Worthwhile Bankruptcy Articles


Piling On: Borrowers Buried by Fees

Published: April 20, 2008

Slowly but surely, a handful of public-minded bankruptcy court judges are drawing back the curtain on the mortgage servicing business, exposing, among other questionable practices, the sundry and onerous fees that big banks and financial companies levy on troubled borrowers.

It isn’t a pretty sight, if you are a borrower. But shining a light on this dark corner certainly qualifies as progress.

The cases come out of bankruptcy courts in Delaware, Louisiana and New York, and each one shows how improper, undisclosed or questionable fees unfairly penalize borrowers already struggling with mortgage debt or bankruptcy.

Given the number of new borrowers falling daily into the foreclosure mire, dubious practices by servicers are beyond troubling. Foreclosure filings rose 57 percent in March over the same period in 2007, according to RealtyTrac, the real estate and foreclosure Web site. It also said that banks repossessed more than 50,000 homes last month, more than twice the amount of one year earlier.

If even one of those repossessions was owing to improper fees or practices, that would be one too many.

The case out of the Eastern District of Louisiana, overseen by Judge Elizabeth W. Magner, is especially depressing. It involves Dorothy Chase Stewart, an elderly borrower and widow whose original loan of $61,200 was serviced by Wells Fargo. Judge Magner cited "abusive imposition of unwarranted fees and charges," and improper calculation of escrow payments, among other things. She found Wells Fargo negligent and assessed damages, sanctions and legal fees of $27,350.

The heart of the case is that Wells Fargo failed to notify the borrower when it assessed fees or charges on her account. This deepened her default and placed her on a downward spiral that was hard to escape. And Wells Fargo’s practice of not notifying borrowers that they were being charged fees "is not peculiar to loans involved in a bankruptcy," the court said.

During a 12-month period beginning in 2001, for example, Well Fargo assessed 13 late fees totaling $360.23 without telling Ms. Stewart or her late husband, whose name was on the loan before he died. Even though the terms of the mortgage required that Wells Fargo apply any funds it received from the Stewarts to principal and interest charges first, the late fees were deducted first. This meant that the Stewarts' mortgage payments were insufficient, making them fall further behind — and keeping them subject to more late fees.

Then there were the multiple inspection fees Wells Fargo charged the borrowers. Because its computer system automatically generates a request for property inspections when a borrower becomes delinquent — to make sure the property is being kept up — the $15 cost of the inspections piled up. The court noted that the total cost to the borrower for one missed $554.11 mortgage payment was $465.36 in late fees and property inspection charges.

From late 2000 and 2007, Wells Fargo inspected the property on average every 54 days, the court found. But the court also determined that inspections charged to Ms. Stewart had often been performed on other people's properties. Of the nine broker appraisals charged to Ms. Stewart from 2002 to 2007, two were said to have been conducted on the same September day in 2005 when Jefferson Parish, where the Stewart home was located, was under an evacuation order because of Hurricane Katrina.

The broker appraisals were conducted by a division of Wells Fargo that charged more than double its costs for them, the court found. It concluded that the charges were an undisclosed fee disguised as a third-party vendor cost and illegally imposed by Wells Fargo. The bank also levied substantial legal fees and failed to credit back to the borrower $1,800 that had been charged for an eviction action but that had been returned by the sheriff because it never occurred.

While Wells Fargo claimed that the borrower owed $35,036, the judge said the actual figure was $24,924.10. The judge ordered Wells Fargo to provide a complete loan history on every case pending with her court after April 13, 2007.

A Wells Fargo spokesman said the bank "strongly disagrees with many aspects of the recent bankruptcy rulings in New Orleans and plans to appeal these matters. Wells Fargo continuously works to enhance its bankruptcy procedures to comply with the requirements of the bankruptcy courts throughout the country."

The second illuminating case emerged in federal bankruptcy court in Delaware and involved a problem that lawyers representing troubled borrowers say they often encounter: fees levied after a borrower has satisfied all obligations under a Chapter 13 bankruptcy and the case is discharged.

Mortgage lenders argue that their contracts allow them to recover all the fees and costs they incur when a borrower files a Chapter 13 bankruptcy plan, even those not approved by the court and charged after a case is resolved. But borrowers contend that because such charges have not been approved, they should be disallowed.

Judge Brendan Linehan Shannon put forward this example: If a lender imposed $5,200 in charges on a borrower to cover weekly property inspections and the court disallowed $4,000 of it, lenders still contend that they have the right to try to collect fees after the case concluded that the court did not approve.
"This cannot be," the judge wrote. "If the court and the Chapter 13 Trustee fully administer a case through completion of a 60-month Chapter 13 plan, only to have the debtor promptly refile on account of accrued, undisclosed fees and charges on her mortgage, it could fairly be said that we have all been on a fool's errand for five years."

Finally, borrowers can be cheered by an opinion written this month by Cecilia G. Morris, bankruptcy judge in the Southern District of New York.

The case involved Christopher W. and Bobbi Ann Schuessler, borrowers who had $120,000 of equity in their Burlingham, N.Y., home when their bank, Chase Home Finance, a unit of JPMorgan Chase, moved to begin foreclosure proceedings. The couple had filed for personal bankruptcy protection, which automatically prevents any seizure of their home.

But the bank moved for a so-called relief from the bankruptcy stay, and claimed the couple had no equity.

The Schuesslers got into trouble because Chase had refused a mortgage payment they tried to make at a local branch. Testimony in the case revealed a Chase policy of accepting mortgage payments in branches from borrowers who are current on their loans but rejecting payments from borrowers operating under bankruptcy protection.

The Schuesslers did not know this. When Chase rejected their payment, they briefly fell behind on their mortgage, according to the court documents. Then Chase moved to begin foreclosure proceedings.

"Without informing debtors, Chase Home Finance makes it impossible for JPMorgan Chase Bank branches to accept any payments," Judge Morris wrote. "It appeared that Chase Home Finance intended to commence an unwarranted foreclosure action, due to 'arrears' resulting from Chase Home Finance's handling of the case in its bankruptcy department, rather than any default of the debtors."

Court documents also state that Chase was unable to show that it had tried to communicate with the borrowers before it began efforts to seize their home. The judge concluded that the way Chase deals with bankruptcy debtors is an abuse of the process. She instructed Chase to pay the borrowers' legal fees.

Thomas Kelly, a Chase spokesman, conceded that the bank had made some mistakes in the Schuessler case, especially the fact that the branch teller had not advised the borrowers where to send their payment when it was rejected.

"Payments from customers in bankruptcy require special handling under bankruptcy law so tellers are requested to tell customers to mail in the payment or call the toll-free number on the back of the form," he said. "In light of the judge's concerns we are reviewing our practices." He also said the bank had followed industry practice in moving to foreclose quickly "so we could meet the guidelines for servicing loans for investors."

"These cases clearly indicate that bankruptcy courts are no longer being fooled by the maze of fees, firms and flim-flams of the mortgage servicing industry," said O. Max Gardner III, a lawyer who represents borrowers in Shelby, N.C. "The servicers and their lawyers should recognize the clear and present danger of these decisions while they still have time to turn their ships around and do the right thing." 

Copyright (c) 2008 The New York Times Company.  All rights reserved.

More Consumers Are Behind on Their Loans

More Americans have fallen behind on consumer loans than at any time in nearly 16 years, as credit problems once concentrated in mortgages have spread into other forms of debt, according to the American Bankers Association.

In a quarterly study, the association said the percentage of loans at least 30 days past due rose to 2.65 percent in the fourth quarter, from 2.44 percent in the third quarter and 2.23 percent a year earlier.

The rate of delinquencies was the highest since a 2.75 percent rate in the first quarter of 1992.

"There’s no question that the economy is weakening beyond housing, resulting in the loss of household purchasing power," said John Lonski, chief economist at Moody’s Investors Service.

"Deterioration of household credit should continue through 2008, though the rate may moderate," he said. "If it intensifies, then the current recession may prove more severe than anticipated."

The association’s chief economist, James Chessen, attributed the jump in the delinquency rate largely to auto loans.

Late payments on “indirect” auto loans, which are made through dealerships, totaled 3.13 percent, the highest on record. Delinquencies on direct auto loans rose to 1.90 percent, a 2 ½-year high.

Credit and debit card delinquencies rose to 4.38 percent, from 4.18 percent in the third quarter, after four consecutive quarterly declines.

