on the Bankruptcy Soapbox

Debt settlement companies thrive on tapping the consumer’s genuine desire to pay back their debts.  They promise that they will compromise with your creditors for a sizable discount and all will be well with the world.  There are any number of reasons that isn’t so, and the promoters know it, but that’s another blog.

The scheme works because the debt settlement company gets a hunk of their fee first, before creditors are offered a dime.  And they get it by automatic withdrawal from the consumer’s bank account. I have been amazed lately at just how hard it is to cancel one of those payment arrangement.

The couple in my office this week are poster children for the absurdity of the debt settlement program.  The numbers supplied to the desperate couple, 79 and 76, showed that $19K would go to creditors and $16K to the debt settlement company.  Huh?

The other absurdity was that this couple had only Social Security and a small pension for income, and they have a substantial mortgage payment.  Yet, the debt counselors(!) wanted $1036/month for this service!  Needless to say, the entire arrangement was unworkable and any debt expert worth a $16K fee knew it from the start.

Yet, the firm got several months worth of $1000 bank drafts before the couple’s son learned what was going on and helped extract them from the “program”.

I’ve turned the Florida law firm running this “business” in to the State Bar of California for investigation of unauthorized practice of law in this state.  My next task is to see if the money is recoverable.

A debtor who becomes entitled to an inheritance in the six months following the filing of a bankruptcy case must contribute that inheritance to his creditors. 11 USC 541 (a)(5).  This is one of only three exceptions to the idea that bankruptcy operates to “net out” what the debtor owns and what he owes on the day the case is filed.

As Craig Andresen points out, the contents of a spend thrift trust are not property of the bankruptcy estate, and not, therefore, available to pay creditors in a bankruptcy case. So, if that inheritance comes to the debtor in trust rather than outright, it does not go to creditors.
As awkward as it is, I try to ask prospective debtors if there is any likelihood that they will inherit money in the near future. If that is a possibility, I suggest that the client talk frankly with the source of that inheritance about making any gift to my client in trust, with a spendthrift clause.

While most Americans are incredibly private about their financial troubles, I doubt that anyone leaving money to their loved ones at their passing wants that money to end up benefiting the credit card lenders. It may require that the client swallow their pride to admit to the depths of their financial woes in the process of enlisting the help of the testator to make their gift effective.  It requires consideration.

We got a call about three o’clock the other afternoon from someone who wanted to come in that afternoon and file bankruptcy that day. When my partner hesitated, the caller responded, “Well , you are open now aren’t you?”

I had a mental image of one of those parking lot , drive up coffee vendors, selling “bankruptcy” instead of java.
As Mike Doan writes about the information gathering for bankruptcy, would that it was that easy.

The general “bankruptcy bargain” is that the debtor provides full financial disclosure and the system provides a discharge of debts. (It’s somewhat more complicated than that, but that describes the overview).

We’ve experienced a spate of clients who think that because they’ve signed a representation agreement and provided us with some information, their work is done. Wrong. Usually the information is incomplete, ’cause they either don’t read, don’t think about the “bankruptcy bargain” , or can’t believe that we really need all that information.
Believe me, we wouldn’t ask for it if it wasn’t necessary.

I need to be able to better convey the idea that staggering in our door and paying us money just gets you out of the starting blocks in the Bankruptcy Relay; the finish line is getting the discharge, and there are miles to run between those two points.

California was one of 18 states who sued the tax settlement firm JKHarris for selling services they couldn’t provide. The settlement reached will require fuller disclosure of the odds of reaching the promised results.

Everyone in debt trouble, particularly those in trouble with a heavy hitter like the IRS, wants to believe that a cheaper resolution is available for their problem. The consumer is predisposed to believe that a former insider, like the former IRS agents who supposedly work for JK Harris, can solve their problem on the cheap. Even as I write this, Google brings up the following headline for Harris:

JK Harris Company Will Solve Your IRS Problems Today.I see lots of clients with large tax problems who have signed up with J K Harris to “settle” their taxes before they come to me with their tax problems unaddressed. Often, it is obvious to me that these people are not good candidates for an offer in compromise, which is what tax settlement firms are touting.

The IRS will compromise taxes where the taxpayer (or non-taxpayer) has few assets; little income; the collection statute of limitations is approaching; or other factors that make it unlikely the IRS can collect everything it’s owed.

If the individual doesn’t fit that profile, a successful offer in compromise is unlikely. Yet I see no evidence that Harris explored those factors before taking money from the desperate customer.

One of the myths about bankruptcy is that you can’t discharge taxes. Wrong: income taxes first due more than three years ago, for which a truthful return has been on file for at least two years, and assessed more than 240 days ago are dischargeable in bankruptcy.

My next candidate for the Attorneys General of the various states are the debt settlement companies, whose pitch to consumers is equally as false as JK Harris.

