Nasty Phone Call From IRS Auditor: Could It Be a Hoax?

Consumer Complaint iStock_000004051547XSmallASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I received the same threatening message three separate times on my home answering machine. The voice is strongly accented, loud, threatening, cruel, harsh, nasty, condemning, harassing, and then oddly, at the very end, almost kind and pleasant. 

Here is the transcription – the punctuation is mine: 

“Hi this is Melwyn Thatcher (name unclear due to accent) calling from the tax audit department of the Internal Revenue Service. The nature behind this voicemail is to make you aware about a situation. We have received a legal petition notice against your name concerning an illegal tax evasion, a tax fraud. Be aware that we are taking the matter to the federal (unclear word) courthouse and we’re about to issue a warrant for your arrest. But before we go ahead and do anything like that, if you need any further details relating to this case you can call us back on our call back number 888-393-2421. I repeat 888-393-2421. Again this is Melwyn. You have a great day here. Thank you very much.”

By the way, I do not owe the IRS any money. In fact, I am totally debt free. Is this a hoax, or something I should be worried about? 

Very truly yours, 


Dear Anita,

Should you be worried? Absolutely not.

I am so glad you didn’t return the phone call. If you had, THAT would be worrisome.

I have no doubt that many serious crimes are involved in the transmission of that message. You and probably thousands of other people are the intended victims of an outrageous consumer fraud scam. In fact, see IRS warns of pervasive phone scam.

Many of these fraudsters operate out of telephone boiler rooms in Eastern Europe and Southern Asia. Some are members of criminal gangs, others are funneling the money to fund international terrorism.

If you were to reply to this type of message, you would be badgered to pay a fictitious debt. Even if you refused to pay anything, the fraudster might still trick you into providing personal financial information and then later use this information to steal your identity. (Learn how to avoid identity theft.)

Some people do fall for these types of scam phone calls. Perhaps they have a guilty conscience about unfiled tax returns, or an old bank debt they assume has prompted the call.

You will probably receive more calls from this outfit.  Like all telemarketers, they are working their phone list. The bottom line is this:  Don’t call them back. If you answer when they call you, just hang up.

The Federal Trade Commission also recommends that you report the call to them using the FTC Complaint Assistant at (Add “IRS Telephone Scam” to the comments of your complaint.)


Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Dwyane Wade in Foreclosure?

2007 ESPY Awards - ArrivalsCould Dwyane Wade, worth approximately $100 million, really be in foreclosure? According to recent news reports, yes.  You may be thinking: What? Sure we hear about millionaire celebrities who live extravagant lifestyles only to end up in bankruptcy or lose a $25 million dollar home to foreclosure. But Wade is still making $30 million a year and the home in question is worth only $1.2 million (a pretty modest price tag for his income level).

So what gives?  Read a bit further into the story and you’ll get the explanation, which can be collapsed into one word — divorce. Wade’s situation is a lesson to anyone deciding what to do with the family home during divorce. Luckily for wealthy Wade, this situation is probably little more than a public relations fiasco for him. For the rest of us mortals who might be in a similar situation, it is a big deal and can be financially devastating.

Wade’s Property Settlement in His Divorce

Wade and his ex-wife, Siohvaughn Funchesreached a property settlement in their divorce last summer. She got the house in New Holland, Illinois. According to TMZ, Wade’s name was removed from the title to the home. But it sounds like his name is still on the home loan documents.

This is not unusual. When a home is awarded to one party in a divorce, it’s a fairly simple matter to drop one spouse’s name off the title to the home. Not so for the loan documents. Usually, the divorce judgment or settlement will state that the spouse who gets the home is solely responsible for making the mortgage payments. Even so, the parties cannot drop one spouse’s name from the loan documents. It’s up to the bank to do that. Because the bank has no incentive to remove one party’s responsibility for paying the mortgage, it rarely (if ever) does. Think about it. Why would the bank agree to give Wade a free pass on his liability for the home loan? He’s the one with the big bucks.

Wade’s Beef Is With His Ex, Not the Bank

According to the news reports, Funches stopped making the mortgage payments on the $1.2 million dollar home. She is now in default to the tune of $225,000. The bank started foreclosure proceedings against Wade and Funches.  But because Wade is still on the loan documents (this blog assumes that he is; it’s possible, but unlikely, that he’s not), his gripe is against Funches, not the bank.

