Bankruptcy Reform Act Finally Blows Sky High

The Debt Slave Act, better known as the Bankruptcy Reform Act of 2005 has at long last blown sky high. We will get to "how" in just a moment but first let's review some of the provisions of the bill. Lenders asked for and received everything on their wish list as follows:

Wish List

• A strict financial means test that may prohibit many debtors from filing a liquidation bankruptcy under Chapter 7;
• A requirement that all debtors must receive a briefing from an approved credit counseling agency at least six months before they can file their bankruptcy case; Note: Check with your local bankruptcy court to determine if they will waive the time restrictions in the beginning months.
• A requirement that debtors take an approved class on debt management techniques before they receive their bankruptcy discharge;
• A provision making it easier for a court to dismiss a bankruptcy case outright or to convert a Chapter 7 case to a Chapter 13 case; and
• A provision permitting a court to impose sanctions on attorneys, or even on debtors, for filing a Chapter 7 case that is dismissed or converted to a Chapter 13 case.

After the fairy godmother (Bush) signed the bill written by industry lobbyists and passed by Congress as "reform", banks and lending institutions went on a credit binge of previously unimaginable proportion. The most ridiculous abuse of common sense were the so called "Liar Loans" more commonly referred to as "Stated Income Loans".

In addition, much of the subprime mess and the HELOC (home equity) can be attributed to lending institutions behaving as if Sixteen Tons was the new state of being.

You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store

Liar loans are now blowing up. I talked about this recently in Bring On The Alt-A Downgrades.

Liar Loans Discharged In Bankruptcy

Debt Slavery is now in reversal. Inquiring minds should consider this extremely significant ruling: BK Judge Rules Stated Income HELOC Debt Dischargeable.

Tanta writes:

This is a big deal, and will no doubt strike real fear in the hearts of stated-income lenders everywhere. Our own Uncle Festus sent me this decision, in which Judge Leslie Tchaikovsky ruled that a National City HELOC that had been "foreclosed out" would be discharged in the debtors' Chapter 7 bankruptcy. Nat City had argued that the debt should be non-dischargeable because the debtors made material false representations (namely, lying about their income) on which Nat City relied when it made the loan. The court agreed that the debtors had in fact lied to the bank, but it held that the bank did not "reasonably rely" on the misrepresentations.

I do not always agree with Tanta, but I would say that I do over 85% of the time. And I certainly agree with her post this time. She is correct on two counts:

1) This was an extremely significant ruling
2) This was the correct ruling

What is interesting to me was some of the comments, some of which defended the lenders. I have zero sympathy for the lenders and the following comments are in line with my thinking.

Tanta Writes:

Nat City gets zero sympathy for me on this one. Talk about a case of "fool me twice."

Jas Jain writes:

Tanta: “I argued some time ago that the whole point of stated income lending was to make the borrower the fall guy: the lender can make a dumb loan--knowing perfectly well that it is doing so--while shifting responsibility onto the borrower, who is the one "stating" the income and--in theory, at least--therefore liable for the misrepresentation.”

Bingo: And the reason this was carried to such an extreme was the debt slave act of 2005 in conjunction with absurd interest rate policy at the Fed, the Fed's direct sponsorship of ARMs and derivatives, and the "Ownership Society" of the Bush administration. All of which are also blowing sky high right now.

Uncle Festus writes:

A few random thoughts on things which have been raised in these comments:

1. I don't think that the lender will appeal this, because at this point it's not "binding" precedent on any other court (though it will be cited as "persuasive" precedent in future similar disputes). I think the lender will not appeal it because there is a real risk that the higher court (either the 9th Circuit itself or the Bankruptcy Appellate Panel) could affirm it and it would then become binding on the entire 9th Circuit, which encompasses the whole West Coast plus Arizona and Nevada. The money at risk in this individual case (if there is any at all) is minuscule compared to the risk of this becoming the law in the largest Circuit in the country.

Binding or not, the die is cast. Furthermore, under a Democratic Congress and Obama as president the entire bankruptcy reform act is likely to be rewritten.

As ye sow so shall ye reap.

Banks and lending institutions are now bearing the fruits of their attempts to make debt slaves out of consumers. I salute the ruling of Judge Leslie Tchaikovsky.

Comments

[GMC:]

It was the responsibility of the lendor and the borrower to exersize honesty. Since when did lying become acceptable? They both acted with dishonest intent and they both should be liable.

2008 May 30 09:43 AM

[Chuck Allen:]

Banks simply have a license to steal. They always have and will forever have the license to steal.

