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I Guess Bankrutpcy Attorneys Are Debt Relief Agencies Again -- But How Much Does It Matter?

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 started requiring certain people and entities to disclose to consumers in looking to file bankruptcy that they are a "Debt Relief Agency", and to instruct potential bankruptcy filers not do to do things such as not to incur more debt before filing.  See, 11 U.S.C. §§ 526(a)(4) and 528(a)(4) and (b)(2).  Since this time bankruptcy attorneys across the nation have been contesting the fact that they classified as a "debt relief agency" under the these code provisions, because these provisions do not necessarily include the direct application of "lawyer" or "attorney".  They have also, been disputing that the law can constitutionally restrict them from advising their clients to incure new debt, because in some situaitons involving the mortgage crises, this might be benefical.

The matter is important to consumer bankruptcy attorneys on an emotional, practical, and legal level.  On an emotional level, most attorneys do not believe they competed to get into law school, lived through that grind, and pass an impossible bar exam just to have bare the mark that compares it to other fly by night organizations.

On a practical matter, debt relief agencies have a duty to provide certain disclosures to debtors within a short period after meeting with them.  This does not sound onerous on its face, but most consumer bankruptcy attorneys are kind enough to offer most people free evaluations when the new law places terrible restrictions on them already concerning these services.  It literally takes hours of their time, already discouraging attorneys to practice in the area.  Also, many attorneys are nice enough to talk to consumers over the telephone.  This puts the attorney at risk of not being able to provide these disclosures.

On a legal level, bankruptcy attorneys do not believe that Congress should be allowed to prohibit them from advising their clients in ways that might be financially beneficial to the client, as the new Code provisions do.

Then, of course, there is the whole issue of the question itself.  If an attorney does not know if the provision applies to him or her, how does he or she know to try and comply with it.  So, attorneys have been racing around the country trying to get this issue before bankruptcy courts and district courts to get some degree of clarification.  Needless, to say these decisions have been mixed, at best, leaving some attorneys practicing in a particular court, not having to comply, and those in another court having to comply.

This whole discussion is predicate to a decision of first impression being handed down by one of the United States Courts of Appeal, which states that attorneys are debt relief agencies and must comply with those disclosure provisions, but striking down that part of the law as unconstitutional to prohibits attorneys from advising their client as to incurring debt.  In effect, the 8th Circuit splits the baby.

In Milavetz v. United States of America, the 8th Circuit Court of Appeals found that the new term, "debt relief agency" as defined in 11 U.S.C. § 101(12A), is not ambiguous.  Holding with a majority of the courts that have ruled on this matter, including the Texas case, Hersh v. United States, 347 B.R. 19 (N.D. Tex. 2006), "constitutional avoidance" does not apply in this as to the "debt relief agency".  The Court of Appeals defined constitutional avoidance as "where an otherwise acceptable construction of a statute would raises serious constitutional problems, the Cour will construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress".  Thus, if interpreting "debt relief agency" to include attorneys would raise constitutional problems, the Court would look for another interpretation.

Ultimately, the Court found that "debt relief agency" includes attorneys because they were not expressly excluded from this group under 11 U.S.C. § 526(d)(2), and because the limited congressional history specifically discussed this provision in terms of "professional standards for attorneys".  The Court also found that providing this disclaimer is does not violate the constitution guarnatees of free speech.

This being the case, the 8th Circuit had to determine if the prohibition restricting attorneys from discussing with clients the possibility of incurring new debt was overly broad and thus unconstitutional.  The 8th Circuit found it was.

The Court ruled that § 526(a)(4)'s plain language an attorney is prohibited from providing this beneficial advice—even if the advice could help the assisted person avoid filing for bankruptcy altogether. For instance, it may be in the assisted person's best interest to refinance a home mortgage in contemplation of bankruptcy to lower the mortgage payments. This could free up additional funds to pay off other debts and avoid the need for filing bankruptcy all together.  The Court found that Incurring these types of additional secured debt, which would often survive or could be reaffirmed by the debtor, may be in the debtor's best interest without harming the creditors.

The end result is that, at least in the 8th Circuit, and probably around the country, bankruptcy attorneys are going to have to use the "debt relief agency" moniker and provide certain minimal disclosures, but § 526(a)(4) is no more, and the government cannot tell you not to provide beneficial information to your clients.

(Pictured is the Hon. Lavenski R. Smith who wrote the opinion).

The Housing Market Could Totally Collapse

According to Fortune nearly half of all of the country's outstanding home loan debt is owned by or guaranteed by either Fannie Mae or Freddie Mac.  $5 trillion dollars worth of mortgages, and these two government-sponsored enterprises are in serious financial shape and could fail.

The problems with the two agencies are already causing a loss of confidence with investors, and it is making housing loans harder to come by.

