Recently, economic news from both Wall Street and Washington has become increasingly more dismaying. Officials are desperately working to quell fears that America is heading toward financial disaster. Some of the language that has been chosen by these officials, however, has been indicative of the opposite conclusion. For instance, one term that has been bandied about rather freely regarding the subprime mortgage crisis is “perfect storm.” Since the release of the hit movie of the same name, this term has been overused to hyperbolically describe nearly everything that has gone wrong. However, the term might still be useful in deconstructing the metaphor in order to predict where we possibly could be headed.

                The term “perfect storm” refers to a set of conditions that occur simultaneously in order to create the worst possible outcome. It originally was used to describe the Halloween Nor’easter that hit Atlantic Canada in 1991. The storm was the result of an unlucky confluence of weather events that, while individually would have been rather benign, resulted in the second most costly hurricane of that year. Like many powerful coastal storms, there was immediate damage and loss of life, and, while the storm was raging, widespread fear and panic occurred. People could only hunker down and wait for the storm to pass, all the while hoping for the best.

           After the storm, the people who were spared during the initial onslaught emerged to face the destruction that was left in the storm’s wake. The effects of the storm were widespread, and the building process was extremely costly and time consuming.  Bearing this in mind, reflect for a moment on Hurricane Katrina. It made landfall on New Orleans and the Gulf Coast in August of 2005 and caused incredible damage not only to the infrastructure of the region, but also to the inhabitants. Widespread disease and looting occurred even after meteorological calm returned to the region. The consequences of this storm were so appalling that some residents who were stranded in the aftermath expressed that they wished they had fallen victim to the fury of the actual storm itself. Even today, more than three years later, conditions in New Orleans are inexcusable: crime, poverty, and unemployment are rampant. While a storm can be terrifying as it is battering us, it is often the rubble left in its wake that is the hardest to cope with.            

What does all of this have to do with our current financial situation?
Assuming that the subprime mortgage crisis was (or is) in fact a “perfect storm”, it means that after the visible bank closures and the initial wave of bankruptcies and foreclosures, we still have a long way to go. The aftermath of this financial hurricane will not be contained to the banks that owned the risky (and now valueless) mortgages, nor to the people that invested heavily in an inflated stock market. Every one of us will be forced to deal with the destructive wake of this financial crisis.           

Even in relatively affluent areas the situation is grim. Unemployment, bankruptcy, and foreclosures in Suffolk County have risen immensely from October 2007 to October 2008, and this trend throughout the country is either comparable or far worse. The initial shock to the economy will reverberate for years. The preliminary losses will, due to basic economic principles, continue to multiply. Furthermore, a lack of credit from banks stifles job creation, which slows spending, which in turn causes businesses to cut back. This downward spiral is self-perpetuating, and needs to be actively broken. We can all contribute to this by making wise decisions regarding our financial situations and especially our credit. If you do not fully understand what you ought to do to help not only yourself, but also the economy at large, consult an attorney who is experienced in matters relating to credit, bankruptcy, or foreclosure. It cannot eliminate the fact that the initial storm occurred, but it can help staunch the bleeding and speed the rebuilding process of our storm-damaged economy.    –

 

 

Times are tough. Our entire economy is in severe crisis, and with the rest of the world experiencing similar hardship it is unlikely that we will encounter a quick, easy solution. Home values are plummeting, causing people stuck with less than ideal mortgages major financial distress. Companies are folding and laying people off, making jobs even scarcer than they already are. Costs are skyrocketing for nearly all goods and services in our daily lives, and every indication is that things are probably going to get worse before they get better. If you are having a tough time right now, you are not alone. The good news is that there are solutions that you can use to improve your situation and relieve the burden of debt that is currently crushing you.

 

One very good option for some people is to declare bankruptcy. Bankruptcy rates are rapidly increasing from San Francisco, California, to Long Island, New York and everywhere in between. The people making the decision to declare bankruptcy are from all walks of life, and all income levels. There is no archetypal bankruptcy case. The one thing that they have in common is that they all made a business decision to help ease their burden and start over with a clean slate.

 

Some people with loads of personal debt do not consider bankruptcy as an option because they think that it is something to be ashamed of. This could not be farther from the truth. Declaring bankruptcy is not weaseling out of your financial obligations- it is making a serious and well thought-out business decision to utilize an established financial tool to help improve your quality of life.

 

Bankruptcy as an institution exists because people get caught in unexpected situations that turn their world upside-down. It is not designed to protect lazy people that are trying to game the system, but instead to protect people like you- hard working individuals that due to falling home values, rising medical expenses, or some other previously unforeseen trouble now find themselves on the verge of drowning.  If the owners of a big corporation find themselves with mounting debt and little to no chance of recovery, they sell off their assets and declare bankruptcy, effectively canceling their debt. They do this without apology to laid-off workers or upset shareholders. They do not feel bad about the decision because they exercised their right to use an existing solution to minimize future hardship. This tool is available to you as well, and you should not discount it as an option because of a non-existent moral obligation to a creditor.

