Unlicensed Debt Buyers

The Maryland Court of Special Appeals issued a decision in Finch v. LVNV Funding, LLC. on Friday June 28, 2013 that held that judgments obtained by unlicensed debt buyers are void. The opinion is available here:


What does this mean? If you were sued by an unlicensed debt buyer and it obtained a judgment against you, it may be declared void by the courts. If you want more details call our office at 301 620-1016 or e mail me at borison@legglaw.com  Some of the debt buyers who operated without a license for a period of time include Midland Funding, LVNV, Cornerstone, Bethesda Funding, FFPM Carmel or Advantage Assets.       

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Debt Buyers

The debt buying industry has grown to a 100 billion dollar industry. The industry buys debt for pennies on the dollar and then sues on the full value of the debt. The suits are based on the idea that many consumers will default because they will not recognize the company suing them or cannot afford legal representation. The consumers wrongly think they do not have to do anything to stop the process. When the consumers do nothing, the debt buyers obtain a default or affidavit judgment against them.  DOING NOTHING is not the answer for consumers.

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Consumer bankruptcy

Consumer Bankruptcy Basics

Conquest, War, Famine, Death—these the Book of Revelations tells us are the Four Horsemen of Apocalypse, no matter what that later apostle known to the sporting gentry as Grantland Rice wrote some nineteen centuries later. Yet in the arena of consumer bankruptcy, neither prophet was right. Here and now those dread specters are: Divorce, Illness, Unemployment, and Overspending. These now are the harbingers of economic doom that spell the end of the “good life” for so many of the economic refugees that seek relief in this “Court of Last Resort”.

In re Rice  94 B.R. 617, 618 (Bkrtcy.W.D.Mo.,1988)

 The above quote was written in 1988. Since that time the court of last resort and the deadly specters for consumer bankruptcy have changed in one respect because the overspending was fueled by the breach of the “economic social contract” that had existed between lenders and debtors from the beginning of this country in 1776 to the late 1990s.

The economic social contract provided that lenders would evaluate the debtor’s ability to pay a particular loan. If the debtor could not afford a particular loan, the loan would be denied by the lender. The debtors could rest easy that their application for credit was thoroughly analyzed by the lender. As a result the debtor did not have to double check the lender. The lender’s interest in the debtor’s ability to pay was a natural consequence of the lender wanting its loan repaid. Unknown to debtors but well known to the lenders, there was a seismic shift in the “economic social contract” beginning in the 1990s and so pervasive by the year 2007 that the “economic social contract” was broken and discarded entirely by lenders.

The decimation of the economic social contract came about as a result of the widespread adoption of the securitization process in all consumer lending. Securitzation is one of those ideas that looks great on paper but when put into operation leads to financial disasters. In its simplest form, a lender sells off the loan that it has generated into a pool of assets that in turns offers securities backed by the loan. The security is then an asset backed security. The pools are sold to investors eager for good returns on investments backed by assets. It offers a more concrete perception of the investment. The ability of brokerage firms to sell the pools is only limited by the assets available to “back them”.  The need to have product soon overwhelms any quality controls and the desire for quality control is soon replaced by math theories that the mixture of assets produces a sum greater than its parts. Thus the theory is that the invincible pool can survive large scale defaults.

Given that many consumers relied on the “economic social contract” the overspending category now has grown as a substantial factor in the realm of consumer bankruptcy.

The other major change to occur since the 1988 decision is the changes to the Bankruptcy law. In 1994, Congress made various changes to the Bankruptcy Code. In conjunction with those changes, they commissioned a study to review the code for changes and improvements. This study was conducted through the Brady Commission. Creditors, with a natural distaste for the bankruptcy process, anticipated that the Brady Commission would provide numerous changes to the system.

