Bankruptcy and Loan Modifications: Hype or Help?

You may have heard commercials from attorneys and loan modification gurus offering loan modification services through bankruptcy. They are probably referring to proposed legislation called the Helping Families Save Their Homes in Bankruptcy Act. Beware of the hype, because this has not become law and may change significantly before it becomes law, assuming it becomes law at all.

How Current Bankruptcy Laws Impact Mortgages

Under current bankruptcy laws, debtors who qualify can file a Chapter 13 repayment plan bankruptcy proposing to strip unsecured liens, other than a first mortgage, from their home. Lien stripping is available if a second mortgage is completely unsecured (i.e. the fair market value of the home is less than the balance on the first mortgage). The following example may illustrate the point better:

Example: In 2000, husband and wife purchase a home for $500,000 with 100% financing, including a $400,000 balance on their first mortgage (30-year fixed rate at 6%) and $100,000 on a second mortgage (adjustable rate mortgage). in 2008, the home value has dropped to $350,000 and the formerly happy homeowners now have $50,000 in credit card debt because their mortgage payments are now beyond their ability to pay. In a Chapter 13 bankruptcy, the debtors have the capability of completely removing the second mortgage and treating it as unsecured. However, current bankruptcy laws do not allow any type of modification to the first mortgage.

What Will The Proposed Legislation Do?

A common frustration that I hear from potential clients is that they cannot get their lender to modify their mortgages to a more reasonable payment or interest rate. With falling home values and spiraling mortgage payments, adjustable rate mortgages are a common cause of home foreclosures. The Helping Families Save Their Homes in Bankruptcy Act makes the following proposals:

• Eliminating a provision of the bankruptcy law that prohibits modifications of first mortgages;
  
• Changing the Chapter 13 debt limitations to allow more debtors to qualify for a Chapter 13 repayment and lien stripping plan;
  
• Permitting bankruptcy judges to modify variable interest rates with a new interest rate that will keep the mortgage affordable while allowing creditors to get a fair return on their investment;
• Make filing bankruptcy easier by waiving the pre-bankruptcy credit counseling requirement for families facing imminent foreclosure; and
  
• Requiring lenders to give proper notice when assessing fees and allowing judges to waive prepayment penalties.

When Will These Proposals Become Law?

It is too early to tell if the proposals will even become law, let alone what the final law may look like. Supporters and lobbyists are lining up on both sides to have their say and there are 2 different versions pending, one before the Senate and one before House of Representatives. For now, the best advice is to ignore the hype and remain watchful. In the meant time, contact a qualified bankruptcy attorney if you are facing foreclosure or need other debt relief assistance.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Gift Cards and Bankruptcy: Now What?

Now that the holiday season is over, shoppers are flocking to stores to use their new gift cards. But what happens if the retailer that issued the gift card files for bankruptcy? Unfortunately, a gift card may be worth little or nothing if this occurs.

Consumers in California might have an extra measure of protection. California Civil Code § Section 1749.6(b) requires a retailer to honor gift certificates issued before the bankruptcy filing. However, this law may conflict with federal bankruptcy law and no court has ruled on the effectiveness of this law.

Retailers that file for reorganization under Chapter 11 of the Bankruptcy Code generally intend to stay in business. They will usually ask permission from the bankruptcy court to honor gift certificates in order to maintain good customer relations. However, there is no guarantee that the court will grant permission to accept gift certificates.

If the court will not allow the retailer to honor the gift certificates or if the retailer is going out of business and files for Chapter 7 liquidation, the card holder becomes a creditor of the bankruptcy estate. Gift certificates are considered unsecured debt and would have 7th priority among unsecured creditors. Many other types of creditors would have higher priority, including secured creditors and employees with unpaid wage claims. In fact, the holder of a gift card willlprobably receive only a percentage of the value of the gift card assuming the bankruptcy estate even has enough assets to pay creditor claims.

In the end, the best thing to do with a gift card is to spend it as soon as possible. There is never a guarantee that the business will survive for the recipient to use it.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

What Does the New "No Texting" Law in California Really Include?

Under a new California law effective January 1, 2009. it is now illegal write, send, or read a "text-based communication" while driving. While most media outlets only make reference to the common practice of sending and receiving text messages from a cell phone, the new law also applies to any type of electronic communications such as testing, instant messaging and email.

First time violators will be fined $20 and then $50 for each violation after that. The law does not apply to situations where the driver is using a phone to look up a number to place a phone call. The law does not apply to "emergency service professionals" such as police officers when the electronic communications occur in the scope of their duties and while in an authorized emergency vehicle.

California drivers were previously banned from using their cell phones while driving unless they used a headset or a speaker. Passed in 2006, that law did not cover texting or emails.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Why I Cancelled My Better Business Bureau Membership

When I first became of a member of the Better Business Bureau, I was under the assumption that it was an organization that I could trust to be fair to both businesses and consumers. My recent experience with a complaint filed against Hewlett-Packard and Staples caused me to rethink my position and cancel my membership.

Complaint Against HP

In a recent blog article, I discussed a problem with a defective HP laptop that I purchased at Staples in October 2008. After 3 weeks, the sound card and network card both failed. Staples refused to exchange the laptop and HP wanted me to send it back for repairs. Their repair and warranty policy was in the box.

It took HP over a week to send me the box to return the laptop and another 3 weeks to make the repairs. While waiting for the return, I filed a complaint with the Better Business Bureau.

When I received the laptop back, HP failed to even address the network card. The BBB closed the file before the repairs were even complete. When I asked to have the complaint reopened so I could add information about HP's failure to provide a complete repair, I was rudely told by San Jose BBB employee Erin McCool that she felt HP had handled the situation "appropriately." When I asked to speak with Ms. McCool's supervisor, she stated that her supervisor was the CEO and that she was out of town. I have yet to hear any further response from Ms. McCool's supervisor.

It appears that local Better Business Bureau's are actually run like franchises and there are no uniform rules for dealing with consumer complaints. I suppose that explains why HP can maintain a satisfactory rating with the BBB while it has over 2000 open consumer complaints. The San Jose BBB swept my complaint under the rug, so I refiled it with the new information to see how HP will address my complaints.

Complaint Against Staples

I also filed a complaint against Staples with the San Diego Better Business Bureau, which is where I purchased the laptop. The San Diego BBB informed me that all complaints involving Staples are sent to the BBB in Natick, MA. The transfer occurred on November 4, 2006. However, the BBB in Natick, MA has no record of receiving the complaint. The complaint was "retransferred" on November 26, 2008. The Natick office still has no record of my complaint and there has been no response whatsoever from Staples.

Most BBB offices do not allow you to search and review the specific complaints against a business. Instead, it gives the business time to respond. A business can maintain a satisfactory BBB rating without regard to the sufficiency of the response to a consumer complaint. Even businesses that routinely victimize customers can maintain a satisfactory rating if they are "responsive" to a consumer's complaint.

My experience has shown that the BBB complaint process is both burdensome and unreliable. If I cannot have faith in how the BBB handles consumer's complaint, I cannot have faith in the ratings system it uses to rate businesses.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Another $600 Billion Bailout?

A day after announcing a $20 billion bailout for Citigroup, the Treasury Department and the Federal Reserve announced a plan to purchase $600 billion in bad loans. San Diego business and bankruptcy attorney Carl Starrett was asked to appear on KUSI's Good Morning San Diego to talk about what this bailout means to the general public:

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.