Both before and after the mortgage collapse the home mortgage industry had problems with predatory and unethical bankruptcy and foreclosure practices. In Bankruptcy, debtors must file Chapter 13 if they can afford to repay some reasonable portion of their debt. However, a National Association of Consumer Bankruptcy (NACBA) study shows 97% of people qualify for Chapter 7. Less than 3% of the population fail the means test because they are too rich to file Chapter 7 and must file a Chapter 13 or 11.
Predatory and Unethical Bankruptcy and Foreclosure Practices
Some attorneys often tell clients they are too rich because, in 2021, the Chapter 13 attorney fee is about $4,000. But, the average attorney fee for a simple consumer Chapter 7 in 2021 is $1,400 for a single and $1,600 for a joint petition. If you need a 13, then you need it. Don’t let a lawyer talk you into filing Chapter 13 when Chapter 7 may do a better job for you faster and for less money. He should at least explain why you need a 13 if he is trying to sell it to you. Commonly that explanation will be that a 13 will save a home. A Chapter 7 will only delay a foreclosure sale.
In one case, there was a Chapter 13 budget that only allowed $50 per month per child for food simply so it could be filed as Chapter 13! That case was unfeasible and was doomed to fail, but it made more money for the attorney than a Chapter 7 would. In another case, the debtor filed Chapter 13 three times because the petition was poorly prepared. The client paid three times for bankruptcy and never got a discharge or case completed. Finally, the client came to me, and he filed a Chapter 7 and got his discharge.
⎆ The 2005 bankruptcy code changes.
Be aware that the system encourages attorneys to put debtors into Chapter 13 and does not effectively monitor attorneys who put people improperly into Chapter 13. Attorneys earn more from a Chapter 13, and the Court punishes them under 11 USC 707b if they file a case as a Chapter 7 when the client could have afforded a 13. Attorneys rarely or never receive punishment for incorrectly putting a client into a 13.
Unfortunately, in 2005, banks paid millions in lobbying new code sections to push consumers into Chapter 13 and make bankruptcy far more expensive and difficult for consumers.
However, there are times when you must file Chapter 13. Here is a list of considerations that might require you to file as a 13 instead of a 7.
You filed Chapter 7 within the last eight years.
Your income is high enough that you can afford to repay.
You have a cosigner you wish to protect.
You need to effectively manage priority or non-dischargeable debts like taxes, student loans, or foreclosure problems
⎆ When it is ethical to file a Chapter 7 or 13.
You probably need Chapter 7 if you have:
You have little or no assets to lose.
Your budget has little or no disposable income, which restricts your ability to repay.
A good attorney will explain in detail why he is placing you into Chapter 13. Therefore, when making your attorney selection, be aware that some offices pay staff bonuses to file you as a 13 because it triples their income to file cases as a Chapter 13. The purpose of bankruptcy is to give unfortunate debtors relief and a fresh start effectively. Events leading up to filing are often due to a job loss, illness, a divorce, and other sudden or unexpected events. There is nothing wrong with a deserving honest debtor planning bankruptcy to ensure that debts are discharged, and necessary property is kept for a fresh start. Judges and Trustees only want you to get it right the first time.
To accomplish this, it requires understanding the law, preparing a petition properly, and cooperating with the court. However, you cannot start over successfully without income, property, and a little planning. Of course, understanding your legal options makes it far more likely you will successfully discharge debts. However, hiding assets or transferring property to family or friends for less than its value is a crime, and the system will catch it.
⎆ Predatory or unethical foreclosure practices.
If you are attempting to save a home from foreclosure Chapter 13 is the tool that will do it. It also has special tools for other debts. Only Chapter 13 allows you to force the mortgagor to accept the payments. It is unethical for an attorney to place a client in an unaffordable Chapter 13 simply to earn a higher fee. In bankruptcy court, we say the plan is unfeasible. Only Chapter 13 can strip a second mortgage. A Chapter 13 may strip a $ 50,000-second mortgage. The Chapter 13 may cost $10,000, but you may profit $40,000 more than filing as a Chapter 7.
There were little or no ethical requirements for mortgage officers and lenders before the 2008-2014 foreclosure crisis. Mortgage Bankers were exempt from the licensing and educational requirements because of internal bank training. The CFPB has made many changes and new rules after the mortgage crisis, which happened from 2008 until about 2013. These new rules change how foreclosures can be processed substantially.
⎆ New mortgage regulations for bankers.
However, now there are fiduciary duties, licensing, and training requirements for all mortgage bankers and mortgage brokers. The responsibilities of a mortgage banker are higher than those of a mortgage broker. We suggest that you usually use a mortgage banker instead of a broker. A Banker has a higher level of training and fiduciary duties the banker has for you than the broker. Because the debtor is placing his trust in the mortgage banker, these regulations cover accepting a mortgage application and lending to a consumer. One of these rules is that the banker has to do what is best for the client not what is best for the bank. A mortgage Broker may place a loan into an adjustable mortgage to make a higher commission the mortgage banker can’t. Hiring an ethical and knowledgeable banker may keep your home from being listed in the Jefferson County Commissioners sales.
Predatory & Unethical Bankruptcy & Foreclosure Practices, Nick Thompson.
If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.
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Nick C. Thompson
Nick used to work for the banks before becoming an attorney. He is a former tax department attorney and assistant county attorney. He has filed bankruptcy cases and defended foreclosures since 1988.
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