Contrary to the creditors’ expectations, the Brady Commission did not view the bankruptcy system as severely broken and in need of dramatic repairs. The commission report found limited changes were necessary. Despite this report in 1997, the creditors wanted large scale changes and began efforts to change the law as early as 1998. The so called Bankruptcy Reform was enacted in 2005. It was designed to limit access to the system by raising procedural speed bumps. One procedural road bump was the pre-filing credit counseling requirement. The asserted value of this pre-filing counseling was that many people filing may not need bankruptcy. After the passage of this requirement, the providers of the counseling themselves concluded it was largely useless and that the overwhelming majority of those forced to spend time and effort to determine if bankruptcy was necessary were persons who clearly needed to file bankruptcy.

Today, consumers have two potential avenues for relief under the Bankruptcy Code. That may file a Chapter 7 or a Chapter 13. Chapter 7 is basically where the debtor agrees to exchange his or her non-exempt assets for a discharge of his or her obligations to most creditors. Non-exempt assets are those assets for which there is no law that permits the debtor to retain even if the debtor owes creditors. The theory behind permitting certain assets to be exempt from the reach of the debtor’s creditors is that reducing debtors to penniless status does not ultimately serve any useful purpose.

Chapter 13 is formally known as a debt adjustment plan. The debt to be paid by a debtor is adjusted to such amounts that he or she can afford to pay over a set period of time.  There are a series of benefits potentially available to a debtor who elects to enter into a Chapter 13 plan. These potential benefits are discussed below. 

The election to file a Chapter 7 for a consumer debtor is now governed by a means test and a provision that permits cases to be denied based on abuse. The means test consists of two parts. The first part is whether or not the debtor’s household income (less expenses of non-filing household members) for the six full months prior to filing exceeds the median income for a like size household in the state where the case is filed. If the debtor’s income is below the median then he or she has passed the means test and they may elect to file a Chapter 7. If the debtor’s income exceeds the median income, then the debtor’s expenses must be analyzed to see if the debtor could afford a monthly payment that will pay out certain minimums.  If not, then the means test no longer applies. If they can make monthly payments that amount to a certain level, then that consumer debtor may not be able to file a Chapter 7. 

The Chapter 7 is often most appropriate for those who find themselves overwhelmed with debt and needing a fresh start. The Chapter 7 usually starts your financial life over by exchanging your non-exempt assets for release from your existing debts.

The Chapter 13 debtor enters into a payment plan by which the debtor agrees to make a series of regular payments to a trustee, who in turn makes distributions to the debtor’s creditors in accordance with the plan approved by the bankruptcy court. The plan can provide a mechanism for a debtor to make up past due payments on se
cured debts such as a mortgage or a car loan. The debtor can also provide for payments on tax debts and can eliminate some of the interest and penalties that would otherwise accrue outside of a bankruptcy proceeding. The Chapter 13 also permits a debtor to modify certain secured debts under the right circumstances. For instance, if the debtor has a first and second mortgage on their home, and there is no equity in excess of the balance of the first mortgage, the second mortgage may be treated as an unsecured creditor. Any unsecured creditor is not entitled to payment in full unless the debtor can afford the unsecured creditors in full. Additionally, the Chapter 13 debtor retains control of all of their assets – exempt and non-exempt if the debtor’s plan will pay the debtor’s creditors payments equal to the value of the debtor’s non-exempt assets.

In the end the selection of which Chapter of bankruptcy for a consumer debtor requires analysis that is often enhanced by experience measured by years as well as cases. 

  * Scott C. Borison has been practicing law since 1987. He has represented several thousand debtors in consumer bankruptcy proceedings. He has regularly been invited to speak on bankruptcy and related topics by both local and national organizations. He has been recognized by his peers locally being named the bankruptcy attorney for several years through the Frederick Magazine attorney poll. 

Disclaimer. This blog entry generally discusses certain aspects of bankruptcy. Since it is a general review, it does not address various exceptions that may apply to a person’s individual situation. It cannot and should be used as a substitute for retaining the services of an experienced bankruptcy attorney to review and analyze your particular situation.    




