Articles Posted in Statistics

Sacramento Bankruptcy NewsflashAccording to the Eastern District of California that handles all Chapter 7 and Chapter 13 Bankruptcy cases in the Sacramento Metropolitan Area, data shows that filings in the region have fallen consistently over the last few years. As we all have probably noticed, the economy has improved significantly since the Great Recession of 2009. The bankruptcy filing statistics are proof that the economy is now stronger than it has been over the last several years. Sacramento saw a record number of filings in 2010 with a whopping 54,365 cases filed that year. Every year subsequent saw fewer cases filed than the previous year. Last year the Eastern district of California saw only 14,328 new cases filed and includes all Chapter 7, Chapter 13, and Chapter 11 bankruptcies. These numbers even predate filings before the Bankruptcy Laws were modified significantly in 2005 under the Bankruptcy Abuse and Consumer Protection Act (BAPCA).

Although the economy has improved substantially and the unemployment rate has dropped from 9% to less than 5% since 2010, there are still a significant number of people who need to consider taking advantage of the bankruptcy laws in order to confront and resolve the economic turbulence they face. Historically, the number one reason people needed to file for bankruptcy were unexpected medical bills. The recent filings during the height of the Great Recession were due to the mortgage and foreclosure situation many people faced with their homes. Fortunately, many people have already made great use of the bankruptcy code to shield themselves from the banks and to reorganize debts into a much more manageable situation and to stop the foreclosure process in its tracks.

The best use of the Bankruptcy laws are to get your debts discharged that enable a person to start over with a “clean slate” financially. The ultimate discharge of all debt is granted by a federal bankruptcy court that issues a stay to prevent a creditor from any further attempt to collect a debt from the individual. While most debts such as credit cards, medical bills, and other unsecured debts can be extinguished in bankruptcy, other types of debts cannot be discharged: these include child and spousal support, tax debts, and sadly most types of student loans.

Many people considering filing Chapter 7 or Chapter 13 bankruptcy in the Sacramento metropolitan area are interested to know the statistics associated with filing for protection from their creditors and elimination of their debts. These people are relieved when they find that most individual bankruptcy cases are not caused by reckless spending. The number one reason that causes a person to file bankruptcy is financial hardship.

As we have seen over the last few years, peaks in bankruptcy petitioner typically occur during times of economic downturn. Interestingly, states with the least consumer friendly laws ordinarily receive the most bankruptcy petition filings. This is because those laws make it easier for creditors to collect unpaid debts from the individual. The United States saw the highest number of bankruptcy filings in 2005 (likely due to a change in the law making it more difficult to file bankruptcy). That year the Courts processed over 2 million bankruptcy cases. Since reform of the bankruptcy laws in 2005 the statistics have gone up and down. Over the last 5 years the Courts have seen the highest number of filings in 2010, with over 1.5 million cases filed. Last year, the federal bankruptcy courts saw less than 950,000 cases filed.

California has typically seen the highest number of bankruptcy cases filed throughout the nation. This is in large part due to our high population. Conversely, Alaska typically sees the fewest number of bankruptcy filings. For example, Alaska residents accounted for less than 1,000 bankruptcy filings in 2011 whereas California saw more than 240,000.

Sacramento area residents considering a Chapter 7 or Chapter 13 Bankruptcy should be aware the Eastern District of California has decided to raise the costs of filing a case effective June 01, 2014. The new Chapter 7 filing fee for the Sacramento jurisdiction is now $335.00. The Chapter 13 filing fee has also been raised to $310.00.

The Judicial Conference of the Administrative Office of the United States Courts approved the increase earlier this year. This fee increase reinforces the Federal Court’s continuing policy of shifting costs from the general population to the people who actually use the courts. In the context of a bankruptcy, this shift can be problematic, however, since the individuals seeking protection of the bankruptcy code have difficulty coming up with the filing fee to begin with, much less, paying the increased fees.

Every time the court Imposes a fee increase, we find less people being able to take advantage of the protection offered by the Bankruptcy Code. Supporters of the fee increase would argue that a debtor who cannot afford to pay the increased fees may apply for a fee waiver or alternatively request to make the fee in installments over the course of several months.

All Sacramento area residents have been hit hard by the economic downturn of the last several years. Unfortunately, this downturn has begun to disproportionately affect senior citizens and people leaving the workforce. In the early 90’s people over 55 accounted for approximately 2 percent of bankruptcy filings. Today, seniors account for roughly 22 percent of all bankruptcy filings.