Chuck

2008 May 30 10:23 AM

[Urbane Gori...:]

I agree with Chuck Allen. The same banks and credit card carriers that pushed for bankruptcy reform also managed to weasel their way out of any control over their rights to raise credit limits to whatever heights they wanted whenever they wished. It's a filthy little game. Sucker someone into credit, then squeeze the life out of them when they lose their job - Then make it impossible for them to file bankruptcy. I'm particularly outraged that they go after first-year college students, kids with no impulse control. These practices rank right up there with crack-cocaine dealers. It's an indication of how much our elected politicians are under the thumbs of anyone willing to fund their re-election.

Thx jegan ;-/

2008 May 30 10:55 AM

[farmer448:]

THe banks forgot two impotant principles:
1. TINSTAFEL, first law of economics, there ain't no such thing as a free lunch.

2. What goes around comes around. Trust is a very strong commodity. So when you make your customer part of a hugh sting on the bond market, don't be surprised when your customer acts like you and declares bankruptcy.

2008 May 30 12:24 PM

[ros freed:]

How do "kids" of 19+ years old have no impulse control? Why don't parent teach "impulse control" and money management? Why don't schools, starting in 1st grade when kids presumably get a small allowance, teach this?
If a kid left school and went to work at a modest job, and practiced good money managment, saved and invested, he/she could be a millionaire by the time he was thirty.
It's the same old story, trying to blame someone else for one's own probems. It starts withe parents, who don't know how to control their own buying impulses. They encourage kids to go to college, as a result of which they acquire huge debt. Burdened with this debt, the "kid" finds that he can't get a job in his chosen field, and ends up doing a job he could have done when he left school at 16. The whole idea is a) to keep colleges employing huge numbers ot professors and other support staff, and B) to keep the "kid" out of the job market in order to make the unemployment figures look better. So, don't blame the banks, it's the system, and historically the only way the "system" can be changed is through revolution. Obama's idea that he can somehow "change" a goverment system that has evolved over 100 years in order to make the rich richer and the poor poorer is either naive, or simply his way of getting elected so he can get richer. The aim of every good American is to get richer, and does it matter that your neighbor gets poorer?....he's just not as smart as you

2008 May 30 12:47 PM

[unimpressed...:]

I have long maintained that bankers are egregiously greedy and profoundly stupid. The whole subprime lending fiasco bears out my contention. Additionally, the much heralded, by bankers, new bankruptcy law is the icing on this cake.

2008 May 30 02:17 PM

[moonbat1775:]

Amen, Chuck Allen.

to wit:

banksters

To counterfeit,
what a silly thing to do!
It's a crime;
you could do time;
you'd certainly be blue.
No, become a banker
if you hanker
to make money that is new.
You'll be respected
and not rejected
by the people that you screw.
It's theft the same
but you won't be blamed
by those that you undo.
(And you'll do no time for your crime sublime.)
But at the end, can your money bend
the rules that condemn you?

2008 May 30 04:07 PM

[Daneric40:]

Its a crap ruling. So now if I am a homeowner with some money problems I can expect to get it flushed down the toilet, scott free. I still believe in personal responsibility. Banks lend money and when they WERE being tightfisted about their loans everyone cried "FOUL"! (discrimination, etc.) Yeah, there are snakes at the financial institutions but hey when has this ever NOT been in the history of mankind?

The very act of taking out a loan incurs risk on both the lender and the borrower, however the lender certainly didn't put a gun to anyone's head. And the borrower typically lies and plays innocent thru the whole process knowing full well usually that they don't deserve the money (hence they lie).

But the borrower KNOWS the terms of the arrangement. They place TRUST in the bank that they will provide the money at the stated terms (which they do).

And if the bank does not lend the money, the same lying borrrowere will go on their local news and slam the bank. So after years of this crap, the banks said fine, you wnat the money, we'll give you the money, have fun.

This is all actually a product of modern liberalism. Liberals don't ever take responsibility and thats what this is too.

The ruling is crap, and ya know who suffers the most? Us responsible people. I'll have to pay for that lying bag o shit's chapter 7 mortage. Thanks Judge!

2008 May 30 08:30 PM

[Daneric40:]

PS - The bankrupcty reform act was mainly lobbied by (for years), and intended for the credit card industry because of all the abuse they were taking. People would dump all there debt on CC's and then declare bankruptry knowing full well the CC's would get washed away. Its bullshit liberalism like i said. It ain't like my pop's generation where they took responsibility for their actions.

2008 May 30 08:34 PM

[moonbat1775:]

Daneric,

I sympathize with your concern for individual responsibility etc. But don't you realize the game is rigged? Government backed fractional reserve banking is a license to STEAL. This is not hyperbole. Banks create money out of thin-air and then lend it out. Not only does this steal via inflation but it is the root cause of the business cycle.

It is not jealousy of bankers because they have money. It is OUTRAGE because they got it and continue to get it by legalized theft and they cause depressions, finance wars etc.
"Respectable banker" is an oxymoron.

Both Dems and Repubs love the Federal Reserve since it allows them to finance government without raising taxes.