Delinquencies on home equity loans rose to a 2 ½-year high of 2.39 percent, and on home equity lines of credit delinquencies rose to 0.96 percent, matching a level last seen in the fourth quarter of 1997.

The association’s study covers more than 300 banks that extend a majority of outstanding consumer loans. It covers direct auto, indirect auto, home equity, home improvement, marine, mobile home, personal and recreational vehicle loans. 

Copyright (c) 2008 Reuters.  All rights reserved.

Foreclosure Machine Thrives on Woes

Published: March 30, 2008

NOBODY wins when a home enters foreclosure — neither the borrower, who is evicted, nor the lender, who takes a loss when the home is resold. That’s the conventional wisdom, anyway.

James and Tracy Edwards, with their children, Jennifer and Ryan, say they have had problems with fees charged by Countrywide.

The reality is very different. Behind the scenes in these dramas, a small army of law firms and default servicing companies, who represent mortgage lenders, have been raking in mounting profits. These little-known firms assess legal fees and a host of other charges, calculate what the borrowers owe and draw up the documents required to remove them from their homes.

As the subprime mortgage crisis has spread, the volume of the business has soared, and firms that handle loan defaults have been the primary beneficiaries. Law firms, paid by the number of motions filed in foreclosure cases, have sometimes issued a flurry of claims without regard for the requirements of bankruptcy law, several judges say.

Much as Wall Street’s mortgage securitization machinery helped to fuel questionable lending across the United States, default, or foreclosure, servicing operations have been compounding the woes of troubled borrowers. Court documents say that some of the largest firms in the industry have repeatedly submitted erroneous affidavits when moving to seize homes and levied improper fees that make it harder for homeowners to get back on track with payments. Consumer lawyers call these operations “foreclosure mills.”

“They get paid by the volume and speed with which they process these foreclosures,” said Mal Maynard, director of the Financial Protection Law Center, a nonprofit firm in Wilmington, N.C.

John and Robin Atchley of Waleska, Ga., have experienced dubious foreclosure practices at first hand. Twice during a four-month period in 2006, the Atchleys were almost forced from their home when Countrywide Home Loans, part of Countrywide Financial, and the law firm representing it said they were delinquent on their mortgage. Countrywide’s lawyers withdrew their motions to seize the Atchleys’ home only after the couple proved them wrong in court.

The possibility that some lenders and their representatives are running roughshod over borrowers is of increasing concern to bankruptcy judges overseeing Chapter 13 cases across the country. The United States Trustee Program, a unit of the Justice Department that oversees the integrity of the nation’s bankruptcy courts, is bringing cases against lenders that it says are abusing the bankruptcy system.

Joel B. Rosenthal, a United States bankruptcy judge in the Western District of Massachusetts, wrote in a case last year involving Wells Fargo Bank that rising foreclosures were resulting in greater numbers of lenders that “in their rush to foreclose, haphazardly fail to comply with even the most basic legal requirements of the bankruptcy system.”

Law firms and default servicing operations that process large numbers of cases have made it harder for borrowers to design repayment plans, or workouts, consumer lawyers say. “As I talk to people around the country, they all unanimously state that the foreclosure mills are impediments to loan workouts,” Mr. Maynard said.

LAST month, almost 225,000 properties in the United States were in some stage of foreclosure, up nearly 60 percent from the period a year earlier, according to RealtyTrac, an online foreclosure research firm and marketplace.

These proceedings generate considerable revenue for the firms involved: eviction and appraisal charges, late fees, title search costs, recording fees, certified mailing costs, document retrieval fees, and legal fees. The borrower, already in financial distress, is billed for these often burdensome costs. While much of the revenue goes to the law firms hired by lenders, some is kept by the servicers of the loans.

Fidelity National Default Solutions, a unit of Fidelity National Information Services of Jacksonville, Fla., is one of the biggest foreclosure service companies. It assists 19 of the top 25 residential mortgage servicers and 14 of the top 25 subprime loan servicers.

Citing “accelerating demand” for foreclosure services last year, Fidelity generated operating income of $443 million in its lender processing unit, a 13.3 percent increase over 2006. By contrast, the increase from 2005 to 2006 was just 1 percent. The firm is not associated with Fidelity Investments.

Law firms representing lenders are also big beneficiaries of the foreclosure surge. These include Barrett Burke Wilson Castle Daffin & Frappier, a 38-lawyer firm in Houston; McCalla, Raymer, Padrick, Cobb, Nichols & Clark, a 37-member firm in Atlanta that is a designated counsel to Fannie Mae; and the Shapiro Attorneys Network, a nationwide group of 24 firms.

While these private firms do not disclose their revenues, Wesley W. Steen, chief bankruptcy judge for the Southern District of Texas, recently estimated that Barrett Burke generated between $9.7 million and $11.6 million a year in its practice. Another judge estimated last year that the firm generated $125,000 every two weeks — or $3.3 million a year — filing motions that start the process of seizing borrowers’ homes.

Court records from 2007 indicate that McCalla, Raymer generated $10.4 million a year on its work for Countrywide alone. In 2005, some McCalla, Raymer employees left the firm and created MR Default Services, an entity that provides foreclosure services; it is now called Prommis Solutions.

For years, consumer lawyers say, bankruptcy courts routinely approved these firms’ claims and fees. Now, as the foreclosure tsunami threatens millions of families, the firms’ practices are coming under scrutiny.

And none too soon, consumer lawyers say, because most foreclosures are uncontested by borrowers, who generally rely on what the lender or its representative says is owed, including hefty fees assessed during the foreclosure process. In Georgia, for example, a borrower can watch his home go up for auction on the courthouse steps after just 40 days in foreclosure, leaving relatively little chance to question fees that his lender has levied.

A recent analysis of 1,733 foreclosures across the country by Katherine M. Porter, associate professor of law at the University of Iowa, showed that questionable fees were added to borrowers’ bills in almost half the loans.

Specific cases inching through the courts support the notion that figures supplied by lenders are often incorrect. Lawyers representing clients who have filed for Chapter 13 bankruptcy, the program intended to help them keep their homes, say it is especially distressing when these numbers are used to evict borrowers.

“If the debtor wants accurate information in a bankruptcy case on her mortgage, she has got to work hard to find that out,” said Howard D. Rothbloom, a lawyer in Marietta, Ga., who represents borrowers. That work, usually done by a lawyer, is costly.

Mr. Rothbloom represents the Atchleys, who almost lost their home in early 2006 when legal representatives of their loan servicer, Countrywide, incorrectly told the court that the Atchleys were 60 days delinquent in Chapter 13 plan payments two times over four months. Borrowers can lose their homes if they fail to make such payments.

After the Atchleys supplied proof that they had made their payments on both occasions, Countrywide withdrew its motions to begin foreclosure. But the company also levied $2,793 in fees on the Atchleys’ loan that it did not explain, court documents said. “Every paycheck went to what they said we owed,” Robin Atchley said. “And every statement we got, the payoff was $179,000 and it never went down. I really think they took advantage of us.”

The Atchleys, who have four children, sold the house and now rent. Mrs. Atchley said they lost more than $23,000 in equity in the home because of fees levied by Countrywide.

The United States Trustee sued Countrywide last month in the Atchley case, saying its pattern of conduct was an abuse of the bankruptcy system. Countrywide said that it could not comment on pending litigation and that privacy concerns prevented it from discussing specific borrowers.

A generation ago, home foreclosures were a local business, lawyers say. If a borrower got into trouble, the lender who made the loan was often a nearby bank that held on to the mortgage. That bank would hire a local lawyer to try to work with the borrower; foreclosure proceedings were a last resort.

Now foreclosures are farmed out to third-party processors who hire local counsel to litigate. Lenders negotiate flat-fee arrangements to try to keep legal bills down.

AN unfortunate result, according to several judges, is a drive to increase revenue by filing more motions. Jeff Bohm, a bankruptcy judge in Texas who oversaw a case between William Allen Parsley, a borrower in Willis, Tex., and legal representatives for Countrywide, said the flat-fee structure “has fostered a corrosive ‘assembly line’ culture of practicing law.” Both McCalla, Raymer and Barrett Burke represented Countrywide in the matter.

Gee Aldridge, managing partner at McCalla, Raymer, called the Parsley case unique. “It is the goal of every single one of my clients to do whatever they can do to keep borrowers in their homes,” he said. Officials at Barrett Burke did not return phone calls seeking comment.

