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Tag Archives: Bankruptcy

Economy slowing down again, and Federal Reserve Bank is running out of traditional stimulus options says UCSC Economics Professor Carl E. Walsh

The economy is slowing down again despite interest rates being lower than ever: What is the government going to do next? Here is the answer, by NY Times Reporter Sewell Chan:

“The challenges the Federal (Reserve Bank) faces aren’t going to get any easier in the coming months,” said Carl E. Walsh, a professor of economics at the University of California, Santa Cruz. “The choices ahead are only getting worse as the economy seems to be slowing down.” Professor Walsh was quoted in the New York Times Thursday, August 12, 2010 edition, Section B1

Sewell Chan’s August 12, 2010 NY Times article introduces us to a new term, “Quantative Easing”, and says that after lowering short term interest rates, about the only thing that the Federal Reserve can do is to pursue a policy of “Quantitative Easing”. According to Mr. Chan, Quantitative Easing is a controversial and uncertain central bank tactic. There is little modern historical precedent by which Quantitative Easing can be studied and analyzed by economists to predict results.

Mr. Chan explains that because short term interest rates are already close to zero, that now the Federal Reserve Bank’s last and final option is more “Quantative Easing”. Will it work?

What is “Quantative Easing”? Simply put, it is the printing of additional money to purchase financial assets in the market place, by using government money to buy instruments held by investors. The instruments purchased by the Government Treasury in “Quantitative Easing” are things such as (a) mortgage backed securities (b) buying/cashing out debts owed by the government such as Fannie Mae and Freddie Mac obligations/bonds and (c) buying Treasury Securities like government bonds.

How does “Quantative Easing” seek to help the economy? My understanding is that Quantitative Easing intentionally creates some inflation as it increases the money supply, and thus with more money rolling around, there is an incentive to invest it by lending it to others. People and investors who now have this freshly borrowed cash then go on spending sprees, and it is these sprees which are supposed to stimulate economic growth by more lending to people who buy things with the newly borrowed proceeds.

In short, more people buying things with borrowed money increases demand for goods and services and such. Increased demand keeps prices for goods and services higher, which is supposed to offset the deflation of prices of goods and services that is occurring in this recession. (See following blog post describing why deflation is “bad”)

Shortly put, deflation is supposed to be “bad” during a recovery from economic recession because deflation will result in a further economic slowdown as people conserve their cash and do not spend it in order to wait for lower prices on everything from TVs to cars to houses to ocean cruises.

This would be a “Second Wave” of “Quantitative Easing” as the Federal Reserve Bank already took a first “Quantitative Easing” step between January 2009 and March 2010 by printing money in the amount of $1.725 trillion (that is 1,000,000,000,000!) dollars to purchase $1.25 trillion in mortgage-backed securities (essentially buying mortgages from private investors), $175 billion in debts owed by government-controlled entities like Fannie Mae (more mortgages) and $300 billion in Treasury securities.

Here are the pros and cons:

Pros of “Quantitative Easing” to buy mortgages and investment instruments held by private investors when lowering interest rates doesn’t seem to be getting the job done to stimulate the economy: Sewell Chan of the NY Times writes that the Federal Reserve Bank’s Chairman Ben Bernanke is an astute student of the Great Depression and that Mr. Bernanke has long argued that the central bank (The Federal Reserve Bank) has the additional tool of Quantitative Easing which should be somewhat readily used to avoid deflation in prices, as deflation will slow, stop or reverse a recovery as people look at cash as an investment in and of itself instead of spending the cash. For example, if you know that the $500 TV set will reduce to $475 in six months (a mere 5.0% deflation in price) then you are more inclined to wait six months to purchase. If you know that your $300,000 home you are looking at buying will decrease 5.0% in one year to $285,000 then you will keep in renting one additional year and will not buy the home, thus stagnating the housing market.

Cons of “Quantitative Easing” More conservative voices (according to the NY Times Swell Chan) propose that the Federal Reserve Bank should not go out into the marketplace to buy mortgages, and that the most aggressive steps taken should be to lower short term interest rates (please note that short term interest rates are almost zero!)

