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Bankruptcy is Bad….Unless You’re a Mortgage Servicer

Posted on May 14, 2012 in Uncategorized

 

Nobody comes to our office proud to be filing bankruptcy.  Bankruptcy to many people evokes shame, financial flaws, mistakes, and humiliation.  More than anyone, creditors have been driving these feelings to associate with bankruptcy so consumers will try everything possible to avoid it – including liquidating 401Ks, borrowing from friends, family and payday loan stores, and incurring mental anguish if they do choose to file.

How the mighty have fallen.  Today, a company you may never have heard of called Residential Capital, LLC (commonly called “ResCap”) filed for Chapter 11 Bankruptcy relief in New York.  For most people, Chapter 11 business bankruptcies aren’t that interesting.  The first day alone consists of dozens of motions and emergency hearings that would drive the average reader to boredom or worse.  But this might interest people for two reasons.

First, ResCap is a division of Ally Financial (formerly known as GMAC).  Ally is doing well in its banking and its auto loan divisions.  But its mortgage division, ResCap, left a lot to be desired.  Ally was one of the five major mortgage servicers to settle a substantial lawsuit with the state Attorneys General a few months ago.  They were accused of robo-signing and committing other substantial bad acts.

Second, you are a creditor of ResCap.  So am I.  So are all of your friends and family.  The federal government, through the Treasury Department, loaned Ally about $17 billion.  Let’s just say the bank is in no way ready to pay the remaining $12 billion back now.  Nor is the government ready to shed its significant investment in ResCap.  This is the ultimate point of interest:  How much will the government recover from its investment it made to avoid a financial collapse?

Bankruptcy offers companies, as well as individuals, a fresh start and a chance to reorganize.  It’s a little interesting how individuals are treated with contempt when they file, but businesses don’t hold themselves to the same standards when they require the same protection.  That double standard won’t change any time soon.

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