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Where we are and how do we get out of it

The growth for our economy since the 80s has resulted from increasing reliance on the service sector of the economy. The increase in the service sector has primarily rested upon consumer spending. The consumer spending has been fueled by credit – mortgages, home equity loans, long term car loans and, of course, credit cards. Everyone has been encouraged to not only spend what they earned but to use credit to mortgage their future earnings to provide an immediate impact on the economy. It is good while it lasts. 

Now that we have mortgaged our future earnings to the breaking point what can we do. The world is in a panic because it now realizes that the debt service on past spending will continue to grow and mean not only will the consumers not be able to spend more than what they earn but even the consumer’s earnings will not be available for spending since an increasing portion will be needed for debt service.

The only way to resolve the problem is reigning in the debt and more specifically the cost of that debt to every person who finds themselves owing more on a house than what it is worth, a car payment that is out of line with their income and credit card balances that will take 34-52 years to pay off if minimum monthly payments are made. The only answer is that the debt must be reduced and the cost of repaying the debt must be reduced as well.

In the 2005 debate over so called Bankruptcy Reform, an amendment was offered to limit interest rates to no more than 30% – it failed. (The reasons it failed were astonishing but that is for another time). Consumer bankruptcy comes down to a fight over who gets the consumer’s earnings. With a negative savings rate, the consumer will spend everything he or she earns so the question is who will get that consumer’s money – the prior creditor who advanced credit or the future creditor who wants to make a sale to the consumer. That is the central issue here.

Will the country make some decisions which will limit the amount claimed by the existing creditors by placing a limit on the amount of interest that can be charged for interest (I have seen default rates on credit cards in excess of 45%), over limit fees and various other charges? My belief is that the unregulated charges that have been permitted have caused the “crash” to occur sooner and be more severe than if there had been reasonable limits. It does not matter in determining the solution given where we are now. What does matter is where do we go from here. 

The only way this crisis will be resolved will be by limiting what the existing creditors can get from consumers. This will include a need to reduce mortgages to house values to stop the tidal wave of foreclosures causing housing prices to continue a downward spiral. Credit cards will need to pare down debt and by all means have to be regulated to limit interest rates and fees. Without these changes, and allowing past creditors to pursue their claims against consumer’s earnings with unregulated, unlimited fees and costs, we will see a downturn in the economy that will be devastating.   

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Who could have anticipated that telling regulators not to regulate could lead to disaster? Anyone and Everyone

Tonight’s speech failed to address any of the reasons that the current crisis exists. Interestingly, the off the record comments that Wall St was “drunk” did not make the speech.  This would have required identifying the bartender – the regulators. So much for personal responsibility.

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Corporate Welfare Alive and well – The Government is planning to throw multibillion sandbags to stop the credit crisis flood

According to press reports, the government is preparing to throw more multi billion dollar sandbags to stop the flood from the mortgage crisis. There is a talk of a Resolution Trust II, if not in name, in spirit. For those who may not remember, the government created the Resolution Trust Corp to bail out the faltering Savings & Loans. The S & Ls found themselves drowning in bad debt as a result of careless lending that was nevertheless financially rewarding for the people running the S & Ls – sound familiar? The Resolution Trust Corp took the bad debts off the hands of the S & Ls to relieve the S & Ls of their self inflicted problems. The end result of the process was that many who worked the system grew rich, the persons responsible for the crisis as a whole survived and retained their fortunes. (I understand the pain and agony in this crisis has already begun – the former CFO of Freddie Mac is apparently facing tough times – he has to sell his $5,000,000 vacation home). The problem was then, as it is now and apparently will be forever, that the government bail out does not extend to individuals. So much for the end of welfare – corporate welfare appears to remain strong and firmly entrenched. “We the people” has transformed to “We the politically connected Corporations”. With this safety net for the corporate ranks, do you think that we will see Resolution Trust III – bet on it. The situation was allowed to progress so far that the bailout cannot be avoided. 

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