2008 May 30 09:30 PM

[Froggie:]

Re impulse control, it is now known that the human brain does not usually reach full maturity until about the early or mid 20s. The last portion of the brain to mature is the prefrontal cortex, which appears to be involved in impulse control. Until the brain is fully mature, an adult level of impulse control is unlikely to be achieved. So, first year college students are more vulnerable than older adults, and John Egan's criticism is valid.

Governments have a valid role to play in human affairs, including economic interactions. To believe otherwise is to fall pray to the manipulations of the politicians who have become advocates for the rich and ruthless. The USA is becoming a plutocracy. The vast majority of the population in our country would be better off if our government were not neglecting its obligations to the nonrich. "The Squandering of America" by Robert Kuttner is an eye opener.

2008 Jun 02 03:44 AM

[User 367352:]

I bought a house with what is now called a "liar loan." However, I never lied about my income. Rather, I got pre-approved for a standard, 30-year loan just as I had on my existing home. I then sold my first house, moved into temporary housing while my new home was built, and when it was time to close on the new house I was told by the lender that, in order to close, they needed me to do an 80/20 loan through a "stated-income" loan. When I asked what that meant, I was told they were able to use my projected future income to qualify for a better rate and, since I was doing an 80/20 loan, there would be no PMI (which at the time was not tax deductible). Thus, I NEVER gave false information for my so-called "liar loan." The only lying was by the lender in saying I was pre-approved (not just pre-qualified, which is meaningless) for the same standard, 30-year FHA loan I had on my first house. So please, those of you blaming the borrrowers or the lenders and borrows equally, know the facts before you judge. Banks are dirt-bag liars, and these loans were presented as a valid, new lending tool. Indeed, there were (and still are not) laws against them! I think anyone who blames the borrower instead of the unscrupulous lender is a prostitute for Corporate America. As for bankruptcy "reform," that is just another example of corporations being treated better than people, and the Baby Boomer Republicans sticking it to their children after enjoying Chapter 7 for themselves for decades. Just think- a bankruptcy judge can "cram down" a mortgage for a rich person's vacation home, but not a lender like me! UNCONSCIONABLE!

Mar 01 07:21 PM

[User 367352:]

I bought a house with what is now called a "liar loan." However, I never lied about my income. Rather, I got pre-approved for a standard, 30-year loan just as I had on my existing home. I then sold my first house, moved into temporary housing while my new home was built, and when it was time to close on the new house I was told by the lender that, in order to close, they needed me to do an 80/20 loan through a "stated-income" loan. When I asked what that meant, I was told they were able to use my projected future income to qualify for a better rate and, since I was doing an 80/20 loan, there would be no PMI (which at the time was not tax deductible). Thus, I NEVER gave false information for my so-called "liar loan." The only lying was by the lender in saying I was pre-approved (not just pre-qualified, which is meaningless) for the same standard, 30-year FHA loan I had on my first house. So please, those of you blaming the borrrowers or the lenders and borrows equally, know the facts before you judge. Banks are dirt-bag liars, and these loans were presented as a valid, new lending tool. Indeed, there were (and still are) not any laws against them! I think anyone who blames the borrower instead of the unscrupulous lender is a prostitute for Corporate America. As for bankruptcy "reform," that is just another example of corporations being treated better than people, and the Baby Boomer Republicans sticking it to their children after enjoying Chapter 7 for themselves for decades. Just think- a bankruptcy judge can "cram down" a mortgage for a rich person's vacation home, but for a middle-class borrower like me! UNCONSCIONABLE!

Mar 01 07:24 PM

[User 416905:]

I think most of the banks are a bunch of Madoff's in sheeps clothing. They are Prey upon the poor and hard working. Because these people do not have much to start out with, they want to be like everyone else and have nice homes and cars. They want to send their children to college just like everyone else as well. They get took to the cleaners and the bankers encourage it. These bankers forget that we our their American fellow human beings who should have the right to declare bankrupcty on their mortgages and on college loans. After all, they are consumers just like credit card holders. The people who have credit cards can file bankruptcy and people can even declare bankruptcy on a cell phone bills or on a discharged bank accounts.
When a person looses the ability to find or keep a job because of an economic downturn. Yes, they should have the same rights as if those mortgage loans or private school loans are just credit cards. Credit cards are classified as an unsecured debt so are private college loans. First the mortgage crisis and now private college loans. These people can not afford to pay for loans if they do not have job or jobs.
I hope that they get what is coming to them, the rich high society bankers who eat expensive cavier,shrimp, and steak while we and our children go cold and hungry and that is the reversal of the bankruptcy act of 2005. Go Congress!!! Take up and stand by your American fellow cohorts. We need your help to turn around the law. When it get reversed, you will see more people with money and more and new jobs created. Lets stand united against these predatorily lenders.

Sheila
From Missouri

May 20 12:06 AM