on the Bankruptcy Soapbox

How many of us hit the internet when we need information?  The computer has replaced the library as our first response to an unknown.  Linda Hamm writes about the dangers of relying on bankruptcy “information” found on the web
on the Bankruptcy Law Network.  She reminds us that not everyone who write on the web knows what they are talking about. 

A second problem with internet message boards is that the question posed contains only the facts, or the view of the facts, that the poster thinks are important.  So often, things that the layman overlooks are the issues that drive the legal result.  That is why the give and take of an interview with a lawyer is essential to pin down the applicable law.

It is essential for those researching their bankruptcy options on the internet to see time online as background for a meeting with a lawyer.  Become familiar with the terminology and the concepts.  Create a list of questions to discuss with counsel.  Don’t rely on what you read on the internet.

I’m a real fan of Chapter 13: it’s powerful, flexible, and cost effective. One of its few downsides is that there are caps for how much debt a filer may have and qualify for Chapter 13. Mercifully, those debt limits adjust every three years.

Effective April 1, 2007 the cap on debts in Chapter 13 will increase to $336,900 for unsecured debts and $1,010,650 for secured debts. These limits apply to liquidated debts only; unliquidated debts are not included in the test.

More about Chapter 13.

The first hurdle in the newly enacted means test for Chapter 7 eligibility is the median income for a household of comparable size in that state.  Those under the median pass the means test at the first hurdle;  those above the median go on to calculate if their allowed expenses yield “disposable income”  sufficient to repay creditors a portion of their claims.

The Census Bureau has just released new figures that are used in bankrutpcy cases filed after February 1.  For California, those figures are

• 1 person household      $44,499
• 2 person household        59,086
• 3 person household        64,118
• 4 person household        72,996

One of the glitches in the drafting of the 05 amendments is that the language of the statute talks about comparing the size of the “household” to the census figures for “families”.  Thus the household may be measured by the Census Bureau’s “heads on beds” standard, irrespective of the degree of economic interdependence of those sleeping in those beds.  Yet we indulge in the fiction that Congress knew what is was thinking when it passed this act.  The more we work with the “new law”, the more fictional it  becomes.

Car manufacturers lobbied Congress to make it harder for debtors to keep their cars through bankruptcy.  In Chapter 7, that was accomplished by eliminating the “ipso facto” clause, which said that merely filing bankruptcy was not a breach of the purchase contract.  The expectation was that debtors would reaffirm their car loans, giving the car lender the right to sue for a deficiency judgment against the debtor should the debtor later default, rather than risk losing the car.

Reaffirmations would diminish the debtor’s discharge and lock the debtor into paying for a car that might well be worth substantially less than the loan balance.

Debtor’s attorneys were expected to certify that repaying a car loan would not create a hardship for the debtor;  if the attorney wouldn’t/couldn’t so certify, the reaffirmation agreement needed to be approved by the bankruptcy judge after a hearing.  Most bankruptcy judges were less than enthusiastic about this new role.

Debtor’s lawyers have wondered about the continued existence of “pay and drive”, the practice of car lenders allowing the debtor to keep the car for so long as the payments were current and the car insured.  Putting debtors to the test of reaffirming a badly upside down car or returning it to the lender might not be such a great idea for the auto industry if debtors shucked their greatly depreciated vehicles.

At last weekend’s banrkuptcy seminar, judges and lawyers reported that in practice, only Ford Motor company is routinely repoing vehicles where the post bankruptcy debtor  has not reafffirmed the debt but remains current on payments and has insurance.  All the rest of the lender community has apparently figured out that they do not want to “eat steel” and take possession of a flood of cars worth less than what is owed from debtors willing to continue paying for them.

Perhaps, a bit of common sense has inserted itself in the world of BAPCPA.

Cathy

Technorati Tags: bankruptcy, reaffirmation, car,

I try to disuade clients from fixation on their credit score as a measure of financial health.  I’ve seen too many clients sitting in my office with winning credit scores and so much debt they can’t pay it off in this world or the next.  I have to wonder what that score is measuring.

Atlanta bankruptcy lawyer Jonathan Ginsberg writes about the use of credit scores in the insurance industry.  I have always found the alleged connection between one’s credit worthiness and one’s safety as a driver to be spurious.  Let’s hope the Supreme Court sees this as a pernicious practice as well when it considers Geico v. Edo this term.

The Bankruptcy Code attempts to exclude from its shelter those who “abuse” the system.  Chapter 7 has a provision in Section 707(b) that allows a challenge to the entitlement of a debtor to get a dishcarge under that chapter.  However, only a debtor whose debts are “primarily consumer” debts is subject to this scrutiny.  One whose debts result from business failure or failure to pay their taxes are not subject to review for “abuse”, regardless of their ability to pay.

That came home to me as I interviewed a single man with a fine salary, yesterday.  He is exempt from the means test because his debt was incurred in business.  There is certainly a policy argument for making the consequences of business failure tolerable.  That is, I think, a  hallmark of the American business ethic, the acceptance of failure and the encouragement of trying again.

The exclusion from the “can-pay” scrutiny for those who haven’t paid taxes seems to me to be harder to justify.  Our society isn’t stronger for a policy protecting those who haven’t paid their fair share of maintaining our infrastructure.

Which leads you back to the unstated premise underlying the means test, that all consumers who can’t pay their bills are to some degree dishonest.   My learned opinion is HOGWASH.

I wrote more on this all too important subject at the Bankruptcy Law Network.  Clients seem intent on making their attorney’s lives more complex.

Cathy Moran