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By Jessica Silver-Greenberg and Michael Corkery
More than a decade after Yvette Harris’s 1997 Mitsubishi was repossessed, she is still
paying off her car loan.
She has no choice. Her auto lender took her to court and won the right to seize a
portion of her income to cover her debt. The lender has so far been able to garnish
$4,133 from her paychecks — a drain that at one point forced Ms. Harris, a single
mother who lives in the Bronx, to go on public assistance to support her two sons.
“How am I still paying for a car I don’t have?” she asked.
For millions of Americans like Ms. Harris who have shaky credit and had to turn
to subprime auto loans with high interest rates and hefty fees to buy a car, there is no
getting out.
Many of these auto loans, it turns out, have a habit of haunting people long after
their cars have been repossessed.
The reason: Unable to recover the balance of the loans by repossessing and
reselling the cars, some subprime lenders are aggressively suing borrowers to collect
what remains — even 13 years later.
Ms. Harris’s predicament goes a long way toward explaining how lenders,
working hand in hand with auto dealers, have made billions of dollars extending
high-interest loans to Americans on the financial margins.
These are people desperate enough to take on thousands of dollars of debt at
interest rates as high as 24 percent for one simple reason: Without a car, they have
no way to get to work or to doctors.
With their low credit scores, buying or leasing a new car is not an option. And
when all the interest and fees of a subprime loan are added up, even a used car with
mechanical defects and many miles on the odometer can end up costing more than a
new car.
Subprime lenders are willing to take a chance on these risky borrowers because
when they default, the lenders can repossess their cars and persuade judges in 46
states to give them the power to seize borrowers’ paychecks to cover the balance of
the car loan.
Now, with defaults rising, federal banking regulators and economists are
worried how the strain of these loans will spill over into the broader economy.
For low-income Americans, the fallout could, in some ways, be worse than the
mortgage crisis.
With mortgages, people could turn in the keys to their house and walk away. But
with auto debt, there is increasingly no exit. Repossession, rather than being the end,
is just the beginning.
“Low-income earners are shackled to this debt,” said Shanna Tallarico, a
consumer lawyer with the New York Legal Assistance Group.
There are no national tallies of how many borrowers face the collection lawsuits,
known within the industry as deficiency cases. But state records show that the courts
are becoming flooded with such lawsuits.
For example, the large subprime lender Credit Acceptance has filed more than
17,000 lawsuits against borrowers in New York alone since 2010, court records
show. And debt buyers — companies that scoop up huge numbers of soured loans for
pennies on the dollar — bring their own cases, breathing new life into old bills.
Portfolio Recovery Associates, one of the nation’s largest debt buyers, purchased
about $30.2 million of auto deficiencies in the first quarter of this year, up from
$411,000 just a year earlier.
One of the people Credit Acceptance sued is Nagham Jawad, a refugee from
Iraq, who moved to Syracuse after her father was killed. Soon after settling into her
new home in 2009, Ms. Jawad took out a loan for $5,900 and bought a used car.
After only a few months on the road, the transmission on the 10-year-old Chevy
Tahoe gave out. The vehicle was in such bad shape that her lender didn’t bother to
repossess it when Ms. Jawad, 39, fell behind on payments.
“These are garbage cars sold at outrageous interest rates,” said her lawyer, Gary
J. Pieples, director of the consumer law clinic at the Syracuse University College of
Law.
The value of any car typically starts to decline the moment it leaves the dealer’s
lot. In the subprime market, however, the value of the cars is often beside the point.
A dealership in Queens refused to cancel Theresa Robinson’s loan of nearly
$8,000 and give her a refund for a car that broke down days after she drove it off the
lot.
Instead, Ms. Robinson, a Staten Island resident who is physically disabled and
was desperate for a car to get to her doctors’ appointments, was told to pick a
different car from the lot.
The second car she selected — a 2005 Chrysler Pacifica — eventually broke
down as well. Unable to afford the loan payments after sinking thousands of dollars
into repairs, Ms. Robinson defaulted.
Her subprime lender took her to court and won the right to garnish her income
from babysitting her grandson to cover her loan payments.
Ms. Robinson and her lawyer, Ms. Tallarico, are now fighting to get the
judgment overturned.
“Essentially, the dealers are not selling cars. They are selling bad loans,” said
Adam Taub, a lawyer in Detroit who has defended consumers in hundreds of these
cases.