In a statement, Countrywide said it recognized the importance of the efficient functioning of the bankruptcy system. It said that servicing loans for borrowers in bankruptcy was complex, but that it had improved its procedures, hired new employees and was “aggressively exploring additional technology solutions to ensure that we are servicing loans in a manner consistent with applicable guidelines and policies.”

The September 2006 issue of The Summit, an in-house promotional publication of Fidelity National Foreclosure Solutions, another unit of Fidelity, trumpeted the efficiency of its 18-member “document execution team.” Set up “like a production line,” the publication said, the team executes 1,000 documents a day, on average.

OTHER judges are cracking down on some foreclosure practices. In 2006, Morris Stern, the federal bankruptcy judge overseeing a matter involving Jenny Rivera, a borrower in Lodi, N.J., issued a $125,000 sanction against the Shapiro & Diaz firm, which is a part of the Shapiro Attorneys Network. The judge found that Shapiro & Diaz had filed 250 motions seeking permission to seize homes using pre-signed certifications of default executed by an employee who had not worked at the firm for more than a year.

In testimony before the judge, a Shapiro & Diaz employee said that the firm used the pre-signed documents beginning in 2000 and that they were attached to “95 percent” of the firm’s motions seeking permission to seize a borrower’s home. Individuals making such filings are supposed to attest to their accuracy. Judge Stern called Shapiro & Diaz’s use of these documents “the blithe implementation of a renegade practice.”

Nelson Diaz, a partner at the firm, did not return a phone call seeking comment.

Butler & Hosch, a law firm in Orlando, Fla., that is employed by Fannie Mae, has also been the subject of penalties. Last year, a judge sanctioned the firm $33,500 for filing 67 faulty motions to remove borrowers from their homes. A spokesman for the firm declined to comment.

Barrett Burke in Texas has come under intense scrutiny by bankruptcy judges. Overseeing a case last year involving James Patrick Allen, a homeowner in Victoria, Tex., Judge Steen examined the firm’s conduct in eight other foreclosure cases and found problems in all of them. In five of the matters, documents show, the firm used inaccurate information about defaults or failed to attach proper documentation when it moved to seize borrowers’ homes. Judge Steen imposed $75,000 in sanctions against Barrett Burke for a pattern of errors in the Allen case.

A former Barrett Burke lawyer, who requested anonymity to avoid possible retaliation from the firm, said, “They’re trying to find a fine line between providing efficient, less costly service to the mortgage companies” and not harming the borrower.

Both he and another former lawyer at the firm said Barrett Burke relied heavily on paralegals and other nonlawyer employees in its foreclosure and bankruptcy practices. For example, they said, paralegals prepared documents to be filed in bankruptcy court, demanding that the court authorize foreclosure on a borrower’s home. Lawyers were supposed to review the documents before they were filed. Both former Barrett lawyers said that with at least 1,000 filings a month, it was hard to keep up with the volume.

This factory-line approach to litigation was one reason he decided to leave the firm, the first lawyer said. “I had questions,” he added, “about whether doing things efficiently was worth whatever the cost was to the consumer.”

James R. and Tracy A. Edwards, who are now living in New Mexico, say they have had problems with questionable fees charged by Countrywide and actions by Barrett Burke. In one month in 2002, when the couple lived in Houston, Countrywide Home Loans withdrew three monthly mortgage payments from their bank account, Mrs. Edwards said, leaving them unable to pay other bills. The family filed for bankruptcy toCopyright 2008 The New York Times Company.  All rights reserved. try to keep their home, cars and other assets.

Filings in the bankruptcy case of the Edwards family show that on at least three occasions, Countrywide’s lawyers at Barrett Burke filed motions contending that the borrowers had fallen behind. The firm subsequently withdrew the motions.

“They kept saying we owed tons and tons of fees on the house,” Mrs. Edwards said. Tired of this battle, the family gave up the Houston house and moved to one in Rio Rancho, N.M., that they had previously rented out.

Countrywide tried to foreclose on that house, too, contending that Mr. and Mrs. Edwards were behind in their payments. Again, Mrs. Edwards said, the culprit was a raft of fees that Countrywide had never told them about — and that were related to their Texas home. Mrs. Edwards says that she and her husband plan to sue Countrywide to block foreclosure on their New Mexico home.

Pamela L. Stewart, president of the Houston Association of Debtor Attorneys, said she has become skeptical of lenders’ claims of fees owed. “I want to see documents that back up where these numbers are coming from,” Ms. Stewart said. “To me, they’re pulled out of the air.”

An inaccurate mortgage payment history supplied by Ameriquest, a mortgage lender that is now defunct, was central to a case last year in federal bankruptcy court in Massachusetts. “Ameriquest is simply unable or unwilling to conform its accounting practices to what is required under the bankruptcy code,” Judge Rosenthal wrote. He awarded the borrower $250,000 in emotional-distress damages and $500,000 in punitive damages.

Fidelity National Information Services has also been sued. A complaint filed on behalf of Ernest and Mattie Harris in federal bankruptcy court in Houston contends that Fidelity receives kickbacks from the lawyers it works with on foreclosure matters.

The case shines some light on the complex relationships between lenders and default servicers and the law firms that represent them. The Harrises’ loan servicer is Saxon Mortgage Services, a Morgan Stanley unit, which signed an agreement with Fidelity National Foreclosure Solutions. Under it, Fidelity was to provide foreclosure and bankruptcy services on loans serviced by Saxon, as well as to manage lawyers acting on Saxon’s behalf. The agreement also specified that Saxon would pay the fees of the lawyers managed by Fidelity.

But Fidelity also struck a second agreement, with an outside law firm, Mann & Stevens in Houston, which spelled out the fees Fidelity was to be paid each time the law firm made filings in a case. Mann & Stevens, which did respond to phone calls, represented Saxon in the Harrises’ bankruptcy proceedings.

According to the complaint, Mann & Stevens billed Saxon $200 for filing an objection to the borrowers’ plan to emerge from bankruptcy. Saxon paid the $200 fee, then charged that amount to the Harrises, according to the complaint. But Mann & Stevens kept only $150, paying the remaining $50 to Fidelity, the complaint said.

This arrangement constitutes improper fee-sharing, the Harrises argued. Texas rules of professional conduct bar fee-sharing between lawyers and nonlawyers because that could motivate them to raise prices — and the Harrises argue that this is why the law firm charged $200 instead of $150. And under these rules, sharing fees with someone who is not a lawyer creates a risk that the financial relationship could affect the judgment of the lawyer, whose duty is to the client. Few exceptions are permitted — like sharing court-awarded fees with a nonprofit organization or keeping a retirement plan for nonlawyer employees of a law firm.

“If it’s fee-sharing, and if it doesn’t fall into those categories, it sounds wrong,” said Michael S. Frisch, adjunct professor of law at Georgetown University. Greg Whitworth, president of loan portfolio solutions at Fidelity, defended the arrangement, saying it was not unusual for a company to have an intermediary manage outside law firms on its behalf.

The Harrises contend that the bankruptcy-related fees charged by the law firms managed by Fidelity “are inflated by 25 to 50 percent.” The agreement between Fidelity and the law firm is also hidden, according to their complaint, so a presiding judge sees only the lender and the law firm, not the middleman.

Fidelity said the money it received from the law firm was not a kickback, but payments for services, just as a law firm would pay a copying service to duplicate documents. In response to the complaint, Fidelity asserted in a court filing that the Harrises’ claims were “nothing more than scandalous, hollow rhetoric.”

But the Fidelity fee schedule shows a charge for each action taken by the law firm, not a fee per page or kilobyte. And Fidelity’s contract appears to indemnify Saxon if the arrangement between Fidelity and its law firm runs afoul of conduct rules.

Mr. Whitworth of Fidelity said that the arrangement with Mann & Stevens did not constitute fee sharing, because Fidelity was to be paid by that law firm even if the law firm itself was not paid.

He also said that by helping a servicer manage dozens or even hundreds of law firms, Fidelity lowered the cost of foreclosure or bankruptcy proceedings, to the benefit of the law firm, the servicer and the borrower. “Both parties want us to be in the middle here,” Mr. Whitworth said, referring to law firms and mortgage servicing companies.