The main reason seniors have been subject to Chapter 7 and Chapter 13 in recent years is due to the rising costs of medical care and their reliance on expensive medications. According to a recent study, 70 percent of seniors who live in poverty have suffered from a major medical condition. Only 50 percent of seniors living above the poverty line have faced these maladies that range from cancer, heart disease, high blood pressure, etc . to name a few.

Seniors therefore face a unique set of challenges when confronting economic turbulence. This is due, in large part, to the fact that elderly people tend to have limited incomes and there exists a lower probability of increasing income or earning additional income from employment opportunities as the individual continues to age. These real limitations have a direct impact on the individual’s decision of whether to file a Chapter 13 or a Chapter 7 bankruptcy.

Sacramento bankruptcy lawyers who file Chapter 7 and Chapter 13 bankruptcies on behalf of individuals will be glad to know that the Center for Responsible Lending has published a study that shows that it makes more sense for lenders to modify a distressed homeowner’s loan than to immediately foreclose on the individual’s property. The Center released a study on March 22 that researched whether investors who held a defaulting loan could retrieve more money through foreclosure or modification. The study used the net present value test (NPV), which is used by the federal loan modification program in addition to numerous private programs. The answer turned out to be (under most circumstances), whether the loan was securitized or not, that it made more sense to modify because the lender received more money in the long run.

The authors explained that when considering whether to modify a loan, a prudent investor must balance the cost of foreclosing with the costs of reducing a borrower’s monthly payment. The NPV test is a ready tool to calculate this ratio and the authors using the instrument were able to evaluate over 1,500 test cases. The authors were also able to include different circumstances such as original size of the loan, different property values, and well as the size of the reduction in monthly payments. According to the study then, if the end result of the test shows a lower re-default rate than the actual re-default rate, the value of modifying the loan is higher than what could be gotten through foreclosure. Therefore, under these conditions the lender should grant a loan modification rather than initiate foreclosure proceedings. The Center’s study calculated that most real-world circumstances should lead to a loan workout.

According to the study, a loan modification that discounts the loan by 10% would be profitable more than 86% of the time under existing self-cure numbers. Thus, the Center has concluded that NPV tests should begin to inspire a lender’s willingness to implement the loan modification process into its business model.

Recent data proves what practitioners in the Sacramento metropolitan area have already noted with regard to the loan Modifications being sought by individuals or corporations filing for Chapter 7 bankruptcy. On February 3, 2011 the Federal Reserve bank of Chicago released a study that shows that bank -held mortgage loans are one fourth to one third percent more likely to be modified than a similar securitized mortgage. The study also shows that individuals who receive the loan modification are almost 10 percent less likely to default on the new loan generated by the bank. Similarly, the Center for Public Integrity notes that homeowners are more likely to get their loan renegotiated if a bank owns their mortgage by a margin of 26% – 36%.

The practice of securitization consists of investment banks or brokers who bundle individual loans into a pool whereby investors are then able to buy a stake in the pool of loans with the lenders continuing to collect the monthly payments. This “securitization” is completely legal, but is widely blamed for contributing to the housing crash since it allowed institutional lenders to make high risk loans and then pass the risk of default onto the investors who purchased the bundled loan pools.

Borrowers have no say as to whether the loan on their residence has become securitized in this fashion. Unfortunately, these borrowers must deal with the consequences of their loan having been securitized if they seek a modification later. The increased chances of receiving a loan modification existing in a bank held loan appear to remain firm regardless of the borrower’s credit rating. The reasons for this may be due to coordination problems among investors, legal constraints, as well as a lack of servicers’ financial incentives (such that the servicers control the “loans” but do not have an ownership stake since it has been passed along to investors).

Economists and legal experts believe that 2011 could see a slowdown in personal bankruptcy filings. As indicators point to an improving economy and consumers borrow less money, “there is less reason for people to take the step of filing for bankruptcy” according to University of Illinois Professor, Robert Lawless.