Many lawyers assisting poor borrowers like Ms. Robinson say they learn about
the lawsuits only after a judge has issued a decision in favor of the lender.
Most borrowers can’t afford lawyers and don’t show up to court to challenge the
lawsuits. That means the collectors win many cases, transforming the debts into
judgments they can use to garnish wages.
The lenders argue that they are just recouping through the courts what they are
legally owed. They also argue that subprime auto lending meets an important need.
And collecting on the debt is a critical part of the business. The first item on the
quarterly earnings of Credit Acceptance, the large subprime auto lender, is not the
amount of loans it makes, but what it expects to collect on the debt.
The company, for example, expects a 72 percent collection rate on loans made in
2014 — the year that a used 2009 Volkswagen Tiguan was repossessed from Nina
Lysloff of Ypsilanti, Mich.
With all the interest and fees on her Credit Acceptance loan factored in, the car
ended up costing her $28,383. Ms. Lysloff could have bought a brand-new
Volkswagen Tiguan for $22,149, according to Kelley Blue Book.
When Ms. Lysloff fell behind, the trade-in value on the car was a fraction of
what she still owed. Last year, Credit Acceptance sued her for $15,755.
The strategy at Credit Acceptance, which has a market value of $4.4 billion, is
yielding big profits. The Michigan company said its return on equity, a measure of
profitability, was 31 percent last year — more than four times Bank of America’s
return.
Credit Acceptance did not respond to requests for comment.
Some of the people who got subprime loans lacked enough income to qualify for
any loan.
U.S. Bank is pursuing Tara Pearson for the $9,339 left after her 2011 Hyundai
Accent was stolen and she could not pay the fee to get it from the impound lot. When
she purchased the car in 2015 at a dealership in Winchester, Ky., Ms. Pearson said,
she explained that her only income was about $722 from Social Security.
Her loan application listed things differently. Her employer was identified as
“S.S.I.,” and her income was put at $2,750, court records show.
Citing continuing litigation, U.S. Bank declined to comment about Ms. Pearson.
Auto lending was one of the few types of credit that did not dry up during the
financial crisis. It now stands at more than $1.1 trillion.
Despite many signs that the market is overheating, securities tied to the loans
are so profitable — yielding twice as much as certain Treasury securities — that they
remain a sought-after investment on Wall Street.
“The dog keeps eating until its stomach explodes,” said Daniel Zwirn, who runs
Arena, a hedge fund that has avoided subprime auto investments.
Some lenders are pulling back from making new loans. Subprime auto lending
reached a 10-year low in the first quarter. But for those borrowers already stuck with
debt, there is no end in sight.
Ms. Harris, the single mother from the Bronx, said that even after her wages had
been garnished and she paid an additional $2,743 on her own, her lender was still
seeking to collect about $6,500.
“It’s been a nightmare,” she said.
Copyright 2017 The New York Times Company. All rights reserved.
What types of bankruptcy are available?
Chapter 7 and chapter 13 are the two chapters most often used by the average consumer. Chapter 7 is typically used by those with little non-exempt property and less than median income. Chapter 13 is used by consumers who desire to propose a chapter 13 plan of reorganization to provide for their various debt over a 3 to 5 year plan of reorganization.
How does a person decide which chapter is best?
Various items need to be considered in determining whether to file for bankruptcy under chapter 7 or chapter 13. One item to be reviewed is the "mean test" which was added to the bankruptcy code in 2005. If a person has substantial property in excess of that which is "exempt," filing under chapter 13 would likely be appropriate. Also is a person is behind with their mortgage or in a foreclosure, they would consider using chapter 13 to propose a plan to reinstate their mortgage.
Can a future employer consider my bankruptcy in a hiring decision?
Goverment employers may not deny employment to those who file for bankruptcy. Private employers may not terminate an employee because of a bankruptcy filing. Although technically a private employer can refuse to hire a person on account of a bankruptcy filing, often the discharge of debt makes a person a better candidate with his financial situation resolved.
May a person file for bankruptcy for just come of his debt?
A person is required to list all of his or her debt in the bankruptcy case. Those debts that are dischargeable will be discharged. A person though is free to voluntarily repay any debts if they should so desire.
Jordan E. Bublick - Miami Bankruptcy Lawyer - North Miami & Kendall Offices - (305) 891-4055 - www.bublicklaw.com
What types of bankruptcy are available?
