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Monday, July 22, 2013

How the City of San Diego Avoided Bankruptcy

How San Diego avoided bankruptcy

Three California cities file for bankruptcy in less than two weeks.
Had that recent headline appeared six or seven years ago not many people would have been surprised to see the city of San Diego in that ignominious group.
It may not seem like it but San Diego’s pension debacle, which caused The New York Times to dub the city “Enron by the Sea,” could be viewed as a blessing in disguise. The backroom deals that created a massive financial mess were exposed nearly a decade ago, forcing city leaders to push for unheard of pension changes and employee concessions well before the recent recession revealed sizable pension deficits were commonplace throughout the country.
If San Diego hadn’t made those moves, it may have joined the ranks of San Bernardino and Stockton which both filed for bankruptcy, in part, because of benefits promised to their workers. The third city to go bankrupt was Mammoth Lakes, but its troubles stemmed from a developer winning a $43 million judgment against the city.
The list of municipal bankruptcies is expected to grow as more cities speed toward a financial cliff that San Diego was able to avoid but not without a significant sacrifice to basic services, such as public safety, libraries and parks.
Thom Reilly, a San Diego State University professor and former chief executive of Clark County, Nevada, said San Diego was once a poster child for all that’s wrong with public employee pensions but has now emerged as a model for other jurisdictions on how to fix the problem. He said the city benefitted by having its unsustainable pension system exposed way before it became a national issue.
“San Diego is ahead of the curve because they went to such efforts to keep their self-dealing secret and it really came to light even before it exacerbated with the recession,” Reilly said. “So they began working on making substantial changes to their pension system, public pay and retiree health care. … In many jurisdictions, not just in California, I think it’s just been in the last couple years that they’ve had a better understanding of what these promises are and how substantial the costs are.”
To be sure, the circumstances in San Bernardino and Stockton are much different from in San Diego. For example, the unemployment rate in those cities is double that of San Diego, foreclosure rates are sky high and a significant number of residents receive some form of public assistance. In other words, San Bernardino and Stockton are working-class cities that have been battered much more by the economic downturn than San Diego.
Steve Erie, a University of California San Diego political-science professor and co-author of “Paradise Plundered,” a book on the San Diego’s political history and financial problems, said the services provided in San Bernardino and Stockton are likely much more robust than in San Diego because they didn’t make the same sacrifices over the past decade. That will change now, he said.
“They have to close fire stations; we just never built them,” Erie said. “San Diego, ironically, even though it decided not to go into bankruptcy, is a model for what these cities will look like when they come out of bankruptcy: Lower public services and changes in pension systems.”
While San Diego is no longer on the brink of bankruptcy, that doesn’t mean all is well in America’s Finest City. The city is still saddled with a nearly $2.2 billion pension deficit, $1.8 billion in future payments for retired workers' health benefits and a $900 million backlog of street, sewer and building repairs.
It will be generations before those debts are paid off, debts created by promises made by past city leaders over the last three decades.
Still, it’s a far cry from 2005 when a mayoral candidate ran solely on the platform of San Diego filing for bankruptcy. Current Mayor Jerry Sanders, who has always opposed bankruptcy, won that election and steered the city on a slow but steady course toward financial redemption.
The first step came before he took office when the city eliminated several benefits for new hires, such as supplemental pension checks and the ability to collect a pension and salary simultaneously. Sanders then brokered a deal with labor to significantly reduce the size of pensions for workers hired after June 30, 2009. Next came other labor concessions such as across-the-board 6 percent compensation cuts for nearly all city workers and forcing employees to pay more out-of-pocket toward pension costs.
San Bernardino and Stockton have cut their workforces significantly to make ends meet in recent years but haven’t received nearly as much in labor concessions as San Diego. For example, San Bernardino employees don’t contribute any money toward their pensions; taxpayers foot the entire bill.
Sanders said he sees a lot of what went wrong in San Diego also took place in San Bernardino and Stockton, such as masking the true financial picture from the public and using one-time money for ongoing expenses.
“That’s something the city of San Diego did for years and years and years … but the employee compensation they never cut because that was too tough politically,” he said. “I think that’s what you’re seeing in these cities is it’s always revolving around the fact that it’s labor costs that have thrown them into bankruptcy. What that means for the community is they’re not getting services anymore.”
Sanders said his city has endured a decade of financial pain, but it may have been exactly what City Hall needed to get its act together.
“In the long run, it is going to be a tremendous blessing,” he said. “I think that we learned some strong lessons and I think the public has been much more willing to pay much more attention to city government. And while that’s not always the most pleasant thing in the world because people don’t trust you at all, I think we’ve rebuilt that trust to a great extent. … I think that the community can look forward to better days in the not-too-distant future.”
San Diego continued its pattern of leading the way on pension changes in June when voters overwhelmingly approved an initiative that replaces pensions with 401(k)-style plans for most new city hires. Unions are now challenging the measure before a state agency, saying it violates state labor law.
In a sign that San Diego’s past continues to haunt despite progress, Moody’s Investors Service said it would be a “credit negative” for the city if the initiative isn’t fully implemented and its purported $950 million in savings isn’t realized. The city had its credit rating suspended from 2004 to 2008 because of past financial misdeeds.