It was a good day at my desk, if one has to work on Saturdays.

• I gave notice that one client was rescinding a $180,000 mortgage for Truth in Lending violations.
• I found three clients whose second deeds of trust can be eliminated as liens on homes because they are completely underwater.
• I sent out three Qualified Written Requests under RESPA to lenders whom I suspect have played games with the servicing on my client’s mortgages.

My conclusion about the mortgage meltdown is that there is not one universal approach to getting clients some breathing room on their mortgage debt, but there are a number of approaches that can lessen the pain borrowers are feeling, and raise the odds these people can keep their homes.

My great friend Doug Jacobs identified finding a lawyer you can talk to and listen to as important points in selecting a lawyer. He points out that the client will be disclosing lots of information normally held confidential.

But I would take it a step further: it’s not just a lawyer you can tell your secrets to. You need to find a lawyer whom you can question, over and over if necessary, until you understand the choices that you must make in filing bankruptcy.

Some things a client doesn’t have to truly understand to file bankruptcy: how the means test works, or doesn’t work, is one of them. The debtor need only validate some of the information in the form.

But other bankruptcy issues require the client to make choices and perhaps confront risks. Is the loan repayment to your parents a recoverable preference? Does the recent use of your credit card make you susceptible to the charge of incurring debt by fraud? Are you at risk of a UST challenge to your Chapter 7 case as an abuse?

Decisions surrounding these issues are, in the end, the client’s decision. The factors are complex, and in this day of “new” bankruptcy law,sometimes uncertain. The client needs to feel absolutely comfortable asking their counsel to explain the issue, assess the risks, and explore alternatives with them. The lawyer needs to be capable of explaining without jargon or presumption.
So I would add to the list of qualities in superior bankruptcy counsel openness to the layman’s questions and the willingness to restate and reanalyze the options until the client understands. A lawyer who is not capable of making you a partner in the conduct of the case may end up excluding you from considerations that rightfully belong to you, the client.

A bankruptcy court in Oakland recently rebuffed a mortgage lender who claimed it had been defrauded by borrowers who lied on the loan application.  The judge agreed the debtors falsely inflated their income, but found that the lender had not reasonably relied on the false representations.  The lies were not enough to make the debt non dischargeable when the lender was asleep at the switch.

The broader question in the mortgage meltdown is whether the Wall Street firms that bought these liar loans from the sleeping lenders have any recourse against the lender.   Can the seller of the loan escape responsibility for selling a financial instrument of questionable value?  Did the Wall Street buyer have to investigate the actual bona fides of the loans or is it entitled to rely on the lender’s representation that the loan was sound?

Street smarts suggest that Wall Street was content not to look too closely at these loans so it could pretend that all of this profitable paper was what it was puffed up to be.  Under the theory of the Hill case, they, too, may be found not to have been reasonable in their reliance.

You never know just how a client hears your advice, until you hear yourself quoted back to yourself as the reason for a client doing something stupid.  In my case, I’m unclear about whether the message received was really as reported, but it’s made me think about my choice of words.

I was asked in the initial consultation if gifts of money from the debtor’s parents in the past year presented “a problem”.  No, I replied, thinking that such gifts don’t change the analysis, or the expected outcome of the case.  The client now claims that my words were a license to fail to disclose the gifts. Huh?

For some clients, it is clear that full and complete disclosure is emotionally very hard.  The fearful and the stressed somehow  are  simply sure that telling the whole truth imperils the bankruptcy, when just the opposite is true.  Just as sunshine is the best disinfectant, disclosure in the bankruptcy paper work is the best insurance for a good outcome.

So, I will be  looking for new phrases that will penetrate the understanding of those disinclined to hear what I’m trying to convey and reiterating that the client is the one ultimately responsible, under penalty of perjury, for the completeness of the schedules.

The “new” bankruptcy law set out to make bankruptcy complex and laden with booby traps, including the restrictions on choice of exemptions.  John Bates has performed a truly marvelous service with his table of exemption systems available in each state and the options for those who have moved within the statutory periods.

ExemptionsExpress collects all of this highly technical information and is a god send for attorneys in one state who have to figure out whether the exemptions of another state are extraterritorial.

Now, if I could just find a reliable, up to date collection of the exemption amounts in each state, I’d be a happy camper.

Pam Stewart writes about debt collectors suggesting a cash advance on the card they were collecting on to pay the arrears.  That one ups the story I’ve heard twice in the past 2 months:  the collector offers a new credit card if you will settle the amount due on the card he is collecting on!

Clearly, it’s a crazy world in the realm of debt collectors.  Collectors have to be imaginative or compelling to get you to write the check, or authorize the bank account debit for money they can’t reach otherwise.

Debt collectors rely on fear, shame or harrassment to get you to pay them money they can’t get at.  As long as you understand their game, you can be resolute and pay first things first.