The two companies are hybrids or sort.  Fannie Mae was created by Congress in 1938 and Freddie Mac was created by Congress in 1970.  The mandate for both is to maintain a market for mortgages by buying loans from banks, repackaging them as bonds, and selling those securities to investors with a guarantee that they will be paid. This makes lending more tempting for banks because Fannie and Freddie take on risks like missed payments, defaults and swings in interest rates.  However, the companies are also publicly traded, with the usual mandate of trying to maximize profits for shareholders.  Their efforts involves risk, and as quasi-government programs there is an implicit guarantee that the feds wouldn't let them fail.  As a result, the market and rating agencies have always treated these two as bulletproof.

Each company has borrowed billions directly from the United States Treasury.  Because of the government involvement they have had  a AAA credit rating and could borrow at low rates, which is a benefit they need in order to loan money.  As a result, they have piled on risks without a capital cushion to cover it.  It has not help that like Enron and other companies Fannie Mae has been found to have overstated its earnings and Freddie Mac has been found to have overstated its profits.  Their stock value has recently fallen by 47%.

The question is if these two giants start to founder, how much will it cost the government to bail them out, and whether they are bailed out or not, how much of the surrounding economy will the two take with them if they fail.

It is interesting to talk about and speculate about these issues, but the truth of the matter is that these events would impact real people.  It will undoubtedly lead to more ordinary people needing to file bankruptcy to save their homes.  If the companies sell off debt or obligations, it will lead to harsher collection activity.  This will undoubtedly lead to automatic stay and discharge injunction violations.  So, it is a very real problem.

Global Inflation Is Rising, Rising, Rising

Inflation is a bad, bad thing.  It hurts most everyone.  As gas prices, food prices and the prices for essential rise uncontrollably, people and companies simply cannot keep up with the market pressures.  People or consumers have to go further in debt, more debt does not get paid, more people are forced into bankruptcy, and then companies and creditors are squeezed.  They immediately get more aggressive, more strident, more litigious.  Operations are set in motion to collect, collect, collect, and everything just appears to spiral out of control.  Once they get their organizations headed in a particular direction, as we know, creditors and companies cannot seem to turn the system off or train it to make distinctions.  The automatic stay and discharge injunctions will be violated.

According to a report by HuffPo there is currently no where to hide from the bogeyman that is inflation.  Prices in one in four countries, many of them in emerging markets, are accelerating at a double-digit pace, which puts them at least two and a half times the 4 percent annual U.S. headline inflation rate, according to new research from Morgan Stanley.  With this, the U.S. economy has slowed to nearly a standstill in the last year because of the mounting inflation and the collapse in the housing and mortgage markets. Other industrialized countries have seen about a 2 percent average rate of growth while emerging economies have topped 7 percent.  That growth is now being threatened by inflation.  Food prices have jumped 39% from February 2007 to 2008, led by wheat, soybeans, corn and edible oils, according to the International Monetary Fund.

Morgan Stanley economists Joachim Fels and Manoj Pradhan said they were "flabbergasted" by their findings that 50 countries had double-digit inflation rates. On that list were six of the 10 most populous countries in the world, including India, Indonesia, Pakistan, Bangladesh, Nigeria and Russia.  In total, those facing such pricing pressures accounted for 42 percent of the world population.  "In other words, close to three billion consumers are currently experiencing double-digit rates of price increases," they wrote in a note to clients.

And, the problem is that soaring inflation is not easy to tame. Some countries, such as India where inflation is running at around 11 percent, may have no choice but to boost interest rates.  Many emerging-market economies also link their currencies to the dollar, and because of the U.S. Federal Reserve's loose monetary policy stance right now the central bank has aggressively cut interest rates in response to the credit crisis and that has helped feed inflationary pressures.

The longer inflation remains elevated, the more damage it will do to long-term economic growth.

As we have often seen, as goes the World eventually goes the United States.

Bush's Hoovervilles

Business Press Failed Us In Regard To The Credit Card Industry

The Columbia Journalism Review reports on how the business press missed a sea change in the credit-card industry.  Primary among what was missed is a body of work, compiled by nonprofit groups, academics, documentarians, and others, that marshaled data to make visible a dramatic qualitative and quantitative—and recent—shift in the relationship between the credit-card industry and its customers that does not benefit the consumer.  That is that the credit-card exchange has shifted from a lending and underwriting paradigm to a sales paradigm involving penalties, fees, and default interest.  Rates that were illegal a generation ago are no longer regrettable outcomes to be avoided but central to the business model.  A  business model that centers on a besieged American middle class caught in an iron vice of stagnating incomes; shrinking disposable income; rising costs for health care, housing, and education; usurious and rapacious practices of the credit-card industry; a growing, consolidating, and increasingly sophisticated debt-collection industry; and, to add insult to injury, a new bankruptcy law that closes the courthouse door to formerly eligible debtors.  And, this view is supported by credible, anecdotal and aggregate data and happens also to be true.