Bankruptcy is a legal process that provides relief to many individuals who can no longer pay all of their debts.

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How profound:
I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
Thomas Jefferson, (Attributed)
3rd president of US (1743 – 1826)

Consider the following points when considering whether we are witnessing the next residential real estate bubble:

  1. The U.S. Census Bureau released median income statistics on September 21, 2009.  Do your buyers’ have income above or below the Median Income (see,
  2. The IRS released updated expense standards effective November 1, 2009.  Are your buyers’ actual household expenses above the IRS National Standards (see,,,id=104627,00.html)?  Will their actual household and utility expenses exceed the local standard for their state (see, each state’s local standard at,,id=104696,00.html)?
  3. If their average monthly income (gross income before taxes) is less than the median income in their state, can they afford the home they are trying to buy?
  4. If their household expenses exceed the IRS standards and their average monthly income is less than the local median income, can they afford that home?  Can they still afford that home even if their average monthly income exceeds the median?
  5. If your buyers did not qualify for the home buyer’s credit, would they still be able to purchase that home?
  6. If that loan they are applying for is not a fully amortized loan, given the above, if it were fully amortized, could they afford the payments?
  7. If a new home buyer should have 6 months of actual household expenses, including mortgage payments, saved in the event of job loss or other catastrophe (a real possibility today), do your buyers have sufficient reserves?
  8. If the banks/lenders/servicers in your area were to release their inventories into your marketplace, what would befall the valuations in your marketplace?
  9. If foreclosures were to return to their natural progression and cycle, rather than being slowed by trial loan modifications and other market manipulations, what would happen to the price of homes being purchased by first time home buyers?

If any of this analysis sounds familiar, it is!  From October 2001 through April 2007, home prices accelerated based upon an artificial manipulation of affordability by the credit industry, as supported by willing and uninformed consumers.  The above concerns were tossed aside in favor of unreasonable anticipations of ever more home price increases.

Shouldn’t today’s buyers be asked the hard questions of affordability?  In balancing the risk of losing sales against the risk of yet another and even greater catastrophic housing bubble, isn’t it the duty of each of us who touch their lives, the buyer’s agent, the attorney, the mortgage broker, to ask the hard questions?

In our office, when asked to do so for a potential buyer, we run each client through the Bankruptcy Means Test that challenges the concept of affordability; applying the above government statistics and standards through an accepted formula.

if banks/lenders/servicers were to release housing stock into the market place based upon affordability, rather than accounting manipulations to avoid marking the value of their inventory to market, what would happen to home values?

It will do none of us any good to go through yet another housing bubble.  But, that is exactly where we are headed if actual affordability is not brought back to (and kept in) the market.

A recent email to a client follows, and should be a fair warning to have clients consult with bankruptcy counsel before execution of short sale purchase and sale documents:

  1. As a result of the short sale of your home before you file bankruptcy you will no longer have the contractually due amount owing to your first and second.
  2. As a result, when we calculate your eligibility for Chapter 7 relief (rather than Chapter 13 relief) we will not be able to deduct from your Annualized Monthly Income those monthly payments.
  3. As a further result, if your Annualized Monthly Income (calculated from the prior 6 months of payment advices) exceeds the Median Income for your 4 member household (currently $79,971) you will not “pass” the Means Test, meaning that you will be forced into a 5 year Chapter 13 repayment plan; and to add insult to injury you will only be repaying your debts without the benefit of saving your home.
  4. Rent does not reduce your Annualized Monthly Income for purposes of calculating the Means Test.
  5. Remember that the short sale does not monetarily benefit you (you will still have liability for the deficiency owing on the second), and yet the inability to claim the contractually due amounts (even if not being paid) will cause you greater harm because you cannot gain a Chapter 7 discharge, but must wait out a Chapter 13 discharge.
  6. The short sale, although delayed, can happen any time after you receive your Chapter 7 discharge. This would be a win-win for you and the Realtor.

Louis J. Esbin, Esq.
Law Offices of Louis J. Esbin
27201 Tourney Road, Suite 122, Valencia, CA  91355-1857
Tel: 661-254-5050 | Fax: 661-254-5252 | Web:
Certified Bankruptcy Specialist – State Bar of California Board of Legal Specialization.

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