Bankruptcy works on disclosure: in exchange for full disclosure of assets, debts, and financial history, creditors with notice of the case are bound by the outcome, hopefully the discharge. Disclosure costs the debtor nothing and it insulates the debtor from charges that he has concealed property of value or otherwise been less than candid with the court.

My colleague Jay Fleischman wrote about the consequences of failing to disclose even the right to sue for a violation of consumer law. My questionnaire for clients says repeatedly that you must disclose all of your assets, yet I get back questionnaires showing no clothing (did they come to my office in a barrel?), no bank accounts, no furniture, no car, etc.

Sometimes, they don’t have the kind of property in question, but more often, they made assumptions. They assumed that 1) if the account was overdrawn, they didn’t have to list it; 2) if the clothing was worth little, they didn’t have to list it; 3) if the bank had a lien on it, they didn’t have to list it. The erroneous assumptions go on.

I declined representation in a case this week that promised a five figure retainer in large part because I believed that I could not get the prospective client to take seriously the need to be open and candid with the court.

If you want to keep any asset, tangible or intangible, after the bankruptcy, list it in your schedules. That way, you also get to keep the discharge, the real prize in this exercise.

My colleague Susanne Robicsek wrote about the implications of a state to state move on filing bankruptcy. Where you live and how long you have lived there drive where you file and what exemptions are available.

A different issue arises when you contemplate moving from a house that’s been foreclosed to rental housing in the same area. The impact of a bankruptcy filing on potential landlords is one of the things I have found hardest to predict for clients. Some landlords want an elaborate application, references, and a credit check; others want far less.

It is my sense that if you must secure rental housing around the time you expect to file bankruptcy, you are better off shopping for and leasing before you file bankruptcy. While your credit score may be poor, being a debtor in a pending bankruptcy is usually scarier for a landlord.

Like any credit transaction you complete before filing bankruptcy, make sure to be completely honest in answering any questions put by the landlord. Lying on your application may invalidate the agreement. You don’t have to volunteer bad news, but don’t willfully misstate the facts.

California has several laws that limit what a mortgage lender can do to collect its money after the foreclosure. I was reminded of the purchase money antideficiency statute yesterday when meeting with a client who took out two loans to buy a home. The home was now in foreclosure.
California Code of Civil Procedure 580(b) provides that a lender may not sue a borrower after a foreclosure sale when the loan was used to acquire a home. This Depression-era statute puts the risk of non payment solely on the lender who made the loan to buy the property. The lender’s sole remedy is to foreclose on its deed of trust.

Contrast these facts to a loan taken out by a borrower for other purposes, such as remodeling, business, or payment of other bills. Such a loan doesn’t fall within the anti deficiency provision because it wasn’t used to acquire the home. A holder of a second deed of trust on a HELOC, for example, has the right to sue the borrower should a foreclosure by the senior mortgage lender cut off its interest in the collateral. Facing those facts, perhaps bankruptcy is the right choice.

For yesterday’s client, the fact that both loans on the troubled property were taken out to buy the house protects the borrower from any future collection action by either lender. This client didn’t need bankruptcy protection. They’ll be survivors of the mortgage meltdown.

A small business owner finds it hard to separate themselves from the business, even when that business is incorporated. After all, the owner’s financial livelihood rises and falls with the success of the corporation’s business.

Twice in the past two days, I had occasion to point out to clients who own small corporations that when the bankruptcy trustee says “you”, the trustee is talking about you, the individual, not the business that you have been immersed in.

But the important legal distinction is that the corporation that owns the business is a separate legal “person” from the flesh and blood human being who owns the stock in the corporation and serves as its officer and director. The debts of the corporation are not necessarily the debts of the shareholder. The corporation can file bankruptcy without the shareholder, and conversely, the shareholder can file bankruptcy without impacting the day to day operations of the corporation.

In analyzing a bankruptcy filing or answering questions from a bankruptcy lawyer or bankruptcy trustee, make sure you know who you are.

More on business bankruptcy.

Service of a summons in a collection suit seems often to be the prod that gets procrastinating debtors into my office to file bankruptcy. Yet it is not the emergency that they think. Their financial world will not end if a judgment is entered before they file bankruptcy.

These collection actions are usually on credit card debts and almost always the client admits the debt and has no defense to the suit. Therefore, filing a truthful answer would do little to alter the situation.

Second, the debt is just as dischargeable in bankruptcy if embodied in a judgment as it is as a monthly bill in default. There is no loss of rights should the judgment be entered before commencement of the bankruptcy case.

Procedurally, even when the defendant (the person who has been sued) fails to timely answer, the plaintiff must jump through several more hoops just to get the piece of paper that is the judgment, and still more hoops to compel some sort of payment on that judgment. It all takes time, and it is usually not nearly as important to the plaintiff as to the defendant.
If you are served with a summons, take a deep breath. It probably signals that you need to file and you need to face up to that fact, but it doesn’t mean the world ends in 30 days, when the answer is due.

Gather up all of your bills, your paystubs, and your last tax return, and see a bankruptcy lawyer.

More on lawsuits

Cathy Moran

I wrote earlier that stress is a real and serious threat to physical health that needs to be factored in to the discussion about bankruptcy and the alternatives. Recent studies suggest that stress may also lead to obesity.

Individuals in debt tend to see their debts as a financial problem, when those debts are also a threat to physical, psychological, and social well being. An entire part of the debt puzzle is lost if you don’t factor in the consequences of unremitting stress on the body and the family.

For that reason alone, I don’t find that debt settlement programs are a real solution for most consumers. Even if the program is structured so that it actually works ( and most are not), the continuation of a substantial financial commitment to old debt is debilitating.

So, better health joins the need to save for retirement in my pantheon of reasons why bankruptcy so often is the better choice.