Fair warning, let the rant begin!

Recently I was driving and heard an advertisement enticing the consumer to go into debt to go on vacation.

The ad goes something like this.

Wife: “Oh, I can’t believe it.”

Husband: “Yeah”

Wife: “Is this our vacation?”

Husband: “No, it’s the honeymoon we never took.”

So far, so good, but then here is the catch…  Wait for it…

Husband: (Thinking) “Finally I get to fulfill the promise I made, thank you Ivy (Name Changed to protect the guilty) Financial.”  Then the radio announcer guy says “Take out a loan against your house for new furniture or that vacation you’ve always wanted to go on.”

I thought we learned our lesson in 2008!

At this point I started yelling at the radio.  I stopped myself before I drove off the road and because I had woken up my daughter (sorry Mellie) with my rant.  I let loose a torrent of frustration usually reserved for my hapless New York Mets.

Did we learn anything in 2008?  You finally have SOME equity in your home and you are going to borrow against it to go on vacation?  Seriously?

Banks exist to make a profit.  They are not sending you on vacation for nothing.  Every additional dollar you borrow against your home is an additional dollar you will have to pay back later.  SO DON’T DO IT!!!

Lets pull this ad apart.  It said “take a loan against your house.”  A house is a thing, an object, something that is replaceable.  Your home is where your kids live!!! The bank is enticing you to borrow money against the place your kids live.

You can’t live in your vacation.

I can’t tell you how many people I see in my office that have awful second mortgages and can’t tell me where they spent the money.  I know where they spent the money, and so do the Ivy Financials of the world.

So what does this have to do with bankruptcy?  Very little actually.  Most lenders are being very careful about second mortgages these days.  They are being careful because with the value of real estate plummeting (it has dropped 35-40% and the biggest shoe hasn’t dropped yet) they have been subject to lien stripping even when they have tried to pull a dirty 80/20.  This means that a lot of second mortgage lenders are not getting paid on their loans.

Be assured that this time around, the second mortgages will be paid, every last penny, and if they are not, they are going to start foreclosure proceedings.

There is no free ride on the second mortgage these days.  I thought we learned our lesson in 2008.

Dear Senator Specter/Representative Dent:

In 2005, you voted with credit card companies and against the American consumer by voting for BACPA (Bankruptcy Abuse and Consumer Protection Act).

BACPA doubled the cost of filing bankruptcy in the United States.  BACPA chased otherwise qualified attorneys out of the field because of its stringent and unfair requirements that put the lawyers who practice in this field at risk.

This bill further injures those who practice in this field by lumping them in with debt settlement companies and various other non-professional groups by requiring them to call themselves “debt relief agencies.”

A solo attorney is no more a debt relief agency than a chicken farmer is a Kentucky Fried Chicken franchisee.  Both operate in similar arenas but have different functions.

This is the worst economy I have seen in my lifetime, and it is probably the worst you have seen as well.  Real unemployment is somewhere around 18% and people are hurting.

While Congress and the President have spent the last year and a half arguing about National Health Care, the economy has gotten worse.  Like with BACPA, Congress is listening to the special interests with deep pockets, not the people who elect them.  This is a mistake.

While Congress and the President have spent $1.4 trillion ($700 billion TARP, $700 billion stimulus) bailing out banks and stimulating government labor, the economy has worsened.

That $1.4 trillion is gone.  Like toilet paper, it cannot be reused, so pointing out that you could have given every man, woman and child a check for $4700 on a debit card with a 90 day expiration date and jump started our economy much more effectively, is pointless.  Aggravating but pointless.

One thing Congress can do right now is to repeal BACPA.  BACPA was bought and paid for by credit card companies and banks, the same banks that took bailout money from the taxpayers who are suffering under BACPA.

Another thing Congress can do is to allow mortgages to be modified inside of Chapter 13 bankruptcy.  Yes the courts would need some more staff, maybe even a special modification master, but it would alleviate some of the pressure on this economy.

This is how modification inside of a Chapter 13 would work.  Lets take Joe Taxpayer (the guy who is probably going to vote for none of the above in 2010).  Joe has a mortgage of $200,000 at a 9% interest rate.  His payment (not including taxes) is $1609.25.  The total interest paid on the loan would be $379,328.28.  On the date the mortgage was closed, banks were borrowing from the fed at a rate of 2.2%.

The bank can still turn a profit on 2% interest, so the bankruptcy special master would lower the interest rate to 4.4%

Joe Taxpayer’s payment would drop to $1000 per month.  The term of the mortgage would be extended out to 42 years.  The total interest paid on this term would be $238,999.36, but the extra 12 years of principle payments of $1000 would be $144,000.00.

Now Joe Taxpayer can afford his mortgage, and the bank gets what they bargained for, albeit on a delayed basis.

The banks will complain about the time value of money, but the reality is that the average mortgage is paid off in about 5.8 years, meaning mortgages are refinanced or sold, so most banks will not be waiting 44 years to get their money, and when the mortgage is paid off the bank is getting what it bargained for anyway.

So how about it Congressman?  Why don’t we put HAMP and BACPA in the circular file where they belong and do something for the American people?

So there it is, I will follow up on this with a response from my Representatives.  Feel free to cut and paste a copy of this text and email it to your Congressman or Congresswoman and see what happens as well.

The two things for the consumer to know is that BACPA (the act passed in 2005 that made bankruptcy more difficult and expensive) considers bankruptcy lawyers debt relief agencies and that bankruptcy lawyers cannot advise their client to take on more debt before filing bankruptcy.

Lets take this case one part at a time.  The idea that Congress has lumped bankruptcy lawyers together with credit counseling, debt settlement agents, mortgage modification firms and other associated crooks is infuriating, but that is what the law that the banks paid for says.

The second and more nefarious part of this decision is that attorneys may not advise their clients to take on more debt prior to filing bankruptcy.

On its face, that makes common sense, but what about the automobile issue?  Every few years, people will need to change cars.  Buying a reliable car prior to bankruptcy has two positives for the client:

1. A reliable vehicle is a necessity everywhere but the major metropolitan areas, and
2. A reasonable car note that is kept in bankruptcy can serve as a means to improve one’s credit score after filing bankruptcy

Footnote 6 (which does not have the force of law) indicates that purchasing a car, buying groceries, paying medical bills or making purchases that a reasonable in anticipation of filing bankruptcy are acceptable.

While I am hesitant to advise a client based on a footnote, it seems to clear that the Supreme Court allows bankruptcy lawyers to have frank discussions with their clients about life.

While I am still infuriated by being lumped into a group of thieves, that was Congress’ doing, not the Supreme Court, and my representative Charlie Dent and my Senator Arlen Specter who both voted for this.  I wonder if they would like a do-over considering the current economy.  I’m going to email his office and let you know.

Oh, and perhaps Congress should be considered by a debt relief agency since they are the greatest group of crooks and frauds ever assembled.