Be an educated client, but don’t tell me how to do the means test!  For someone who has spent as much time as I have trying to get good bankruptcy information out in the public domain, I found I had a very churlish reaction to a new client who wanted to tell me how his bonus would affect the means test.  What is there about law that makes everyone who is literate think he can read the law, and practice law?

The error this client was making was common:  he assumed that current monthly income was the magic number for an above median income debtor.  He missed the entire part of the “test” that looks at deductions from CMI to reach Monthly Disposable Income.  Who could tell whether the bonus made a difference on the bottom line without calculating the allowances and deductions?

Makes me ask myself, what is it that I want in a client?  How much knowledge should they have?  Do I really want to teach each client how the means test works, or doesn’t work, in order to file their case?  Do I truly prefer the passive, non thinking client?  This business of “medians” is more complex than it appears on its face.

My friend David Leibowitz explores the fears his clients have of bankruptcy on Bankruptcy Law Network.  I encounter clients with the same emotions, fear that life as they know it will end if they file bankruptcy.  Well, at some level, the miserable life of living in debt; sleepless nights;  having no financial  reserves will end.  But their fears are of something more horrible yet, bankruptcy.

Why aren’t they afraid of being penniless in their old age? This seems to me to be a real fear.  Almost every client who’s struggling to repay credit cards, now at 29% interest, is skimping on saving for retirement.  Courtesy of the Great Recession, they have no equity in their homes.  If they have a job, there’s no pension attached.  They have little or nothing set aside to augment Social Security.  Yet fear of bankruptcy keeps them paying on debt they can never repay.

My last post talked about the institutional purveyors of this fear.  I’m on this soapbox and don’t want to step down til I make some headway on this issue.

As one of the Peanuts characters said, “Arghhhhhhh!”

My colleagure at Bankruptcy Law Network Peter Orville wrote

It is natural to be afraid of doing something you’ve never done before, like filing for bankruptcy protection. This is especially true if you’ve heard stories about why you shouldn’t file bankruptcy

My beef is that the fear of bankruptcy is promoted by those with something to gain by demonizing bankruptcy. It’s the creditors, their cohorts the credit scoring folks, and the debt settlement companies who want you to think that filing bankruptcy is the end of life as we know it.  They all profit if consumers are scared off of filing bankruptcy.

My charge to my clients is that bankruptcy is not painful, or at least, any pain is self inflicted.  You can make yourself (or allow yourself) to feel as miserable and worthless as you choose to do so.  No one associated with the courts, including trustees, is judgmental.  A debtor does not have to justify his choice of bankruptcy relief and does not have to prove he is “worthy” of a discharge.  Eligibility for a discharge, even after bankruptcy reform, is presumed.

I have a perverse admiration for clients who have endured the pain and dispair of financial distress for as long as most of them have before seeking me out.  But life does not have to be that way;  bankruptcy is an honest and effective choice.   There is nothing to be afraid of.

Liz Weston, L.A. Times financial writer, walked a room full of bankruptcy attorneys at the Sacramento Valley Bankruptcy Forum through the impact of various credit events on your credit score last weekend.

She recounted how, after meeting some debtors as she worked on stories, she no longer saw debtors as deadbeats. She saw the challenges in their lives and the soundness of electing bankruptcy.  Her candor about the change in her world view was refreshing.

Having written a book on credit scoring, she naturally was caught up in the interface with bankruptcy.  But I as one who is frustrated by the fixation of those drowning in debt on their credit score, I wanted to stand up and shout:  Ruin your credit score, not your life!

The financial media sounds a drum beat that one’s life and worth is wrapped up in that credit score, something we don’t fully understand and based on credit reports which are notoriously inaccurate.  Life will end, we’re told, if our credit score declines.

That fear keeps American consumers struggling to pay debt that they can never, in this life or the next, repay.  They appear to consider a lifetime of minimum payments rather than a fresh start in bankruptcy to preserve their credit score.

