[Editor's Note: This is the first of two parts looking at the difference between home mortgage delinquencies of the wealthy--which are on a dramatic rise--and alternatives for the less well-to-do.]

A recent headline in The New York Times:

Biggest Defaulters on Mortgages Are the Rich

If you’re thinking, yeah, well–what else do you expect from the Times? OK, here’s basically the same story from Fox:

Wealthy Walk Away From Mortgages

Reading both accounts, one will notice a  shared theme, namely the question  “what’s best for the community?”

Community and neighborhood interests are crucially important. Hence our posts about the nonsensical behavior of institutions that lets home after home slide into foreclosure, which affects property values like bombing a pond. Aanymore, this ain’t about ripples from a pebble. What really hurts a neighborhood more? Owner-driven bankruptcy–or bank-driven foreclosure?

Property-value loss cascades through neighborhoods

Foreclosed properties littered through a neighborhood affect property values throughout the entire community, not merely the adjacent homes.

On the other hand we’ve all seen major league bankruptcies, from big players such as The Donald to major automakers. Not to mention the current, wadded-up mess with the Texas Rangers baseball club…

How is it that when “the big boys” do it, it’s a business decision?

Yet, when consumers file for bankruptcy protection, they are somehow…sneaky?

Unemployment data say ‘no progress’

Let’s look at the numbers of the so-called recovery: Since June of last year the unemployment rate is virtually unchanged, whether you look at the so-called “official rate” (row U-3 in the labor department’s Table A-15) of 9.7 per cent in June 2009 versus 9.6 per cent last month. Ok, that’s not “seasonally adjusted.” The seasonally adjusted figures show a slightly better picture: 9.5 percent in June 2009 versus 9.5 per cent last month–which means even when we consider the lesser numbers of jobless people counted in the “official rate,” there’s no change in a year.

And the same holds true for row U-6, which is the actual “total unemployed” rate. The not-seasonally-adjusted rate in June 2009 was 16.8 per cent in June 2009 and 16.7 per cent last month. Again, a .1 per cent difference. The seasonally-adjusted rate was 16.5 per cent in June 2009 and 16.5 per cent last month. Same pattern.

On the bright side, last month’s rate is down in both columns from a peak in April, when the “official rate” was 9.9 per cent and the actual rate was 17.1 per cent.

So we’ve progressed to the point that we’re back to where we were a year ago–with total unemployment actually closer to 20 per cent than it is to the claimed “official rate” of nearly 10 per cent.

Wealthy ditch mansions as business decisions

And now even the wealthy are sending “jingle mail” to their mortgage servicers, sending in the keys to their mansions (some primary, some secondary homes–and some that were intended as investments) and heading off to, well, wherever the rich go. What’s sort of fascinating, though, is that they’re ditching these high-end properties in significantly higher measure than the less well-to-do have been.

According to the July 8 Times piece, “Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.”

The article cites data showing that “[m]ore than one in seven homeowners with loans in excess of a million dollars are seriously delinquent” while only “[a]bout one in 12 mortgages below the million-dollar mark is delinquent.”

So basically “homeowners with less lavish housing are much more likely to keep writing checks to their lender.”

Lends a new meaning to “there goes the neighborhood,” doesn’t it? Makes one wonder what the brainiacs behind credit ratings and FICO scores are going to do with these data.

The data were provided by analytics firm CoreLogic to the Times, who says, “Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

“ ‘The rich are different: they are more ruthless,’ said Sam Khater, CoreLogic’s senior economist.”

The Fox account shares a similar perspective concerning the data: “As for those investment or second homes, Corelogic says delinquents on those topping the million dollar mark sit at 23%, while it’s just 10% on the cheaper ones.”

But the Fox writer tries a reverse spin: now that the wealthy are acting like the plebe sub-primers, suddenly having mortgage problems isn’t a class sin. But it just goes to show how the salt-of-the-earth middle class endeavors to persevere, against all odds.

“So to me this isn’t just an excuse to bash the wealthy, ” writes Gerri Willis, “… but a testament to the middle class…”They understand the value of a dollar and the value of a contract.

“Many are just too proud to throw up their hands and wave the white flag — for better or for worse.”

In other words, Willis seems to be saying, C’mon guys, even if it makes no business sense and the banks refuse to work with you, keep making those payments and honoring those contracts!

(In Part 2, we’ll have a look at what happened to Del Phillips and his condo.)

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13

[Editor's note: This is the follow-up to a "week that was" review of several consumer-debt issues that  were in the news from August 15 to August 21, 2009.]

In the preceding post, we looked at a “debt-relief” company that is getting sued by the Texas Attorney General, in an attempt to get back more than $4 million for more than 2,500 customers who got hung out on the line when the company shut down and filed for bankruptcy. What really stinks about that can be found in the AG’s petition, describing the “aggressive practices” of the so-called debt-relief industry in general: “Consumers interested in debt settlement likely are also considering options such as traditional credit counseling, debt management plans, debt consolidation loans, and possibly bankruptcy.”

Imagine that: bankruptcy was absolutely not a good idea for its customers but was a nifty-good idea for itself.

The petition goes on to spell out the dangers of dealing with companies like Debt Relief USA. Repeating that such companies “may also disparage” other, better methods, the petition continues: “In reality, the debt settlement company has no interest or ability to advise consumers on the best option for them, rather they are selling their program.” Then it lists “inherent risks” with the practice, risks “that can have catastrophic effects to the consumer.”