His remedy is to go after Funches for any damages he sustains.  If Wade’s settlement agreement was like most, it probably has an indemnification clause in which Funches agrees to pay for any damages resulting from foreclosure or similar actions. If it does, Wade can bypass  a few steps before he tries to collect against Funches.

And what damages might Wade incur?

Wade Might Be on the Hook for a Deficiency After the Foreclosure

I’m sure Wade could care less that his ex-wife can no longer live in the home. But should he worry that the bank can get a judgment for a deficiency in the foreclosure action?  It depends on how much equity is in the home.

If you lose your home to foreclosure in Illinois, the lender can also get a deficiency as part of the foreclosure judgment. (Learn more in Deficiency Judgments After Foreclosure in Illinois.)  A deficiency is the difference between the unpaid loan balance and the amount the home sells for at the foreclosure sale. If your home is underwater, you’ll owe a deficiency. If you have lots of equity in the home (more than the unpaid loan balance), then you’ll be safe. (This is true in many other states. To learn about your state’s deficiency after foreclosure law, see Deficiency After Foreclosure in Your State.)

Example. The home sells for $200,000. You still owed $250,000 on the mortgage. The deficiency is $50,000.

So, if the unpaid balance on Wade’s mortgage is more than the equity in the home, the bank can get a deficiency judgment against him and Funches. Once the bank has the judgment, it can use various collection measures to get the money if Wade doesn’t voluntarily pay up. But let’s be honest. If Wade ends up owing even the full $225,000 (or a bit more once you wrap in foreclosure costs and attorney’s fees), that’s a drop in the bucket for him.

If Wade goes after Funches to recover any amounts he pays, he probably can’t touch the $25,000 she gets from him in support, but if there’s anything left of the $5 million settlement, he might be able to get that.

What About Wade’s Credit?

Having a foreclosure on your credit report is never a good thing. In Wade’s case, however, I doubt this foreclosure is going to affect his ability to get credit or take out loans in the future. Plus, since he’s worth $100 million, I’m not sure he needs credit like the rest of us do.

The Lesson for the Rest of Us

Unfortunately, this scenario is not unique to celebrities and their ex-spouses.  And unlike Dwyane Wade, most people that end up in his situation don’t have $100 million lying around to stave off a foreclosure or pay off a deficiency judgment.

So what does that mean?  If your ex defaults on the mortgage in the home that she or he is living in, you will be named in the foreclosure action. That means it goes on your credit report and if there’s a deficiency judgment, you’ll be on the hook for that too.  You can go after your ex to reimburse you for any amounts you pay (or any amount that get taken by the bank from your wages or bank account). But whether your ex has anything you can collect against is another matter.

How to Avoid this Situation?

One way to avoid this nightmare is to require that your spouse, as part of the divorce agreement, refinance the loan under his or her name only. Unfortunately though, because divorce and financial stress go hand in hand, often divorcing parties aren’t able to qualify for a new home loan on their own.

Another simple option is to sell the home. The parties divide up the debt and/or equity however they agree, and walk away.

The bottom line when it comes to divvying up the family home: Make sure you understand all of the eventual consequences if your spouse stops paying the mortgage. (To get informed about your options, see Divorce and the Family Home.)

35% of U.S. Consumers Have Delinquent Debt

debt & foreclosure helpOn July 30, 2014 the Urban Institute released the results of its study, Delinquent Debt in America. The alarming numbers revealed that among adults who have a credit file:

  • 35% of U.S. consumers (77 million) have a debt or unpaid bill that has been sent to collections, and
  • 5% of U.S. consumers have a recent debt or bill that is more than 30 days late.

These numbers reflect nonmortgage debt only – credit cards, auto loans, student loans, and medical bills. The Urban Institute gleaned the information from 2013 data from one of the nationwide credit reporting agencies.

What Is a Debt Past Due?

Debt past due (or unpaid debts or bills) are those debts that creditors have reported to the credit reporting agencies as being more than 30 days late. Among those with debts past due, the average amount needed to become current is $2,258.

What Is a Debt in Collections?