Problem #1: Those economists wary of “Quantitative Easing” say that in a “perfect storm” of circumstances, Quantitative Easing can lead to 1970s style “stagflation” as the government floods the economy with too much available money when it buys out the debt obligations of (a) mortgage backed securities (b) debts owed by government entities to investors such as Fannie Mae bonds and (c) Treasury securities, in an atmosphere when the economy is operating at a reduced level, because there is a surplus or bumper crop of money floating around, but not so much to buy.

Problem #2: According to economists skeptical of “Quantitative Easing” say that further purchases of mortgages, government debts and treasury bills by the Federal Reserve will undermine faith in the US dollar as an accepted stable world currency and the safety of the US Treasury bill as keeping ahead of inflation because it fosters “perceptions of monetizing indebtedness,” according to Mr. Chan’s analysis of economist Kevin M. Warsh, in that it looks like it is the printing of money to pay off the public debt. “On a very simple level [with Quantitative Easing], the Federal Reserve Bank is printing money so the Treasury can spend more than it’s collecting in tax revenues…these are highly unusual circumstances, so no one is too worried about it [right now]. But it is always a temptation to use the central bank to finance government expenditures.”

Mr. Chan writes that economist Kevin M. Warsh notes that the Federal Reserve already has purchased 2.3 trillion worth of debt which includes vast sums of Treasury Bills, perhaps too much. The Treasury Bills are essentially a large share of the national debt. (Note that the Chinese probably now hold the remaining balance. That is a none too funny note for another day). Mr. Warsh notes that the Federal Reserve Bank’s institutional credibility is at stake, if it threatens the currency’s stability to pursue domestic growth.

Problem #3: Economists wary of Quantitative Easing relate that economists “don’t have a lot of good historical episodes in modern economies to know exactly what the effects of quantitative easing are.” Mr. Chan quotes Professor Walsh.

Zillow.com chief economist and Yale Professor of Economics both say: “HOMES ARE NO LONGER GOOD NEST EGG INVESTMENTS” in Tacoma, Renton, Olympia, Bremerton and Chehalis.

“People [wrongly] think it’s a law of nature [that housing prices always go up so as to always beat inflation]” says Yale University economics professor Robert J. Shiller and economist Karl E. Case. Interviewed by the New York Times, Yale economist Mr. Shiller relates that there has been an overall “bubble” since the end of World War II that is unlikely to be repeated, but that even during that historically unprecedented 60 year post WWII boom, that housing values outpaced inflation by only 1.1% per year. Quite to the contrary of the 1947-2005 point of view, during the 1900-1946 time period people saw houses quite differently. They saw them like they were cars. Houses 1900-1946 were seen as a consumer durable that the buyer eventually used up says Yale economist Shiller.

According to Yale University economist Shiller, the first notion of housing as an investment first began to blossom after WWII, when the nesting urges of returning soldiers created a construction boom. Demand was then further stoked as the “baby boom” of post WWII babies grew up and bought places of their own in the 1970s.

Adding fuel to the post WWII housing boom, (1) the inflation of the 1970s (which increased the value of hard assets) and (2) liberal tax policies (like deductible mortgage interest and property taxes AND lack of significant capital gains on housing appreciation) both helped make housing a good bet to at least slightly beat inflation.

Nevertheless, Yale’s economist Shiller says that despite all of these accelerating economic “tailwinds” prices rose moderately for much of the period, providing a mere 1.1% annual increase in value after inflation. However, during the extraordinary housing bubble that began in the late 1990s, housing prices were beating inflation by an average of 4.0% per year.

Zillow.com chief economist Stan Humphries echos Mr. Shiller, saying housing prices will be lucky to beat inflation, as quoted in the New York Times on August 23, 2010: “There is no iron law that real estate must appreciate…all those theories advanced during the boom about why housing is special – that more people are choosing to spend more on housing, that more people are moving to the coasts, that we are running out of usable land – didn’t hold up.”

I urge all of my customers in Tacoma, Renton, Olympia, Bremerton, Chehalis, and throughout Washington state to please read David Streitfeld’s front page article in the Monday, August 23, 2010 New York Times , which provided the content for this blog post.

WOW! Elizabeth Warren, Harvard Law Professor, may be nominated to serve as new Consumer Protection Czar!