THE Fidelity contract attached to the complaint also hints at the money each motion generates. Foreclosures earn lawyers fees of $500 or more under the contract; evictions generate about $300. Those fees aren’t enormous if they require a substantial amount of time. But a few thousand such motions a month, executed by lawyers’ employees, translates into many hundreds of thousands of dollars in revenue to the law firm — and the lower the firm’s costs, the greater the profits.

“Congress needs to enact a national foreclosure bill that sets a uniform procedure in every state that provides adequate notice, due process and transparency about fees and charges,” said O. Max Gardner III, a consumer lawyer in Shelby, N.C. “A lot of this stuff is such a maze of numbers and complex organizational structure most lawyers can’t get through it. For the average consumer, it is mission impossible.” Virtues of the Short Sale


IS it possible for a homeowner who owes $725,000 on a mortgage to sell a house for only $560,000 and still walk away happy, or at least relieved? The answer is yes, if the transaction is a short sale — defined as selling for less than the mortgage owed, in a deal with the lender to forgive the rest of the debt and head off a foreclosure.

A last-ditch option for a homeowner in default, the short sale is increasingly being seen a valuable tool by sellers, buyers, real estate agents and lenders. But it does come with this caveat from real estate agents and lawyers: it is an intricate transaction, often taking many months to complete.

Describing the process as “the lesser of two evils,” Mark Boyland, the president of the Westchester-Putnam Multiple Listing Service and an associate broker at Keller Williams NY Realty, nevertheless emphasized its value as “a way to help out both the homeowner and the bank, and make a bad situation better.”

The case above, involving a four-bedroom ranch in southern Westchester, is typical. The sale price did not cover the entire mortgage but was still high enough for the lender to forgive the remaining balance, said Patti Cunningham, the owner of Cunningham Realty in Hawthorne, who brokered the deal.

The owner had been grappling with the costs of college tuition and a parent’s medical bills, and had refinanced the mortgage loan six times in five years to meet the growing expenses, Ms. Cunningham said.

The owner decided to sell the house, bought in 1999 for $310,000. But the $700,000 that a 46-year-old ranch in good condition might have fetched in a more robust market was not realistic. The house languished, and when bids did come in, they were far below the asking price. Several months later, the seller, who had fallen behind on mortgage payments, was notified that foreclosure proceedings had begun.

Finally, with an offer of $560,000, Phyllis Knight Marcus, a real estate lawyer in Hawthorne, contacted the lender, who eventually agreed to the deal.

“In the end, the seller got out from under,” the lawyer said. “The buyer was happy because he got a bargain, and the bank was pleased to have the situation solved.”

Ms. Marcus is working on five short-sale cases in Westchester County; last year she had none. Mr. Boyland at Keller Williams is similarly negotiating five short sales, versus none a year ago.

“It’s a trend that began last year in response to a troubled market,” he said, “and more and more people finding themselves in an upside-down situation.”

Nationally, defaults on home mortgages reached an all-time high at the end of 2007 as foreclosures surged on adjustable-rate mortgages, the Mortgage Bankers Association, an industry group, reported on March 6.

In Westchester, foreclosure numbers are also on the upswing, said Geoffrey Anderson, the executive director of Westchester Residential Opportunities, a nonprofit housing group in White Plains. In the first nine weeks of the year, there were 515 foreclosure filings in Westchester, Mr. Anderson said, adding, “That’s up significantly from what it was last year, and we’re expecting many more in the coming months” as many more adjustable-rate mortgages reset this spring and summer.

The bulk of the foreclosures are occurring in places like Yonkers, Mount Vernon, New Rochelle and Greenburgh, which have the highest concentrations of low-income residents, Mr. Anderson said. But more affluent communities are far from immune. For example, Mr. Boyland’s short-sale cases are in Pound Ridge, Katonah, Bedford and North Salem.

Still, when compared with foreclosures in other New York area suburbs, Westchester’s are relatively low. For instance, according to ForeclosureDeals.com, a listing service, Westchester has 91 homes in foreclosure, while Nassau County has 186.

As an indicator of how complicated such cases can be, and of how many more are expected, Mr. Boyland is one of a number of professionals taking courses in short sales. He has also hired a specialist as a consultant. “The banks change their guidelines every week,” he said, “so you have to stay on top of things.”

The laws governing such sales are also in flux. For example, a federal law passed late last year exempts sellers from having to pay income tax on the amount forgiven, but only if the house in question is the owner’s primary residence. In previous years, the forgiven debt was considered income, even though the seller received no money.

PropertyShark.com, a real estate data provider, is one of several businesses offering courses. “It’s very important for investors and brokers to understand the distressed-property industry,” said Bill Staniford, the company’s chief executive, “because it looks like we might be dealing with this for years down the road.”

But even though short sales are on the increase, Ms. Cunningham of Cunningham Realty cautioned that sellers should not expect to use them as “a quick way to get out of a bad deal.”

Before a bank agrees to one, she said, the lender first needs to ascertain that “a seller is really at the end of the rope financially, and has tried to utilize his or her own resources first.” A seller seeking a short sale must submit a hardship document outlining what led to the default in payments, along with a detailed lists of expected fees, expenses and commissions, in addition to principal and interest.

But even then, after a price has been determined and the paperwork submitted, many months often go by before a decision is reached by the lender, which retains the right to turn the deal down.

Housing advocates and mortgage counselors caution that a short sale is only one option; some nonprofit groups are helping borrowers work out alternative arrangements with their mortgage holders.

“The short sale is not the only way to go,” said Mr. Anderson at Westchester Residential Opportunities. “We’re not involved in any yet, but as we see that a short sale could benefit a homeowner, we would advocate for that.”

Copyright 2008 The New York Times Company.  All rights reserved. 

Soaring foreclosures are bad news for neighbors with good credit who want to sell or refinance

Alan Zibel
The Associated Press

If your neighbors have lost their homes, you could pay the price when you try to sell or refinance - even if your credit is good.

Neighbors matter when it comes to pricing homes. Appraisers use comparable sales data to calculate the value of a home, a number lenders require for selling and refinancing. And comparable sales in neighborhoods plagued by foreclosures knock down the value of homes.

This problem, which makes it tougher for borrowers to pull cash out of their homes, is another sign of how a sick housing market infects the entire economy. If borrowers cannot refinance at lower rates, that could cause even more foreclosures, real estate experts say.

"The abundance of foreclosures has turned into a snowball effect," said Karen Mann, a San Francisco Bay area appraiser.

Mortgage brokers and appraisers in California, Florida and Nevada, where inflated home prices have fallen the most, say more homeowners are stuck in this situation.

The number of U.S. homes facing foreclosure soared 57 percent in January from a year earlier, and 230,000 homes nationwide received notices from lenders, according figures from Irvine, Calif.-based RealtyTrac Inc.

Far-flung suburbs popular with first-time buyers have been hit hardest by the foreclosure drag. In northern California, buyers often borrowed as much as 100 percent of their home's value, Mann said.

Some of those homeowners are walking away from mortgages and turning properties over to their lenders.

Appraisers commonly base their calculations on property sales in the past six months within a half-mile of the property. But declining markets make that calculation difficult, especially if there are no recent completed sales and many foreclosed properties on the market.

"It's difficult to get a good assessment of what the valuations would be in this type of market," Global Insight economist Brian Bethune said. "Everybody knows that there's some downward pressure, but how much? This whole appraisal process has become a lot more complicated."

A better approach, said Loreen Stuhr, a Las Vegas appraiser, is to look at older sales of nonforeclosed properties and make adjustments to consider the market's decline - a drop in home values of up to 2 percent every month in Las Vegas.

But Southern California appraiser Rita Bradley said appraisers are obligated to look at all properties in the area, including bank-owned properties on the market. "Just because you can pull a sale from five months ago doesn't mean it's really indicative of what's happening in the neighborhood today," she said.

Consumer groups predict the foreclosure wave will lower property values, and thus property-tax revenue for states and municipalities.

Copyright (c) 2008 Associated Press. All rights reserved.

"Look Out for That Lifeline"

Granville Jones knew he was spending beyond his means after he racked up $90,000 largely in credit-card
debt—$10,000 more than his annual income. So last summer the Durham (N.C.) pharmacist turned to the Consumer Law
Center for help. The firm told Granville that if he withheld payments from creditors, the CLC would have the leverage to
negotiate a lump settlement on his debts and cut his balances by half in five years. So Granville stopped paying his bills
and instead handed over a monthly sum to the CLC to cover an eventual settlement with creditors as well as the firm's
fees. "When you are financially stressed, you hope for miracles," says the 47-year-old, who was current on his bills before
reaching out to the law firm.