Bankrupt!! Billions in Debt, Detroit Tumbles Into Insolvency

From the NY Times:

Billions in Debt, Detroit Tumbles Into Insolvency

DETROIT — Detroit, the cradle of America’s automobile industry and once the nation’s fourth-most-populous city, filed for bankruptcy on Thursday, the largest American city ever to take such a course.
The decision, confirmed by officials after it trickled out in late afternoon news reports, also amounts to the largest municipal bankruptcy filing in American history in terms of debt.
“This is a difficult step, but the only viable option to address a problem that has been six decades in the making,” said Gov. Rick Snyder, who authorized the move after a recommendation from the emergency financial manager he had appointed to resolve Detroit’s dire financial situation.
Not everyone agrees how much Detroit owes, but Kevyn D. Orr, the emergency manager, has said the debt is likely to be $18 billion and perhaps as much as $20 billion.
For Detroit, the filing came as a painful reminder of a city’s rise and fall.
“It’s sad, but you could see the writing on the wall,” said Terence Tyson, a city worker who learned of the bankruptcy as he left his job at Detroit’s municipal building on Thursday evening. Like many there, he seemed to react with muted resignation and uncertainty about what lies ahead, but not surprise. “This has been coming for ages.”
Detroit expanded at a stunning rate in the first half of the 20th century with the arrival of the automobile industry, and then shrank away in recent decades at a similarly remarkable pace. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.
From here, there is no road map for Detroit’s recovery, not least of all because municipal bankruptcies are rare. State officials said ordinary city business would carry on as before, even as city leaders take their case to a judge, first to prove that the city is so financially troubled as to be eligible for bankruptcy, and later to argue that Detroit’s creditors and representatives of city workers and municipal retirees ought to settle for less than they once expected.
Some bankruptcy experts and city leaders bemoaned the likely fallout from the filing, including the stigma. They anticipate further benefit cuts for city workers and retirees, more reductions in services for residents, and a detrimental effect on borrowing.
“For a struggling family I can see bankruptcy, but for a big city like this, can it really work?” said Diane Robinson, an office assistant who has worked for the city for 20 years. “What will happen to city retirees on fixed incomes?”
But others, including some Detroit business leaders who have seen a rise in private investment downtown despite the city’s larger struggles, said bankruptcy seemed the only choice left — and one that might finally lead to a desperately needed overhaul of city services and to a plan to pay off some reduced version of the overwhelming debts. In short, a new start.
“The worst thing we can do is ignore a problem,” said Sandy K. Baruah, president of the Detroit Regional Chamber. “We’re finally executing a fix.”
The decision to go to court signaled a breakdown after weeks of tense negotiations, in which Mr. Orr had been trying to persuade creditors to accept pennies on the dollar and unions to accept cuts in benefits.
All along, the state’s involvement — including Mr. Snyder’s decision to send in an emergency manager — has carried racial implications, setting off a wave of concerns for some in Detroit that the mostly white Republican-led state government was trying to seize control of Detroit, a Democratic city where more than 80 percent of residents are black.
The nature of Detroit’s situation ensures that it will be watched intensely by the municipal bond market, by public sector unions, and by leaders of other financially challenged cities around the country. Just over 60 cities, towns, villages and counties have filed under Chapter 9, the court proceeding used by municipalities, since the mid-1950s.
Leaders in Washington and in Lansing, the state capital, issued statements of concern late Thursday. A White House spokeswoman said President Obama and his senior team were closely monitoring the situation.
“While leaders on the ground in Michigan and the city’s creditors understand that they must find a solution to Detroit’s serious financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover and revitalize and maintain its status as one of America’s great cities,” Amy Brundage, the spokeswoman, said in a statement.
