Various forms of insurance are often big pieces of my clients’ budget.  The irony is that they often have life insurance and car insurance, but no health insurance.  Yet the consequences of illness would be far more devastating than the risks my clients were protecting against.  Gene Melchionne’s piece at Money Health Central starts a good conversation about the purpose and need for insurance.

In the past two months I’ve looked at several  budgets that contained disproportionately large insurance expenses: once for car insurance for a single woman with two old, paid for cars, and the other, life insurance  for a single person of retirement age.  If the purpose of insurance is to pay a necessary expense should the named catastrophe occur, then in my view, the cost of the protection  for each of these clients was disproportionate to the risk.  I sent the clients out to reconsider the need for insurance of that magnitude.

It seems that budgets sometimes get on autopilot and no one has considered the necessity of the expense, or its relationship to other budget items.   When there isn’t enough money to go around, all items should be on the table.

My friend Gene Melchionne trotted out the brutal numbers on repayment of a student loan for four years at a private university.  No matter how enriching the education, the loan may be the financial death of the graduate.

But what sorrows me are the parents of those same students who have guaranteed or cosigned those loans.  The co signor is equally liable with the student for repayment of the debt. The cosignor may have no control over whether the loan gets deferred (with interest during deferment added to principal) or whether the student honors the committment to pay.  On Gene’s numbers, you can see in an instant why the student borrower might not be able to pay, even assuming the graduate got a decent job.  But the parents remain equally liable.

The cosigned loan is still a non dischargeable debt should the parents file bankruptcy.  I’m seeing a fair number of folks in their late 50′s and 60′s, nearing retirement, or enduring unemployment, and their kid’s student loan is a millstone around their neck.

Frankly, I’m waiting for a stalwart couple of a certain age for an opportunity to argue to a bankruptcy judge that repayment of the offspring’s student loans at this point in the parents’ life is an undue hardship.

Image courtesy of besighyawn.

Money Health Central, a new portal for personal finance, goes live today.  A project of mine with five friends who are also bankruptcy lawyers, our goal is to provide solid, reliable information on money and debt issues for  consumers.

If you are a bankruptcy lawyer, this site is a resource for your clients.  If you are someone in financial trouble, we hope the site will help you work through the issues you face now and build skills for your post debt life.

Come on over and take a peak.

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