on the Bankruptcy Soapbox

While there are an endless number of misconceptions about filing bankruptcy, the one I’ve encountered more often in the past weeks is the belief that participation in a debt management program or debt settlement program meets the new requirement for a “credit briefing” as a condition of filing bankruptcy.

To be clear, the credit briefing that is required in order to file bankruptcy must be from an organization approved by the UST in the district in which the bankruptcy case is to be filed. Most commercial debt settlement outfits are not approved. Here’s the list of approved agencies .  The briefing must be completed within 6 months of filing the case.

Among the bad information out “there” about credit counseling is that the counseling takes 6 months.  No.  The usual credit briefing session is between 30 minutes and an hour.   It must take place within 6 months of filing.
Another complexity that I’ve seen twice in three weeks are individuals who attempted credit counseling on the internet and encountered a computer or connection glitch such that they didn’t “complete” the session.  In each instance, the bankruptcy  case was dismissed for failure to complete the briefing before filing.

While there is no evidence that credit counseling serves any useful purpose, it is the law. Fail to get credit counseling and the case is likely doomed.

One of the petty struggles I have with clients is convincing them that they need to include all of their debts in bankruptcy.  Sometimes, they will tell me they don’t want to include their car loan in the case because they “need the car”.  Sometimes I find the student loan payment in the budget but not on the list of creditors.

Part of the issue is grounded in confusion between scheduling a debt and discharging the debt.  Debtors are required to list all of their debts and risk denial of discharge if they don’t.  However, debts are not necessarily discharged just because they are listed.  The Bankruptcy Code specifies a number of debts that simply aren’t dischargeable in bankruptcy.  Those debts still must be listed.

The desire to exclude debts from the schedules is sometimes fanned because debtors don’t know that they can reaffirm debts during their case.  A reaffirmation agreement essentially waives the discharge as to that particular debt and puts the parties back on the same legal footing as they had before the bankruptcy was filed.

Clients are frequently surprised when they learn that they can continue to pay a discharged debt voluntarily if they wish.  “Pay the dentist after the case is filed if you wish, but list them in the bankruptcy if you owe money when the case is filed. ”

Then, there are the clients who “love” their credit card issuer and want to keep paying because of loyalty or out of fear of being without plastic.  I have to tell them that for some card issuers, the love is one sided, and the issuer will cancel the card independently of being listed or not in the case.

Moral of the story, there are a number of options for debts post filing, so don’t get tripped up by leaving out creditors.

My colleague Nick Ortiz explained cash collateral as primarily a business  bankruptcy concept:  a creditor with a lien on income producing assets has a lien on the cash that asset produces as well.  But you don’t have to have a traditional business to have cash collateral, and the duties it brings in a bankruptcy reorganization.

The issue usually comes up with respect to rental real estate:  the monthly rent is cash collateral.  In consumer cases, it is often the taxing authorities who have a blanket lien on all of the debtor’s assets.   The other, obvious but oft forgotten lien holder is the mortgage lender, whose security documents undoubtedly give it a lien on the income produced by the mortgaged property.

In any bankruptcy case in which the debtor remains in possession of his assets under the protection and supervision of the bankruptcy court, the rights of the secured lender in the cash collateral must be respected.  The debtor is prohibited from using cash collateral without either the consent of the secured creditor or a court order.  Fail to get either consent or an order and appointment of a trustee,  conversion or relief from stay are  likely to follow.

I keep encountering posts on internet bankruptcy boards from individuals who have “filled out the means test” and then proceed to announce their conclusions.  Given the uncertainties in the legal community about how to apply the means best and the think and re-think I engage in preparing Form 22, I can’t imagine a non lawyer learning anything reliable from trying to do this themselves.

The tricky issues include how to deal with income from non filing spouses; from roommates or extended family member; and how to handle business expenses for the self employed.  (One bankruptcy appellate panel recently decided that the judges who drew up the form did it wrong!)  Then there is the dispute on the deduction side about operating expenses for paid for cars; allowances for older cars; debts associated with property you’re surrendering, and just what part of your telecommunication expenses go on the form.

I cringe when I ask a client to sign this form, as they cannot possibly validate all of the entries on the form.

While I won’t say “don’t try this at home”, I am certain you should draw no conclusions about the means test and your eligibility for Chapter 7 based on your efforts to take the test.   Get an experienced bankruptcy lawyer involved.

My colleague Craig Andresen writes about the problem of debts repaid to family members within a year of filing bankruptcy.  Craig suggested having the debtor recover the money before filing in the form of a new loan;  after bankruptcy, the debtor is free to repay the family member without hindrance and the new loan is protected from avoidance by the  “new value” exceptions to preference recovery.
This comes about because the Bankruptcy Code gives the trustee the power to recover the money from the recipient and distribute it to creditors according to the priorities of the Code.  A payment to a creditor within the statutory period that allows them to get more than other creditors is a preference.

This came up in an initial consultation I had last week.  My proposed solution was a little different than Craig’s:  I pointed out to my client that the client, who has a fine job but an investment disaster on his hands, could fund the preference settlement with the trustee on behalf of his relative.  After all, the trustee simply wants the value that went out to the family member restored to the bankruptcy estate for the benefit of all.

Fundamental lesson, though, is that your bankruptcy lawyer can’t find solutions if you don’t disclose all of the facts.

I know that those in financial difficulty are frequently not operating at their peak. But for the life of me, I can’t understand how the recipient of a summons and complaint from a California court can take from the papers only that they have a “court date”. Arghhh!

The basic outline of a collection suit is that the creditor files a complaint with the court. The court issues its summons, which validates the complaint and puts the defendant on notice that there is a legal suit pending.

The summons tells debtors plainly that they must file a typewritten answer to the complaint within 30 days of service, or the defendant may get a judgment for the relief prayed for, which is usually money.

Served with the complaint is a notice of case management conference on a given date, well after the date on which the answer is due. At the case management conference, assuming that an answer has been filed, the court will set deadlines, trial dates, etc. But none of this scheduling is necessary if the defendant has not contested the complaint by filing an answer.

Why is it that a consumer debtor grasps only the date of the case management conference, and absorbs none of the rest of the message that says clearly, in two syllable words, that one must file an answer for there to be anything for a court to decide?

I should have a cassette tape to play to tell clients that the case management conference date is meaningless if you didn’t file an answer. If you don’t have a defense to the action, that’s fine. Just don’t obsess about a date that means nothing if you didn’t take the time to read the summons and understand that filing an answer is the price of admission.

There’s more on the subject of collection suits at Bankruptcy in Brief.

As I look over the mortgage rescue legislation the Senate is considering, I conclude they are clueless about what it takes to keep families in their homes. No foreclosure is going to be prevented by counseling. No home is saved by giving buyers at foreclosure sales a tax credit. Measures to prevent this mess from occurring again don’t help today’s sufferers an iota.

The one provision in the proposed bill that might help today’s homeowners facing foreclosure was the provision that allows bankruptcy courts to perform the loss mitigation that the lenders talk about but don’t do. Let bankruptcy courts write secured claims down to the value of the property today; let the court excise the indexed increases in interest rates. Provide some meaningful help to real, live families who may otherwise be homeless.

If Congress can’t do that  (and they show few signs of willingness to buck the bankers who brought us this mess) they should at least refrain from claiming they are doing anything to keep people in their homes. Would you say that’s likely?