The Urban Institute defines a “debt in collection” as one that has been charged off by a creditor (which generally means it’s more than 180 days delinquent). Some of these debts can be quite old since they remain on a credit report for seven years. The average total debt in collections per person is $5,178. The report noted that some people are likely unaware that they have old debts listed on their credit reports as charged off or in collection. (This underscores the importance of checking your credit report regularly and fixing outdated information or errors. To learn how, see Nolo’s Cleaning Up Your Credit Report.)

Actual Numbers of People in Debt Are Likely Even Higher

The percentage of those in debt is probably even higher than these figures because the statistics do not take into account:

  • adults who don’t have a credit file (these are low-income people who don’t have access to traditional credit, but often have other types of delinquent debts or loans outside the financial mainstream)
  • those who are behind in, or are struggling with, mortgage debt, and
  • people who owe money to friends or family.

Delinquent Debt by Region

The study looked at these statistics in various regions of the country. Check out the report’s map that records the concentration of Americans in debt across the nation.  The South had the largest percentage of residents in debt, but the study points out that you see more variances in the number of adults with delinquent debt as you look at smaller and smaller geographical areas (rather than large regions of the country).

Any Relief in the Future?

Not likely. That a large number of people in this country are struggling with debt is no surprise, although the actual percentage cited in the study is alarming. The reasons for this level of debt are many. Sure, some people could stand to control their spending a bit and live within their means. But more likely, for the vast majority of people with unpaid bills, merely tightening their belts will not solve their financial troubles.

Years of high levels of unemployment and underemployment, the housing bust, the shrinking middle class, the fact that wages have not quite kept pace with inflation, and the higher cost of college and graduate schools, are just a few of the issues facing us and our country. Unfortunately, these hard-to-solve problems mean that debt will be the reality for many residents of the U.S. for the foreseeable future.

Senator Warren Takes Private Student Loan Industry to Task

Since 2005, private student loan lenders have enjoyed a special privilege in bankruptcy – their loans are not automatically discharged (eliminated) in bankruptcy. This sets them apart from credit card lenders, medical providers, and most other lenders of unsecured loans and credit. This special privilege puts them on par with entities such as the Department of Education and parents who are owed child support. And, believe it or not, it even gives them an advantage over the IRS. You can get rid of certain older income tax debts in bankruptcy, whereas your private student loans can be as old as the hills and it doesn’t matter for bankruptcy. (You can discharge student loans in bankruptcy if you prove undue hardship, a difficult standard to meet. It hasn’t helped many student loan borrowers over the years.)

There doesn’t seem to be any good reason for the private student loan industry’s special privilege (more on that in a previous blog post), other than the fact that banks form a powerful lobby. And consumer advocates have been vehemently pointing this out in recent years as the student loan debt crisis heightens in our country (student loan debt has surpassed credit card debt in the U.S. – no easy feat).

Even Congress is taking notice – some legislators are pushing to take away the special privilege that private student loan creditors enjoy in bankruptcy, and instead treat them like other unsecured creditors, such as credit card companies.

In a Senate Banking Committee hearing yesterday on Capitol Hill, Senator Elizabeth Warren did a great job of highlighting just how little banks do to help private student loan borrowers who are struggling to repay their debt (unlike the federal government, which provides an array of flexible repayment programs, loan forgiveness, and cancellation options for federal student loans). She recounted the story of a couple who takes care of their three grandchildren because the children’s mother (the couple’s daughter) died. The couple cosigned a private student loan with their now-deceased daughter, and is now struggling to raise three little children and make payments on the $100,000 loan. They tried to get some help or relief from the bank, but not surprisingly (at least to any of you who has a private student loan), they hit a brick wall. No loan forgiveness even though the student borrower is dead. No loan modification to stretch out payments over time, reduce the interest rate, or offer some other way for them to afford the payments. Nothing.

Senator Warren’s spirited exchange with Richard Hunt, President and CEO of the Consumer Bankers Association, is worth a listen – it exemplifies how the private student loan industry does nothing to help struggling borrowers while at the same time enjoys an immense advantage in bankruptcy.  (Listen to the exchange on YouTube: As Mr. Hunt tries to assure the committee that there are options for struggling borrowers, Senator Warren refuses to let him off the hook. The colloquy highlights what anyone with a private student loan already knows – those assurances are meaningless. Senator Warren’s questioning makes clear that there is one fair option – removing the private student loan industry’s special treatment in bankruptcy.

