The automatic stay is the hallmark of bankruptcy, so when the judge lifts the stay to permit a lender to foreclose, we tend to think the curtain has come down on our client as homeowner.  Well, maybe not, or at least, not yet.

In some cases, the road to foreclosure seems to be a wandering path rather than an expressway.  Case in point:  relief from stay was granted in my client’s case on April 15th.  The notice of default, the first step in the statutory foreclosure process, was not recorded until six months later.

Those six months are months the clients lived payment free in the house.  They continue to try to wend their way through the lender’s loan modification process.  Even if they aren’t successful in getting a modification, it will be at least another 4 months before the lender can hold a foreclosure sale.

This is a recent example that reinforces a story I’ve told before, about the client who moved his family out of their large comfortable home as soon as he saw they could not keep it.  They rented a house, and worked on preparing for a bankruptcy filing.  More than a year later, when we were ready to file, the lender had still not taken the first step in foreclosure.  Twelve months the client paid rent, when he could have stayed where he was, at no cost.

If the headline drew you in, like the Geico gecko, you can complain you’ve been duped:  in bankruptcy, you disclose everything. Period.

My colleague David Leibowitz, himself a bankruptcy trustee writes, about things frequently omitted from bankruptcy schedules., and the possible consequences.

In my experience, the problem is not so much an intention to conceal that leads to omissions of assets, it’s failure to take disclosure seriously.  Clients don’t want to read the questionnaire that prompts them for various kinds of assets they might have.  They don’t commit to thinking about how this question might apply to their situation.  Or they assume because an asset has little market value, it’s excluded from the schedules.  You would not believe the number of clients whose completed questionnaires tell me they have no clothes. Yet I’ve never met with a naked client.

The hardest kind of things for laypeople to “see” as assets are those that are just legal rights, or even, possible legal rights:  the worker’s compensation claim, the claim against the landlord, the participation in a class action.  All of those are assets that need to be listed.

Often a trustee will elect not to administer even non exempt assets, because the effort to pursue them is too great compared to the possible return.  But even if the trustee were to administer the claim for the benefit of creditors, the loss to the debtor is usually far less than the value of the discharge of debts that results in bankruptcy.

The good folks at the Collaborative Law gathering yesterday had the same questions that their clients have:  when is the right time to file bankruptcy?  what happens when you file?  what does it  do to (for?) your life?

Collaborative Law, as I understand it, involves couples in a cooperative effort with a shared set of legal, financial, and mental health professionals to navigate a divorce.  My task was to add the bankruptcy arrow to their quiver.

It was energizing to meet a vibrant, engaged group of professionals all trying to make divorce and the accompanying issues more rational, less expensive, more comprehensive.

I sat in a courtroom last week and watched dozens of  Chapter 13 cases get dismissed, often because the debtor had not taken seriously the requirement that all their tax returns be filed within 45 days of the commencement of the case.

Perhaps I shouldn’t be surprised that  folks who didn’t take filing tax returns seriously in the first place continue to blow it off when bankruptcy is filed.  But filing returns is mandatory and dismissal automatic under the provisions of bankruptcy reform.

What debtors need to understand is that bankruptcy is a benefit and to get the benefit, you need to play by the rules on the timeline created by the Bankruptcy Code.

Usually I’m bewailing the lack of attention with which bankruptcy clients handled the incorporation of an ongoing business.  In variably, the vendor accounts are still in the name of the proprietor, the stock may not have been issued, and it’s unclear whether there was an explicit transfer of the assets to the corporation.

But last week, such inattention promised to pave the way for the stockholder to walk away from a failed corporation, taking the phone number, which was undoubtedly the most valuable assets in the business.

For, you see, they never transferred the phone account of the proprietorship to the corporation. My individual client still owned the phone number and should be able to use that number in a new business started from the ashes of the present corporation!

If the phone number had been transferred, then we would have been faced with tricky questions of how to sell it to the individual before the corporate bankruptcy and how to value the number such that the transfer wasn’t a fraudulent transfer.

