Those in a financial bind have to make hard decisions about who to pay when there isn’t enough to pay everyone. The most aggressive creditors, the credit card companies, have the lowest priority in my view of who should get paid. Shorting your obligations for housing, car payments, taxes and student loans all have far larger and more immediate consequences for non payment than unsecured credit card debt.
Student loans? you say. It’s tempting to put repaying student loans on a back burner. The availability of deferments suggests that regular payment on student loans may not be all that important. Consider that unpaid interest on student loans is added to principle, so that you incur interest on last month’s unpaid interest in the following month. You don’t need to have been a math major to understand how expensive compound interest gets over time.

A less well known consequence of not paying on student loans is that any hope of discharging student loans in bankruptcy requires that the borrower have made a good faith attempt to repay the loan before seeking its discharge.

Courts have found that borrowers otherwise eligible for the discharge of their student loans in bankruptcy are barred from relief because they paid other debt instead of their student loans. Paying the squeaking creditor rather than the student loan had enormous and unanticipated consequences. Borrower beware.

One of the most frustrating things after the debtor gets a discharge is establishing just what debt was affected by the discharge. Creditors and some debtors expect to find a single document telling them what is no longer enforceable and what survives the bankruptcy. No such luck.

The official form used by most bankruptcy courts merely states that the debtor is granted a discharge. The general information on the second page of the form suggests that you might need an attorney to understand the application of the discharge in a particular case.

That’s why Gene Melchionne’s article on saving your bankruptcy papers is so on point. In this era of debt buyers and zombie debt, most debtors can expect to get a collection letter on a debt that was discharged in their bankruptcy.

In California, where 9th Circuit decisions are controlling, the Beezley opinion (994 F.2d 1433 1993) tells us that even a creditor who wasn’t listed or didn’t get notice is discharged in a no asset bankruptcy. The caveat is that if the creditor has a claim to non dischargeability because of the debtor’s bad acts, the claim survives until the creditor has a chance to challenge the discharge of his debt.

Usually what it takes to make a zombie debt collector go away is a copy of the discharge order and a copy of the schedules showing that the original creditor was listed in the bankruptcy.

So, save your bankruptcy documents, and if copies of the schedules don’t make the creditor go away, contact a bankruptcy lawyer to pursue an action under the bankruptcy code for sanctions against the creditor.

Adam Savage, the speaker at my son’s graduation Saturday as a mechanical engineer, made a point equally applicable to his audience of newly fledged engineers as to my audience of those shouldering lots of debt: Look at the big picture.

For engineers, Savage hoped that they would look beyond the technical challenges of any task at hand to see where they, and the gadget they were making, fit in the larger world. For debtors, I want clients to look beyond making this month’s minimum payments to assess whether there is any meaningful chance of paying off the debt and achieving economic stability.

Short term thinking was exemplified recently for me by a client considering refinancing her home mortgage to a smaller payment “like her friend has.” I cautioned about loans with appealing initial payments that soon morph into monsters that the borrower can’t afford, putting the home at risk. Her response, to my dismay, was “I’ll deal with that when it adjusts.”

Looking at the long term was the theme of my recent post on the Bankruptcy Law Network, looking at the differing results if you paid off credit card debt with the contractual minimum payment or put the same money into an IRA over the same period.

Making good decisions about how to deal with a technical or a financial challenge requires that we lift our eyes from the desk in front of us to the future, and look at the bigger picture.

Thanks to my colleague Wendell Sherk for the pointer to the site of Americans for Fairness in Lending

I found their 10 Top Tricks of the Lending Trade right on point. The day before I had seen an earnest couple with a loan on their only car on which they owed twice what the car was worth. They were poster children for the techniques employed to sell bad deals to consumers. Given the age of this loan, a Chapter 13 will allow us to strip the secured obligation down to the present value of the car. I haven’t calculated how much they have overpaid before they got to my office.

This is all on point for me as I ponder what can I expect clients to learn from the circumstances that brought them to bankruptcy. In the case of my car buying couple, the fundamental problem of the couple was insufficient work in the husband’s trade and low wages in the wife’s restaurant industry. But the bad car loan may have been a precipitating factor that kept them from scraping by.

Is it reasonable to think that Joe Average can become sophisticated enough to avoid the rip offs? Is there a legislative strategy that won’t cripple honest business? Wish I knew, but it’s clear we need to think about it.

I met with a couple yesterday with over a $100K in credit card debt. When the bankruptcy schedules are filed, this will look like a case of consumer spending run amok. What, the casual observer will ask, did they buy for that amount of debt?

Medications, gas, and groceries, is the answer. Because this 50ish couple are both diabetic in addition to having been in a horrific car accident several years ago. When they moved to California from the midwest, their insurance premiums went from $800/ month to $1900/month. Their insurance does not cover doctor visits or medications. Credit cards help mitigate the desperateness of their situation for a while.

This supports my contention that credit cards simply mask, for a while anyway, the squeeze on the middle class. We can delude ourselves for a while that things are OK, when they are not.

I’m always delighted when I uncover another aspect of the bankruptcy “reform” act of 2005 that operates in my client’s favor. We all know that the law was written to skewer the consumer debtor who was painted as irresponsible and profligate, a picture absolutely at odds with the world as I’ve seen it in 28 years of bankruptcy practice.

Yesterday’s discovery was how the law treats broken families better than intact families. My client is a single woman with a teenage child for whom she receives substantial and regular support. (Thank you, Dad). In preparing the Chapter 13 version of Form B22 to determine what Mom will have to pay to unsecured creditors, one includes the child support she receives in income; takes the deductions based on a household of two; then subtracts the support from the final number!

End result: Mom, my client, gets to figure her expenses including the cost of housing, feeding, and educating her daughter, but then gets to back out of the equation the support she gets for the child. In this case, it made a $1000/month difference, a $1000 less per month that she must pay to creditors.

I wonder if the cock sure Congressmen who wrote and passed this bill realized that the “new” law treats divided families better than the traditional, intact family. In the meantime, I will take every advantage I can find in this wretched law where it benefits my clients.

In the space of 24 hours this week, I saw two clients with substantial credit card debt who had been servicing that debt faithfully and at a substantial sacrifice , hanging on to the slippery financial slope, when a single irregularity in payments to one creditor sent their interest rates from 4-9% to 30%. For each client, that was the triggering event: they made an appointment with a bankruptcy lawyer.

An objective look at the impact of using universal default as a “reason” to increase the interest rate on a card that is being paid according to terms suggests this is horrible policy. In the cases of my clients, the card issuers turned a performing account being paid by someone who could probably never have paid off the balance in full, and thus would be paying interest forever into a bankruptcy write off. Good going guys.

As the heat in Congress increases on credit card issuers, some claim to have abandoned the practice of universal default. Consumer Action’s latest study of credit cards says it isn’t so.

In a macabre way, I guess in my line of work, I should applaud universal default: it instantly brought home to my client base that credit cards are rigged against the consumer and that pretending that you can pay them off is self deception. Anyway, I have two new bankruptcy clients.

Cathy Moran

Bankruptcy in Brief