Nolo Publishes 50-State Series on Redeeming Your Home After Foreclosure

home on lifeboatAre you in foreclosure or did you recently lose your home to foreclosure? In many states, you have one last chance to get your house back — called redemption. When you redeem your home, you essentially repurchase your home from the person or entity that bought the home at foreclosure. If your state gives you the right to redeem, the purchaser must give you the home back if you pay the correct amount within the redemption time period.

How Does Redemption Work?

To redeem your home, you must:

  • act within the allotted time period (which varies by state), and
  • repay the amount that the purchaser paid at the foreclosure sale, plus certain costs and other fees. In some states you must also reimburse the purchaser for any repairs or maintenance done to the home.

The costs, fees, and other “extras” that you must pay vary by state.

Do You Always Get the Right to Redeem?

No. In some states, once the house is sold at foreclosure, you are out of luck. And in some states other factors affect whether you can redeem — for example, whether the foreclosure was judicial or nonjudicial or whether the loan documents waived the right to redeem.

How Much Time Do You Get to Redeem?

‘The time period in which you must redeem also varies widely by state. You might get 60 days or you might get a whole year.  Often the time period is different depending on the type of foreclosure process used (judicial v. nonjudicial), whether you’ve abandoned the home, or whether the property is agricultural.

How to Find the Redemption Law in Your State?

Nolo recently published a series of articles on whether you can redeem your home after foreclosure. The series covers each of the 50 states, plus the District of Columbia. In your state’s redemption article, you’ll find out whether you have the right to redeem, the redemption time period, the amount you’ll have to pay, any special procedures you must follow, how to find your state redemption statute, and more.

To find your state’s redemption after foreclosure article, go to Nolo’s Getting Your Home Back After Foreclosure topic page and click on your state. You can also find your state’s redemption article, plus other foreclosure articles specific to your state on Nolo’s State Foreclosure Laws topic page (again, click on your state).

Other Options to Get Your Home Back

In every state, you redeem your home before the foreclosure sale (this is called the equitable right of redemption). And you usually have other options available to save your home before the foreclosure sale, many of which are better than redemption. For example, you might be able to reinstate the mortgage by paying past-due amounts plus costs. Or you could try to work out a loan modification, forbearance agreement, or repayment plan with your lender. To learn about your options, see Nolo’s Alternatives to Foreclosure topic page.

Do I Have to List a Debt to My Mom in My Bankruptcy?

Daughter and her upset mother having financial problemsASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am getting ready to file bankruptcy and am getting conflicting advice about whether I have to list a debt I owe to my mother. 

Over the past six years I have borrowed a total of $50,000 from my mother. We never signed anything, but she expects to be paid back if I am ever able to do so. Beyond that, she has not attached any other conditions. 

My hair stylist, who filed bankruptcy, says I only have to list the debts I can’t pay. I have consulted with two lawyers. One says I must list every debt, including the money I owe my mother. The other says I should list my mother’s debt, but if I don’t, no one will ever know. 

I’m sure you get this question all the time, but it’s a big issue for me. If I list my mother as a creditor, it might appear like I don’t trust her, and it will hurt her feelings. What should I do? 



Dear R.M.,

It’s an excellent question and you are right – I get it all the time. I have probably answered it 30,000 times already will likely answer it another 20,000 times before I go up to the big bankruptcy court in the sky.

The short answer is that you are required to list all of your debts when you file for bankruptcy.

You Must List All Debts in Bankruptcy

You said you “borrowed” money from your mother. That means it’s a debt. When you file for bankruptcy, you must list all of your debts on your bankruptcy papers (called the petition and schedules). Contrary to your hair stylist’s understanding of the law, your bankruptcy schedule of creditors is not a wish list of the debts you want to eliminate. Rather, your bankruptcy papers are a financial statement, and the law requires that they be accurate. If the court finds that your schedules are not reliable or were prepared with no regard to accuracy, your case could be denied.

Case in point: I recently represented a creditor in a Chapter 13 bankruptcy case. I was successful in persuading the court to convert the case to Chapter 7, which is an extreme rarity, by proving that the debtor knowingly submitted materially false bankruptcy schedules. That debtor is now going to lose his house in a forced sale by the Chapter 7 trustee, and my client is going to get paid.

Strategies for Facing Your Mother

That said, I’ll give you some practical strategies that may allow you to do the right thing and prevent hurt feelings and embarrassment.

