The Supreme Court hears oral argument today in two important consumer bankruptcy cases with potentially wide ranging impact on debtors and their counsel. At 10:00 a.m. the Court hears argument in the case of Milavetz, Gallop, & Milavetz v. United States (08-1119; 08-1225), which involves whether attorneys are "debt relief agencies" under the Bankruptcy Code and are thus restricted in what they may advise a debtor or potential debtor in bankruptcy, including the incurrence of debt in anticipation of a bankruptcy filing, such as buying a vehicle or obtaining other items of necessity by use of credit. The Bankruptcy Code places other restrictions on debt relief agents, including a required disclosure in any advertisement effectively announcing that the attorney is a debt relief agent who assists in the preparation and filing of bankruptcies. Lawyers are challenging the restrictions on First Amendment free speech grounds and maintain that the restriction precludes attorneys from offering otherwise sound legal advice to prospective clients.

At 11 a.m., the Court is to hear argument in United Student Aid Funds, Inc. v. Espinosa (No. 08-1134),another bankruptcy case dealing with the dischargeability of certain student loan obligations in a Chapter 13 case. The cases involves the issue of whether a debtor may obtain a discharge of certain student loan obligations by simply stating his or her intention to do so her Chapter 13 plan and obtaining a discharge after her plan was completed, but who did not offer evidence of "undue hardship" which is required by the Bankruptcy Code. The debtor obtained four student loans to attend technical school. In his Chapter 13 case, he listed the principal owed to the United Student Aid Funds (USAF) as being due and payable through the plan, but did not include any of the accrued interest. After not receiving the interest payments and after more than three years had passed since the Chapter 13 case was discharged, USAF commenced collection action against the debtor, who argues that the USAF is barred by the Chapter 13 discharge and the delay in objecting to the content of the plan before the Objection to Confirmation deadline.

Both cases are summarized more thoroughly at SCOTUSBLOG.COM.

Belsky, Weinberg & Horowitz is presently required to state that it is a debt relief agency assisting individuals in the filing of bankruptcies to discharge and/or reorganize their debts. We represent only debtors and offer free consultations by phone or in person. Please visit our website for additional information on the various bankruptcy issues and options available to you or contact one of our attorneys.

You may have heard the folks in D.C. mention that the worse in the economy seems to be over. You may also know that a great number of the mortgage loans that went into default that caused the current crisis have now traveled through the system. Foreclosures remain high, but the government bail out of big banks such as Bank of America, Citigroup and JP Morgan Chase, and insurer AIG have stemmed further significant negative economic impact caused by the first wave of mortgage defaults that began in late 2007.

You may ask yourself, "Did he just say first wave of mortgage defaults?" That's right!

No one in D.C. has said it yet but the worse for the economy may still be ahead of us in what is being called the second wave of mortgage defaults set to hit the economy beginning in the fall of 2009. Approximately $750 Billion worth of 4 & 5 year option arm mortgages are set to reset or recast themselves in the next 4 years. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data shows.

An option arm mortgage is an exotic loan product with typically very confusing terms that usually end with a significant increase in monthly mortgage payments to the borrower. Many of these loans do not reset for several years, but once they reset there is usually no telling how high one's mortgage payment can become. For example, Shirley Breitmaier took out a $315,000 option ARM to refinance a previous loan on her house. Her payments started at 3/8 of 1 percent, or less than $100 a month, according to Cameron Pannabecker, the owner of Cal-Pro Mortgage and the Mortgage Modification Center in Stockton, California, who is working with Breitmaier. The loan allowed her to forgo higher payments by adding the unpaid balance to the principal. She'll be required to start paying principal and interest to amortize the debt when the loan reaches 145 percent of the original amount borrowed. Once this loan resets, her monthly mortgage payment will skyrocket to $3,500.00 per month! The next wave of mortgage defaults is littered with just these types of loans!!

"Option ARM borrowers hit with unaffordable monthly payments are another threat to the housing recovery and the economy", said Susan Wachter, a professor of real estate finance at the University of Pennsylvania's Wharton School in Philadelphia. Owners who surrender properties to the bank or are foreclosed upon for failing to maintain higher mortgage payments will further increase the supply of housing which in turn will further depress real estate prices and continue to de-stabilize the housing market. This will be part of the reason why the economic recovery will be long and slow as the next wave of defaults will act to continue to drag down the American economy as a whole.

There seems to be no end in sight, but come the spring of 2013, almost all of these exotic option arm mortgages will have been through the system. Do not look for a rebound in housing prices until at least 2012. To learn more, contact us at Belsky, Weinberg, & Horowitz, LLC.

On June 12, 2009, for the first time in two hundred years in Maryland, all three branches of Government came together with practitioners at the annual Maryland State Bar Association Law Conference in Ocean City, Maryland for a unique and historic gathering to report on what their branch of government has been doing in response to the foreclosure crisis and to share ideas of how we all can participate during this difficult economic condition. Sponsored by the Consumer Bankruptcy Section of the Maryland State Bar, speakers from all branches presented materials, opinions, procedures and predictions regarding the current crisis. The speakers were: Hon. Robert M. Bell, Chief Judge, Court of Appeals of Maryland; Hon. Duncan W. Keir, Chief Judge, U.S. Bankruptcy Court for the District of Maryland; Hon. Doyle Nieman, Maryland House of Delegates (House Environmental Affairs Committee); Samuel J. Gerdano, Executive Director of the American Bankruptcy Institute; Phillip Robinson, Esq., Civil Justice, Inc.; Gerard R. Vetter, Esq., Chapter 13 Trustee (Baltimore Div.), Legal and Legislative Committee of the National Association of Chapter 13 Trustees; Anne C. Ogletree, Esq., Rules Committee; Secretary Thomas Perez; and Hon. Alan Wilner, Associate Judge (Retired), Court of Appeals of Maryland.

The message was clear that, although much work has been done thus far to extent assistance to those in danger or foreclosure, there is much more left to do and volunteers are needed.  Many state and federal rescue programs have been created, although those programs are falling short in assisting the vast number of homeowners in need of assistance. Many people either don't know or understand what loan modification programs are and who qualifies. 

The biggest warning came from the President of the American Bankruptcy Institute, Samuel Gerdano. He warns of a pending tidal wave of potential foreclosures set to hit the economy starting in the fall of 2009. Mr. Gerdano advised that starting this September and hitting its peak in 2011, the United States will see an additional $750 billion worth of 4 and 5 year option arm mortgages once again resetting. The amount of mortgage defaults will be greater than the first round already through the system. This means another collapse of the big institutions requiring yet another bailout. He communicated that the worse is not over, but instead, is just in front of us.

The program was a great success in part due to the outstanding efforts of the MSBA Consumer Bankruptcy Section Council member, Alexander Gordon, IV. It will be made available online in the future for rebroadcast.