The miracle never happened. Instead, Jones gets daily calls from collection agencies. One lender has sued him in county
court for the $25,000 it's owed. Frustrated, Jones cancelled the program in January. The CLC agreed to refund the
$10,744 he paid, but only after Jones filed a complaint with North Carolina's attorney general in February. "All Consumer
Law did was leave me hanging," says Jones. The CLC did not return calls for comment.

Jones' predicament is another by-product of the credit crunch. With individuals of all income brackets struggling to pay
their bills, many are seeking help from the hundreds of debt-settlement firms that promise to reduce credit-card balances
by as much as 70% over several years.


Like credit counselors, debt-settlement firms generally collect a single monthly payment from clients. But rather than
disbursing the money to credit-card companies to cover the borrowers' bills, they withhold it. The settlement firms then
use the money as a bargaining chip in an attempt to negotiate a lump-sum payout with lenders. These programs have
proliferated of late as credit-card debt has soared; the typical U.S. household now has more than $7,000 in outstanding
balances, up 45% from five years ago.

The booming business has caught the attention of prosecutors and regulators, who say such programs can leave
consumers in worse financial shape. Fees for the services run high. And when banks don't agree to settle—if the
settlement firm contacts them at all—consumers get hit with late charges and penalized with higher interest rates, leaving
borrowers with even more debt than when they started.

Wary of such pitfalls, seven states have already banned settlement activities. Others, such as Iowa, are considering
similar rules. Meanwhile, the Federal Trade Commission and attorneys general in six states have recently filed complaints
against debt-settlement firms. Four are investigating Hess Kennedy Chartered, an affiliate of the Consumer Law Center,
including AGs in North Carolina and Florida, both of which filed civil charges against the Coral Gables (Fla.) firm for
allegedly deceptive practices. "There are more of these firms than we can handle," says Norman Googel, an assistant
attorney general in West Virginia, which is investigating 15 settlement firms. "They are truly exploiting a group of
consumers already in crisis." Hess Kennedy didn't return calls for comment.

The settlement industry defends its services, asserting that its payment plans can be more affordable than traditional
credit counselors and provide consumers an alternative to bankruptcy. "Debt settlement is a boot camp for getting out of
debt," says Nicolas de Segonzac, president of the trade group Association of Settlement Cos. Says Jenna Keehnen,
executive director of U.S. Organizations for Bankruptcy Alternatives: "In any industry there are bad actors. But for every complaint, there are thousands and thousands of appreciative customers that have gone successfully through the

What many borrowers who sign on don't realize, though, is that fees can run as high as 30% of the total outstanding
balance, or $3,000 on $10,000 in debt. It's also often unclear to individuals, say state and federal prosecutors, that the
bulk of their initial payments—those made within the first year—go toward fees rather than the settlement. "The programs
typically require financially strapped consumers to pay fees up front, so they make money whether or not any useful
services are performed," says Philip Lehman, an assistant attorney general in North Carolina.

Although some consumers have found relief with debt-settlement firms, the programs do not have the same success rate
as credit-counseling agencies. Credit counselors, which have long-standing relationships with issuers, work with lenders to lower interest rates and create a monthly payment plan for borrowers. According to the National Foundation for Credit
Counseling, which represents 1,500 counselors in the U.S., 60% of clients complete the plans.

By comparison, North Carolina prosecutor Lehman estimates that 80% of consumers drop out of debt-settlement
programs within the first year. And the Federal Trade Commission, which has settled six cases against settlement outfits
in the past four years, found that at one of those firms, just 1.4% of the consumers who entered the program finished it
and settled with lenders.

Why? One reason is that some banks, including Bank of America (BAC) and Discover Financial Services, (DFS) refuse to
negotiate with settlement firms. The programs, issuers say, only add to their pile of bad debt since consumers stop
payment. "This is one instance where both creditors and debtors are worse off," says a credit-card executive who
declined to be named.

Meanwhile, borrowers rack up late fees, over-limit charges, and other penalties for missed payments. Creditors may also
pass the debts to collection agencies or sue for damages in court. Those blemishes inflict long-lasting damage on a credit
report. All that can leave borrowers not only with more debt, but even worse, can force them into bankruptcy—exactly the
situation many were trying to avoid.

Barbara Bautch knows what it's like to be on that slippery slope. Unable to manage the $12,000 tab on two cards, the
part-time health-care aide in Silver Bay, Minn., signed up with settlement firm American Financial Services in 2006,
forking over $233 a month to the Bakersfield (Calif.) company. After one of the card companies sued, Bautch learned that
AFS hadn't contacted either issuer regarding a settlement deal. Between late charges, penalty interest, and attorneys'
fees, her debt now stands at $20,000. AFS did not return calls for comment. Says Bautch: "AFS drove me into
bankruptcy, and it was no sweat off its back."

"Too Much Debt? Too Bad."

A major avenue of escape for troubled credit-card borrowers is narrowing. Consumers with onerous debt traditionally
have found relief among credit counseling agencies, middlemen who negotiate with lenders to lower interest rates and
consolidate balances into a low monthly payment. But banks aren't as willing to cut deals now. "More consumers will end
up in bankruptcy," says Travis B. Plunkett, legislative director at the advocacy group Consumer Federation of America.

Nonprofit credit counselors have been around almost since the dawn of the credit-card business more than 50 years ago.
Their approach hasn't changed much in that time. Typically, a counselor sets up a so-called debt-management plan that
allows a client to pay off a balance over five years. The individual makes a single monthly payment to the group, which in
turn sends the money to the various lenders.

Until recently issuers often agreed to ratchet down interest rates permanently, to as low as 0%, for those working with
credit counselors. That has been a critical concession, says the industry, since it makes monthly payments more
affordable and helps ensure the principal is getting paid down. But now some credit-card companies are balking. Discover
Financial Services, (DFS) counselors contend, won't cut rates below 17.9% for clients, while Capital One Financial (COF)
is holding firm at 15.9%. At least 5 of the 13 largest issuers are offering smaller breaks on rates than they did five years
ago, according to a study by the Consumer Federation of America. Discover won't disclose rate details, saying it makes
decisions on a case-by-case basis: "We have a range of rates that we temporarily offer card members depending on their
situation," says spokesman Matthew Towson. Capital One didn't return calls for comment.

Some companies are still willing to deal. JPMorgan Chase (JPM) announced a year ago it would cut rates to 0% for
consumers who agree to a formal debt-management plan. Bank of America will drop to the low single-digit level or even
to 0% in some instances.

Meanwhile, counselors are fretting that they aren't getting paid for their services as they did in the past. The credit
counseling agencies historically have collected 15% of the total debt that's paid off. Today banks are forking over less
than 8%, notes the National Foundation for Credit Counseling, the umbrella group for 1,500 counselors. That money goes
to fund operations, so counselors worry they may have to skimp on services given the cutbacks. "If funding doesn't
improve, we will be in serious trouble," says Winchell Dillenbeck, executive director of Consumer Credit Counseling
Services of the North Coast in Arcata, Calif.

Why are credit-card companies clamping down? Some analysts suspect issuers are increasingly worried about losses.
Card issuers reported $38 billion in bad loans last year. Columbia Law School professor Ronald Mann gives another
reason. He says banks have taken a closer look at the data and determined that most individuals will keep paying their
debts even if lenders don't lower the rates as they have in the past. "Higher rates maximize the recovery," says Mann.

The counselors see the world differently. In the current credit crunch, more borrowers are turning to their programs. The
NFCC worked with 2.7 million individuals last year, a nearly 30% jump from 2006. Without the usual rate breaks,
counselors think more people will fall behind on their payments. That could lead to an uptick in bankruptcies. A study by
Visa Inc. (V) found that 50% of consumers who dropped out of credit counseling programs declared bankruptcy. Says
Dillenbeck: "If we don't have good concessions, we have little power to help people."

Copyright 2008 Business Week. All rights reserved.

Published: March 5, 2008

Americans filed for bankruptcy in growing numbers in February, buckling under the combined weight of rising energy prices, a weakening housing market and sky-high personal debts.

An average of 3,960 bankruptcy petitions were filed per day nationwide last month, up 18 percent from January and up 28 percent from a year earlier, according to Automated Access to Court Electronic Records, a bankruptcy data and management company.

