There is much to be said about this legislation from various perspectives -- political, economic, and financial -- but here I want to contradict an oft-expressed opinion: that homeowners facing foreclosure are not being helped by the bailout legislation.

The basic idea afloat out there is that absent a provision in the bill that would authorize Chapter 13 bankruptcy judges to modify residential mortgages and interest rates, the homeowners are being left high and dry. Not true. While such a bankruptcy provision would benefit a portion of the population in mortgage trouble, many more folks facing foreclosure either don't have sufficient income to propose a viable Chapter 13 plan, or just can't afford the legal fees.

While Chapter 13 can also be useful in scheduling missed payments over the course of the repayment plan, many -- if not most -- homeowners can afford to both keep their mortgage current and pay an extra amount into a repayment plan every month to pay off the arrears. Further, if missed payments are the only problem, many lenders are now amenable -- outside of bankruptcy -- to extending the loan period and tacking the missed payments on at the end.

Simply put, Chapter 13 is a relatively narrow remedy in the larger foreclosure context. The language in the failed legislation, on the other hand, would provide much broader relief to homeowners facing foreclosure. Here's why.

Under the bailout legislation, in a large number of foreclosure situations, the federal government will be involved in one way or another. That alone will be somewhat of monkey wrench in the foreclosure gears. But that's not all: All the government agency players will have to have a plan under which they will seek to keep homeowners in their home. This plan will provide a legal basis for advocates and housing counselors to push for meaningful modifications and relief from foreclosure.

While the federal agencies (and mortgage servicers, in cases where the mortgages continue to be privately owned) will have to take the impact on taxpayers into account when negotiating a mortgage workout, they will likely be willing to modify the mortgages down to the market value of the property, or even below, since the legislation prefers that mortgage workouts take place within the context of the HOPE for Homeowners Act as amended by section 124 of the Emergency Economic Stabilization Act. Further, the Government will, where appropriate, facilitate conversion of the old loan into a 30 year fixed-rate FHA insured mortgage as provided for in the HOPE for Homeowners Act.

In short, because of increased government involvement with foreclosures under a mandatory plan that encourages retention of home ownership, many more homeowners will be able to keep their homes than previously, and for those who don't qualify for help, the foreclosure machine is likely to be gummed up beyond all imagination. From my standpoint, this is a very good thing.

That got me to thinking: It would be very helpful for TV public affairs shows to always put up sidebars or bubbles showing the net personal worth and annual income of their various talking heads. The same would go for TV appearances by public officials, politicians, and political shills of all stripes. I found myself wondering about the Fed chairman's net worth, and then the members of the Committee and the other "experts" assembled to support the administration's request. From there, my thoughts jumped to the TV commentators and pundits who are either super rich themselves or operate in those circles.

Why should we care about someone's wealth whose views are foisted upon us 24/7? Every time one of these well-heeled folks says something being proposed is in "our" interest, I have to wonder whose interest they are talking about. Surely Secretary Paulson's interest is not the same as mine, as my net worth is slim to none. So, when Henry Paulson, or Ben Bernanke or Nancy Pelosi or Rush Limbaugh, or John McCain advises that a course of action would be in "all our interests," I'm pretty sure they're thinking of a relatively small circle of family, friends, and associates whose net worths are way up there in the many millions. There are exceptions to this class-based viewpoint of course -- Franklin Delano Roosevelt may have been one -- but for me, it holds more truth than not.

So here's what I think about the proposed bailout. It's crystal-clear that the people who have made out big time under the current credit-debt system desperately want it to continue. And for them, the bailout is a necessity. It may be that it's a necessity for the rest of us as well, but I'm unwilling to take it on trust from the people who are pushing that line.

If I had knowledge of who had most benefited from the housing and credit bubbles, I would be better positioned to assess whose interests were being served in the proposed bailout. For now, it appears to me that the "titans of Wall Street" and the government that serves them are using the same shock-and-awe approach to this power grab as has worked so well with the American people in the past -- scare the hell out of them, and then take what you like.