Spared that headache by the ineptitude of the incorporating professional. Yipee!

It’s happened again:  there’s an email in Monday morning’s inbox from a client whom I first met weeks ago, who tells me they want to file before Wednesday’s mediation in state court!  I have no creditor information, representation agreement, money, or credit counseling certificate.   Just as inconvenient, I’m not sure I have staff who can drop everything (related to clients who planned ahead and played by our rules) to make this happen.

Clearly I’m not communicating to clients what is involved in getting even a skeleton petition on file.  Lots of clients seem to think that I may be able to file the petition without any involvement on their part beyond providing info and money.  Wrong.

The bankruptcy paperwork is filed with both the client’s signature and my signature.  We are both attesting to the accuracy of the information and the debtor’s eligibility for  bankruptcy relief.

The full filing is even more information intense:  budgets looking forward and backward; recent financial history; intentions with respect to secured debts.  All of it is doable, just not with a snap of the fingers.

Got to go:  got a skeleton to assemble before Wednesday.

The details are set:  October 29  5-7:30 p.m.  Computer History Museum, Mt. View

Designed for lawyers new to the bankruptcy practice, this class will focus on the practicalities of the means test.  Who has to take the test?  What is income?  What are the overlooked deductions?

The class is limited to 35 participants and we will leave ample time for questions.  The materials will go through the B-22 line by line with case law and annotations.  There are not always answers, but there are approaches that competent lawyers should be advocating.

I expect to have MCLE credit for the class and snacks.  Whichever rings your chimes, join us.  Expected cost $250 with discounts for those who sign up another new lawyer.

Reserve a spot by emailing cathy@law-full.com.

Once again, a client told me that if she’d known before what she learned in the financial management class required to get her bankruptcy discharge, she probably wouldn’t have needed bankruptcy in the first place.

Pretty strong words, from someone who admitted that she approached the required class with low expectations.

She announced that she intended to get her child and her step children to watch the class as well, so they go out into the financial world well prepared to deal with money and credit.

The bankruptcy “reform” act of 2005 did little good for debtors or bankruptcy law or practice, but debtor education is a winner.

Falling home prices have lead to a surge of strategic defaulters, in real estate columnist Kenneth Harney’s words:  people who abruptly choose to stop making mortgage payments.  These folks have made an economic decision that continuing to pay on a house that is significantly underwater does not make economic sense.

Harney is clearly bothered by this choice by people who appear to be able to make the payments, but elect instead to default and lose the property.  In this and an earlier column, he raises the question of the morality of  elective mortgage default.

I’ve been chewing on that idea:  is there a moral issue when a borrower voluntarily defaults?  The law attaches  consequences to certain promises, such as the promise to repay money borrowed.  If the borrower is capable of repaying but does not, is that a moral failing?  Or is it nothing more than the weighing of the consequences of shunning a legal duty vs. the cost of performing the promise?

I tried thinking about this from the lender’s side of the transaction:  are there any moral obligations that the lender assumes when they make the loan?  Could the lender exercise a legal right (to foreclose, say) and yet violate a moral precept?  (All of this presupposes that corporations have morals, or moral duties, of course.)  Would a lender have a moral obligation to modify a loan in the absence of a legal obligation?

Or, is all that is involved in the mortgage loan transaction the undertaking to expose yourself to certain unpleasant consequences if you default?

It bears more thought.  I routinely ask bankruptcy clients whether it makes sense to continue to pay on mortgages where the loan balance is significantly greater than the property’s value.  I want them to consider the option of walking away in the course of the bankruptcy.

Dismissed and discharged. These two terms are at the opposite ends of the scale of results in bankruptcy, yet they are often confused.

A debtor gets a discharge and is relieved of the legal liability for the dischargeable debts in the bankruptcy case.

A dismissal means the bankruptcy case was terminated short of the discharge.  It could be dismissed at the request of the debtor or upon the motion of the trustee or the court.  But it means that the case has been close without a discharge.

A case in which a discharge is entered will be closed by the court when all the legally necessary steps have been met, such as the trustee’s report.