Chapter 7 and chapter 13 are the two chapters most often used by the average consumer. Chapter 7 is typically used by those with little non-exempt property and less than median income. Chapter 13 is used by consumers who desire to propose a chapter 13 plan of reorganization to provide for their various debt over a 3 to 5 year plan of reorganization.
How does a person decide which chapter is best?
Various items need to be considered in determining whether to file for bankruptcy under chapter 7 or chapter 13. One item to be reviewed is the "mean test" which was added to the bankruptcy code in 2005. If a person has substantial property in excess of that which is "exempt," filing under chapter 13 would likely be appropriate. Also is a person is behind with their mortgage or in a foreclosure, they would consider using chapter 13 to propose a plan to reinstate their mortgage.
Can a future employer consider my bankruptcy in a hiring decision?
Goverment employers may not deny employment to those who file for bankruptcy. Private employers may not terminate an employee because of a bankruptcy filing. Although technically a private employer can refuse to hire a person on account of a bankruptcy filing, often the discharge of debt makes a person a better candidate with his financial situation resolved.
May a person file for bankruptcy for just come of his debt?
A person is required to list all of his or her debt in the bankruptcy case. Those debts that are dischargeable will be discharged. A person though is free to voluntarily repay any debts if they should so desire.
Jordan E. Bublick - Miami Bankruptcy Lawyer - North Miami & Kendall Offices - (305) 891-4055 - www.bublicklaw.com
Initial Facts This is a bankruptcy case study for Ms. F. who resides in Aurora, Illinois. She is in the office to determine whether or not she can qualify for chapter 7, the fresh start bankruptcy. Otherwise, she is potentially interested in a chapter 13 bankruptcy case which is a reorganization of debts. Let’s look+ Read More
The post Bankruptcy Case Study For Ms. F., From Aurora, Illinois appeared first on David M. Siegel.
Initial Facts This is a bankruptcy case study for Ms. F. who resides in Aurora, Illinois. She is in the office to determine whether or not she can qualify for chapter 7, the fresh start bankruptcy. Otherwise, she is potentially interested in a chapter 13 bankruptcy case which is a reorganization of debts. Let’s look+ Read More
The post Bankruptcy Case Study For Ms. F., From Aurora, Illinois appeared first on David M. Siegel.
Initial Facts This is a bankruptcy case study for Ms. F. who resides in Aurora, Illinois. She is in the office to determine whether or not she can qualify for chapter 7, the fresh start bankruptcy. Otherwise, she is potentially interested in a chapter 13 bankruptcy case which is a reorganization of debts. Let’s look+ Read More
The post Bankruptcy Case Study For Ms. F., From Aurora, Illinois appeared first on David M. Siegel.
By Gretchen Morgenson
Even as Wells Fargo was reeling from a major scandal in its consumer bank last year,
officials in the company’s mortgage business were putting through unauthorized
changes to home loans held by customers in bankruptcy, a new class action and
other lawsuits contend.
The changes, which surprised the customers, typically lowered their monthly
loan payments, which would seem to benefit borrowers, particularly those in
bankruptcy. But deep in the details was this fact: Wells Fargo’s changes would
extend the terms of borrowers’ loans by decades, meaning they would have monthly
payments for far longer and would ultimately owe the bank much more.
Any change to a payment plan for a person in bankruptcy is subject to approval
by the court and the other parties involved. But Wells Fargo put through big changes
to the home loans without such approval, according to the lawsuits.
The changes are part of a trial loan modification process from Wells Fargo. But
they put borrowers in bankruptcy at risk of defaulting on the commitments they
have made to the courts, and could make them vulnerable to foreclosure in the
future.
A spokesman for Wells Fargo, Tom Goyda, said the bank strongly denied the claims
made in the lawsuits and particularly disputed how the complaints characterized the
bank’s actions. Wells Fargo contends that the borrowers and the bankruptcy courts
were notified.
“Modifications help customers stay in their homes when they encounter
financial challenges,” Mr. Goyda said, “and we have used them to help more than
one million families since the beginning of 2009.”
According to court documents, Wells Fargo has been putting through
unrequested changes to borrowers’ loans since 2015. During this period, the bank
was under attack for its practice of opening unwanted bank and credit card accounts
for customers to meet sales quotas.