This, of course, implies that this was and is an engineered crisis. And why not? Everyone in a position of responsibility repeats the mantra that these high-flying finance types are very smart people. If so, they must have seen it coming. A lot of us said-to-be less brilliant people saw the handwriting on the wall a long time ago.

Of course, a possible alternative explanation is that the Masters of the Universe (to paraphrase Tom Wolfe's Bonfire of the Vanities) are far too arrogant and completely lacking in common sense. In that case, we really ought to ignore what they say and let events take their course. It's not inconcievable that "the market" will produce a better outcome. I would like to see, however, a broad-based program to help the millions of homeowners facing foreclosure, even if a larger bailout bill never makes it out of Congress.

According to a plethora of financial market pundits, the takeover will "calm financial markets" and hasten the day when real estate values can be determined with some amount of certainty. As long as prices keep falling, sales will not keep up with inventory. Undoubtedly true. However, perhaps the time has come when America really is bankrupt in deed, if not in name, and it will just take a few respected leaders (possibly a presidential candidate or two) to call out the naked emperor. In the meantime, we can expect to be treated to a series of "light at the end of the tunnel" statements by the "powers that be", all designed to calm the savage consumer beast and keep the big money in America instead of some other, more financially stable, country.

Although the real estate fiasco can be hard to understand, a brilliant article in the Sunday, September 14^th San Francisco Chronicle pulls it together about as well as anybody can. The most important point in the article is that the new housing recovery law will likely only benefit the most irresponsible of the impacted homeowners -- this because of the abililty of the lenders to pick and choose which loans they will cash out at 90% of the home's current appraised value. While this approach may help the bottom lines of the various banks that got caught shorthanded, it does little for our sense of fairness. Or, to put it another way, it makes the old saw "let no good deed go unpunished" a little less funny in the case of the millions of homeowners who have struggled to stay current on their mortgages but who will now be deprived of relief because their loans aren't bad enough to justify the lender taking a hit.

How does this work? Foreclosure proceedings typically begin after you have missed between 3 and 5 monthly payments. A few more months are likely to pass before your home comes up for sale at a foreclosure auction. If your home isn't purchased at the auction--which these days is typical--you will be able to remain until your home is put up for sale by a real estate company and you are legally evicted--all of which can take a good many more months.

Depending on your state, it can take a year or more from the time you decide to act until the time you need to once again start paying for shelter. Using this opportunity to save for the future will grease the skids when you need to find new housing, and will make it easier to live without credit, a worthwhile goal in itself.

The credit bubble is leaking furiously, as shown by skyrocketing foreclosure rates, but it hasn't popped yet. People keep borrowing more, and if they can't borrow on their home equity, they just run up the debt on their credit cards. And if people can't afford to pay their mortgage loans, you can bet they won't be able to pay down their credit cards, which generally have far steeper interest rates and penalties.

To borrow from Winston Churchill, it appears that foreclosures were not the beginning of the end of the credit crisis, but merely the end of the beginning.

Trends in earning, spending, and saving have pointed to a credit crisis for years. It may not end until an unprecedented wave of consumer and small business bankruptcies wipe away the debt that just can't be repaid. Personal bankruptcy rates are already rising -- there were 40% more in 2007 than in 2006, according to the American Bankruptcy Institute. There may come a day, not too far away, when millions of consumers will throw up their hands and walk away from their mountain of unsecured debt by declaring bankruptcy.

You can follow the credit bubble as it shifts and morphs its way through our financial institutions at http://www.federalreserve.gov/releases, where the Federal Reserve posts monthly reports that track the effects of the credit crisis on America's financial infrastructure.

If the flow of money is the fuel of American capitalism, then these reports are the fuel gauge. The Fed's unglamorous reports give us hard data on how much money is coursing through the American economy.

