“We don’t want to mention bankruptcy [in a foreclosure prevention guide] because it is so detrimental to borrowers.”
Fannie Mae representative, Texas Foreclosure Prevention Task Force meeting, September 9, 2009.
Isn’t bankruptcy one of the very few real tools borrowers have to prevent a foreclosure and force a lender to accept a payment plan for the arrearages? Yeah, pretty sure. Lenders hate when borrowers file for bankruptcy because it transforms borrowers from beggars, hoping to work out a deal, to debtors with rights, and it provides the supervision of a judge who is ready to enforce those rights (good example here)
So it turns out that the comment made in a state task force meeting quoted above is just the tip of the iceberg. Lenders are perfectly willing to do anything it takes to prevent borrowers from knowing their rights, including deceiving the public, while many others are at least knowing accomplices. Omitting the bankruptcy option from any conversation on borrower’s rights is not just an oversight; it is intentional — and it is wrong.
Not one of these guides list bankruptcy even as an option for borrowers (click on agency for its guide):
- HUD (and again here).
- NeighborWorks (NeighborWorks is supposed to be looking after borrowers but issues like this keep surfacing, another example here.)
- FDIC (Federal Deposit Insurance Corporation) has a brand new Foreclosure Prevention Tool Kit (updated 9/16/2009).
- Homeownerhship Preservation Foundation (The Homeownership Preservation Foundation runs the Hope Hotline, article here, but it is close to if not actually a lender front, article here, so this should not be a big surprise.)
- Hope Now Alliance (an alliance of lenders mainly, article describing them more here).
- The Federal Reserve System (the central bank of the US). Some wonder if they are a little too friendly with the banks — President Obama has proposed a new agency to oversee consumer lending practices called the Consumer Financial Protection Agency, article here. Of course some worry the new agency will just be another toothless tiger if it is allowed to exist at all, like OSHA, Consumer Product Safety Commission, etc.
- Fannie Mae (and again here), and its sister lender Freddie Mac (these are Government Sponsored Enterprises, or GSEs, currently bailed out and run by the US government).
- Foreclosure Prevention Resource Center (The Center is “powered” by the Mortgage Bankers Association but you would not know it by the name at the top of the site or the link “www.homeloanlearningcenter.com”). The only time the Center mentions bankruptcy is in this sentence: “The primary causes of delinquency, foreclosure and bankruptcy are not poor planning, but illness, loss of employment or marital problems.”
- National Black Church Initiative (they made the mistake of partnering with Fannie Mae and the Mortgage Bankers Association). This guide does mention bankruptcy actually – so you know what to do when your lender files bankruptcy.
Some others I saw in passing that also failed to even mention bankruptcy were in Pennsylvania, Ohio, Nevada, Washington State Dept of Financial Institutions, Texas Department of Savings & Mortgage Lending (referencing guide by Texas A&M Real Estate Center and others already mentioned above), Georgia, Virginia, New York City Comptroller, Miami-Dade County Consumer Services Department, Fox News.
One in California references a guide here (by a legal aid organization) that mentions bankruptcy without slamming it, although it certainly does not explore it in any detail — but at least it does not hide it. I have not seen all the guides from all the federal, state and local entities that have one, but the best guide I saw that describes bankruptcy appropriately is one by Arizona (27-28).
Some Mention Bankruptcy, Negatively
Effect of a bankruptcy on your credit record: Severe.
Of course a foreclosure is not so great on your credit record either.
Bankruptcy: Filing for bankruptcy will temporarily halt the foreclosure process and may force the mortgage lender to accept a more borrower-friendly repayment plan. But a bankruptcy should only be considered as an absolute last resort. A bankruptcy will remain on your credit report for ten years.
State of New York Banking Department (emphasis added).
I like how it says bankruptcy is a temporary fix, like bankruptcy will only prolong the inevitable. Here is another example:
Bankruptcy: Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, and can make it difficult to get credit, buy another home, get life insurance, or sometimes, get a job.
Federal Trade Commission – Facts for Consumers – August 09 (emphasis added).
So filing bankruptcy will probably just ruin your life according the the Federal Trade Commission (no credit, no home, no job and your children will be homeless when you die).
Others Just Discuss Bankruptcy as a Scam
Bankruptcy scams. You may have heard that filing bankruptcy will stop a foreclosure. This is true — but only temporarily. Filing bankruptcy brings an “automatic stay” into effect that stops any collection and foreclosure while the bankruptcy court administers the case. Eventually, you must start paying your mortgage lender, or the lender will be able to foreclose. Bankruptcy is rarely, if ever, a permanent solution to prevent foreclosure. In addition, bankruptcy will negatively impact your credit score and will remain on your credit report for 10 years.
US Comptroller of the Currency, Consumer Tips for Avoiding Mortgage Modification Scams and Foreclosure Rescue Scams, May 16, 2008, Consumer Advisory CA 2008-1
Not sure where the Comptroller gets its “stats” from — “rarely, if ever” might be an exaggeration. I also wonder what the statistics are for borrowers who tell lenders their life story and beg for a loan modification. The phrase “rarely, if ever” also comes to mind (article here), but I sure would mention the loan modification option in a foreclosure prevention guide. Why does the Comptroller mention one, and not the other? Surely the US Department of Justice, the lawyers of the US government, would not let lenders’ preferences sway the legal advice it gives the American people.
