, the trustee concludes that he can't get any funds to pay creditors other than those secured by the property, so he abandons the property and doesn't sell it.
In a Chapter 13, also called a wage earner plan, the debtor (person filing bankruptcy) pays his or her disposable income (that portion of income left after paying housing costs such as rent, food, utilities and other normal living expenses) to the Chapter 13 trustee, who then doles the money out to the creditors. A Chapter 13 plan goes on for as long as five years. At the end, the debtor gets a discharge from any debts that haven't been paid through the Chapter 13 (with some exceptions).
There are two types of bankruptcies avaialbe for individuals. The first is Chapter 7. This is also called a straight bankruptcy. In a Chapter 7, a trustee is appointed to take over all of the person's assets, sell them, and use the money to pay creditors. In reality, most Chapter 7s are what are called "no asset" cases, meaning there are no unencumbered assets for the trustee to sell. The trustee won't sell a house, for example, if it is worth less than the mortgage that is owed. Before a trustee can take any of the money he gets from selling assets, he first has to pay any secured creditors, those creditors, such as banks that hold mortgages, or credit unions that hold the title to a car, who have taken a pledge of property from the borrower. Only after secured creditors are paid can the trustee use any excess funds to pay other creditors. In most Chapter 7s, the trustee concludes that he can't get any funds to pay creditors other than those secured by the property, so he abandons the property and doesn't sell it.
In a Chapter 13, also called a wage earner plan, the debtor (person filing bankruptcy) pays his or her disposable income (that portion of income left after paying housing costs such as rent, food, utilities and other normal living expenses) to the Chapter 13 trustee, who then doles the money out to the creditors. A Chapter 13 plan goes on for as long as five years. At the end, the debtor gets a discharge from any debts that haven't been paid through the Chapter 13 (with some exceptions).
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