The debt in Detroit dwarfs that of Jefferson County, Ala., which had been the nation’s largest municipal bankruptcy, having filed in 2011 with about $4 billion in debt. The population of Detroit, the largest city in Michigan, is more than twice that of Stockton, Calif., which filed for bankruptcy in 2012 and had been the nation’s most populous city to do so.
Other major cities, including New York and Cleveland in the 1970s and Philadelphia two decades later, have teetered near the edge of financial ruin, but ultimately found solutions other than federal court. Detroit’s struggle, experts say, is particularly dire because it is not limited to a single event or one failed financial deal, like the troubled sewer system largely responsible for Jefferson County’s downfall.
Instead, numerous factors over many years have brought Detroit to this point, including a shrunken tax base but still a huge, 139-square-mile city to maintain; overwhelming health care and pension costs; repeated efforts to manage mounting debts with still more borrowing; annual deficits in the city’s operating budget since 2008; and city services crippled by aged computer systems, poor record-keeping and widespread dysfunction.
All of that makes bankruptcy — a process that could take months, if not years, and is itself expected to be costly — particularly complex.
“It’s not enough to say, let’s reduce debt,” said James E. Spiotto, an expert in municipal bankruptcy at the law firm of Chapman and Cutler in Chicago. “At the end of the day, you need a real recovery plan. Otherwise you’re just going to repeat the whole thing over again.”
The municipal bond market will be paying particular attention to Detroit because of what it may mean for investing in general obligation bonds. In recent weeks, as Detroit officials have proposed paying off small fractions of what the city owes, they have indicated they intend to treat investors holding general obligation bonds as having no higher priority for payment than, for instance, city workers — a notion that conflicts with the conventions of the market, where general obligation bonds have been seen as among the safest investments and all but certain to be paid in full.
Leaders of public sector unions and municipal retirees around the nation will be focused on whether Detroit is permitted to slash pension benefits, despite a provision in the State Constitution that union leaders say bars such cuts.
Officials in other financially troubled cities may feel encouraged to follow Detroit’s path, some experts say. A rush of municipal bankruptcies appears unlikely, though, and leaders of other cities will want to see how this case turns out, particularly when it comes to pension and retiree health care costs, said Karol K. Denniston, a bankruptcy lawyer with Schiff Hardin who is advising a taxpayer group that came together in Stockton after its bankruptcy.
“If you end up with precedent that allows the restructuring of retirement benefits in bankruptcy court, that will make it an attractive option for cities,” Ms. Denniston said. “Detroit is going to be a huge test kitchen.”
Around this city, there was widespread uncertainty about what bankruptcy might really mean, now and in the long term. Officials said city workers were being sent letters, notifying them that city business would proceed as usual, from bills to permits. A hot line was planned for residents and others with questions and worries.
For some Detroiters, recent memories of bankruptcies by Chrysler and General Motors — and the re-emergence of those companies — appeared to have calmed nerves. But experts say corporate bankruptcy procedures are significantly different from municipal bankruptcies.
In municipal bankruptcies, for instance, the ability of judges to intervene in how a city is run is sharply limited. And municipal bankruptcies are a form of debt adjustment, as opposed to liquidation or reorganization.
Here, residents are likely to see little immediate change from the way the city has been run since March, when Mr. Orr arrived to oversee major decisions. A bankruptcy lawyer, he is widely expected to continue to run Detroit during a legal process. Mayor Dave Bing and Detroit’s elected City Council are still paid to hold office and are permitted to make decisions about day-to-day operations, though Mr. Orr could remove those powers.
Mr. Orr has said that as part of any restructuring he wants to spend about $1.25 billion on improving city infrastructure and services. But a major concern for Detroit residents remains the possibility that services, already severely lacking, might be further diminished in bankruptcy.
About 40 percent of the city’s streetlights do not work, a report from Mr. Orr’s office showed. More than half of Detroit’s parks have closed since 2008.
Monica Davey reported from Detroit, and Mary Williams Walsh from New York