February was the busiest month for filings since Congress overhauled the bankruptcy law in 2005. Bankruptcy experts said the rise was particularly worrisome because those changes made filing for bankruptcy more complicated and expensive.Facing Default, Some Walk Out on New Homes
Published: February 29, 2008

When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried.

In a declining housing market, he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford. “I was terrified,” said Mr. Zulueta, who services automated teller machines for an armored car company in the San Francisco area.

Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.

Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender’s problem. “They took the negativity out of my life,” Mr. Zulueta said of You Walk Away. “I was stressing over nothing.”

You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say.

Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, according to a survey by the National Association of Realtors. Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home in order to cover closing costs.

“I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in an e-mail message.

For some people, then, foreclosure becomes something akin to eviction — a traumatic event, and a blow to one’s credit record, but not one that involves loss of life savings or of years spent scrimping to buy the home.

“There certainly appears to be more willingness on the part of borrowers to walk away from mortgages,” said John Mechem, spokesman for the Mortgage Bankers Association, who noted that in the past, many would try to save their homes.

In recent months top executives from Bank of America, JPMorgan Chase and Wachovia have all described a new willingness by borrowers to walk away from mortgages.

Carrie Newhouse, a real estate agent who also works as a loss mitigation consultant for mortgage lenders in Minneapolis-St. Paul, said she saw many homeowners who looked at foreclosure as a first option, preferable to dealing with their lender. “I’ve had people say to me, ‘My house isn’t worth what I owe, why should I continue to make payments on it?’ ” Mrs. Newhouse said.

“You bought an adjustable rate mortgage and you’re mad the bank is adjusting the rate,” she said. “And sometimes the bank people who call these consumers aren’t really nice. Not that the bank has the responsibility to be your friend, but a lot are just so uncooperative.”

The same sorts of loans that drove the real estate boom now change the nature of foreclosure, giving borrowers incentives to walk away, said Todd Sinai, an associate professor of real estate at the Wharton School of Business at the University of Pennsylvania.

“There’s a whole lot of people who would’ve been stuck as renters without these exotic loan products,” Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.”

In the boom market, homeowners took their winnings, withdrawing $800 billion in equity from their homes in 2005 alone, according to RGE Monitor, an online financial research firm.

Since the Depression, American government policy has encouraged homeownership as an absolute good. It protects people from increases in rent and allows them to build equity as they pay off their mortgages. And it creates stability in communities, because owners are invested in their neighbors.

But new types of loans like interest-only mortgages and cash-out refinance loans mean buyers do not pay down their mortgages. And adjustable rate mortgages, which accounted for 39 percent of mortgages written in 2006, expose owners to rent-like rises in their housing costs.

The value of homeownership, then, has increasingly shifted to the home’s likelihood to rise in value, like any other investment. And when investments go bad, people tend to walk away.

“When people don’t have skin in the game, they behave like they don’t have skin in the game,” said Karl E. Case, a professor of economics at Wellesley College, who conducts regular surveys of borrowers as a founding partner of Fiserv Case Shiller Weiss, a real estate research firm.

Though many states give banks recourse to sue borrowers for their losses, Mr. Case said, in practice it’s not often done “It’s tough to do recourse,” he said. “It’s costly, and the amount of people’s nonhousing wealth tends to be pretty slim.”

Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Mr. Menegatti said, 20 million households will owe more than the value of their homes.

“Will everyone walk out?” he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”

When homeowners see houses identical to their own selling for much less than they owe, Mr. Menegatti said, “I wouldn’t be surprised to see five or six million homeowners walk away.”

For Raymond Zulueta, the decision to go into foreclosure, and to hire You Walk Away, brought him peace of mind. The company assured him that in California he was not liable for his debt, and provided sessions with a lawyer and an accountant, as well as enrollment with a credit repair agency. He stopped paying his mortgage and used the money to pay down other debts.

Consumer advocates and others question the value of You Walk Away’s service.

“We are more interested in servicers and borrowers coming to mutual resolutions through loan remediation,” said Kevin Stein, associate director of the nonprofit California Reinvestment Coalition. “Even though we are not seeing good outcomes, we’re not willing to throw up our hands and say people should walk away from their homes based on the advice of a company that stands to profit from foreclosure.”

Jon Maddux, a founder of You Walk Away, said the company’s services were not for everybody and were meant as a last resort. The company opened for business in January and says it has just over 200 clients in six states.

“It’s not a moral decision,” Mr. Maddux said of foreclosure. “The moral decision is, ‘I need to pay my kids’ health insurance or my car payment so I can get to work.’ They made a bad decision, but they shouldn’t make more bad ones just because they have this loan.”

Mr. Zulueta said he felt he had let down the lender, himself, and his family.

“But you got to move on,” he said. “I know in a few years my credit’s going to be fine. If I want to get another house, it’s going to be there. I’m not the only one who went through this. I know I’m working the system, but you got to do what you got to do. There’s always loopholes.”

Copyright (c) The New York Times Company 2008. All rights reserved.

Debt Relief Can Cause Headaches of Its Own

It wasn’t supposed to work this way.

Joseph A. Mullaney, a consumer affairs lawyer in New Jersey, was once a victim of a debt settlement company.

Credit card companies have long seduced customers with “buy now, pay later,” hoping they would pay at least a minimum amount month after month but never pay off their debts. Now, though, with the economy slowing and houses no longer easy sources of cash, a growing number of consumers cannot pay even the minimums.

In December, revolving debt — an estimated 95 percent from credit cards — reached a record high of $943.5 billion, according to the Federal Reserve. The annual growth rate of this debt increased steadily in 2007, reaching 9.3 percent in the last quarter, up from 5.4 percent in the first quarter.

The amount of debt that is delinquent — in which minimum payments are late but the accounts are still open — also appears to be on the rise. The Federal Reserve found that 4.34 percent of the credit card portfolios of the 100 largest banks that issue cards was delinquent in the third quarter of last year, up from 4.07 percent in the previous quarter. Charge-offs — accounts closed for nonpayment — also grew in that period, and banks expect charge-offs to keep rising in 2008.

“It’s not that card debt is unmanageable for everyone,” Adam J. Levitin, a credit expert and an associate professor of law at Georgetown University, wrote in an e-mail message. “Rather, it is unmanageable for some (and a growing group, it seems).”

What can borrowers do to extricate themselves?

If belt-tightening suffices, one option is a debt management repayment plan in which interest rates, but not balances, are reduced.

Ronald J. Mann, a law professor at Columbia University and a credit expert, describes credit industry practices as intended to enslave borrowers in a “sweat box.” He recommends a Chapter 7 bankruptcy that wipes out most credit card debt.

Many consumers, however, are loath to file for bankruptcy protection, said Mark S. Zuckerberg, a bankruptcy lawyer in Indianapolis. And others may find that they cannot qualify for a Chapter 7.

Then there is debt settlement, when a debtor and creditor agree that payment of a negotiated, reduced balance will be payment in full. Debt settlement generally works best when consumers can offer a lump sum, the experts said. But consumers may face taxes on the amount the creditor has forgiven.

“Done correctly, it can absolutely help people,” said Cyndi Geerdes, an associate professor at the University of Illinois law school who also runs a consumer debt clinic.

Consumers can arrange debt settlement themselves, and many Web sites offer advice. Consumers can also hire a lawyer or use debt settlement companies, many of which advertise online and on television. The experts agree, however, that “buyer beware” is the best advice when considering debt settlement companies.

A thousand such companies exist nationwide, up from about 300 a couple of years ago, estimated David Leuthold, vice president of the Association of Settlement Companies, which has 70 members and is based in Madison, Wis.

Deanne Loonin, a senior lawyer with the National Consumer Law Center in Boston, has investigated them. “It’s possible there are honest ones,” she said, “but I assume they aren’t until proven otherwise.”

Travis Plunkett, legislative director of the Consumer Federation of America in Washington, said distressed borrowers who cannot produce lump sums to settle with creditors were the most vulnerable to dishonest companies. In some cases, these companies tell consumers to stop paying monthly minimums, explaining that they will negotiate a settlement when borrowers have saved enough. Meanwhile, they take hefty monthly fees directly from clients’ bank accounts.

Creditors will not negotiate reduced balances with consumers who are still making monthly payments. But when they stop paying, total balances swell with fees and interest rates. And depending on the law in states where debtors live, creditors can attach wages and property to satisfy the new total owed.

