Analysis Debts Canceled by Bankruptcy Still Mar Consumer Credit Scores

ABI Bankruptcy Brief | November 11, 2014

November 13, 2014

NEWS AND ANALYSIS

ANALYSIS: DEBTS CANCELED BY BANKRUPTCY STILL MAR CONSUMER CREDIT SCORES

Tens of thousands of Americans who went through bankruptcy are still haunted by debts long after — sometimes as long as a decade after — federal judges have extinguished the bills in court, the New York Times reported today. The problem, state and federal officials suspect, is that some of the nation's biggest banks ignore bankruptcy court discharges. Paying no heed to the courts, the banks keep the debts alive on credit reports, essentially forcing borrowers to make payments on bills that they do not legally owe. Lawyers with the U.S. Trustee Program are investigating JPMorgan Chase, Bank of America, Citigroup and Synchrony Financial, formerly known as GE Capital Retail Finance, suspecting the banks of violating federal bankruptcy law by ignoring the discharge injunction. The banks say that they comply with all federal laws in their collection and sale of debt. At the center of the investigation is the way banks report debts to the credit reporting agencies. Once a borrower voids a debt in bankruptcy, creditors are required to update credit reports to reflect that the debt is no longer owed, removing any notation of "past due" or "charged off." But the banks routinely fail to do that, according to the people briefed on the investigation, as well as interviews with more than three dozen borrowers who have discharged debts in bankruptcy and a review of bankruptcy records in seven states. Still, federal judges have started to raise alarms that some banks are threatening the foundations of bankruptcy. Bankruptcy Judge Robert D. Drain said in one opinion that debt buyers know that a bank "will refuse to correct the credit report to reflect the obligor's bankruptcy discharge, which means that the debtor will feel significant added pressure to obtain a 'clean' report by paying the debt," according to court documents. Read more.

WATCH AUTHOR JAKE HALPERN EXPLORE THE SEAMY WORLD OF DEBT COLLECTING IN NEW ABI VIDEOCAST

ABI Resident Scholar Prof. Lois Lupica interviews Jake Halpern, author of the hot new book Bad Paper: Chasing Debt from Wall Street to the Underworld. Named a Best Book of the Month for October by Amazon, it's a riveting tale of the seamy world of debt collecting and the shady characters at the center of the multi-billion dollar business. Click here to watch.

REPORT: STATE PENSION FUNDS' COMBINED UNDERFUNDING RISES TO $4.7 TRILLION

State employee retirement systems are underfunded by a total of $4.7 trillion for a funding ratio of 36 percent, said a report from State Budget Solutions, a nonprofit organization advocating state budget reform, Pensions & Investments reported yesterday. The report, "Promises Made, Promises Broken 2014," uses data from fiscal year 2013 comprehensive annual financial reports and actuarial valuations from individual plans. In its 2013 report, the group estimated underfunding at $4.1 trillion, or a 39 percent funding ratio. The report measured state public pension liabilities by market valuation instead of discount rates based on investment return assumptions because "the discount rates that plans use are just far too high," said Joe Luppino-Esposito, State Budget Solutions general counsel and the report's author. A risk-free rate based on a 15-year Treasury bond rate works better when states fail to make annual contributions and address unfunded liabilities, Luppino-Esposito said. "Even if you are on target, it doesn't work. The bottom line is that on paper, nothing beats a government pension. But in reality, the money isn't there," Luppino-Esposito said. The overall actuarial assets of state pension funds in the 50 states, according to the report, total $2.68 trillion, while liabilities total $7.42 trillion. Read more.

Click here to read the full report.

REPORT: CITIES STILL STRUGGLING TO RECOVER FROM U.S. RECESSION

A report released on Tuesday from the Pew Charitable Trusts shows that most big U.S. cities have been struggling to restore revenue to pre-recession peaks amid lagging property-tax receipts and cuts in state and federal funds, Bloomberg News reported yesterday. Pew analyzed financial statements for the central cities of the 30 most-populous metropolitan areas and found that as of 2012, a majority still hadn't recovered from the recession that ended in June 2009. Revenue of 18 municipalities declined in 2012 after adjusting for inflation, with eight logging their lowest collections since the economic slump started in 2007, according to the report. Read more.

