Is the U.S. Housing Market Headed for Collapse?

There are some, and their numbers are growing, who feel the U.S. housing market is headed for collapse. Here are some of the reasons they cite:

• New home sales are at an all-time low.
• Because of this, construction of new homes has all but come to a standstill
• The Mortgage Bankers' Association reports home loan applications are at a 13-year low
• Foreclosures continue to rise. The glut of bank-owned properties further depresses real estate values.
• Because of the number of foreclosures and bank losses, banks are tightening their credit standards to those last seen in the early 1970s, which will further depress the market.
• Home prices are still far above 90% of Americans' ability to purchase a house. The law of supply and demand dictates prices will fall until demand matches supply.
• People need jobs in order to buy houses, and with unemployment near 10%, that isn't happening.
• Bankruptcies continue to rise, up 32% in 2009 over 2008.
• The giant tax credit that artificially pumped up the housing market last year is gone, and the government can't continue to fund it.
• Fannie Mae and Freddie Mac, the "twin pillars" of the housing market, are in total shambles. It's estimated it could take another $5 TRILLION to fix them. But Fannie, Freddie and the VA back over 90% of mortgages.
• The overall U.S. economy is drowning in debt. Consumer, government and business debt is in the neighborhood of 360% of gross domestic product (GDP). This debt bubble is about to burst.

Any way you look at it, the forecast isn't good for the housing industry.

$85 Million in Legal Fees

Chrysler's bankruptcy, which started in April, 2009, has generated nearly $85 million in legal fees and costs, most of it going to its lead attorneys, who billed an average of $500/hour.

Chrysler filed a Chapter 11 reorganization. This same chapter is available to small businesses and even individuals. However, because Chapter 11 has to be able to accommodate the likes of Chrysler and other huge corporations, filing a Chapter 11 isn't a viable option for most people or companies. While it's true that most debtors wouldn't incur $85 million in legal fees, the sheer size of that number for a year's work should demonstrate that bankruptcy isn't cheap.

Second (or Third or Fourth) Marriages Complicate Estate Planning

It's human nature not to be alone. That's why the majority of people who lose a spouse, either through divorce or death, remarry. Second and subsequent marriages complicate estate planning in ways most people never consider before they say "I do." Here are a few of the problems:

Age difference. When one party is significantly older or younger, by 10 or more years, the problems are compounded because of the strong likelihood one party will outlive the other for a significant time period. This is espcially true if the husband is older, since women tend to live longer than men anyway.

Health issues. Many older people suffer significant health issues that have to be addressed as part of the overall estate plan.

Children from prior marriages. This is the one issue most people catch. The possibilities are endless. Husband has children; wife doesn't. Wife has children, husband doesn't. Both have children. The children get along (not only as between parents, but among themselves). The children don't get along. There are minor children. There are children with special needs. You get the picture.

Children vs. new spouse. This is the million dollar question. In virtually every second or subsequent marriage where there are children from a prior marriage there will be a conflict between the new spouse and the children of the prior marriage. The parent's loyalties are divided between his/her new spouse and his/her children.

Pre-Nuptial Agreements. While technically not part of "estate planning" as it is commonly understood, the existence or absence of a pre-nuptial agreement in a second marriage can have a significant estate planning impact. In most states, a surviving spouse has certain rights, called the spouse's pre-emptive share, that may allow her to reject the provisions under a will and claim what she is entitled to under intestacy laws. A properly drafted pre-nuptial agreement can go a long way toward avoiding this.

Attorney Fee Only Plan Not in Good Faith

An attorney and his client came up with a novel, but ultimately unsuccessful, way to file immediately and pay attorneys' fees -- and nothing else.

In In re Buck, 2010 WL 2746217 (Bky.D.Mass. July 9, 2010), the problem for the Bucks was they couldn't pay the attorneys' fee of $2,000 for a Chapter 7 bankruptcy. They wanted immediate relief from the harrassing collection efforts they were subject to, but, understandably, their attorney wouldn't file for them until they paid his fee. So they agreed to file a Chapter 13, which cost $4,000, but those fees would be paid through the plan, at $130/month. This allowed them to file immediately. Sounded like a good plan.

That was until the bankruptcy court determined that the plan was not filed in good faith. It turns out that all of the Bucks' property was exempt and all of their debts were dischargeable in Chapter 7. As a result, no one other than the attorney would have received a distribution under the plan. The bankruptcy judge said that this was not a "good faith" plan, it exposed the debtors to 36 months of payments and delayed their discharge by that same time. As a result, he refused to confirm the plan. The Bucks converted to Chapter 7 and the court ordered that the attorney could not receive fees for either the Chapter 13 or the Chapter 7.

Steinbrenner 1, IRS 0

George Steinbrenner, the bombastic boss of the New York Yankees, died this week. Many people only know George Steinbrenner from Seinfeld episodes, but to many baseball fans, he was the undisputed face of the Yankees from 1973 until his death. Steinbrenner was famous for hiring, firing and then re-hiring managers and meddling in their day-to-day operations.

By dying in 2010, Steinbrenner (actually his heirs) gets to keep an estimated $632 million from his reported $1.15 billion estate that otherwise would have gone to estate taxes. As Kelly Phillips Erb, a/k/a The Taxgirl, writes on her blog, that sum is enough to pay the entire budget of the Small Business Administration for all of 2009.

Congratulations George, you won another one.

Providing for Pets

Many people have pets that become a part of the family. To some, a pet might be the only family they have. What can be done to provide for pets upon the owner's death?

Contrary to what TV might show, most states don't allow a person to leave money or property directly to a pet. However, there is nothing wrong with making provision for a pet in a trust and leaving money to the trust.

If a pet is to be provided for in a will, there are a couple of documents that, at a minimum, are necessary. First, obvioulsy there has to be a will that makes provision for the pet. Remember that you can't leave anything directly to the pet, so if there is a fund established for the pet, it will have to be given to a trust. And the will should provide for someone to take the pet. Make sure that person is willing to accept and care for the pet. Money given directly to an individual with instructions to use it for the pet is probably not enforceable. So you might want to consider establishing a trust. Finally, there should be a durable power of attorney that specifies that the attorney in fact named has the ability to decide what to do with the pet. Everyone should have a durable power of attorney in case they become incapacitated, anyway.

Is Bankruptcy Moral?

A lot of people struggle with this question. Most people are fundamentally honest and the idea of not paying their just debts doesn't sit right with their upbringing. There is a lot of guilt associated with filing bankruptcy.

Bankruptcy goes back at least to the 14th century. The term "bankruptcy" probably comes from the Italian banco rotta, which means "broken bench." It was the custom to break the bench of a merchant who could not pay his creditors. "Bankruptcy" is also figuratively description of a ruptured bank, with a resulting loss of money. England has had a formal bankruptcy law since 1542.

Even earlier, the law of Moses in the Old Testament called for the sabbath year, a year occurring every seven years when debts were forgiven.

In America, bankruptcy is one of the few laws specifically mentioned in the United States Constitution, which provides that Congress shall have power to make and enforce a uniform law regarding bankruptcy.

The purpose of this historical review is to show that throughout history, humankind has found that a process by which debtors could be released from their debts and given a fresh start has a salutary effect. Bankruptcy is legal and while filing bankruptcy may not be the most desirable outcome, there is nothing immoral about it.