 

Declaring bankruptcy is an entirely valid way to address crippling debt before it is too late, and it can be the best decision for many people. As with any other business decision that you make, it is important to understand all of the facts. If you are experiencing financial trouble, talk to an experienced bankruptcy attorney who will be able to inform you about your myriad options and whether or not bankruptcy is a viable solution for you.

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Drive anywhere in Suffolk or Nassau County, and you will see the signs of a depressed economy: countless for-sale signs, vacant businesses, foreclosed homes, and quiet streets.  These signs tell of consumers hunkering down- a widespread withdrawal from a grievously injured economic system.  It can be during times such as these, when things might seem hopeless, that we can actually be thankful for a thing like bankruptcy.  While bankruptcy is a sensitive and personal issue for most people, it can also be an interesting phenomenon.  For instance, have you ever wondered how bankruptcy came about?  Who invented this consumer protection concept, and why? 

 

When the Montauk and Rockaway Indians were still hunting and trading on Long Island, bankruptcy had already been an established practice for thousands of years.  In fact, in Ancient Greece, there was even a type of Chapter 13 “reorganization.”  Modern Chapter 13 allows a debtor to reorganize his debts with a lower interest rate and total amount.  In Ancient Greece, only men were permitted to work.  If a man fell behind in his bills, a creditor could petition the local court to have the Man indentured as a debt-slave.  He would be required to work for the creditor until the debt was repaid.  However, being that a man’s family was considered his property, wives and children were indentured as well; often for many years.  This property rule was a frightening idea for slaves owned by the debtor, as they would forever belong to the creditor as part of the “bankruptcy.” 

 

In Roman times, individuals who provided financial services such as currency transfers or loans would operate at a bench in a public place.  In the event they went bankrupt, (or simply ran off with their client’s money) the bench would be broken to indicate the vendor was no longer in service.  This is where the term bankruptcy came from: the Latin words for broken bench.  Many individuals who went bankrupt naturally or were “caught” going bankrupt would often be penalized with harsh prison sentences. 

 

In the time of the Inquisition, Phillip II of Spain inherited a country in trouble.  Already operating with a deficit, Phillip engaged the country in a long series of wars that depleted Spain’s resources even further.  In addition, Spain’s population at the time was small, and spread in thin pockets across the country, which made the collection of taxes quite difficult.  As a result of all this financial duress under Phillip II’s rule, Spain became the first country to declare national bankruptcy.  In fact, during the height of the Inquisition, Phillip II declared bankruptcy several more times.

 

In colonial America, a bankruptcy usually meant serving time in jail.  Even this was uncertain however, as the original colonies soon abandoned practices originally stolen from Great Britain.  Because communication and coordination was so difficult in the early history of the United States, this led to a wide array in the rules and consequences of a bankruptcy from region to region.  In some places, you might be forgiven your debt, with certain restrictions.  In other regions, you could do hard time in a primitive jail. 

 

Throughout the eighteenth century, bankruptcy rules and practices changed frequently, and sometimes did not exist at all.  Finally, the 1898 Bankruptcy Act was passed, and bankruptcy rules across the country gained uniformity.  The rules under this act shifted the balance of benefits to the consumer. 

 

Since the Bankruptcy Reform Act of 1978, bankruptcy has largely remained as it is now.  There have been other key changes to the Act- in 1984 and 2005, for instance, but bankruptcy continues to be a way to start over for people who have no options left.  Everybody deserves a second chance, and by studying the history of bankruptcy, we can clearly see that ancient and modern societies alike have agreed that there should be financial relief and redemption in some way.     

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How will this affect bankruptcies and foreclosures?

    Critics of the federal Bailout plan are many in number, and are ever more ferociously shouting their opposition.  Even to those who know nothing of financial matters, it can be clearly seen that the United States Government is treading in dangerous territory.  Essentially, the government has agreed to buy the sick and troubled assets of institutions that neared or fell into collapse as a result of those assets.  How does that make any sense?  Treasury Secretary Henry Paulson tells us that the purchase of these unhealthy assets will allow banks to distribute capital in the form of credit and other types of loans.  The idea is that the outflow of this credit will move the economy forward again, which will in turn increase the value of the assets held by the government, which can then be sold or returned to the issuing institutions.    

While there is a possibility that this plan will work, it will in all likelihood only be for a short period of time.  What the bailout plan does not allow for is the fact that the troubled assets were troubled before the crisis began.  In fact, they were troubled because the borrowers themselves were in danger of defaulting.  Is it any wonder?  Subprime loans are exactly that- substandard.  