U.S. COLLEGE BORROWING DROPS 8 PERCENT

Borrowing for U.S. colleges declined for the third year in a row as the federal government clamped down on for-profit schools and families became more cost-conscious, the Wall Street Journal reported today. Federal and private-loan lending totaled $106 billion for the 2013-14 academic year, down 8 percent from the prior year, according to a report released today by the nonprofit College Board. The decline marks a significant reversal in borrowing, which peaked at $122.1 billion in 2010-11 after rising for years. The drop is partly due to a decline in enrollment at for-profit colleges, where most students borrow and where default rates are generally higher. The schools have come under increased scrutiny since 2010, when a report by the Government Accountability Office found deceptive practices that ranged from promising unrealistically high pay for graduating students to not disclosing total tuition costs for students before they enrolled. Total outstanding balances for student loans hit a record of nearly $1.31 trillion in September, according to a Federal Reserve report this month. Most of the debt owed is for federal loans, which account for about 92 percent of the outstanding balances, according to MeasureOne, a San Francisco-based firm that tracks student loans. Read more. (Subscription required.)

CFPB ISSUES SWEEPING PLAN TO REGULATE PREPAID CARDS

The Consumer Financial Protection Bureau is set to go beyond industry expectations when it unveiled a long-awaited proposal today that establishes new requirements for prepaid cards, Collections & Credit Risk reported today. The agency's plan covers anticipated areas like the need for better disclosures, while also branching into other terrain such as a cap on how much consumers would pay if their prepaid funds were stolen or the card was lost. The proposal would also require card issuers to provide consumers with "easy and free access" to account information about the card. Additionally, the plan would apply not just to traditional plastic prepaid cards, but cover a whole range of other prepaid card accounts, including mobile, peer-to-peer payments, payroll, student financial aid and certain government benefits. Read more.

Click here to read the CFPB's plan.

WARREN JOINS U.S. SENATE DEMOCRATIC LEADERSHIP

U.S. Senate Democrats elevated first-term Sen. Elizabeth Warren (D-Mass.) to an expanded leadership team as they prepare to become the chamber's minority party in January, Bloomberg News reported today. Warren, who will act as a bridge to the party's liberal wing, said she'll use her role to focus on financial equality in the U.S. She will be strategic policy adviser to the Democratic Policy and Communications Committee, led by Sen. Charles Schumer (D-N.Y.). This places Warren, one of the Democratic Party's chief critics of Wall Street, under the leadership of Schumer, one of Wall Street's biggest backers in the Senate. Read more.

LISTEN TO A REPLAY OF THE ASSET SALES COMMITTEE CALL ON THE CHAPTER 11 REFORM COMMISSION'S PROPOSAL TO SURCHARGE SECURED LENDERS FOR 363 SALES!

Looking to access yesterday's Asset Sales Committee call looking at the ABI's Chapter 11 Reform Commission's consideration of a proposal to surcharge secured lenders for 363 asset sales? To access a free replay of the discussion, please click here.

WHAT SHOULD YOU KNOW ABOUT CYBERSECURITY, BIG DATA AND PRIVACY? WLC KEYNOTE SPEAKER PROVIDES PERSPECTIVES AND ADVICE

Watch ABI Resident Scholar Lois Lupica speak with Fortalice CEO Theresa Payton, cybersecurity expert and former White House CIO, about cybersecurity and privacy in the age of big data. Payton, the keynote speaker at ABI's Winter Leadership Conference, discusses recent bank and retail security breaches, and provides tips for keeping your information secure. Click here to watch the video.

