Why Are Banks So Scared of the Word Bankruptcy?
Posted Oct 12 2009 in Wink and Wink by @winkshesaidAn excellent and well-researched article by Robert Doggett for the website ForeclosureBuzz.org takes a look at a number of foreclosure prevention guides offered by various industry players (HUD, the FDIC, Fannie Mae), States and even Federal Agencies and finds their bank-controlled message leaves out your strongest legal weapon: Bankruptcy. Even worse, when bankruptcy is mentioned in these “helpful” consumer guides, it is misrepresented, presented as likely to be a scam or dismissed as not legitimate. Why are the banks so scared of the word bankruptcy?
Doggett says it best: “Lenders hate when borrowers file for bankruptcy because it transforms borrowers from beggars, hoping to work out a deal, to debtors with rights, and it provides the supervision of a judge who is ready to enforce those rights.” Ah yes, the law. Banks really wish you would forget about using it to your advantage, because then the playing field gets leveled and they can no longer intimidate, ignore rights, and wield the full power of their moneyed influence against the little guy. Nope, once a person files for bankruptcy protection, the bullying has to stop.
Mr. Doggett examined over 20 of these “helpful” publications, angled at helping homeowners avoid foreclosure and protect their rights and found just one, Arizona’s, that directly listed bankruptcy as a positive option for homeowners struggling with mortgage payments and looming foreclosure actions. The rest paint such a negative picture of bankruptcy you have to wonder if they aren’t overplaying their hand. They use words like “last resort” and “absolute last resort.” This is simply a scare tactic. Of course the banks want you to wait until the very last second to even consider bankruptcy—they want you to dig that hole as deep as possible because all the emergency measures you take: payday loans, money borrowed from friends and family, maxing out every last credit option, foregoing necessities– all that money goes right into their pockets. They want to drain you of every last drop before you are finally desperate enough to call a bankruptcy lawyer and learn your rights.
Because I practice bankruptcy law in Colorado, I wanted to see what information is out there for people struggling with mortgage debt in our state. Colorado’s mortgage help site doesn’t mention bankruptcy either, no surprise. It does, however, link to Colorado Legal Services, which is a service for low income Coloradoans, meaning those who make less than Colorado’s poverty level. A great service, no doubt, but one that serves a small percentage of the population and is hard pressed to even do that because of lack of resources (the Legal Aid Foundation of Colorado admits to turning away thousands for this reason). The link to legal aid, however, makes no mention of bankruptcy and merely takes you to the website, which has no high-profile bankruptcy resources, either.
Of course Bankruptcy is not going to save every house from foreclosure. That’s an unrealistic goal in light of Colorado’s housing situation, where anywhere from 33% to 65% of homeowners owe more on their mortgage than the house is worth. And most people struggling to pay their mortgage have other financial problems.
Many people in Colorado owe more than their house is worth, their mortgage payments are resetting upwards out of their reach, their wages and/or hours are being slashed or they are outright losing their jobs, their medical bills are burying them in debt, not to mention the new credit card interest rates banks are ramping up without notice or fair reason. These problems will not be solved with a simple loan modification (if you are one of the few who can get one that isn’t setting you up to fail).
These are the types of financial problems bankruptcy can help. Bankruptcy can wipe our credit card debt and medical bills, freeing up money to pay the mortgage. Bankruptcy can force lenders to the negotiating table, often resulting in better terms. And for people who cannot ultimately stay in their house, bankruptcy eliminates the negative tax consequences of foreclosures (yes, no one writing these guides likes to talk about the fact that the bank can come after you for any remaining mortgage balance after a foreclosure sale).
When you look objectively at the benefits of bankruptcy for so many struggling homeowners, it makes sense that the banks don’t want to say the word. And let there be no doubt about it, these “helpful” guides are put out there by the banks. For example, the Foreclosure Prevention Resource Center is actually powered by the Mortgage Banker’s Association, which is also behind the National Black Church Initiative’s foreclosure resource guide. And in Colorado, the Colorado Foreclosure Hotline linked to by the resource guide lists its partners at the bottom of their pamphlet: Fannie Mae, US Bank, Chase and the Colorado Mortgage Lenders Foundation, among others. And once you learn about the benefits of bankruptcy for those living with crushing debt, well it’s no wonder banks want to (oh, Mike, I just can’t do it—he wanted me to make a hide the salami joke here, but I have my principles) keep the option of bankruptcy off the table. Because once people learn their rights, it’s a whole new ball game. (He’ll just have to settle for a sports reference.)
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