Thursday, June 6, 2013

Some Good News on Mortgage Loan Forgiveness

Clients that completed their Chapter 7 case in 2011 were denied a loan modification on their second mortgage in 2012.  Yesterday, our clients called with the news that the owner of the large junior lien on their home just completely forgave their loan.  While stories of modification process abuses seem to be the norm, perhaps we can hope for more good news on principal forgiveness soon.

Thursday, November 8, 2012

Bankruptcy can save your house from foreclosure

Bankruptcy Can Save Your House from Foreclosure

Article from  Linke below

NEW YORK ( -- Slick TV commercials and online ads tell delinquent borrowers that they can save their homes by filing for personal bankruptcy. But is it true -- or just too good to be true?

Bankruptcy can bring foreclosure proceedings to a halt, end harassment from debt collectors, and give borrowers time to make up missed payments and reorganize their finances. In some cases, bankruptcy can also help mortgage borrowers save their homes permanently.

It's not, however, going to help every troubled homeowner. If, for example, the homeowner's biggest problem is not enough money, bankruptcy is not going to solve that.

"It's the best tool there is for people behind in payments but who have ongoing income," according to Binghamton, N.Y., attorney Peter Orville, "those who had been making payments and who could be making payments again."

Halting the process

The first thing a bankruptcy filing accomplishes is to stop the foreclosure process. Lenders can't foreclose or even try to collect debt until permitted to do so by the court.
But first, you have to decide what type of bankruptcy to file for. There are, basically, two types to choose from: Chapter 7 and Chapter 13.
A Chapter 7 bankruptcy delays foreclosure. but eventually it usually results in the liquidation of most assets, according to attorney Stephen Elias, author of "The Foreclosure Survival Guide." Borrowers almost always lose their homes in a Chapter 7.
Some bankruptcy attorneys, like New York-based David Pankin, prefer Chapter 7 because it gets rid of all unsecured debt, leaving only secured debt, such as mortgages, exempt. In this scenario, borrowers still owe their mortgage payments but they can likely afford to make them because all the other debts have been discharged.

But for most experts, Chapter 13 is usually more effective at helping people keep their homes. It gives them time to repair their finances, usually three to five years, during which the court agrees to an income-based budget with monthly payments made to trustees.
The trustees pay the bills, first paying off the secured debt. After that, the trustee pays off unsecured debt, starting with back income taxes.
Next in line comes unsecured debt like credit cards and medical bills. By then, there's usually little cash left and these bills are paid at less than the full rate, often as little as five cents on the dollar.
Borrowers, if they kept up on their payments, can emerge from bankruptcy with their homes still in their possessions.

One thing courts cannot do is "cram down" loan balances on primary residences. That is, reduce mortgage debt to what the home is worth. Neither can they lower interest rates, in most cases, nor lengthen the term of the loans.
They can, however, "strip off" second mortgages, like home equity loans or lines of credit, when home values fall below the first mortgage balances, according to Elias.
"This allows the judge to get rid of the second mortgage," he said. "If there's not enough equity to secure the second, it becomes unsecured debt."
That can be a huge advantage for borrowers. Homeowners may have, for example, a $200,000 first mortgage balance and another $50,000 on a home equity loan. If the home value has dropped to less than $200,000, the judge could rule that all $50,000 of the second is unsecured. Then, it can be paid off at the same pennies-on-the dollar as other unsecured debt.