• Monthly G.19 Reports. These are the reports on consumer borrowing, both traditional loans (such as car loans) and "revolving debt," also known as credit cards. Each month, the Fed lists the total amount Americans have on our credit card bills. The amounts are staggering -- $968 billion in credit card debt, more than 7% higher than just last year -- and show no signs of shrinking. Read more at http://www.federalreserve.gov/releases/g19/.
• The "charge off" rate. This is the percent of loans, including credit card balances, that the lender has written off as uncollectible. The latest figures show that banks are giving up on 5.47% of the credit card amounts owed to them. This figure is the highest since the current bankruptcy law took effect, with the exception of a brief flurry of bankruptcies before the passage of the law. More information here: http://www.federalreserve.gov/releases/chargeoff/.
• The savings rate. This data shows how much Americans are saving each year. It's been hovering between zero and 2% for five years: http://research.stlouisfed.org/fred2/series/PSAVERT. For other Fed research data on personal spending, see http://www.bea.gov/national/index.htm#personal.
• The bankruptcy filing rate. This data is kept by the US court system, updated monthly and can be found here: http://www.uscourts.gov/bnkrpctystats/statistics.htm.

You can get other important numbers and information from non-governmental sources, including:

• RealtyTrac, which offers one-stop shopping for the latest foreclosure statistics and news: http://www.realtytrac.com/news-trends/index.html
• InsideARM.com, which offers an excellent, well-organized archive of timely articles on economic data affecting the debt and credit industry. The link below is for Credit Card news, but be sure to hover your cursor over the News & Analysis link for a list of other areas you can search: http://www.insidearm.com/go/tags/credit%20card.

What the Times article left out -- strangely, seeing as so many bankruptcy lawyers were quoted -- is that there are two exceptions to the tax bomb. If you are insolvent at the time of the debt forgiveness, you will also be forgiven your tax liability. And, here's the kicker: If you file bankruptcy prior to the debt forgiveness (read: foreclosure) the bankruptcy will not only hold off the foreclosure (at least temporarily), but also discharge the debt, so there's nothing to forgive and no income to tax.

Insolvency can be difficult to prove after the fact, but there is no doubt about the bankruptcy exception. Although many people shy away from bankruptcy, it can be a marvelous remedy when dealing with the possibility of foreclosure. It's beyond my comprehension why that point wasn't made.

In some cases struggling homeowners are filing to prevent foreclosure. (A record high 243,353 homes went into foreclosure in April, according to data released on May 14 by RealtyTrac.) Squeezed by rising costs for everyday necessities like gas and groceries and unable to tap into their homes for temporary relief -- declining values have left some people owing more than their homes are worth; it's also more difficult to get home equity lines of credit or loans -- many people have turned to their credit cards "as a last resort," says Robert Lawless, a professor of law at the University of Illinois who follows bankruptcy trends.

To find out what the law has to say about these issues and more, check out the brand new Foreclosure area on Nolo.com. Soon we'll be adding an article on foreclosure basics and an FAQ with answers to common foreclosure questions.

Lately, I've been working with my colleagues at Nolo to produce useful materials that will help anyone in any stage of the foreclosure process -- from those struggling with their new jumbo loan repayments to those with an eviction notice already pasted to their front door. Here are a few of the articles I'd recommend to interested readers:

• My latest article covers the process of reducing your mortgage obligations to help you avoid foreclosure and stay in your home.


• Similarly, Ilona Bray gives you a rundown of all the ways you might be able to stay in your home and keep foreclosure at bay, as well as what to do if you discover that foreclosure is inevitable.


• A cautionary article: Don't Lose Your Home to Foreclosure "Rescue" Scammers. Many unscrupulous people are using the mortgage crisis to prey on those going through one of the most difficult times in their lives. This article gives you the tools to recognize those attempting to defraud you, and how to check up on the legitimate rescuers.


• What happens when your landlord's rental property is being foreclosed upon? Janet Portman provides the information any renter in this situation will need, including warnings about angry, law-breaking landlords and solutions for tenants who find out their new landlord is the bank.

In an April 25, 2008 Associated Press article by Tom Raum, President Bush is reported to have said the money would help Americans cope with rising gasoline and food prices, as well as aid a slumping economy. According to the article, Sen Charles Schumer (D. N.Y) responded: "It's galling to think that taxpayers' stimulus checks will be lining the pockets of OPEC. The sad truth is that the average American family will spend almost their entire stimulus check on higher gas prices this year."