USTP NOTICE OF PROPOSED RULEMAKING ON CHAPTER 11 MONTHLY OPERATING REPORTS

Section 602 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) authorizes the U.S. Trustee Program (USTP) to issue rules requiring uniform periodic reports by debtors in possession or trustees in non-small business cases under chapter 11. The USTP just published in the Federal Register a notice of proposed rulemaking seeking public comment on the proposed rule and periodic report forms. The proposed rule is published in the Federal Register at 79 FR 66659 (Nov. 10, 2014) (to be codified at 28 C.F.R. pt. 58). The proposed rule, along with the proposed periodic report forms and instructions, may be viewed on the USTP's website. The proposed rule may also be accessed at www.regulations.gov. All public comments must be submitted on or before January 9, 2015, via www.regulations.gov. Please note that the proposed rule and forms only apply in chapter 11 cases filed by debtors that are not small businesses. Small business debtors are already required to use Official Form 25C, "Small Business Monthly Operating Report."

NEXT ABI LIVE WEBINAR ON NOV. 20 FOCUSES ON PROFESSIONAL FEE CASE BEFORE THE SUPREME COURT

The next abiLIVE webinar will be held on Nov. 20 and will feature a discussion on a case before the Supreme Court that could have a major impact on professional fees for bankruptcy practitioners. In this 75-minute webinar, Thomas J. Salerno of Gordon Silver (Phoenix) and J. Maxwell Tucker of Squire Patton Boggs LLP (Dallas), along with moderator Judge Gregg W. Zive (D. Nev.; Reno, Nevada), will discuss the professional fee issues presented in Baker Botts LLP v. ASARCO LLC, No. 14-103, which was granted certiorari by the Supreme Court on Oct. 2. Click here to register for this important webinar!

ABI MEMBERS INVITED TO ATTEND RETIREMENT DINNER FOR BANKRUPTCY JUDGE PETER J. WALSH ON NOV. 19

ABI members are invited to a special retirement dinner on Nov. 19 honoring Hon. Peter J. Walsh's 50 years of dedicated service to the bench and bar. The event will be held at the Chase Center on the Riverfront in Wilmington, Del., and is being hosted by the Bankruptcy Section of the Delaware State Bar Association and the Delaware Chapter of the Federal Bar Association. Questions should be directed to Karen B. Owens at 302-654-1888. To attend, please go to https://sites-pepperhamilton.vuturevx.com/107/772/uploads/judge-walsh-retirement-dinner-form.pdf

ABI MEMBERS WELCOME TO ATTEND TRIBUTE DINNER ON DEC. 11 TO HONOR BANKRUPTCY JUDGE STEVEN W. RHODES

ABI members are invited to attend a tribute dinner honoring the 29 years of service of Bankruptcy Judge Steven W. Rhodes of the United States Bankruptcy Court for the Eastern District of Michigan for his commitment to the bench, bar and community. The Tribute Dinner will be held at the Roostertail on the Detroit River and is being hosted by the Bankruptcy Community to honor and celebrate Judge Rhodes' service and career. Please contact David Lerner at (248) 901-4010 for more information. To attend, please go to http://www.cbadetroit.com/events/Judge-Rhodes-USBC-Invite-and-Form.pdf

NEW CASE SUMMARY ON VOLO: REV OP GROUP V. MIL MANAGER LLC (IN THE MATTER OF MORTGAGES LTD.; 9TH CIR.)

Summarized by David Hercher of Miller Nash LLP

The Ninth Circuit ruled that two appeals were dismissed as equitably moot because, among other things, appellants did not seek stays of the appealed orders. The bankruptcy court confirmed the chapter 11 plan of Mortgages Ltd., which made and held real estate-secured loans. Under the plan, ML Manager LLC manages the loans. ML Manager sought and obtained bankruptcy court orders clarifying that the plan authorized ML Manager both to act as agent for a group of investors, Rev Op Group, and to sell property and distribute the proceeds. Rev Op Group appealed both orders to the district court, which affirmed the orders. Rev Op Group then appealed to the Ninth Circuit, which dismissed the appeals as equitably moot.

There are more than 1,500 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.

NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: WHAT REPUBLICANS' ELECTION WIN MEANS FOR HOUSING REFORM

According to a recent post, Republicans are unlikely to push the ball forward on reform of the federal housing agencies, but Congress has a number of other opportunities to make changes that will encourage mortgage lending.

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

ABI Quick Poll

A single set of mandatory, uniform federal bankruptcy exemptions should be adopted.

Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.

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