“Many debt settlement companies never explain these risks clearly,” said Joseph A. Mullaney, a consumer affairs lawyer in Voorhees, N.J.

According to Ms. Geerdes, whether a creditor takes legal steps depends on its analysis of each debtor.

Mr. Leuthold said his association’s members served consumers who had already stopped making payments and had no better options. And his members must pledge to inform clients of risks and spell them out in contracts, he said.

David Johnson, senior vice president of ByDesign Financial Solutions, a nonprofit charity in Commerce, Calif., says he advises consumers to avoid companies that charge large fees upfront or through payments.

“It certainly would seem likely that there would be less incentive to push to settle quickly,” Mr. Johnson wrote in an e-mail message. He recommended that consumers look for services that charge after settlement, about 20 percent of the amount of the negotiated reduction in balance.

Desperate consumers may turn to debt settlement, Mr. Mullaney says, because “they usually want to pay their debt” but are also “intrigued with the proposition of getting out of it without the dishonor of declaring bankruptcy and with the prospect of compromising the actual principal that they owe.”

And company employees can be smooth talkers, said Susan Block-Lieb, a law professor at Fordham University and a consumer affairs expert. “You’ve got these really convincing, calm people with a really complicated formula, who are saying, ‘Don’t worry.’ ”

Katherine Taylor, the maiden name of a white-collar worker in Austin, Tex., who did not want to be further identified because she is a supervisor, said she realized last summer that she and her husband would soon be unable to make monthly minimums on their $59,000 in credit card debt. After seeing a television advertisement, Ms. Taylor said she typed “Christian debt settlement” into her computer. “I wanted an agency with high ethics,” she explained.

On the first phone call with one based in Austin, she agreed to let the company take $676 from her bank account for five months, then $416 for the next 13. “I was told that if I stopped making payments and saved up almost $24,000 on my own, in 48 months I would be free and clear and my credit score would improve,” Ms. Taylor said.

Late last year, unable to reach the settlement company by phone and getting constant calls from collectors, Ms. Taylor contacted a local Better Business Bureau office. She was advised to close her bank account immediately and file a complaint.

Offered a partial refund by the service, she is considering her options.

Mr. Mullaney himself was a victim of a debt settlement company. He was determined, he said, to avoid bankruptcy, a black mark for lawyers. But after starting practice in 2003, he said he realized that he would not be able to afford both student loan payments and the minimums on his $33,500 in credit card debt. He searched online for a debt settlement company run by a lawyer, and by phone closely questioned one based in Anaheim, Calif.

As instructed, Mr. Mullaney stopped paying his credit cards, started paying monthly fees and saved aggressively, he recalled. But without warning, three of Mr. Mullaney’s four creditors took legal action. “Finally, the cloud of irrational belief in the concept disappeared, and I realized the scam I’d fallen for,” he said.

On Oct. 17, 2005, the last day before changes in federal bankruptcy law made it harder to obtain a Chapter 7, Mr. Mullaney filed for bankruptcy protection and eliminated his credit card debt. “I’ve found redemption, through using my legal degree and what I’ve gone through, in counseling others who sit before me ashamed and in tears,” he said.

Marc S. Stern, a bankruptcy lawyer in Seattle, said most consumers should not negotiate for themselves. “It’s too emotional, and a lawyer can say things about clients that they never will, like he’s a deadbeat and you’re never going to get any more from him,” Mr. Stern said.

Experts agreed that deals may be struck with many original creditors for 50 to 80 cents on the dollar, while debt buyers, who paid 20 cents or less on the dollar, may settle for a lower amount.

Debt settlement companies are regulated by state attorneys general and the Federal Trade Commission, but they are rarely prosecuted. To improve regulation of this interstate business, the Uniform Law Commission, sponsored by state governments and based in Chicago, is promoting a model law that covers credit counseling and debt management companies. It was in force in four states last year, and an estimated five state legislatures will vote on it this year, said Michael Kerr, the commission’s legislative director.

Mr. Leuthold says his association welcomes regulation but has reservations about the model law, including its volume. “Some say it is long and complicated, 80 pages, and a lot of states don’t want that level of detail,” he said.

Until the states or Congress act, credit card holders are “naked in the world,” said Elizabeth Warren, a law professor at Harvard and a bankruptcy expert. “Unscrupulous debt counselors have built their business models around taking advantage of desperate people.”

Copyright 2008 The New York Times Company. All rights reserved.

Banks Gone Wild

Lexington, Ky.

"I owe about $12,000 in unsecured debt, and my payments just keep going up,” a troubled citizen signing himself T. P. recently informed a personal-finance columnist. He always paid more than the minimum amount due on his credit card bill, but “still the balance never goes down,” T .P. wrote. “Is there any way to get the interest rate down?”

The interest rate that so oppressed T. P.? A towering 29.99 percent. At this rate, the columnist said, if T. P. continued to pay little more than the monthly minimum, it could take him more than 30 years to pay off his balance — even if he never went shopping again.

Trying to fight off a collection agency while paying little or nothing on his credit card debt, another desperate borrower, R. Z., appealed to this same columnist. How could he prevent interest charges and late fees from mounting? He couldn’t, replied the columnist, as long as he legally owed the money.

Consumers like T. P. and R. Z. find themselves caught in the complexities of today’s bankruptcy laws. And their predicament is increasingly common.

Thirty years ago, the unlucky R. Z. would probably have struck many of his acquaintances as something of a deadbeat: Hadn’t he voluntarily run up a debt and then tried to slip out of the deal? T. P., on the other hand, would have received sympathy as the victim of a heartless usurer (if interest rates equal to one-third of the principal had been legal in those days).

But in today’s strange alternative universe of credit card banks, the term “deadbeat” refers not to the improvident borrower but to the solid citizen who prides himself on paying off his balance every month. As anybody with a mailbox knows, credit card issuers make unrelenting efforts to lure accounts from one another as well as to establish new accounts. And what these lenders seek are “revolvers,” people like R. Z. and T. P., who are likely to pay little more than the monthly minimum — and who eventually find themselves in thrall to mushrooming interest payments, abundantly garnished with late fees.

As for the morality involved in lending money at exorbitant rates, the word “usury” itself has taken on a quaint, archaic sound, like “jousting” or “necromancy.” What happened?

In 1978, the United States Supreme Court delivered a landmark decision that freed banks to charge the interest rates allowed in their home states to customers across the country. This decision, at a time of high inflation, unleashed a national credit storm: states scrambled to relax usury laws in order to attract banks, while banks rushed to establish affiliates in states that weakened or abolished such laws. R. Z. and T. P. are the natural products of this unhappy change. One obvious recourse for people like them is to file for bankruptcy. There’s the stigma to consider, of course. But making such a move would allow R. Z. to end the harassment by the collection agency and both men to make fresh starts free of unsecured debts.

Unsurprisingly, in the 25 years since the credit explosion began, personal bankruptcy filings have risen sharply. Bank advocates have argued that this reflected debtors’ increasing abuse of the protections granted by the Bankruptcy Reform Act of 1978. Personal bankruptcies, said the industry, were costing every household a hidden tax of $400 a year, in the form of rising prices and higher interest rates. It mounted a campaign against what banks called an “epidemic” of defaults by debtors.

In 2005, these suffering financial institutions succeeded in securing the adoption of new federal legislation, the marvelously named Bankruptcy Abuse Prevention and Consumer Protection Act. Nobody who favored this bill chose to see that the bankruptcy epidemic had been produced in large measure by the banks, or that the real hidden costs were the usurious interest rates these banks charged borrowers.

Two simple comparisons demonstrate the point: From 1980 to 2004, personal bankruptcy filings increased 443.45 percent, which is certainly impressive. But over the same time, consumer credit debt rose a bit more, by 501.29 percent. In 1980, less than one personal bankruptcy case was filed for each $1 million in consumer credit outstanding; the figure was slightly smaller in 2004.

Bankruptcies tend to rise as amounts of credit rise. No mystery there, and certainly no epidemic. It all suggests that the bankruptcy code was performing remarkably well.

But the banks got what they wanted from Washington. Since the law has been on the books, people like R. Z. and T. P. have continued to receive all kinds of credit offers (no limits there), but they may have a much harder time now fending off disaster through bankruptcy protection.