Let's say it like it is: George Bush (and, not so coincidentally, most of Congress) is giving their oil buddies a $150 billion tax rebate. It may be in your bank account for one brief moment, but it will quickly be recycled into the major oil companies' coffers. All of this takes place in the context of the worst housing slump since the depression, record foreclosure numbers, and a recession in many -- if not all -- states.

My earlier proposal makes even more sense now. It will help folks who really need help and will serve to make our economy stronger. Everyone with significant debt (which is just about everyone) should use his or her rebate check to file for bankruptcy. The entire process can cost as little as $600 for people who represent themselves (which many currently do, with paperwork help from paralegals and targeted legal advice from lawyers). And even if you choose to hire a lawyer to represent you, the proposed rebates will definitely give you a good start on the fees, especially if you are married.

Bankruptcy has been around since biblical times, and has long been recognized as an important component of the capitalist economy in that it restores debtors to the consumer marketplace. Specifically, bankruptcy gets rid of credit card and most other kinds of debt (exceptions are alimony and child support; most student loans; recent taxes; and debts caused by fraudulent or willful and malicious actions). Most people are solvent for the first time in years when they emerge from bankruptcy, and once again are able purchase goods and services without going into more debt.

Just imagine how the economy would hum if consumers were freed from the punishing interest rates that often creep over 30% for technical violations of credit contracts. By filing bankruptcy, people will use their government checks to improve their own balance sheet, instead of donating their money to the oil companies and the fat cats who use the large credit corporations to bleed us dry. While it's true that mass bankruptcy filings would tighten rather than loosen consumer credit, it can't get much tighter. Anyway, it's not a bad idea for us to break our national addiction to debt and learn to pay as we go.

Pretty much every bankruptcy attorney will tell you the same story: When you ask a client why he or she wants to file bankruptcy, the typical answer is, "I can't stand the phone calls." I get story after story from normally gregarious people about how they and their families are living in fear of their telephone.

Most people who fall behind on their debts feel guilty, and the debt collectors know it. They prey on that guilt in the expectation that money will somehow be found -- the children will withdraw from college, the daughter will forgo her braces, the mother will take a second job (leaving an empty house for the children to come home to). In the proud tradition of community loan sharks, it makes no difference to the collectors where the money comes from, only that it be paid.

My reaction when I hear these stories? My outer self clucks in sympathy while my inner self gets really furious at the fact that these good people have been made to feel like criminals by the real criminals: The credit card companies that charge 30% interest, trap people into over-payments and delinquencies by unfair billing practices, and raise interest rates on the basis of late payments on unrelated debts.

I also get frustrated because, of the hundreds of people I've counseled in the past several years, not one person knew that they could use a federal law known as the Fair Debt Collection Practices Act to stop collection agencies from phoning them -- and from engaging in a lot of other harassing conduct. Whether or not they decide to file for bankruptcy, these people come away from my counseling greatly empowered by a bit of information that every citizen should know at least as well as they know the pledge of allegiance.

And (drum roll, please) the information is, you can make a bill collector bug off with the following letter, properly addressed to the harassing debt collector:

Attn: [Collector],

Re: [Your name], [Account #]

Dear [Collector]: For the past three months I have received several phone calls and letters from you concerning an overdue [Creditor's name] account. This is my formal notice to you, under Title 15 United States Code Section 1692c, to cease all further communications with me except for the reasons specifically set forth in the federal law. This letter is not meant in any way to be an acknowledgment that I owe this money.

Very truly yours,

[Your name]

Unfortunately, the federal Fair Debt Collection Practices Act doesn't apply to the original creditor, and when creditors own their own collection agencies, as some of the big ones do, the line is gray regarding the federal law's applicability. Also, there are some collectors that aggressively push the envelope in their collection activities and frequently violate your rights under the Act. Nevertheless, many states have similar laws that do apply to the original creditor and the almost universal effect of a letter such as the one I've described above is to stop the harassment, regardless of whether it is the creditor or a collector who is making the calls.

