Or maybe this is just a continuing, disappointed sigh that this group, who tries to build a profession around selling houses, is itself oversold.

Latest example arose where a homeowner was referred to me by his accountant, concerned about a pending short sale of the client’s home.  By our rough calculations, the short sale of the house would trigger about a quarter of a million dollars in forgiveness of debt income.  After discussing it with the client, we called his realtor who had negotiated this sale without discussing a quarter of a million dollars in phantom income to the client hidden in the deal.

When I explained my concern, the realtor’s come back addressed the capital gains tax exclusion for homeowners!  He apparently knew nothing about the tax consequences of a short sale, especially one that didn’t qualify for the special provisions recently enacted.  Worse he seemed indifferent about the adverse impact on his client.

Seems to me the essence of a profession is an institutionalized concern for the client/patient that trumps the self interest of the professional.  I don’t for a moment argue that realtors ought to be giving tax advice;  I do argue that they ought to be able to spot common tax issues and direct the client to an expert.  Here, the realtor was clueless and exposed the client to being blind sided by a huge tax obligation.

A professional has to do better.

The Supreme Court’s recent decision in Lanning and the application of the infamous “means test” to a client’s changing income picture has changed my advice about when to file bankruptcy.

My standard advice to clients newly unemployed who see clearly they won’t be able to pay their existing bills has been to wait.  Wait until you can see things improving.  Wait til you have acquired something that a creditor with a judgment could take from you.  Wait til you have an income such that my fee doesn’t take food off the table.

The Kagenveama decision holding  that the means test was mechanical and meant what it said about how we measured ability to pay creditors.  The means test, after all, was the statute to end judicial discretion on this subject.  I knew that as long as we were measuring ability to pay by looking backward into a period of unemployment, my client would pass the means test.

Now, Lanning says the court can take into account, on ability-to- pay issues, changes that are virtually certain to occur in the future.  Bingo, the future income of my previously unemployed client now must be factored into the mix.

In the usual fashion of Supreme Court decisions, the justices don’t tell us how to do that.  Lanning dealt with a significant, one time payment in the look back period which distorted the current monthly income average.  In that case,  being decoupled from the mechanical means test meant the bonus could be excluded from the  calculation.  We aren’t told how to deal with a future of steady, level income replacing months of no income.  Does the means test become irrelevant on those facts?

Since I’m not anxious to have my clients be the next test case if I can help it, I’m changing my advice:  let’s consider filing sooner rather than later, so we are confident that finally getting reemployed isn’t going to doom the client to failure on the means test.

On doing the means test yourself.

Debtors with a Chapter 7 discharge too recently to get a discharge in a subsequent Chapter 13 can strip off underwater mortgage liens under a decision issued by Judge Edward Jellen in the Oakland division.

This has been a simmering issue, since the guidelines issued by the judges in the Northern District of California include a form order allowing the voiding of an underwater mortgage “on entry of the discharge” in the Chapter 13.  A debtor can’t get a discharge in a 13 filed within four years of the prior Chapter 7.

Since those guidelines were promulgated, several courts in other districts have allowed lien stripping in no discharge 13′s.  Some courts have gone the other way.

Judge Jellen’s decision held that a discharge was not required in order to value and strip a lien for which there is not supporting value in the collateral.  However, he dismissed one of the pair of cases on which he wrote sua sponte for bad faith.  So, there remain issues, but not, apparently, whether lien stripping is available in Chapter 20.

The marketing success of  debt settlement companies flows from two profound truths about the indebted consumer:  they want to pay their bills and they were rebuffed by their creditors when they sought realistic terms.  It’s only too bad that marketing is the only thing that debt settlement companies are successful at.

Today’s New York Times story on debt settlement concluded that the industry “deepens the misery of debtors”. I think the whole concept of debt settlement is faulty and impractical.  But the industry doesn’t care so long as it gets its money off the top.

Debtors who genuinely want to repay their creditors should avail themselves of Chapter 13, where they can generally write the terms on which they repay creditors and have that plan enforced by a federal bankruptcy judge.  Plus, debts settled in bankruptcy generate no cancellation of debt income and therefore no tax hit.

Debt settlement outside of bankruptcy trashes the consumers credit record, so the illusion that debt settlement will preserve credit history is just that, an illusion.  The individual might just as well get real, effective and tax free relief from debts in bankruptcy.

I’ve talked here about my website devoted to rookie bankruptcy lawyers at www.bankruptcymastery.com.  In all the flurry in the last week, I forgot to mention here, where I think lots of my readers are bankruptcy lawyers, that I’ve developed an online course that became available last Tuesday,

My thoughts on why such a course is needed are here.

In short, the course is designed for lawyers new to bankruptcy practice.  It’s 16 sessions on what you need to know to file a consumer bankruptcy Chapter 7, from the initial meeting with the client, clients to avoid, through each of the schedules to reviewing and signing the petition.

Since I dropped the ball here, I’m making the first video available free to readers of the Soapbox. The course, available two segments a week,  is offered for $297.  At the end of the month, the opening “sale” is over and the price goes up. To sign up for the full course, go to the members page for Bankruptcy Mastery.