A group of credit-counseling firms that provide bankruptcy screening — a step the new law requires — report that 97 percent of the clients could not repay any debts at all, and 79 percent sought relief for reasons beyond their control, like job loss and large medical expenses and, notably, rising credit card fees and predatory lending practices.

A boomerang effect has appeared, too. The new law contains a provision forcing many debtors into Chapter 13 compulsory repayment plans. The bill’s backers expected this fresh squeeze on debtors to produce more cash for the banks, but the trend appears to be downward.

In adopting the provision, Congress disregarded the advice of every disinterested group that has looked at the question, including three presidential commissions, the Congressional Budget Office and the Government Accountability Office. It also ignored a past House Judiciary Committee report, which declared that such compulsion might well amount to the imposition of involuntary servitude.

So the lending goes on. People classed as the “working poor,” now beginning to be tapped by the credit card vendors, no doubt constitute a rich supply of coveted potential revolvers — fresh customers for the banks to draw into the credit maze, with its minimums and its unending late fees. In signing the 2005 act, President Bush declared that it would make more credit available to poor people. Unquestionably so. And 30 percent interest was just what they needed, wasn’t it?

Joe Lee is a federal bankruptcy judge. Thomas Parrish is the author of “Roosevelt and Marshall.”

Couple Learn the High Price of Easy Credit

YPSILANTI, Mich. — On a recent evening, Christine Moellering, 40, sorted through the plastic laundry basket where she keeps the family bills, statements and coupons.

“The Sears one is 32.24 percent,” Ms. Moellering said, reading a credit card statement with a balance of $5,955, including $155 in monthly finance charges. The high interest rate took her by surprise. “That’s nice,” she said sarcastically.

Ms. Moellering, and her husband, Mark, 39, earn average salaries for their age (together about $66,000 a year), live in an average-priced home and have an average cost of living. But like many other households these days, they have found that their day-to-day economic life has come to depend not just on how much they earn or spend, but also on how well they shuffle what they owe among a broad array of credit cards, home equity loans and other lines of credit.

Americans spent one in seven of their take-home dollars on debt payments last year, up from one in nine in 1980. Experts say few consumers are able to calculate the true costs of such payments.

Behind closed doors, the decisions families like the Moellerings make about their debt — when to pay it off, when to shuffle it to lower-interest sources and when to let it revolve and build — can determine how much their salaries are worth. Like many others, the Moellerings have run up avoidable penalties and occasionally spent themselves into more debt or higher interest rates, even as they have tried to juggle other balances to bring down their monthly payments.

This spring they allowed a reporter to see how they struggled with these choices. Ms. Moellering’s basket recently included more unwelcome news: $2,693 due on a Visa card through her credit union, including finance charges of $25, and $13,680 on a CashBuilder Elite Visa, including a monthly finance charge of $200.

Their credit card debt came to $22,228, including $380 in monthly finance charges. Interest varied from 12.1 percent to 32.24 percent. The Moellerings also have a mortgage of $93,000 and a home equity loan balance of $68,574, at 8 percent interest.

“We have friends in the same position,” said Ms. Moellering, who earns $30,000 a year as an administrative assistant. “One was off his insurance for a couple weeks and he broke his arm, and they’re out 25 or 30 thousand. We’ve talked to them about it. It doesn’t matter what you do, you always have that credit card debt.”

Just a generation ago, financial profiles like the Moellerings’ would have been unusual. But changes in federal regulations since the 1980s, along with consolidation in the banking industry and changed consumer attitudes toward borrowing and saving, have made credit more widespread, more heavily marketed and more confusing, with offers of more credit — at low rates — extending to even the least reliable risk. In 2006, the industry mailed out nearly 8 billion credit card offers, up from 3.5 billion in 2000.

Credit card debt, less than $8 billion in 1968 (in current dollars), now exceeds $880 billion, more than tripling since 1988, adjusting for inflation, according to the Federal Reserve Bank. Penalty fees alone cost consumers $17.1 billion in 2006 — up from $12.8 billion in 2003, adjusted for inflation, according to R. K. Hammer, a bank card advisory firm. In part because of the debt burden, the consumer savings rate fell below zero percent in 2005 and has stayed there.

At the same time, as banks have moved from fixed interest rates to variable rates, the ability of borrowers like the Moellerings to move balances from one card to another, or from credit cards to lower-interest home equity loans, can have as much impact on their finances as whether they get a raise or trim household expenses, said Greg McBride, senior financial analyst at Bankrate.com. Especially since 2001, Mr. McBride said, as home values have increased and interest rates have dropped, home equity loans have enabled families to carry more debt — to buy more things — at lower cost.

“It’s a whole change in what we consider normal now,” said Vanessa G. Perry, an assistant professor of marketing at the George Washington University School of Business. “Not only has the total amount people borrow increased, but the number of instruments we borrow on has increased. An average family has a mortgage, home equity loan, various credit cards, a car loan, maybe a student loan.”

The growth of easy credit has its upside, helping some families buy a first home or get through a temporary hardship. But the array of loans has become so complicated that many consumers fail to understand the different interest rates, financing charges and penalties they now face, Ms. Perry said.

For the Moellerings, juggling balances and interest rates has enabled them to pay for things they could not otherwise afford, like their 2004 wedding and house renovation, or to eat out occasionally, when “we’ve both had a bad day at work,” Mr. Moellering said. He earns $36,000 a year as a software applications designer.

As foster parents of two children they also receive about $1,200 a month in reimbursement from the State Department of Human Services, which goes toward “food, general living and ballet lessons,” Ms. Moellering said.

When the Moellerings pay a bill late or exceed their credit limit, interest rates have shot up, increasing the monthly cost of transactions and heaping penalty fees on top.

The bills in Ms. Moellering’s basket described an uneven track record of managing balances and interest rates.

On March 27, Mr. Moellering used a debit card rather than a credit card to make nine purchases, ranging from $5.38 to $48, hoping to avoid finance charges. But he miscalculated their checking account balance. Each purchase incurred an overdraft charge of $32, or a total of $288 in penalties, more than the $221.82 cost of the purchases. (After some pleading, the bank, National City, forgave four of the charges, leaving the Moellerings with $160 in penalties, plus interest on both the fees and the principal.)

Every two or three months they send in a payment late, running up a late fee of $30 or more.

Until a court ruling in 1996, most credit cards charged everyone the same fixed rate of interest, around 16 percent, and fees for late payments averaged about $14. But since then, rates have diverged wildly. Late fees typically run $30 to $39.

In their home, with the dishes from a dinner of spaghetti and diced vegetables on the table, the couple discussed their relationship with debt. A 42-inch television, an $800 Christmas gift from Mr. Moellering to his wife, occupied the older child, 4, in the living room. The baby slept.

When the couple met through Yahoo personal ads in 2003, they did not discuss debt. She wrote that she liked snow; he said he looked like Babe Ruth. She had about $6,000 in credit card debt at the time, mostly from paying for books and living expenses after a return to college. She used credit cards rather than applying for lower-interest student loans. “I never tried to get student loans,” Ms. Moellering said. “I was working full time and taking care of my sick mom and trying to go to school, so I never had time, so I just ad hoc’d.”

Their debt escalated when they decided to get married. They paid for rings, a reception, a honeymoon and a new bathroom — about $50,000 in a seven-month stretch.

“In such a short period of time, there’s no way to do it other than credit card debt,” Mr. Moellering said.

He paid for some of the expenses through a home equity loan, and paid contractors with promotional checks that came with low interest for the first year. When money gets low, the Moellerings skip paying credit card companies rather than miss a mortgage payment.

“And if the cat gets sick or something, then suddenly we’re trying to figure out, what kind of card can we use to pay this $500 vet bill,” he said.

In the last two years they have managed to cut their credit card debt by $20,000, Ms. Moellering said, and have built a savings of about $5,000, thanks to a Christmas gift from a relative. Ms. Moellering contributes to her retirement account at work. Both say they could manage better if they only had the time.

“It’s been almost two weeks since we’ve had time to sit down and go over the bills,” Ms. Moellering said. “You can’t do it every day because we both work full time. I’ve got two kids; they want all our attention; they haven’t seen us all day. We’re trying to cook dinner. We have to do the dishes, fold the laundry. We’re exhausted. And on the weekends the kids want our attention, and we want to spend time with them; we don’t want to spend time going through the bills.”

Copyright 2007The New York Times Company