This is about as big as it gets in the world of a bankruptcy lawyer! This story in The New York Times talks about the controversy that will ensue if President Obama should nominate Harvard Law Professor Elizabeth Warren to the newly created Consumer Protection Czar position, a Presidential cabinet level position. Those of you who have met with me perhaps recall me speaking of Elizabeth Warren as a voice for the consumer during the frenzy leading up the passage of the 2005 Bankruptcy Reform Act. I do have some mixed feelings about Professor Warren’s candidacy. Having her become part of the “establishment” as a cabinet member does cause me to worry that her shrill acuity and advocacy may be muted and at worst, silenced. As an outspoken voice of superlative credibility, if she fails at the position because she will not “tow the line”, then I fear that her credibility and standing might be tarnished or compromised. However, in this reform-minded era I can also flip over and say, “Go get’em Elizabeth!” I am torn…and still in shock to learn of the pending appointment.

10 Worst American Real Estate Markets – SUPRISE! Not all of them are in Michigan!

Now folks, this link was just too darn interesting to pass up, so here it is for a quick read. You may have to wait a moment for the iritating “pop up screen with shade over the article” to pass, but after it passes in about 20 seconds,you will be able to read a fascinating (and shocking) article with eye-popping statistics on the current state of real estate markets in America. Who would have thought Santa Cruz, CA would make the list…read on….

Consumer Alert: Judges suspicious of the rising tide of lawsuits and garnishments

Unscrupulous collection lawyers are being “called on the carpet” by consumers and some judges to show proof that the amounts alleged in collection lawsuits and garnishments can be verified through extrinsic evidence. This was reported on Tuesday, July 13, 2010 in the New York Times ( link).

The article explains that “debt buyers” purchase old debts from other collection agencies and credit card companies after the preceding collector/creditor has given up on trying to collect. The new “debt buyer” then often proceeds to file suit with scant evidence supporting the allegations in the lawsuit. Many Judges are dismissing these suits for lack of reasonable extrinsic (outside) evidence of the origin and the composition of the debt. If a consumer will both (1) respond in writing to a collection lawsuit demanding verification of the origin and composition of the debt and (2) show up for Court, the Judge in the case might dismiss the suit if the suing “debt buyer” cannot produce at least copies of billing statements which verify the underlying transaction in which credit was extended or wherein goods and services were purchased with the credit. The NY Times article linked above is very interesting; one small law firm in New York files over 80,000 lawsuits per year, frequently without securing any paperwork to verify that there exists a valid underlying debt of which enforcement is sought. Each lawyer in the firm was filing 5,700 lawsuits per year utilizing computerized and automated software. Very intriguing.

25.5% of Americans now suffer with poor credit scores of 599 and below

“The credit scores of millions more Americans are sinking to new lows. Figures provided by FICO, Inc., show that 25.5% of consumers – nearly 43.4 million people – now have a credit score of 599 or below, marking them as poor risks for lenders. It is unlikely that they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.” reports Eileen AJ Connelly of the Associated Press (See Tacoma News Tribune, 7/12/10, page A8). Ms. Connelly further reports: (a) 2.4 million more people are now in the poor credit 599 and below category than were there in 2008. (b) Only about 17.9% of Americans now enjoy a top credit score of 800 or above, while as recently as April 2008, 18.7% of Americans enjoyed top credit scores of 800 and above. (c) Mid-range credit score individuals who make up about 11.9% of people (FICOs of 650-699) are likely the most affected by the “credit crunch” in that prior to the late 2008-2009 financial meltdown, they readily obtained credit at reasonable rates, but now are often forced to pay much higher rates than they would have paid in early 2008.

AARP:  When Bankruptcy is Smarter.

Recently, I read an article published in the American Association of Retired Persons AARP MAGAZINE in the May/June 2009 issue entitled “When Bankruptcy is Smarter!” by Walecia Konrad. The article discusses that when people are in trouble, they often wait too long before seeking assistance. The AARP article referenced above advises against draining retirement and savings accounts to pay debts, but rather to first consult with an experienced bankruptcy attorney.

For longer-term Washington state residence, one can usually have in excess of $120,000 home equity…and still file to extinguish debts through bankruptcy. The amount of funds one can retain in IRAs and 401k plans is also very, very liberal–particularly if a person is of middle or later age.