“Bankruptcy foreclosure scams” target people whose home mortgages are in trouble. Scam operators advertise over the Internet and in local publications, distribute flyers, or contact people whose homes are listed in the foreclosure notices. Sometimes they direct their appeals to specific religious or ethnic groups. … A bankruptcy filing often stops a home foreclosure, but only temporarily. If a bankruptcy is filed in your name but you don’t participate in the case, the judge will dismiss the case and the foreclosure proceedings will continue. If this happens, you will lose the money you paid to the scam operator — AND YOU COULD LOSE YOUR HOME. You will also have a bankruptcy listed on your credit record for years afterward.
Some Imply Bankruptcy Is Not Legitimate
Bankruptcy
[A] bankruptcy filing often stops a home foreclosure, but only temporarily. What’s more, the bankruptcy process is complicated, expensive, and unforgiving. For example, if you fail to attend the first meeting with the creditors, the bankruptcy judge will dismiss the case and the foreclosure proceedings will continue.
If this happens, you could lose the money you paid to the scam artist as well as your home. Worse yet, a bankruptcy stays on your credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job.
Where to Find Legitimate Help
If you’re having trouble paying your mortgage or you have gotten a foreclosure notice, contact your lender immediately. …
Federal Trade Commission – Facts for Consumers – February 2008 (emphasis added).
Lenders Are Controlling the Conversation at all Levels
The message of these guides are amazingly consistent across all levels (local, state and federal governments, GSEs, local task forces, and even nonprofits allegedly concerned about borrowers). With few exceptions, these guides omit, mislead, or attempt to frighten everyone from filing a bankruptcy, and they certainly do not provide much if anything about a borrower’s rights. There is rarely if ever a mention that an attorney or legal aid organization should be consulted (I found exceptions by Freddie Mac here, and in the guide of the National Black Church Initiative here at page 9 where it suggests a borrower get a lawyer through a university [their clinical programs typically take a handful of cases a year] or the state attorney general [who cannot represent a borrower]).
The guides also typically encourage borrowers to see a counselor. Counselors trained by whom? I have witnessed trainings done by NeighborWorks first hand and much was left to be desired (article here). And remember when NeighborWorks was given millions in federal money to funnel to counseling agencies of its choosing (See list of recent grants here; US House Financial Services Committee guide.)? Why might the lending industry consent to funding NeighborWorks? — maybe they know the advice borrowers will get is consistent with their message, their agenda. It is entirely consistent that a NeighborWorks representative suggested that their counselors be paid by the lenders directly (article). After all, the counselors are doing the lenders’ dirty work. But why would the lenders want to pay them, when the government will? I’m guessing that they would rather keep their bailout money for raises, not counseling when they have already secured the message of the counseling.
Of course bankruptcy is not appropriate in every case, but it could be especially helpful when a lender will not agree to a reasonable payment plan. Having it out there as a possible tool for borrowers encourages lenders to make reasonable payment plans with other borrowers. Bankruptcy will adversely affect a credit report, but so will a foreclosure. There are various requirements needed to file and complete a bankruptcy, such as pre-filing counseling (of course these requirements were solely pushed by the lender lobby), but there are many rules and procedures that must be followed under HAMP (the government’s loan modification program) as well.
The Real Message of these Guides
Bankruptcy is merely a litmus test. If the lenders can keep this option out of hundreds of guides and websites at all levels, imagine what else they have influenced. Rather than provide borrowers with unbiased, complete advice, the options given to borrowers in these guides and articles are more accurately described as:
- Don’t get help from anyone except a counselor that we approve of; the others are scam artists.
The financial industry will eventually be discovered as no better than big tobacco. If the tobacco industry can fall, so can these folks.
Filed under: Advice for Borrowers, National Foreclosure News
Using this brand of logic a bystander should never employ CPR on a person they see stop breathing because many never breath on their own again and all human beings will die eventually. These folks need to enlighten the American Heart Association!
I feel strongly that many of the publications fail to mention bankruptcy because they are without sufficient knowledge to suggest the positive or negative effects of bankruptcy. Further, the requirements imposed on anyone acting as a “debt relief agent” under the Bankruptcy Code are actually designed to discourage such advice.
Consumers do not fall behind on their mortgage just because they lost their job, had a medical condition or are going through a divorce. The typical consumer has numerous financial difficulties and the mortgage is merely one facet of their situation. Simply providing a loan modification or a temporary reprieve from payments will not solve their financial problems. Without discussing bankruptcy as an option, would be like a surgeon telling a cancer patient that the only course of treatment is Chemotherapy when surgery might be the best solution.
[...] Robert Doggett, on the ForeclosureBuzz.org blog, has examined many of the government and state agency guides on mortgage modification, and finds disturbing near unanimity in their opposition to bankruptcy as a remedy for mortgage default issues. [...]
[...] his blog, foreclosurebuzz.org, Doggett counters… Isn’t bankruptcy one of the very few real tools borrowers have to [...]
Why don’t more legal services funded organizations use bankruptcy as a tool? Or even have bankruptcy practice teams?
It is always hard to balance very limited resources with overwhelming needs.
[...] excellent and well-researched article by Robert Doggett for the website ForeclosureBuzz.org takes a look at a number of foreclosure prevention guides [...]
Great article! I linked to it on a blog post. http://tinyurl.com/yzs8bbr As a consumer bankruptcy attorney I am constantly amazed by the level of subterfuge used by banks to deceive consumers. They have it down to a science. Thank goodness for the law.
I too have linked to your post. Your blog is excellent. Thank you for doing this in addition to all your other work!
Nice article. It is clear that there is one set of rules for servicers and another for homeowners. Servicers are only expected to do what’s in their self-interest. Homeowners, on the other hand, are expected to tough it out even to their own detriment. A temporary drop in credit score from strategic default is nothing compared to years of paying too much money on a mortgage that doesn’t make sense.