Notorious Banks and Lenders

Although there are some basic rules that all creditors are supposed to follow when a bankruptcy case is filed, many banks and lenders have different procedures and interpretations of the rules.  Sometimes, differing procedures have nothing to do with the bankruptcy itself, but the business practices of a particular bank often has similar impacts on people who file for bankruptcy.
Today, we’re going to cover a range of topics and practices, and the lenders who are notorious for them.  Mind you that I am not referencing any empirical data or statistics here.  These are based on my many many years of observation – dealing with the same quirks of the same banks over and over and over again.  Also keep in mind that this is a somewhat local experience, as some of the creditors mentioned here do not have branches all across the country.  Other creditors might be more notorious for certain things in Texas or California or New York.
I would like to point out that three of the creditors on this list are part of the Big Four (JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo).  Chase isn’t on this list – not because they’re a good bank, but simply because they haven’t gotten on my radar in a bad way.  Nevertheless, there are reasons why I refuse to do any personal business with any big banks, and you’re about to read some of them below.
Associated Bank
  • Notorious for drowning homes.  Although they seem to have halted this practice in recent years, Associated Bank used to give a lot of junior mortgages on homes that were already worth less than the balance owed on the primary mortgage.  This made Associated Bank a prime target for lien stripping in Chapter 13.  In fact, I believe all but one or two of my lien strips (to date) have involved an Associated Bank mortgage.
Bank of America
  • Notorious for being obnoxious, obstructionist, and incompetent when it comes to mortgage modifications.  Frankly, a lot of mortgage lenders are guilty of this one, but Bank of America consistently stood out as the most irritating creditor to have to try to work with to get a modification.  To their credit, some of the best modifications I’ve helped generate have come from Bank of America, but not without my wanting to commit several felonies along the way.
Best Buy
  • Notorious for claiming that they have security interest in all goods purchased with their credit cards.  Trouble is – their security agreements fail to meet the criteria necessary for a valid security interest in the state of Wisconsin.
  • Notorious for drowning vehicles.  Most financed vehicles are “under water” because they lose such a huge chunk of their value the moment they are driven off the lot.  But Citi is famous for giving people massive loans along the order of $10,000 to $20,000, usually secured by a 20-30 year old vehicle that’s worth less than the paper the title is printed on.  These loans are typically non-purchase money security loans (meaning the borrowers already owned the car before taking out the loan, and put up their vehicle as collateral).  When these people file for bankruptcy, the decision to surrender these vehicles is almost unanimous, unless the vehicle qualifies for a cram-down in Chapter 13.

Credit Unions (generally)

  • Notorious for cross-collateralization.  I can’t pick out any specific credit union, as this practice seems to be common among all credit unions, and only credit unions.  If someone has multiple debts with a credit union and one of those debts is secured, cross-collateralization makes all of the debts secured.  Technically, this can make reaffirmation an all-or-nothing deal.  In reality, this can often be avoided in Chapter 7 if the debtor is willing to call the credit union’s bluff.  But it can create a real dilemma in non-910 claims in Chapter 13.
  • Notorious for threatening actions under sec. 523(a)(2)(C).  Although they’ve stepped back from this practice, it used to be that every time a client of mine filed bankruptcy with a Discover account, we got a letter threatening an adversary proceeding for fraudulent incursion of debt prior to filing for bankruptcy.  We never caved.  How many actions did they ultimately bring against my clients?  Zero.
  • Notorious for the walk away.  In many instances, HSBC simply refuses to foreclose on homes.  Why?  Your guess is as good as mine.  It’s a terrific deal for the homeowner, who gets to stay in their home indefinitely rent-free.  Unless the homeowner, believing that they would soon be evicted, vacate the home prematurely and begin to mount up substantial liabilities for the home that they still legally own and are responsible for.
Payday Loan Stores (generally)
  • Notorious for ridiculously high interest rates.  I can’t pick out a specific creditor, as these predatory lending practices are common to virtually all such lenders.  Interest rates on these loans frequently are 3-4 digits, with many currently approaching 1900%.  Essentially, they’re loan sharks.  Barely legal loan sharks.
  • Notorious for illegal debt collection practices, including FDCPA violations, automatic stay and discharge violations, blatant lies about their rights of recovery, and criminal extortion.
WE Energies
  • Notorious for requiring security deposits for any debtor in bankruptcy who has an outstanding debt.  Any utility company can do this.  Most in Wisconsin don’t, except in rare circumstances.  WE Energies seems to have recently made it a standing policy.
Wells Fargo
  • Notorious for freezing bank accounts after debtors file for bankruptcy.Wells Fargo insists that they are preserving the bankruptcy estate.  Debtors assert that Wells Fargo is exercising control over the estate in violation of the automatic stay.  Even if a judge rules in your favor, the inconvenience can be crippling.  It’s best to use a different bank if you’re preparing to file for bankruptcy.
  • Notorious for not allowing ride-throughs instead of a formal reaffirmation.  I can’t say that this was a very common occurrence, but Wells Fargo was the only creditor I ever heard of who made the argument that failure to sign a reaffirmation agreement was a technical default under the loan and grounds for repossession or foreclosure.
Wisconsin Department of Revenue
  • Notorious for being the last creditor to file a proof of claim.  I hesitate to put them on the list because they’re not doing anything wrong.  Government entities have later deadlines to file proofs of claim than ordinary creditors do.  The Department of Revenue frequently does not file claims until after the bar date for ordinary creditors and nearly before their own deadline.  This can be frustrating, because Chapter 13 plans are typically confirmed much sooner, and WIDOR claims are typically priority claims that have to be funded.  The IRS, for all we make fun of them for running on antique computer software, is usually very prompt with their claims, making it easier to timely address any discrepancies.  Fortunately, we are expecting changes in the federal rules of procedure that will shorten the deadlines to file claims – these rule changes are expected to accompany the national model plan at the end of 2016.