Outrage over that activity — which the bank admitted in September 2016, when
it was fined $185 million — cost John G. Stumpf, its former chief executive, his job
and damaged the bank’s reputation.
It is unclear how many unsolicited loan changes Wells Fargo has put through
nationwide, but seven cases describing the conduct have recently arisen in
Louisiana, New Jersey, North Carolina, Pennsylvania and Texas. In the North
Carolina court, Wells Fargo produced records showing it had submitted changes on
at least 25 borrowers’ loans since 2015.
Bankruptcy judges in North Carolina and Pennsylvania have admonished the
bank over the practice, according to the class-action lawsuit filed last week. One
judge called the practice “beyond the pale of due process.”
The lawsuits contend that Wells Fargo puts through changes on borrowers’
loans using a routine form that typically records new real estate taxes or
homeowners’ insurance costs that are folded into monthly mortgage payments.
Upon receiving these forms, bankruptcy court workers usually put the changes into
effect without questioning them.
It is unclear why the bank would put through such changes. On one hand, Wells
Fargo stood to profit from the new loan terms it set forth, and, under programs
designed to encourage loan modifications for troubled borrowers, the bank receives
as much as $1,600 from government programs for every such loan it adjusts, the
class-action lawsuit said. But submitting the changes without approval violates
bankruptcy rules and puts the bank at risk of court sanctions and federal scrutiny.
When a lawyer for a borrower has questioned the changes, Wells Fargo has reversed
them.
Abelardo Limon Jr., a lawyer in Brownsville, Tex., who represents some of the
plaintiffs, said he first thought Wells Fargo had made a clerical error. Then he saw
another case.
“When I realized it was a pattern of filing false documents with the federal court,
that was appalling to me,” Mr. Limon said in an interview. The unauthorized loan
modifications “really cause havoc to a debtor’s reorganization,” he said.
This is not the first time Wells Fargo has been accused of wrongdoing related to
payment change notices on mortgages it filed with the bankruptcy courts. Under a
settlement with the Justice Department in November 2015, the bank agreed to pay
$81.6 million to borrowers in bankruptcy whom it had failed to notify on time when
their monthly payments shifted to reflect different real estate taxes or insurance
costs.
That settlement — in which the bank also agreed to change its internal
procedures to prevent future violations — affected 68,000 homeowners.
Borrowers having financial difficulties often file for personal bankruptcy to save
their homes, working out payment plans with creditors and the courts to bring their
loans current in a set period. If the borrowers meet their obligations over that time,
they emerge from bankruptcy with clean slates and their homes intact.
Changing these payment plans without the approval of the judge and other
parties can imperil borrowers’ standing with the bankruptcy courts.
In the class-action lawsuit filed last week, the lead plaintiffs are a couple in
North Carolina who say that Wells Fargo submitted three changes to their payment
plan in 2016 without approval. The first time, Wells Fargo put through the changes
without alerting them, according to the couple, Christopher Dee Cotton and Allison
Hedrick Cotton.
The Cottons’ monthly payments declined with every change, dropping to $1,251
from $1,404.
Buried deep in the documents Wells Fargo filed — but did not get approved by
the borrowers, their lawyers or the court — was the news that the bank would extend
the Cottons’ loan to 40 years, increasing the amount of interest they would have to
pay. Before the changes, the Cottons owed roughly $145,000 on their mortgage and
were on schedule to pay off the loan in 14 years. Over that period, their interest
would total $55,593.
Under the new loan terms, the Cottons would have incurred $85,000 in interest
costs over the additional 26 years, on top of the $55,593 they would have paid under
the existing loan, their court filing shows.
Theodore O. Bartholow III, a lawyer for the Cottons, said Wells Fargo’s actions
contravened the intent of the bankruptcy system. “When it goes the right way, the
debtor and mortgage company agree to do a modification, go to court and say, ‘Hey
judge, modify or change the disbursement on my mortgage.’”
Instead, Wells Fargo did “a total end run” around the process, said Mr.
Bartholow, of Kellett & Bartholow in Dallas. The Cottons declined to comment.
Mr. Goyda, the Wells Fargo spokesman, denied that the bank had not notified
borrowers. “The terms of these modification offers were clearly outlined in letters
sent to the customers and/or to their attorneys, and as part of the Payment Change
Notices sent to the bankruptcy courts,” he wrote by email.