Here’s an amended list of some of those risks:

• additional interest, late fees, over-limit charges and assorted, hard-to-predict other fees;
• stuck with a much higher balance than before, consumers can “end up in a far worse financial situation than when they entered the program”;
• ramped-up, harrasing collection efforts;
• creditors may file lawsuits, which most “debt-settlement” companies can not help with, perhaps resulting in numerous judgments;
• the consumer’s credit report will likely take severe hickies, making it tough to get a car, a house–or even a job;
• if the company is actually able to secure a settlement, by the time all the fees are aggregated, it’s likely that any realized will be far less than promised;
• finally, if a settlement is reached, whatever debt forgiveness that does occur will be treated as taxable income.

Also last week, the first of Team Obama’s credit card reforms kicked in, on August 20, when millions across the U.S. were to begin seeing “a host of improvements on their accounts,” according to Daily Finance. Unfortunately, the account continues, “many have already begun to see higher interest rates. Anticipating the changes, many credit card companies have spent the last few months rushing to raise raise rates before the first changes take effect.

“In the past few months, credit card companies have been racing to raise interest rates on millions of credit card holders. People with cards from American Express (AXP), JP Morgan Chase (JPM), Citigroup (C), Discover (DFS), Capital One (COF) and others have been reporting increases even if they’ve never made a late payment and have excellent credit scores. At this point, it looks like all cardholders who carry balances from month to month will see their credit card costs increase.”

According to Jane J. Kim of  The Wall Street Journal, the new rules are “the first of a series of federal actions that constrain card issuers from changing terms on customers.”

Kim summarizes this set of changes by saying that “banks must comply with parts of the recently passed Credit Card Act of 2009 by mailing bills at least 21 days before their due dates and providing at least 45 days’ notice before making a significant change to their rates or fees. Currently, banks are generally required to mail billing statements at least 14 days in advance and provide a 15-day notice of altered fees or rates. The new rules also will bar banks from increasing fees and rates without warning when a consumer misses a payment or exceeds a credit limit.

“Consumers also will be allowed to avoid future interest-rate increases and pay off any outstanding balance over time under the original rate terms. Currently, if a consumer gets hit with a penalty rate, for example, they aren’t given the option to reject the rates.”

“In the past,” writes Lita Epstein at Daily Finance, “by the time cardholders learned of a rate increase, there often wasn’t much time to protest. Even if they chose to do so, they only had two options: paying off the account or locking in the current rate by agreeing to close the account. For many struggling to meet bills after a job loss or other emergency, neither of these options were viable.”

But is anybody surprised that the big banks have already found loopholes? For example, writes Epstein, “Many credit card issuers are getting rid of fixed rate cards completely and instead offering variable rate cards set to an index. That way they don’t have to send notices at all. As the index rate goes up, so does the credit card rate. This method enables them to avoid the protections in the new law.”

Giving the credit card industry so much lead time to plan for the law’s phased in approach is already hurting consumers. Again from Epstein, “Unsurprisingly, these credit card changes have accelerated cardholder default rates,” and “For people who have lost their jobs, rapid interest rate increases and minimum payment changes put even more strain on their budget and will push them even faster toward bankruptcy.”

Indeed, concludes Epstein, although the new legislation may be good for “some consumers, it would have been far more useful if its provisions were enforced immediately upon passage. When it gave the credit card companies so much lead time, Congress also gave them the opportunity to figure out ways around the changes before the bill took effect. Ultimately, with higher fees and interest rates pushing more customers in default, everyone loses — including the credit companies.”

That’s not a bad take. On the other hand, given what we know about “perverse incentives” for the mortgage industry to deny help for hard-pressed homeowners, it kinda sorta makes one wonder whether credit card companies have found a way to securitize credit-card debt in such a way that they come out ahead if consumers default and declare bankruptcy.

Next in “The week that was, Part 3″: housing sales versus housing starts and auctions; obsolete regulation of credit derivatives.

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Related resources for personal bankruptcy:

Overview of the bankruptcy process, with links to Chapters 7 and 13.

In July the Federal Trade Commission (FTC) announced its latest effort to prosecute companies that practice mortgage modification scams. Code named “Operation Loan Lies,” the crackdown on predatory companies is in response to complaints from homeowners facing foreclosure.

Your best defense against these attacks is to know their tactics. When a company guarantees to modify your loan or stop the foreclosure after you pay up front, beware. You’ll likely lose more money yet still be faced with foreclosure.

While the scams originated in California, 25 federal and state agencies are now involved in combating this growing fraud.

While avoiding these scams, consider filing for bankruptcy as a legitimate, detailed alternative.  Your effort to reorganize your finances through Chapter 13 bankruptcy will stop a foreclosure for the period that you are in bankruptcy.

Unlike corporations, individuals like you can file for Chapter 13 of the bankruptcy code. This creates a bankruptcy estate which includes your property. A payment plan can be created which allows you to pay previous mortgage payments over time while still enabling you to meet your basic living expenses.

Not all individual cases qualify for Chapter 13, and credit limitations are created as a result of personal bankruptcy. Many states also have different rules regarding bankruptcy.

But a trusted bankruptcy attorney can evaluate your situation and serve as a legitimate advocate for your financial needs. They will be familiar with state laws regarding bankruptcy, ensuring that your actions to reduce your debt are compliant and effective.

The ultimate goal is to not only weather the financial storm, but create a detailed plan that best utilizes your finances moving forward. Quick-fix schemes will only put you further behind your payment obligations.

If you are faced with an impending foreclosure, don’t become the next victim of a mortgage modification scam. Contact a trusted local bankruptcy lawyer to explore your options.