Tuesday, November 24, 2009

Medical Problems leading cause of Bankruptcy

While leaders in Washington debate health-care reform, bills for medical care right now are driving more people into bankruptcy.

"It's overwhelming, tragic and overwhelming," said Peter Frank, a lawyer with Legal Services of the Hudson Valley, whose agency is seeing more bankruptcy and foreclosure cases related to health-care costs than ever before.

Frank said his agency handles about 60 to 80 cases of health-care-related bankruptcies a year. A few years ago, that number was only 5 or 10 cases.

The problem is being felt all over the country. A study led by Harvard researchers and published earlier this year by the American Journal of Medicine estimated that nearly two out of every three personal bankruptcies — 62 percent — were due to medical bills.

That study was conducted in 2007, before the current economic crisis, so things actually might be even worse than that at this moment.

And even those with health insurance can be susceptible if they're hit with a very serious illness. Nearly 80 percent of those in the Harvard study who went bankrupt due to health-care costs had health insurance when they first became ill.

The rough economy overall sometimes forces people to choose between health care and other necessaries. Take a working couple with two incomes, who suddenly lose one income when one of them is laid off. If they choose to drop medical coverage to help offset the lost income, they might later regret it if one suffers a major illness.

COBRA allows workers who lose their jobs to remain under their employer's health-care coverage temporarily — usually for 18 months — but they have to pay the full cost of premiums. Frank said many middle-class people these days can't afford those payments.

Those who end up in that situation can file under one of two chapters of the federal bankruptcy code.

Frank said if they own a home, they usually can try to save it by filing under Chapter 13. That allows them to arrange to pay off their debt over time.

If they don't own a home, they'll usually opt for Chapter 7. There the basic goal is to wipe out the debt by liquidating all assets.

Frank said his agency also has to step in at least once or twice a month to stop debt collectors' harassing phone calls to debtors on fixed incomes.

Tuesday, November 10, 2009

Cramdown Bill Revisited

With foreclosures continuing to climb and midterm elections just a year away, Congress once again is preparing to tackle the mortgage crisis aggressively. High on many a wish list: a renewed push to allow so-called cramdown, which would let bankruptcy judges adjust the terms of home loans to give borrowers relief.

The banking industry hates cramdown from the idea of cramming deals down lenders' throats, but Democrats argue that earlier efforts to fix the housing mess have not done as well as hoped. Moody's Economy.com MCO estimates that 3.8 million homes will enter foreclosure this year, up 41% from 2008. No surprises, then, those lawmakers are getting an earful. "We have folks calling our office every day," says Senator Jeff Merkley D-Ore., who is pressing Treasury to streamline its program to restructure mortgages.

Capitol Hill is now again looking at other options. One bill, introduced by Senator Jack Reed D-R.I. on Sept. 30 and co-sponsored by Merkley and two other senators, would force lenders to pause before they foreclose and to offer borrowers a break on their mortgage bill if they qualify for help under the Treasury program. Under the same proposed law, states could require mortgage servicers to enter mediation with borrowers before being allowed to foreclose. The bill also would give the states $6.4 billion to help homeowners stay put. "We're really trying to light a fire under the Administration," Merkley says.

Others in the Senate are considering the temporary suspension of home-loan payments or brief monthly mortgage subsidies for unemployed homeowners. House Financial Services Committee Chairman Barney Frank D-Mass. is drafting similar legislation.

The Administration is considering new options, too. One would support the broader housing market by extending a homebuyer's tax credit and making it easier for Fannie Mae FNM and Freddie Mac FRE to finance mortgages. Another would fund state housing agencies and independent mortgage banks. A Treasury spokeswoman noted that the Administration's programs have done more than previous efforts but said it "aggressively continues to build on our progress to date."

Many congressional Democrats think mortgage lenders need to feel the lash before they'll speed up mortgage workouts. Those critics, led by Senator Richard J. Durbin D-Ill., figure banks and mortgage servicers will do their best not to cut principal or interest rates on a mortgage. Lenders want to avoid, or at least delay, the loss they take from lowering what homeowners must pay, critics say. And despite an Administration plan that gives subsidies to mortgage servicers who agree to rework loans, many believe the service firms still gain too much from the fees they collect in foreclosure to bother working out a loan.

Durbin and other lawmakers are calling on Democrats to support what is seen as the party's nuclear option: cramdown. The proposal, which sailed through the House last spring, only to stall in the Senate on a 45-51 vote, authorizes bankruptcy courts to adjust mortgages. If Durbin's bill were to pass, a judge could reduce principal or interest rates on home loans and stretch out mortgage payments, something bankruptcy courts can do already with virtually every other kind of debt.

Supporters say cramdown would free homeowners from debt they can't afford while prodding lenders to cut deals before reaching the courthouse. A bankruptcy-court solution would also cost taxpayers little or nothing. Detractors argue cramdown would spook the mortgage market, driving up borrowing costs and making loans harder to get. Undeterred, Durbin, the second-ranking Senate Democrat, is willing to attach a cramdown provision to any convenient bill if it won't get a hearing on its own. The proposal "will always be part of the conversation, if for nothing else than to scare the [daylights] out of everyone," says one senior Senate aide.

The financial industry, which used major muscle to kill the provision last spring, is arming for the fight, too. "The vote in the Senate was so overwhelmingly close, we're always worried," says one lobbyist. The big banks are leaning on community banks for help: These institutions were largely innocent of the worst excesses of the crisis and tend to be viewed much more favorably on Capitol Hill. "We are kind of the white hat," says a lobbyist for smaller financial institutions. "You'll see a lot of the industry try to hide behind us."

Given the industry's stance, supporters of cramdown say a forceful campaign by the White House would help. President Barack Obama supported it during the campaign and soon after his election, while his chief economic adviser Lawrence H. Summers wrote columns in favor of the proposal last year. But congressional sources say the Administration did little to push for passage of the bill last spring possibly because Obama was reluctant to place further stress on already fragile banks. Now one Treasury official says the department has "no immediate plans" to revive the measure. Yet even without stronger White House support, Durbin might attract enough senators to embrace the bill if foreclosures continue to surge.