Mr. Goyda said that “such notices are not part of the loan modification package,
or part of the documentation required for the customer to accept or decline
modification offers.” He added, “We do not finalize a modification without receiving
signed documents from the customer and, where required, approval from the
bankruptcy court.”
Mr. Limon and other lawyers say that while the bank may wait for approval to
complete a modification, it has nevertheless put through unapproved changes to
borrowers’ payment plans. According to a complaint he filed on behalf of clients in
Texas, instead of going through the proper channels to try to modify a loan, Wells
Fargo filed the routine payment change notification.
The clients also accuse the bank of making false claims by contending that the
borrowers had requested or approved the loan modifications. In many cases, the
trustees who handle payments on behalf of consumers in bankruptcy would accept
the changes Wells Fargo had submitted on the assumption they had been properly
approved.
Mr. Limon represents Ignacio and Gabriela Perez of Brownsville, who say Wells
Fargo put through an improper change to their payment plan last year.
After experiencing financial difficulties, Mr. and Mrs. Perez filed for Chapter 13
bankruptcy protection in August 2016. They owed about $54,000 on their home at
the time, and had fallen behind on the mortgage by $2,177. The value of their home
was $95,317, records show, so they had substantial equity.
In September, the Perezes filed a payment plan with the bankruptcy court in
Brownsville; the trustee overseeing the process ordered a confirmation hearing on
the plan for early November.
But in a letter to the Perezes dated Oct. 10, Wells Fargo said their loan was
“seriously delinquent” and offered them a trial loan modification. “Time is of the
essence,” the letter stated. “Act now to avoid foreclosure.”
Because they were going through bankruptcy, the Perezes were not under any
threat of foreclosure. Mr. Perez said in an interview that the letter worried him, so he
asked his lawyer to investigate.
Then, on Oct. 28, 2016, DeMarcus Jones, identified in court papers as “VP Loan
Documentation” at Wells Fargo, filed a notice of mortgage payment change with the
bankruptcy court. It said the Perezes’ new monthly payment would be $663.15, down
from $1,019.03. In the notice, the bank explained that the reduction was a “Payment
change resulting from an approved trial modification agreement.”
The changes had not been approved by the Perezes, their lawyer or the
bankruptcy court, their complaint said.
Although the monthly payment Wells Fargo had listed for the Perezes was
lower, there was a catch — the same one that showed up in the Cottons’ loan. The
Perezes had been scheduled to pay off their mortgage in nine years, but the loan
terms from Wells Fargo extended it to 40 years. The Perezes would owe the bank an
extra $40,000 in interest, the legal filing said.
“I thought that I was totally crazy, or they were totally crazy,” Mr. Perez said. “I
am 58, in what mind could they think I would agree to extend my mortgage 40 years
more? I don’t understand much maybe, but it doesn’t sound legal to me.”
Mr. Limon quickly fought the changes.
If he had not, Mr. and Mrs. Perez could have faced further complications. The
new Wells Fargo payments were so much less than the payments the Perezes had
submitted to the bankruptcy court that if the trustee had started making the new
payments with no court approval, the Perezes would have emerged at the end of
their bankruptcy plan owing the difference between the amounts. The Perezes would
be unwittingly in arrears, and the bank could begin foreclosure proceedings if they
were unable to make up the difference.
© 2017 The New York Times Company. All rights reserved.
If you are gainfully employed, the payment will most likely come directly from your wages in the form of a payroll control order. If you are self-employed or do not receive a regular pay check, then you will have to make the payment directly to the Chapter 13 Trustee. If you fall behind on your+ Read More
The post Paying The Chapter 13 Bankruptcy Trustee appeared first on David M. Siegel.
If you are gainfully employed, the payment will most likely come directly from your wages in the form of a payroll control order. If you are self-employed or do not receive a regular pay check, then you will have to make the payment directly to the Chapter 13 Trustee. If you fall behind on your+ Read More
The post Paying The Chapter 13 Bankruptcy Trustee appeared first on David M. Siegel.
If you are gainfully employed, the payment will most likely come directly from your wages in the form of a payroll control order. If you are self-employed or do not receive a regular pay check, then you will have to make the payment directly to the Chapter 13 Trustee. If you fall behind on your+ Read More
The post Paying The Chapter 13 Bankruptcy Trustee appeared first on David M. Siegel.
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Learn more about how Bankruptcy works and what you need to know.