As Liz pointed out, the credit score is dynamic:  it is constantly changing, and heals over time.  My call is to fix your balance sheet. Get rid of dischargeable debts.  Save for retirement.  Live beneath your means.  Don’t walk the financial tightrope.

I usually assure clients that institutional creditors are generally very observant of the automatic stay. Once they have notice, they cease collection.  But this month, in two of my pending Chapter 13 cases, Chase Home Loans has run off and set or actually conducted post bankruptcy foreclosure sales.

To make matters worse, given notice of the problem, Chase’s counsel has been either indifferent or ineffectual in moving to unwind the actions taken in violation of the stay.  I’m not sure whether this is simply happenstance, or presages a general meltdown of default mortgage servicing, but it is worrisome.

Susanne Robicsek’s post on the futility of keeping a home through bankruptcy brought to mind Professor Brent White’s paper on the use by government and financial counselors of fear and shame to keep people paying on mortgages on underwater homes.

White cites a litany of messages from apparently credable sources who chant that a foreclosure will scar your life forever onwards.  Further, these messages suggest that the law and morality require that you pay for something that no longer has value or no longer makes economic sense.

Somehow, I didn’t hear that electing to default on a mortgage was immoral when a couple of huge real estate investment companies walked from projects in New York.  Is it immoral only for individuals, but just good business for corporations?

I see my job as a bankruptcy  professional to ask the client to consider walking away.  Is the house genuinely affordable now?  Will the loan reset making it unaffordable in the future?  How much would the housing market have to appreciate just to be able to sell it for what you owe?  Do you want to take a further credit hit down the road when you need to leave this house?

Given the breadth of the current financial morass, I have doubts that what we take as gospel about the future availability of credit to those filing bankruptcy will be the rule in the future.  I doubt that credit availability will return to the norms of the past two decades anytime soon.  Who knows what the rules will be in the future?

I have to ask clients:  just what kind of financial pain are you prepared to endure in the expectation that the old rules will prevail?

The availability of parking at the BART (light rail) station has been my measure of the depth of the recession.  Lots of parking means that not very many folk are working and riding public transit to work.

On my way to Oakland bankruptcy court today, I had to park in the auxiliary parking lots.  Ah, I thought, recovery is on its way.

My partner suggested an alternative explanation: everyone in the parking lot was on their way to a job fair…..

Jonathan Ginsberg’s piece about the murky language of notices from the bankruptcy court struck a cord. In an attempt to provide notice, they sow confusion.  But my pet peeve is the client who calls up and says, literally, “I got this letter from {insert name of court or creditor, or trustee}.  What does it mean?”

I wonder if they think I’m the offspring of Carnak the Magnificent, who provided answers BEFORE reading the questions.  I’m trying to train my staff to tell them to fax me the letter in question, so I can see what they are talking about before trying to interpret it.  In my imagination, it would be much more fun just to provide random answers….

The clients in financial trouble couldn’t get the attention of their mortgage lender about the coming train wreck.  But you’re current, said the telephone representative for the lender.  So, the clients deliberately missed a payment to make their point that they needed help.

Care to guess what happened next?  Determined to remain only one payment down, they sent the next payment, and IT WAS RETURNED.  It was followed by a notice of default.

So now the clients are talking to bankruptcy counsel and are looking for ways to get the constructive attention of PNC Bank.

The would be client had millions of dollars of equity in the house at stake, yet waited til the week of the foreclosure to look for a bankruptcy lawyer.  The required case would be a Chapter 11, which is heavy on procedure.  I didn’t have the capacity to take on such a case on an emergency basis.  Neither could one of my most esteemed colleagues.

How did the homeowner get into this bind?  He’d been trying to negotiate a resolution and a modification right up to the last minute, and at the last minute, the lender said “no”.

I’d like to report that this scenario is aberrational, but it isn’t.  I am not seeing many accepted modifications or even workouts, much less ones that actually improve the homeowner’s situation.  If you are facing foreclosure, don’t bank on positive response from the bank if you envision bankruptcy as the last ditch choice.  There may no capable bankruptcy attorneys available who can turn a case around in less than a week.