But there are other downsides. Bankruptcy can lop as much as 240 points off credit scores. And bankruptcies can remain on credit reports for 10 years, said Pamela Simmons, a California real estate attorney, while all other black marks disappear after seven years or less.
Fending off deficiencies

There is also a potential tax advantage to filing for bankruptcy rather than going to foreclosure, according to Simmons. When a home is repossessed and the lender forgives the portion of the mortgage balance above its market value, a tax liability can be triggered. Any difference between what people borrow and what they repay is considered income.
Congress is temporarily allowing that unpaid debt to be forgiven -- but only for money specifically spent on the home purchase or on home improvement.
Foreclosed? Here comes the tax man

Millions of people, however, refinanced mortgages or took out home equity loans and used the money to fund vacations, pay college tuition, buy cars or boats or simply to live the good life. That money is taxable.

Simmons had a recent client who was allowing his lender to foreclose on him and called her about the timing, asking whether he had to vacate by the day of the auction.
In passing, she asked him how much he owed on the house. He said he bought it for a million but had taken out another $2 million, most of which had not been spent on the house. When she told him he would owe taxes on it both to Uncle Sam and the State of California, he was dismayed
She rushed him into her office and they did the paperwork so he could file for bankruptcy.
"If they discharge that deficiency in bankruptcy, you don't owe tax on it," said Simmons.

If you questions regarding this article call the San Diego Bankruptcy Law firm at at 619-260-1800 or visit us at

Friday, July 20, 2012

Gov. Brown signs Homeowner Bill of Rights

By Nannette Miranda

SAN FRANCISCO (KFSN) -- California homeowners now have some of the best foreclosure protection in the nation. Governor Brown came to San Francisco Wednesday to sign a bill ending what he calls "abusive home lending tactics."

California has one of the highest foreclosure rates in the country and this new law is supposed to slow down that rate, but critics say that might slow down the markets' recovery as well.

"We're done. We're done with robo-signing. We're done with false promises. We're done with the runaround," Attorney General Kamala Harris, D-California, said.

Governor Brown signed into law the nation's toughest protections for homeowners facing foreclosure. Much of the national mortgage settlement agreed to by five banks earlier this year now apply to all mortgage providers doing business in California and make the terms permanent. "I find it almost incomprehensible that so many smart people and so many rich people could screw things up so profoundly and cause so much suffering and get off in many cases," Brown said.

Beginning January 1, the Homeowner Bill of Rights will:

--Ban "dual-tracking" (which is when banks pursued foreclosure even though the homeowner was seeking a loan modification)

--Require one contact person per customer

--Increase penalties for robo-signing (which automatically approves foreclosure without anyone reading documents)

--Let homeowners sue for violations

Read the full article here

Tuesday, July 17, 2012

California's foreclosure rate leads nation in June

By Rachel McGrath
Posted July 11, 2012 at 9:02 p.m.

For the first time since 2005, California's foreclosure rate in June was the highest in the nation, pushed up by an 18 percent year-on-year increase in the number of properties entering the foreclosure process.

Irvine-based RealtyTrac said there were foreclosure filings on one in 288 housing units in California in June, or 47,490 filings total. There were 197,834 foreclosure filings on properties in the U.S. in June

Filings include default notices, auction sale notices and bank repossessions.

In the first six months of 2012, there were just over 1 million foreclosure filings in the U.S., according to RealtyTrac. The number represents an 11 percent decrease in activity compared with the first six months of 2011.

June also marked the 21st consecutive month of a decline in U.S. foreclosure rates, RealtyTrac said.

While national foreclosures dropped by 3.96 percent in June compared with May, California foreclosures rose by 12.42 percent, according to RealtyTrac.  Read the full article here

Monday, July 16, 2012

As Foreclosures Ramp Up, New Roadblocks Ahead | July 09, 2012 | 04:25 PM EDT

Fraudulent foreclosure practices, a.k.a. “robo-signing,” uncovered now nearly two years ago, opened a new wound in the foreclosure crisis that was in the process of healing.

At big bank mortgage servicers and in courts in many states, the foreclosure process ground to a halt, and the pipeline of delinquent loans swelled to historic levels. Lawsuits abounded and lengthy settlement negotiations on all levels of government began.

Nearly two years later, the foreclosure mechanism is just starting to move again.

Foreclosure starts, the first phase of the process, rose nearly 12 percent in May month-to-month, according to a new report from Lender Processing Services. Foreclosures sales, when the property goes back to the bank or to a bidder at the courthouse steps, rose 10 percent.  Read the full article here