Let’s face it. Your mom already knows about your money troubles. Your consideration of bankruptcy should be no surprise to her. In fact, she may actually be glad to have you discharge your debts in bankruptcy instead of asking her to pay them.

You may feel better if you talk to mom, and “fess up.” You can explain that you are legally required to list all of your debts, and that the failure to do so can have serious consequences. You can also tell mom that the law allows you to repay debts after bankruptcy.

Your Bankruptcy Might Provide Your Mom With a Tax Benefit

Now, get this. Your mom might actually benefit if you file bankruptcy – it may make her eligible for tax relief by demonstrating that your debt is “uncollectable.”

Here’s how this works. If the debt is discharged in your bankruptcy, she will have what the IRS calls “absolute proof of loss.” In other words, it establishes that she can’t ever collect the debt. See, IRS Publication Topic 453 – Bad Debt DeductionNormally, your mother would have to sue you and make reasonable efforts to force you to pay before deducting your debt as a “bad debt.” But having your debt discharged in bankruptcy allows her to skip those steps. She should speak to a tax advisor to determine if she is eligible for this tax deduction.

One last point: Please tell your stylist to stick to hair, and stop handing out legal advice.


Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Worried About Losing Your Wedding Ring or Other Jewelry If You File for Bankruptcy?

ringsMost people who file for Chapter 7 bankruptcy don’t have a lot of expensive jewelry. But many own a wedding or engagement ring, or perhaps another special jewelry item, like great grandma’s ruby ring or grandpa’s cufflinks. And while bankruptcy is often fraught with more pressing concerns (Will I lose my home? Can I get that debt collector to stop hounding me?  What about that huge tax bill?), the possibility of losing your wedding ring, heirloom jewelry, or even just a special watch, necklace, bracelet, or pair of earrings can add more mental stress to the process.

Nolo’s New 50-State Series on Your Jewelry in Bankruptcy

So what does happen to those jewelry items when you file for Chapter 7 bankruptcy? As you’ll see below, the answer depends on where you live (or more accurately, which state bankruptcy exemptions you can use).  We outline some of the common ways that states allow you to keep some, or all, of your jewelry. But even more helpful is Nolo’s recently published 50-state (plus the District of Columbia) series on what happens to jewelry in your state.

Exemptions and Jewelry in Bankruptcy

In Chapter 7 bankruptcy you must give up certain items of property. The bankruptcy trustee sells this property and uses the proceeds to repay (at least in part) your unsecured creditors.

Not all of your property is up for grabs, however. (In fact, most Chapter 7 bankruptcy filers give up little or no property.) Each state plus the District of Columbia has enacted laws that protect certain types of property. These laws are called exemptions. Some property is exempt no matter what the value, and other property is exempt only up to a dollar amount. The idea behind exemptions is that someone filing for bankruptcy should not be stripped of basic things needed for living – like shelter, clothing, furniture, a car, and the like. (Learn more about how bankruptcy exemptions work.)

Some states allow you to choose between a set of state exemptions and the federal bankruptcy exemptions. Others only allow you to use state exemptions.  (Find out which bankruptcy exemptions you can use.)

Common Exemptions That You Can Use to Protect Jewelry

The exemptions that are available to you vary by state. Below are some of the types of exemptions that your state might have that you can use to protect jewelry.

Wedding and anniversary ring exemption. Many states allow you to keep wedding and engagement rings, no matter their value. Others put a dollar limit on your wedding ring. Still others don’t have a special exemption for wedding rings.

Jewelry exemption. Some states have a specific exemption that allows you to exempt jewelry up to a certain dollar amount. Some states can be quite generous in this exemption.

Heirloom exemption. Some states have an exemption for family heirlooms – sometimes to an unlimited value and sometimes up to a certain dollar amount. You may be able to use an heirloom exemption to keep jewelry that has been passed down to you from family members.

Wearing apparel exemption. Many states specifically state that you can keep your wearing apparel, often to an unlimited value. Some state bankruptcy courts have ruled that a debtor can exempt a moderately-priced watch, cufflinks, or other modest jewelry item under the wearing apparel exemption.

Wildcard exemption. A wildcard exemption allows you to apply a certain dollar amount to any type of property. If your state has a wildcard exemption (such exemptions can range from as little as $200 to as much as $25,000), you most likely can apply some or all of it to your jewelry.