In evidence of a worrying trend, American adults age 55 and over experienced the sharpest increase in bankruptcy filings of any age group since 1991, according to a recent study conducted for AARP’s Public Policy Institute, writes AARP’s Jonathan D. Pond on October 14, 2008

AARP’s Mr. Pond notes that not only in Washington state, but across the country, that while the bulk of bankruptcy filers are in their 30s and 40s, Americans age 55 or older have experienced the sharpest increase in bankruptcy filings,  accounting for 22 percent of all those in bankruptcy proceedings in 2007. That number is up from only 8 percent in 1991.

A weak economy and increasing health care costs put older Americans, regardless of whether they live in Washington State or not, at greater risk for bankruptcy. Health care expenses can be one of the biggest, if not the biggest, causes of bankruptcy among older Americans. This will affect all senior Americans, not just those residing in Tacoma, Gig Harbor, Bremerton, Puyallup, Chehalis, or Olympia.

Do yourself a favor:  Listen to the AARP: Before draining assets or selling property to pay credit cards, medical bills and other debts, first consult with an experienced bankruptcy attorney. You may save yourself much grief, and tens of thousands of dollars.

Underwater in your house? The pros and costs of “walking away,” known as “strategic default,” as a financial planning tool in Washington

A recent New York Times Article, “No Help In Sight, More Homeowners Walk Away”, published February 2, 2010, suggested that more homeowners than any time in recent history are electing to walk away from real estate that has no equity, or more often, negative equity.

The article, suggests that the psychological threshold is often 75%, meaning that when the value of the house falls below 75% of the amount owed on the house, homeowners quickly decide to walk away. At this point, it becomes much easier to overcome any emotional attachment to the home, and much more difficult to rationalize that the home may eventually go up in value.

Homeowners are faced with the difficult decision of continuing to flush money down the toilet for an estimated 10-40 years waiting for the market to recover to the point that the homeowner breaks even, or walking away from the property and renting for much less while they rebuild their credit.

The article, published nationally, did not include the consideration relevant to Washington, that in many cases anti-deficiency laws protect the homeowner as to the first mortgage, which precludes the first position mortgage company from seeking to collect the deficiency. However, the problem is that when there are second and third position mortgages, the anti-deficiency laws in Washington may not protect the homeowner “walking away” from the house for a deficiency claim from the second and/or third mortgage holders after the first mortgage holder forecloses out the interests of the second and third mortgage holders, leaving the second and third mortgage holders unsatisfied and still owed some or all of their debt. Even when the anti-deficiency laws do not apply such as to the second and third position mortgage holders, the homeowner can file for bankruptcy and have any deficiency or potential deficiency discharged along with credit card debt, medical debt, repossessed car deficiency debts, and other unsecured debts.

The article estimated that 4.5 million homeowners had home values that were at or less than 75% of the value of the home, and it was projected to climb to 5.1 million by the middle of this year. In other words, 10 percent of all homeowners would have homes valued at or less than 75% of the amount owed on the mortgage or mortgages.

If you find yourself in a situation where you are under “house arrest” because you are unable to sell your house for what is owed, please contact our office to discuss your options, including bankruptcy, and determine a strategy to get you back on your feet. Special thanks to Phoenix attorney J. Tyler Martin for much of the drafting and analysis used in this post.

Forgiveness of indebtedness – does this create taxable income, or is there an insolvency exception to IRS taxation?

Individuals facing financial difficulties often hear rumors from creditors and other sources that if their debts are “charged off” or otherwise “forgiven” by their creditors, the individual will receive an IRS Form from their creditor at the end of the taxable year that shifts the tax liability for the forgiven debt to the individual. Creditors and debt collectors excitedly cite to the Internal Revenue Code in support of their argument:  26 U.S.C. § 61(a)(12) states: “General definition.–Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: … Income from discharge of indebtedness.” This “discharge of indebtedness” in lay terms simply means the writing off or forgiveness of outstanding debt. Thus, the general rule supports the creditors and may create tax liability. 
 
However, creditors fail to inform you that there are major exceptions to the general rule that debt forgiveness is taxable income. Two major exceptions to this general rule are 1) if the debt is forgiven while the individual is in a bankruptcy case; and 2) if the debt is forgiven when the individual is insolvent. See 26 U.S.C. § 108(a) (1) (A) and (B), (“Exclusion from gross income.–… In general.–Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if– (A) the discharge occurs in a [bankruptcy] case, [or] (B) the discharge occurs when the taxpayer is insolvent.”) As is readily seen from the fact that there is one exception for those in bankruptcy and a separate exception for “insolvency”, an individual does not necessarily have to be in bankruptcy to be insolvent. Bankruptcy is simply a safe-harbor that creates a bright-line rule. 
 