If, for one reason or another, you just can't keep up, you may be able to avoid foreclosure if you pay the right loan and either blow off the rest, or at least make reduced payments. In almost every case, the right loan to stay current on will be your first mortgage or deed of trust. While I'm always hesitant to tell people to stop meeting their shelter obligations in full and on time, sometimes it's the only rational thing to do -- as wrong as it may feel to many of you. If reducing the amount you throw at your home every month will let you stay there and keep your ahead above water, at least until you can work out a better solution, I'm all for it.

How does this work? When you originally took out the loan to buy your home, you agreed to have the loan (or loans) secured by a mortgage or deed of trust (depending on the state where the property is located). (For the rest of this blog, I will use the term "mortgage" to refer to both mortgages and deeds of trust.) By recording the mortgage in your local land records office, the lender created a lien (legal claim) on the property, which can be enforced by foreclosure if the payment terms of the mortgage document aren't met. As you probably know, in foreclosure the property is sold to make good on the promissory note underlying the mortgage.

The main loan you used to buy your home is termed a "first mortgage." Why first? It's almost always recorded first and gets paid first in case of a sale. In the same manner, a second loan secured by the home is a second mortgage. For example, it's common to use a first mortgage to pay 80% of the sale price and get a second mortgage for the additional 20%. And that's not all. In the bubble years, home value appreciation supported additional loans against the home, often in the form of a home equity lines of credit. As with the first mortgage, the lender's primary remedy for a default on these additional loans is foreclosure.

For foreclosure to be an effective enforcement remedy there has to be enough equity in the home to pay off the holder of the loan being foreclosed. And if the home is sold in foreclosure, all senior lien holders (in that a first mortage is senior to a second mortgage) have to be paid off first. For that reason, until the last several years, banks wouldn't lend in the absence of good credit and a healthy chunk of equity to secure the loan. In the bubble years, however, many loans were made on the expectation that values would rise fast enough to provide adequate security for the prospective loan, even if there was no measurable equity at the time. Also, liberal (dare I say "dishonest" or "fraudulent"?) appraisals were easy to come by.

It's easy to see what happened when the crash came. Not only did homes stop appreciating in value, but the values continue to plummet, erasing whatever equity there may have been at the time of the loan as well as erasing the hope of equity to come. Importantly, then, if in your case one or more of the loans on your home has become unsecured-in-fact -- or never was secured to begin with -- skipping payments won't result in a foreclosure action. Sure you may get sued, but the lender's only remedy is to get a money judgment and put another lien on your home, just in case some equity develops in the future. And lawsuits usually take a long time to develop, giving you the opportunity to raise some money from another source and make up the payments or settle with the lender for less than you owe. Remember, the only reasoning for this strategy is the assumption that you can't afford to remain current on your "mortgage debt."

To determine whether the loans on your home are secured or unsecured (as a factual matter), begin with your home's value (be optimistic, but sensible) and subtract the first mortgage. If you hit zero or below, foreclosure is not a viable remedy for the other lenders, since there is no equity left in the home to pay them off. Assume, for example, that your home is worth $400,000. You have a first mortage of $350,000, a second mortgage of $50,000 and home equity line of credit worth $25,000. When you subtract the first and second mortgages from the home's value, you get zero. If you stop making payments on the home equity loan, the lender won't benefit from a foreclosure, since there wouldn't be anything left from the sale after the first and second mortgage holders are paid.

Of course, it's not always that simple. Sometimes a second or third mortgage is partly secured and partly unsecured. In that case, a foreclosure by the junior lien holder might recover some of the lien but not all of it. On the other hand, when foreclosure does occur, in most states it wipes out all the junior liens, regardless of the equity in the home. For instance, in the earlier example, if the owner of the first mortgage foreclosed on the loan, the liens held by the holders of the second mortgage and the home equity line of credit would both be extinguished, even though there was still equity (at least theoretically, since foreclosure sales usually accept bids far lower than the perceived market value).