Why reaffirm?

I have blogged in the past about why it is critical to disclose all of your debts on your bankruptcy schedules, even ones you don’t want to include or “file against”.  The two main things to take away from that article are:

  • Listing a debt is NOT the same thing as “filing against” or discharging a debt.
  • You have an obligation to disclose all creditors – dischargeable or non-dischargeable, secured or unsecured – as a matter of due process.

So, with that in mind, let’s move on to the topic of reaffirmation agreements.  Again, there are two main points to make in order to understand why a reaffirmation agreement may be necessary.

  • Bankruptcy wipes out debts, but it does not remove liens (with some exceptions).
  • Secured debts are generally dischargeable debts.

All right, so let’s put ourselves in an alternate reality where there is no such thing as a reaffirmation agreement, but all other bankruptcy laws are the same.  You file for bankruptcy and receive a discharge.  The discharge is good against the world.  Therefore, your mortgage and car loan are discharged.  This means that you have no obligation to pay the mortgage company and vehicle lender, and they have no legal right to pursue you for payment.
However, bankruptcy did not wipe out the security interest that existed.  In the absence of payment, the vehicle lender repossesses your car and your mortgage company forecloses on your home.
Enter the reaffirmation agreement.  A reaffirmation is a post-petition affirmation of a debt.  In a way, it converts an existing, pre-petition debt into a post-petition debt, and makes it non-dischargeable under the old bankruptcy.  (It can be discharged in a future bankruptcy, provided that enough years lapse such that you are eligible for a discharge.)
Reaffirmation agreements are voluntary and must be entered into by both parties – the creditor and the debtor.  A debtor who wishes to reaffirm cannot force an unwilling creditor to enter into a reaffirmation agreement.  A creditor who wishes to reaffirm cannot force an unwilling debtor to enter into a reaffirmation agreement.
So, what are some of the advantages and disadvantages to reaffirming?
First, reaffirming a secured debt allows you to keep the collateral so long as you continue to make payments on the loan.  A failure to reaffirm does not necessarily mean that you lose the collateral (you can make payments without a reaffirmation, which we refer to as a “ride through”), but there are some creditors who consider a failure to reaffirm as a default, and sufficient cause to foreclose or repossess.
Second, reaffirming a secured debt is an excellent way to rebuild credit after bankruptcy, because you don’t have to apply for a new loan – it already exists, and the payments you make on it after your case is filed will help boost your credit score.  In the absence of a reaffirmation agreement, however, creditors are not obligated to report your payments to the credit bureaus.
Third, if you file a reaffirmation agreement, but then default on the loan later, the creditor is not only able to repossess or foreclose, but the creditor can also sue you for full payment of the deficiency balance afterward.  Your bankruptcy discharge won’t protect you.  Whereas, if you do not file a reaffirmation agreement, but later default on the loan, you still face the foreclosure or repossession, but won’t be liable for the deficiency.
Here are a few other things to consider when making an informed decision to reaffirm a debt or not…
Creditors are generally under no obligation to repossess or foreclose a property if they do not want to.  Although this is uncommon with real estate and vehicles, if this does happen, you could remain liable for things like property taxes, liability insurance, winterization and heating costs, parking violations, and so forth.  If you cannot get a creditor to physically take the keys to real estate or a vehicle, you probably should not abandon the collateral until they actually come for it.  And don’t just sell the collateral, either.  The lender could come back later for the collateral, and if it isn’t available for collection, you could be assessed criminal penalties.  Property that has a lien on it should never be sold without the lender’s express consent and – ideally – a lien release.
For smaller secured loans (like furniture loans, appliance loans, and jewelry loans), although the creditors have the right to repossess if you default or do not sign the reaffirmation agreement, it is highly unlikely that they actually will.  The costs of repossession almost always outweigh the price the lender will realize at auction.
Creditors who claim to have security in stuff you buy might not necessarily have a valid purchase money security interest (PMSI).  Best Buy is notorious for having very vague security agreements which list as security “all of the debtor’s assets” or “all the debtor’s personal property” or “all items purchased”.  Under Wisconsin law, 409.108(3) of Wisconsin statutes indicates that generic descriptions are okay for finance agreements, but not sufficient for security agreements.  There needs to be some reasonable detail of the collateral.
If you do want to reaffirm, the agreement must be filed with the Bankruptcy Court within 60 days of the date of your 341 hearing (which is when you are scheduled to receive your discharge).  Your case cannot be reopened to get a late-filed reaffirmation approved.  (You can file a motion to delay discharge to allow more time to complete a reaffirmation agreement.  You can also reopen a case to file a reaffirmation agreement after discharge, but the court will not approve it, and at the expense of a $260 filing fee.)
Notwithstanding considerations of positive credit reporting and eliminating the risk of foreclosure and repossession, there are other things you should consider before filing a reaffirmation agreement.  Most notably – can you afford it?  Often overlooked is the budget, but what good is a fresh start in bankruptcy if you’re just going to dig yourself into a new hole with something you cannot afford.  Consider the following factors:
  • What is the monthly payment?  Can I afford to pay it?
  • What is the interest rate?  Could I get a new loan for this sort of collateral at a better rate?  How much of my payment is actually going to the principal balance?
  • What is the term of the loan?  Do I have to make this payment for 6 months or 30 years?
  • How much is the collateral worth?  Does it make sense to pay $20,000 for a car that is worth $6,000?  Might it be cheaper to finance a new car?
  • Is the collateral necessary?  Sure, I love my 72″ plasma television, but is paying $200 a month for it really worth it when I have a wife and two kids to feed?