American borrowers- be they individuals or businesses, carry far too much debt.  That simple fact is the cause of most of our current financial woes: we are over-burdened with debt, and as a whole will never be able to pay back what we owe.  Now, that being the case, how can buying the bad loans of banks so that they can make more loans to people who already could not repay the original loans solve the crisis that has rapidly turned global?  The answer is simple: it can’t.     

Many critics of the bailout plan are in support of an alternative plan- one not likely to occur, that would aid the borrower as opposed to aiding the institution.  It makes absolute sense that by alleviating the current debt load of borrowers, there would be an immediate rise in spending, which would mean a rise in the production of goods and services- the healthiest type of stimulation an economy can receive.  Instead, the bailout plan seeks to do nothing more than continue the current status quo; and we have already seen where that will lead us.    

So is there a “Plan B?”  Other than theories that will be posted everywhere in frustration and never attempted, the answer is no.  Nevertheless, for some, taking control of their own debt eradication comes in the form of a foreclosure or a bankruptcy.  In many cases, a borrower is better off financially by letting the bank foreclose on their home, rather than owing on a mortgage that is higher than the value of the home.  Bankruptcy is also an increasingly popular option to wipe debts clean and start over financially.  In many cases, bankruptcy even allows the owner to keep their home.  One thing is for certain- in these most trying of times, we should allow all options to remain open, because the only thing we can say for sure is that we cannot continue to do things the way we have been.   As Mike Bergeron from Nassau County, New York, put it

“We need a Plan B, C, and D- and they all need to be in action at the same time…”   Agreed. Now how exactly should Main Street communicate that to Wall Street and the Fed?               
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Can it Help Me Prevent Foreclosure or Bankruptcy?

  The bailout plan has passed, and we can all breathe a sigh of relief.  Or can we?  The uncomfortable fact of this matter is that most Americans do not even understand what the bailout plan is, never-mind how it will supposedly work.  The real truth is that this decision was out of the hands of the public anyway.  Driven by precisely marketed fear, our politicians approved the bailout, and we must now deal with it.  So what exactly does that mean, and why do we need the bailout in the first place?  

In order to even begin to understand the bailout plan, a working comprehension of banking in general is necessary.  In order to achieve this, let’s take a look at banking on a sixth-grade level- the reading level most newspapers are written in.  We will start with Bank 1.  Bank 1 has 10 customers, who each have $100 in deposits.  Bank 1 now has a total of $1000 in deposits.  Of those 10 customers that Bank 1 has, 3 of them apply for loans totaling $3000.  Bank 1 uses its $1000 in deposits and borrows $2000 from Bank 2 to fund the loans.  Unfortunately, Bank 1 provided these loans to people with substandard credit conditions, and the loans went into default.  Consequently, Bank 1 fails.  Now Bank 2 has lost $2000.  It seeks to borrow money from Bank 3, but Bank 3 won’t lend any money because it is afraid that what happened to Bank 1 will happen to Bank 2.  So now banks in general stop lending to each other.  This means that when “Joe Plumber” or “Mary Real Estate” requires money to improve their businesses, buy more products, or for any other business need, the banks are not making loans.  This freezes spending, and when that happens, the economy dives into a recession.    

While the preceding is a fairly easy scenario to try to imagine, that idea of it needs to be extrapolated many times over in order to understand what actually happened.  Thousands of consumers defaulted on obligations, and thousands of banks stopped lending.  That defines the credit crunch: when liquid credit markets that enabled the flow of currency to occur literally stopped.  This affected every part of the economy: banks failed, insurance giants disintegrated, the dollar lost value dramatically, and there was the sense of impending panic worldwide.  T

hankfully, the Feds stepped in, bullied the bailout plan through congress, and here we are…   While our leaders are touting the bailout plan as providing relief for the everyday American citizen, this is not entirely accurate.  In fact, the plan is to be paid for by American taxpayers at a time when they can least afford it.  The plan does call for interest rates to be frozen on qualifying mortgages; however, this will only help an estimated 300,000 homeowners for about five years- if the plan moves along as originally intended.  So who is the plan really helping, and where is $700 billion dollars going?   First, the bailout plan does not mandate that $700 billion must be spent.  The plan allows up to that amount, which is a balanced projection of what it might cost to get us out of this financial mess.  What the Federal Government intends to do with the money is to invest in the securitized assets of banks that are in trouble, and have frozen or substantially slowed their lending.  

Yes, that means that the United States Government will then own the same troubled and unhealthy assets that caused the meltdown in the first place.  This will allow banks to clear up their ledgers by removing risk-laden debt, and theoretically will provide the incentive banks need to start lending again.  This way, Joe Plumber spends money by growing his business, the bank profits from his loan, credit remains liquid, and the economy flows once again.  

The most pressing question that remains now is whether or not the banks will swallow their fears and start lending again.  In addition to that query, and perhaps an even more vital question, is exactly what the Federal government plans to do with all those unhealthy assets they intend to buy with our money.  Bookmark this blog to find out.   –