If you have old, unpaid debts, you may be safe from a lawsuit to collect the debt, because a creditor or debt collector has a limited number of years to sue you for the debt. To get a better understanding of time limits for debt collection, check out this newly published article in the Nolopedia, "Time-Barred Debts: When Collectors Cannot Sue You For Unpaid Debts".

And if you want further information on debt collection & credit, you might also be interested in my previous post, "When Credit Bureaus Report Debts Discharged in Bankruptcy: It Should Be a Crime".

The last time the government sent checks to people to help out the economy was in 2001, and many recipients used the money to pay down their debt and keep the collection agency wolves from their doors. This time around, the national consumer debt has more than doubled--and it is even more likely that the loan sharks will gobble up most of the government's gifts hook, line, and sinker. Maybe increasing the government debt by $100 billion in order to fatten the credit card and consumer finance companies will put some more credit in consumers' hands--just what we don't need--but if we follow President Bush's lead, the folks who own the finance industries will be the ones who ultimately benefit.

Here is a modest proposal that will help folks who really need help as well as make our economy stronger: Everyone with significant credit card debt (which is just about everyone) should use his or her check to file for bankruptcy. The entire process can cost as little as $600 for people who represent themselves (which many currently do, with paperwork help from paralegals and targeted legal advice from lawyers). And even if you choose to hire a lawyer to represent you, the proposed rebates will definitely get you started.

Bankruptcy has been around since biblical times, and has long been recognized as an important component of the capitalist economy in that it restores debtors to the consumer marketplace. Specifically, bankruptcy gets rid of credit card and most other kinds of debt (exceptions are alimony and child support; most student loans; recent taxes; and debts caused by fraudulent or willful and malicious actions). Most people are solvent for the first time in years when they emerge from bankruptcy, and once again are able purchase goods and services without going into more debt. Just imagine how the economy would hum if consumers were freed from the punishing interest rates that often creep over 30% for technical violations of credit contracts.

By filing bankruptcy, people will use their government checks to improve their own balance sheet, instead of donating their money to the fat cats who use the large credit corporations to bleed us dry. While it's true that mass bankruptcy filings would tighten rather than loosen consumer credit, it's not a bad idea for us to break our national addiction to debt and learn to pay as we go.

While this approach to mortgage-debt relief seems helpful on the surface, it has one important flaw. A large number of people facing foreclosure are unable to propose feasible Chapter 13 plans that would be a prerequisite for the proposed relief. Proposals for mortgage debt relief in bankruptcy should include Chapter 7 bankruptcy as well as Chapter 13 bankruptcy.

It of course makes sense to use Chapter 13 as the vehicle for residential mortgage modifications -- Chapter 13 already allows for modification of other types of secured debts, and provides for amortization of mortgage arrears over the life of the plan. However, to extend the relief to the many debtors who can't use Chapter 13, Chapter 7 bankruptcy judges should also be authorized to modify mortgages and interest rates, and fold any arrearages into the newly modified mortgages. This will permit debtors to emerge from Chapter 7 with their home ownership intact, and reap the benefits of lower mortgage payments as part of their fresh start.

Not every person or family would be eligible for this relief. The bankruptcy judge would determine whether the debtor could afford the modified mortgage after bankruptcy. This determination would be based on the debtor's income, income history, and other expenses. If the judge decides that the mortgage would cause the debtor undue hardship or interfere with the debtor's fresh start, the mortgage would remain as is, and the creditor would be given a green light to proceed with the foreclosure. Importantly, this is the same procedure as is already used in in Chapter 7 "discharge hearings" when self-represented debtors seek to reaffirm car notes and other secured debts.

Perhaps using Chapter 7 as well as Chapter 13 bankruptcy for mortgage modifications doesn't go far enough. Maybe a special federal court procedure should be set up where anyone facing foreclosure can apply for relief without having to file any type of bankruptcy. There may be constitutional impediments to modifying mortgages outside of bankruptcy, but, if not, it would be wonderful to have a universal procedure for residential mortgage relief, at least from the standpoint of the millions of borrowers subject to predatory loans and flat-out unaffordable mortgages.