Find the Jewelry Exemptions in Your State

To find the specific exemptions that relate to jewelry in your state, go to Nolo’s State Bankruptcy Information page and choose the link to your state. You’ll see a list of articles related to bankruptcy in your state, including an article on keeping jewelry.

Maryland Banks Have 3 Years to Sue Foreclosed Homeowners, Not 12

Lady justice on top of a snailThe Maryland legislature just significantly shortened the time period in which banks can sue foreclosed homeowners for a deficiency. Under a loophole in the old law, banks often had 12 years to pursue foreclosure homeowners for unpaid mortgage debt. Starting July 1, 2014, they’ll  have to do it within three years.

What Is a Deficiency After Foreclosure?

If you lose your home through foreclosure in Maryland, it’s very possible that the foreclosure sale proceeds won’t be sufficient to cover the mortgage debt owed.

Example. Say your home, in the current market, is worth $200,000. But when you bought it ten years ago, it was worth much more. You still owe $250,000 to your mortgage lender. If the home is sold after foreclosure, and the price fetched is $200,000, you’ll still owe the lender $50,000 in mortgage debt. This is called a deficiency.

Some states don’t allow mortgage lenders to go after foreclosed homeowners for a deficiency. But in Maryland, the lender can sue you for a deficiency. Learn more about deficiency judgments after foreclosure in Maryland.

Statute of Limitations for Deficiency Actions in Maryland

The statute of limitations is the time period in which you must bring a lawsuit. If you don’t sue within the statute of limitations, you are barred from suing in the future.

Maryland has a specific statute of limitations law that applies to deficiency judgments after foreclosure. Under that law, the bank has three years from the foreclosure to file a lawsuit to collect the deficiency. But there’s a loophole in another part of Maryland’s statutes. A different law states that a creditor can pursue a deficiency based on a promissory note as long as it does so within 12 years.

The Maryland legislature sealed that loophole. The new law, which will become effective on July 1, 2014, specifically states that the 12-year statute of limitations for promissory notes does not apply to a deficiency based on a deed of trust, mortgage, or promissory note for a residential home. The three-year statute of limitations, therefore, will apply.

Getting Rid of Private Student Loans in Bankruptcy: Will Congress Change the Law?

Processed by: Helicon Filter;A bill that would allow people to wipe out private student loans in bankruptcy might be gaining momentum in Congress.  Although the Private Student Loan Bankruptcy Fairness Act of 2013 (H.R. 532) has been kicking around since January 2013, recent activity indicates that some representatives in Congress are still interested in leveling the playing field between private student loan lenders and borrowers. But unless the bill becomes law, the private student loan industry will continue to have their cake, and eat it too.

The History of Private Student Loans in Bankruptcy

Before 2005, bankruptcy law treated private student loans just like other unsecured debt such as credit card debt and medical bills. This meant that if you filed for bankruptcy, in most cases you could discharge all of your private student loan debt. (There were a few exceptions, for example if you engaged in fraud.)

That all changed with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. In one fell swoop, Congress lumped private student loans together with federal student loans. That means that if you file for bankruptcy today, you can only discharge private student loans if you prove that repaying the debt would cause you an undue hardship. This is a very difficult standard to meet. (Learn more about the undue hardship test for student loans.)

Why Private and Federal Student Loans Should Not Be Lumped Together

Federal student loans and private student loans are very different. If you apply for a federal student loan, the government does not take into account your credit history or ability to repay the loan (with one exception – you cannot get a federal PLUS loan if you have an adverse credit history). Nor do those factors affect your interest rate. Because interest rates are capped for federal loans, even if you are a very poor credit risk, the government cannot assess more than the capped rate. Interest rates for federal student loans are often much lower than the average interest rate attached to private student loans.

Private student loan lenders, in contrast, function like other unsecured creditors. Like credit card companies, private student loan lenders can choose to lend to you, or not. If you have bad credit, they’ll hedge their risk by charging you a very high interest rate.

Federal and private student loans are different when it comes to repayment as well. Borrowers of federal loans can avail themselves of a number of flexible repayment plans. These programs allow borrowers to stretch out payments, reduce monthly payments to an amount based on income, wipe out portions of debt by working in certain fields, and more. In some cases, borrowers can pay little to nothing for many years, and then have the remaining debt forgiven. (Learn more about the various repayment programs for federal student loans.)

