Nonsense and Bankruptcy Exemptions

I've come to realize that my posts are lacking a certain amount of polish and coherence, so I have decided to make an effort to post more often and to make my posts more pithy and generally more intelligent. After all, I can write very well when I put for the effort.

Now, some more on bankruptcy exemptions.

The Illinois Homestead Exemption, or . . .
punishing those who actually try to pay for their homes.

I touched on this topic with my last post. Bankruptcy clients in the current real estate market (read: down the drain and minced in the garbage disposal) either have (a) zero equity or negative equity, or (b) a ton of equity.

Rarely is there a situation, in my experience, were a debtor has, say, $50k in equity. Most often, in those situations, the debtor would have already tapped that with a HELOC or other form of second mortgage. While practical in theory, these "debt consolidation" 2nd mortgages are just a way to eat into home equity while preserving the unsecured lines of credit that debtors horribly mismanaged in the first place and will quickly resume to horribly mismanage.

In Illinois, the homestead exemption is $15,000 for an individual, and $30,000 for a married couple. Federal exemptions are worth $20,200 , and the rest very by state. Some are as high as $100k or even unlimited (Arizona and Texas, respectively).

So, in general, Illinois has dinky exemptions.

As a policy standpoint, these exemptions do not encourage people to build equity in property, since it it easy to lose your home in the event of misfortune. I had a client who had over $100k in equity, but minimal income sufficient only to pay the small mortgage on the property. The debt level was median, between $40k and $75k, with a judicial lien.

If she had been mortgaged to the hilt, we could have filed ch. 7, avoided the judicial lien, and made her life easy as pie. Instead, she's looking at a 100% repayment ch. 13 at over a $1,000 a month (unfeasible and unaffordable). Or she can sell the house and loose that which she struggled long and hard for.

The results are simply not fair and, more importantly, do not serve the purpose of bankruptcy. One's home is one's castle, and, unfortunately in Illinois, your gate is down if you have equity.

Quasi-Obligatory Commentary

From http://www.bloomberg.com/apps/news?pid=20601087&sid=acQvgRoLQmXQ:

"More than 126,000 consumers filed for bankruptcy in the U.S. last month, 34 percent more than in July 2008, the ABI said in its latest report on Aug. 4. The increase came after a 36.5 percent rise in personal bankruptcies nationwide in the first six months, to 675,351, according to the ABI research group, which interprets data collected by the National Bankruptcy Research Center."

and:

"Credit Card Losses

JPMorgan said losses in its Chase credit-card portfolio may be 10 percent next quarter and will be “highly dependent” on unemployment after that. Losses for cards issued by Washington Mutual, which the bank acquired in September, may reach 24 percent by the end of the year, the company said.

JPMorgan’s credit cards lost $672 million, compared with income of $250 million in the second quarter last year. Home- equity charge-offs climbed to $1.3 billion, or 4.61 percent. Prime mortgage defaults rose to $481 million, or 3.07 percent, from $104 million, or 1.08 percent a year earlier."

Too bad the article failes to mention how Chase and most of the other lenders are at least partially, and often majorly, responsible for the bankruptcies themselves. Time and again I get client whose almost sole reason for filing bankruptcy is their credit card rates getting jack to 30%. I have seen debtors who have struggled along for years, through unemployment and famine, after tapping their 401(k)'s and IRA's dry, just to make their minimum payments. Then they watch their minimum payments triple and their interest rates quadruple.

Chase could very well be posting profits, or at least much smaller losses, if it had left the interest rates and minimum payments where they were. Instead, the screw around and drop some more straw on the camel's back, and the next step is a visit to my office.

Thank you Chase; you are one of the best feeders for my services. I love nothing better than adding you to Schedule F with a big fat 5 or 6 figure number in the amount column. You bring it down upon yourself by biting too hard on the teat of the honest but unfortunate debtor.

They even cut my limit and boosted my rate, after I paid off my balance from college. I was using the card for gasoline and whatnot, paying it off every month, and they cut my limit, 6 months after I paid off my $2,000 college indiscretion balance. I was only using it to keep it active and boost my credit score. Their reason: "Not paying bankcards as agreed," despite the fact that my balances are minimal and my monthly payments are quadruple the minimums.

Now? I'll just let it languish with a zero balance until they close it. I'll stick with my Sears Mastercard (they keep bumping my limit) and my credit union credit card (I love my credit union too) - the folks that actually treat me right.

The horrible downside is that, in the next few years, we'll see another bankruptcy reform act, which will further tighten the screws on the already completely-screwed, force more people into nearly impossible Ch. 13 repayment plans (100% of my disposable income for five years? God forbid I need a new alternator), all on the justification that too many debtors are filing bankruptcy after Chase (and others) gave them too much credit, and then turned around and screwed them by jacking the rates and payments.