Yet, it is important to know that those desiring to raise the insolvency defense may have a fight on their hands. Insolvency is determined on a case-by-case basis and must be assessed as of the time the debt is forgiven. Therefore, if an individual is considered “solvent” at the time the debt was forgiven and that individual later becomes insolvent, the debt forgiveness is considered taxable income for which the individual will be liable. Unfortunately, any such taxes are probably not dischargeable in a subsequent bankruptcy. Before you attempt to negotiate with creditors or seek debt reduction/forgiveness, it would be well worth your while to seek the advice of a competent attorney. (Special thanks to Phoenix attorney J. Tyler Martin and his Phoenix colleagues for drafting and analysis used in this blog entry.)
Merry tax-free discharging!

Analysis of US Supreme Court Decision of Monday, June 7, 2010 on Chapter 13 Bankruptcy

The following is a complex and lengthy analysis of a major law change affecting higher income Debtors (those above the state median income according to household size) seeking Chapter 13 bankruptcy protection. You are welcome to pick through this, but recognize, please do not make a decision as to whether you qualify for bankruptcy relief until after you have consulted with a very experienced and reputable bankruptcy attorney in an in-person, face-to-face consultation. The Hamilton v. Lanning case is discouraging, but an experienced, conscientious, and cautious bankruptcy attorney should be able to help you successfully navigate through a Chapter 13 bankruptcy filing and ultimate plan approval.


In Hamilton v. Lanning decided Monday (June 7, 2010), the Supreme Court held in an 8-1 decision that “when a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.” In other words, rather than mechanically applying the calculation of “current monthly income” which looks at the Debtor’s income for the 6 calendar months before the filing of the petition, the court can take into consideration changes in income that have occurred or are known or virtually certain to occur at the time of confirmation.


In Lanning, the Debtor had received a buyout from her former employer which, when included in “current monthly income,” dramatically increased her income over what she was really making, and the mechanical approach would have resulted in her having to pay more into the plan than she possibly could afford. Because after the buyout she was making wages well below the state median income, the Supreme Court held that this change in income could be considered in calculating her “projected disposable income.”


However, this “forward looking” approach should not give the Court or the Trustee, or the Debtor, a blank check: as the Supreme Court stated, “a court taking the forward-looking approach should begin by calculating disposable income, and in most cases, nothing more is required. It is only in unusual cases that a court may go further and take into account other known or virtually certain information about the debtor’s future income or expenses.”


While the expense side of “projected disposable income” was not specifically before the Court, the Lanning opinion did state the court may consider changes in income or expenses when calculating projected disposable income. However, it is important to note what was said and not said. The Lanning opinion requires a “change” in income or expenses, not a discrepancy between the expenses allowed on the means test and the Debtor’s actual expenses. For debtors whose “current monthly income” is above the state median, many expenses are determined based on fixed allowances, not on what the Debtor really spends. If the food and related items allowance (set by the IRS) is $1,152 for the Debtor’s household size, but the Debtor only spends $500 on these items, he or she can claim the full allowance in calculating “projected disposable income.” The trustee should not be allowed to recapture that $652 and require that it be paid to creditors. Conversely, if the Debtor spends $1,500, he can still only claim the allowance. Similarly, if the Debtor’s rent is $500 but the IRS allowed mortgage/rental expense is $1,187, the Debtor can claim the full $1,187 deduction. As a result, for many debtors, the fixed “means test” numbers result in a more favorable result than reality as reflected on Schedules I-J (which helps offset the fact that certain other necessary expenses are simply not allowed as deductions on the “means test” calculation). Because this is not a “change,” Lanning should not result in the IRS-allowed expenses being disregarded.


That said, the Lanning opinion could result in disallowance of deductions for secured debt payments where property is being surrendered or perhaps where liens are being stripped down or off, as those could be seen as “changes” in expenses. Otherwise, unless there is a “change” in those expenses (such as secured debt payments) that are allowed as real numbers on the means test, the means test expenses should apply as written. Special thanks to BankruptcyLawNetwork for much of the content of this post. The need for an immediate post mitigated in favor of quoting the qualified experts from the network.