If you have private student loans, none of these programs are available to you. If you are struggling to make monthly payments, you can try to work something out with your lender. But there’s nothing that will force the lender to negotiate with you. If you want to reduce your payment, stretch out payments, get a lower interest rate, or the like – good luck.

It doesn’t seem fair that private student loan lenders get special treatment in bankruptcy. We don’t provide the same privileges to other lenders, like car loan lenders or credit card companies. So private student loan lenders can charge extremely high interest rates, refuse to lend to people with poor credit histories, require cosigners, but still get protection from discharge in bankruptcy. Essentially, they can have their cake and eat it too

Is Congress Catching On?

In 2013 representative Cohen, along with 14 other congress members, introduced the Private Student Loan Bankruptcy Fairness Act (H.R. 532). HR 532 would remove the special treatment that private student loans currently get in bankruptcy, and put them on the same level as other unsecured creditors. If this bill became law, bankruptcy filers would be able to discharge private student loan debt in bankruptcy.

Sounds great. But unfortunately, according to, the bill has a 2% chance of becoming law (ouch).  Which is not surprising, given the track record of Congress of late. Plus, it’s been sitting around since January of 2013.

A Glimmer of Hope?

It may be too early to give up though. In March (in large part due to some effective pushing by members of the National Association of Consumer Bankruptcy Attorneys) an additional five representatives joined as cosponsors (bringing the tally to 39 in all).  Does this mean the bill is gaining momentum? Let’s hope so.

Banks Avoiding New California Foreclosure Protections?

FinalNoticeIStockAlmost a year and a half ago California’s Homeowner Bill of Rights went into effect. HBOR, as it’s often called, provides more protections to California homeowners in foreclosure. The goal of the law is to prevent some of the mortgage servicer abuses that plagued homeowners in previous years. But according to recent statistics from RealtyTrac, some banks are dealing with the new protections in HBOR by avoiding them altogether.

The California Homeowners’ Bill of Rights

HBOR, which became effective on January 1, 2013, requires banks and mortgage servicers to follow some new rules in nonjudicial foreclosures. (The nonjudical part is key – more on that later.)  A few highlights:

No dual tracking. If the homeowner submits a loan modification application, the servicer cannot start or continue with foreclosure until it’s made a decision on the application. Even if it denies the application, it must wait to foreclose until the appeal deadline has passed.

Single point of contact. Mortgage servicers must assign homeowners who are in foreclosure or seeking a loan modification with a single point of content – one person or team of people who have knowledge about the homeowner’s file and are responsible for the flow of information between the homeowner and servicer decision-makers.

Penalties and damages for violations . If a servicer files unverified documents (the practice of “robosigning” which was a major problem a few years ago), it may be on the hook for a $7,500 civil penalty. And if it violates HBOR, the homeowner can halt the foreclosure, or if it’s already gone through, sue for damages. These rules create more work for the mortgage servicers, slow the process down, and expose the lender to potential liability for missteps. (Learn more about the new requirements of HBOR for California foreclosures.)

Judicial v Nonjudicial Foreclosures in California

Here’s the key to the banks’ recent “workaround” when it comes to HBOR. HBOR rules only apply to nonjudicial foreclosures in California. In a nonjudicial foreclosure, the bank can foreclose on the homeowner without going through the courts. In contrast, in a judicial foreclosure, the bank must file a foreclosure lawsuit in court, follow the required litigation procedures, and get a court judgment before it can sell the home.

Judicial Foreclosures Have Spiked

In the past, most banks in California used the nonjudicial foreclosure process – it was easier and faster.  But not so in recent months.  According to RealtyTrac, in the first three months of 2013, banks filed just one nonjudicial foreclosure in California. Compare that to one year later (after HBOR had been kicking around):  in the first three months of 2014, banks filed 1,396 judicial foreclosures.  This is out of a total of 20,228 foreclosure starts during the same period. So while the majority of new foreclosure cases are still nonjudicial, the number of judicial foreclosures has certainly spiked to unprecedented numbers for California.

The judicial foreclosure process takes longer, but some mortgage lenders and servicers feel that avoiding the new HBOR requirements and eliminating the uncertainty of liability for civil penalties and economic damages is worth the extra time.