I would also appreciate your feedback on the course.  I’m a veteran bankruptcy lawyer, but this teaching business is new, and I’m open to comments that will help me do it better.

Cathy

Get two hours of practice oriented training on dealing with creditor claims in a consumer bankruptcy case June 17 in Mountain View.  Targeted at attorneys new to bankruptcy practice, we will look at when, why and how to review creditor claims.

We’ll also walk through the rules and procedures for contested matters in general, including objections to confirmation; motions for relief from stay; and motions for violation of the automatic stay.

Sign up online:  seating is limited.

WHEN: June 17, 2010 5-7 p.m.

WHERE: Computer History Museum
(Shoreline exit from 101) 1401 N. Shoreline Blvd., Mountain View CA

INSTRUCTOR: Cathleen Moran
Bankruptcy Specialist, California State Bar Board of Legal Specialization

MCLE : 2 hours of general credit

COST: $260

Cathy

Used to be, bankruptcy law was organized to encourage debtors to file Chapter 13 and repay some part of their debts.  Some part of that encouragement came in the form of the Super Discharge:  the ability to discharge debts incurred by bad acts; unfiled tax debt from long past tax years; and unfiled claims in the bankruptcy case.  Most of that departed with BAPCPA.

I’ve adapted.  Chapter 13 became more like the alternative dumping ground if the means test closed off Chapter 7.  Often, the differing allowable deductions on B-22C meant the debtor foreclosed from 7 made minimal payments in 13.

But what galls me these days is the impact of the 9th Circuit BAP decisions of Smith and Martinez which disallow deductions for debt contractually due in the upcoming 60 months on liens to be stripped in the Chapter 13 and for property to be surrendered.  The result is that Chapter 7 becomes more attractive because there, the prevailing case law hews close to the statutory language that allows means test deduction for debts due over the life of a Chapter 13 plan.  What a blow to the sponsors of BAPCPA who were intent on forcing more debtors into Chapter 13 repayment plans.  (This has to be the only time I’ve mourned the thwarting of the intentions of the  BAPCPA proponents.  Remember the line from the Grinch Who Stole Christmas that the Grinch’s heart was just so many sizes too small?)

Very soon after BAPCPA was effective, I argued the Pak case to the BAP concerning whether the statutory look back period in B-22 was conclusive when the debtor’s future income was not only different but larger.  I argued that the law was to be applied the way it was written:  that Congress, in its infinite wisdom (and I tried not to giggle) thought it could write a formula to find the “can pay” debtors and that it intended to cut off judicial discretion to assess the allowance of expenses or the income to be available to fund the plan.  I lost and came away after oral argument with the sense that the judges on the panel wanted the old days back, when their judgment and good sense were the last word.  That was a perfectly fine world, but not the world after enactment of BAPCPA.  (Kagenveama from the 9th Circuit some month later vindicated the argument I made unsuccessfully to the BAP.)

With Smith and Martinez, I again sense that the BAP is chafing at the idiocy found in  BAPCPA.  I chafe too, but I don’t want to see a legal atmosphere where the words of the statute can be ignored if the judges see a way to “get” a debtor or to return to a world where their judgment is valued.  I treasure predictability, and if  BAPCPA gets applied as written(mean though it is), then I’ll figure out how to get my clients the best deal available under the law.  If however we have courts finding interpretations that carry them back to preBAPCPA days, then I feel like the Light Brigade: ” canon to the right of them, canon to the left of them…”  hoping I can ride boldly and well,  into the mouth of hell,…

In the mean time, I’m filing more Chapter 7′s.

Next class in my irregular series on bankruptcy practice skills for rookie bankruptcy lawyers was announced today:  Creditor Claims & Contested Matters.

Two hours on proof of claim basics;  reviewing and objecting to claims; and handling a contested matter in bankruptcy court.

June 17    5-7 at the Computer History Museum in Mountain View.  The usual larger room is being demolished, so seating is even more limited than for the last class.

You can sign up at Law-full.com

Two trends in the housing crisis are intersecting in my practice:  we’re seeing more loan modifications, all the while we see more and more homeowners with whopping negative equity. The question I’m asking each client eager for a modification is “what do you expect for this property five years from now?”

Most loan modifications are simply tacking the arrears to the loan principal and lowering the interest rate for some time.  With a property already worth more than is owed, the arrearage gets capitalized, and the loan principal increases.

When the homeowner owes more than the property is worth, the only way that property can be sold or transfered is by short sale (if the lender agrees) or by foreclosure.  The homeowner is now chained to the property and any disposition of that property in the near future will involve either a protracted negotiation with the lender or a foreclosure and a further hit to the borrower’s credit report.

There are several moving parts in this problem:  how great is the deficit?  for how long will the property be appropriate for the client?  how does the mortgage payment in the modified loan compare to the cost of renting?  Each different combination of factors produces slightly different  analysis.

But the underlying issue remains:  the real property is not really an investment any longer, even with a modified loan.  It is a place to live presumably at a price you can afford today.  When it is no longer affordable or appropriate, you will have a property that is essentially unsaleable in the  conventional manner.

For many clients with loan modifications, we are just kicking the underlying problem down a road a ways.

What is obvious to me is that the