American consumers filing for Chapter 7 or Chapter 13 topped 1.5 Million in 2010. This number represents an increase of 9% from 2009. The Southwestern and Southeastern States accounted for a majority of the increased filings last year. It appears that conditions in the Southeast have improved to some degree with decreased filings in states like Tennessee, South Carolina, and Alabama. However, communities in the Southwest remain mired in the economic turmoil experienced by numerous households across the country. Both California and Arizona saw an approximate 25% increase in bankruptcies from 2009. The economic crisis has forced individuals to make difficult choices or uncomfortable compromises with regard to managing their monthly budget. Numerous households have been forced to make these decisions with regard to their houses or mortgages.

Here in the Sacramento metropolitan area I have met many people who continue to hold onto mortgages they cannot afford because they are unable to get a loan modification or, until real estate values rebound, refinance their property. The fact remains, however, that personal bankruptcy is available to individuals who have extreme amounts of debt and are unable to pay their financial obligations. Eliminating staggering debt, or creating a plan to repay it, can help individuals use their financial resources more efficiently to meet other financial obligations.

If you are a resident of the Sacramento Metropolitan area you may be interested to know that Chapter 7 and Chapter 13 bankruptcy filings have slowed over the last month. Although these numbers may point to a possible sign of economic recovery, the numbers for 2010 as a whole remain at a five year high.

The number of individual households filing for bankruptcy dropped by 13% last month according to the Wall Street Journal. The United States saw 114,587 personal bankruptcy filings in November as whole. While these numbers are down significantly from October, the number of filings still remains 2.2% higher than this time last year. Analysts predict that approximately 1.6 million people will have filed for bankruptcy in 2010. This is the highest number of filings since Congress passed the bankruptcy reform law in 2005. Congress changed the bankruptcy code in 2005 in order to make it more difficult for individuals to qualify for Chapter 7 and eliminate their debts.

Some economists opine that the credit crisis which struck the nation along with the economic downturn pushed bankruptcy filings higher since individuals could no longer use new sources of credit to pay down existing debts and were forced into declaring bankruptcy. Nonetheless, job losses appear remain the driving force behind the flood of bankruptcy filings over the past few years. According to surveys taken by individuals enrolled in mandatory credit counseling classes, required as a prerequisite to filing for bankruptcy, 65% noted a reduction in income was the cause of their financial situation.

Today, the California State Assembly blocked legislation proposed by the State Senate that would protect homeowners against foreclosure while pursuing a loan modification. The legislation was heavily supported by consumer interest groups and opposed by the California banking industry and business interests.

The Assembly rejected SB1275 towards the end of their daily session. If passed by the Assembly and signed by Governor Schwarzenegger, the Bill would have required institutional lenders to consider a loan modification on all distressed homeowners before making the decision to foreclose on the property. SB1275 differs from federal legislation because it creates a cause of action against the lender if they fail to consider a loan modification before the decision to foreclose. At this point federal legislation requires a bank who participates in Obama’s Mortgage Protection Plan to refrain from foreclosing against a homeowner who is attempting to negotiate a loan modification. Unfortunately, these rules are voluntary and have no ramifications if the bank decides to foreclose.

Statistical data show that 10% of California homeowners are 60 or more days behind on their mortgage payments. This number is almost 4% higher than the data compiled for the entire country. More than a third of California’s mortgage holders owe more on their homes than the market value of the house itself.

As a Sacramento Bankruptcy Attorney I take notice of business practices by debt collection companies that may have an impact on my clients. Today, The Washington Post reported a story that highlights the problem of some debt collectors who report inaccurate information to a person’s credit report. This practice has been called “debt tagging” and has been reported by more and more consumers as the economic downturn continues to affect millions of Americans and numerous Sacramento metropolitan area residents alike. Often times “debt tagging” is a result of sloppy research by the debt collector or mistaken identity from people with similar or the same names. Consumers need to take specific measures to protect themselves against inaccuracies on their credit reports these days.

In 2009, the FTC – responsible for enforcing the Fair Debt Collection Practices Act (FDCPA) – received almost 120,000 complaints from consumers about unfair or unethical debt collection practices by in-house or third-party debt collectors. That number exceeded the complaints received in 2008 by approximately 15,000 complaints.

Debt collection companies defend these practices by pointing out the difficulty in tracking a debt back to the original debtor. Often times a creditor will sell their debt onto other companies. Debt collection companies buy the debt for pennies on the dollar with the prospect that they can collect a hefty portion of the debt owed thus making a profit. Unfortunately, the debt collection agencies who buy the debts do not always receive the correct information and this creates the problem especially since the debt may have changed hands many times.