on the Bankruptcy Soapbox

The stupidity of the means test as a metering device in bankruptcy was apparent as I worked through the case of a single debtor. Because she is a renter with an old, paid-for car, and no unpaid taxes, the means test will compel her to pay a significant amount monthly to her Chapter 13 plan.

Whereas, if she had mortgages that were double or triple the amount of her rent, or an upscale new car, or years of unpaid taxes, those payments would be deductions from her income in calculating what she must pay in Chapter 13. Her unsecured creditors would get nothing: all the available money would be diverted to secured claims or taxing authorities.

Does it seem to anyone else that we are rewarding the wrong sort of behavior?

I find a real irony in discussion of the economic stimulus package under consideration to give out money to consumers in the expectation that they will immediately spend it, to our general benefit. Prof. Elizabeth Warren started a discussion of the economy’s reliance on consumer spending.

Commentators and economists consider a stimulus dollar that is saved to be wasted in the equation of avoiding recession. Yet the people I see daily need some savings more than any material thing you can name. They live from paycheck to paycheck, they have nothing for emergencies much less retirement.

While I don’t buy the canard that most people in bankruptcy recklessly overspent, there is something wrong with an approach to the economy that is dependent on continuous consumer spending.

Savings needs a better publicity agent.

The fact that debt collectors are only marginally acquainted with the law was highlighted today when a client reported that her ex husband had been told by a debt collector that the former marriage made him personally liable for his exwife’s debts.

There must be an emphatic, yet polite, word for b***s****. Wish I knew it… “Balderdash” seems so weak. In my most generous view, this could be debt collectors from outside of California who are clueless about community property law. Or, more realistically, they’ll say whatever they think will scare a payment out of someone.

For the record, living in a community property state such as California does not make each spouse personally liable for the contractual debts incurred by their spouse. If your spouse in California takes out a credit card and runs up a balance, you are not liable to the card issuer for the debt. The community property is liable for the debt, but you are not liable. If there is no community property, by reason of divorce or a marital property agreement, then only the person who contracted the debt is liable for it.

This is but one of the “whoppers” told by debt collectors. Engage skepticism when dealing with this breed.

I’m accustomed to advising clients about big ticket debts like mortgages, auto loans and back taxes. I was surprised when a client, resigned to letting her house go to foreclosure, was absolutely delighted to know that she could free herself from her unhappy relationship with Verizon Wireless at the same time.

Bankruptcy terminates executory contracts in place when the case is filed. So the balance of the two year contract with the unsatisfactory provider could be terminated, and the early cancellation penalty treated just like any other unsecured creditor.

I’m adding to my list of things to do before you file, like change banks and cancel automatic payments from your checking account, consider dumping your cell phone provider.

In the 15 mile drive to bankruptcy court yesterday, the radio had two doom and gloom stories about the housing market and the dive on Wall Street, interspersed with no less than three, back to back, buy-my-book-and-get-rich pitches. I think the juxtaposition is not random.

When people are out of work or underemployed, they are open to ideas to “eliminate their debt in months” or make a bundle trading stocks. These appear to be avenues of escape for those in financial distress. We saw it the last down turn: everyone around me in Silicon Valley became a day trader of stocks or a realtor. After all, who could lose money dealing in California real estate?
As always, the only people likely to prosper as a result of these products are the sellers, not the buyers.

Sometimes you need reminding about what you know. I’ve been so involved in looking for Truth in Lending violations or other defenses to my clients’ awful mortgages that I forgot the line of attack that is dependent on market value not wrong doing.

Karen Oakes reminded me that a Chapter 13 debtor can avoid a mortgage where there is no equity to secure the debt. At least in the 9th Circuit, even a voluntary lien, such as a mortgage or deed of trust, is avoidable if senior liens equal or exceed the value of the property at the time the bankruptcy is filed.

Supposing that you avoid a junior mortgage, you are still left with the question of whether it makes sense to keep the house: making payments on a loan that equals or exceeds the value of the house is not obviously a smart use of money.

I think, on today’s news, we have to figure that it will be a long while before property values recover from the hit they have taken. More and more, I am advising clients that the best use of the property is to live in it without making payments for as many months as possible before the lender takes it back.

May I suggest a New Year’s resolution to look at your financial situation, including your preparation for retirement, with detachment and consider whether a fresh financial start makes sense?
A university study done about 10 years ago found that one in 7 American families would be better off if they filed bankruptcy. The point was that Americans were not heedlessly filing bankruptcy to avoid repaying debt. At the time, about one in 17 families actually filed. My experiences in the past decade suggest that the finding remains true in 2008.

A life of minimum payments, minuscule bank accounts, and no retirement savings is a life fraught with financial danger. My clients all too often try to pretend that all is well if they can make the minimum payments on credit cards and juggle no-interest offers to move money from card to card. The debt remains and savings are postponed.

I did a little exercise that contrasted paying off a modest credit card debt by making minimum payments with devoting the same about of money to retirement savings. The results are mind boggling. However much money you have during your working life, you are likely to have less at retirement. Take a look at your statement from Social Security and calculate how you are going to live on that amount.

Clients walk into my office hoping that there is a magic wand, The Alternative to Bankruptcy, that I can wave and allow them to solve the debt problem without bankruptcy. For most, there is no such secret, unknown cure to debt.

It may be time to swallow your pride, file bankruptcy, and devote the energy now spent on managing debt to saving for the future and enjoying the present.