on the Bankruptcy Soapbox

You never know just how a client hears your advice, until you hear yourself quoted back to yourself as the reason for a client doing something stupid.  In my case, I’m unclear about whether the message received was really as reported, but it’s made me think about my choice of words.

I was asked in the initial consultation if gifts of money from the debtor’s parents in the past year presented “a problem”.  No, I replied, thinking that such gifts don’t change the analysis, or the expected outcome of the case.  The client now claims that my words were a license to fail to disclose the gifts. Huh?

For some clients, it is clear that full and complete disclosure is emotionally very hard.  The fearful and the stressed somehow  are  simply sure that telling the whole truth imperils the bankruptcy, when just the opposite is true.  Just as sunshine is the best disinfectant, disclosure in the bankruptcy paper work is the best insurance for a good outcome.

So, I will be  looking for new phrases that will penetrate the understanding of those disinclined to hear what I’m trying to convey and reiterating that the client is the one ultimately responsible, under penalty of perjury, for the completeness of the schedules.

The “new” bankruptcy law set out to make bankruptcy complex and laden with booby traps, including the restrictions on choice of exemptions.  John Bates has performed a truly marvelous service with his table of exemption systems available in each state and the options for those who have moved within the statutory periods.

ExemptionsExpress collects all of this highly technical information and is a god send for attorneys in one state who have to figure out whether the exemptions of another state are extraterritorial.

Now, if I could just find a reliable, up to date collection of the exemption amounts in each state, I’d be a happy camper.

Pam Stewart writes about debt collectors suggesting a cash advance on the card they were collecting on to pay the arrears.  That one ups the story I’ve heard twice in the past 2 months:  the collector offers a new credit card if you will settle the amount due on the card he is collecting on!

Clearly, it’s a crazy world in the realm of debt collectors.  Collectors have to be imaginative or compelling to get you to write the check, or authorize the bank account debit for money they can’t reach otherwise.

Debt collectors rely on fear, shame or harrassment to get you to pay them money they can’t get at.  As long as you understand their game, you can be resolute and pay first things first.

The changes to credit card billing practices proposed by the FRB are welcome, but just scratch the surface of the crushing quality of credit card debt.  My sense, talking to financially stressed people day after day, is that credit cards have merely postponed for many Bay Area residents the recognition that they cannot live a middle class life in this high cost region.

The cost of living in the Bay Area is some 150% of the national average;  our salaries are higher, but not 150% higher.  The vital, start up, high tech, high risk economic climate makes huge winners of some, and economic losers of others.  The availability of credit cards and the energy with which those cards are marketed have made it easier to mask the fact that a middle class life is more expensive than some can afford.

The other issue that makes credit card debt so poisonous is  that it bears interest that a generation ago would have been criminal.  California concepts of usury generally prohibit individuals from charging more than 10% on loans, yet banks can regularly charge twice that to borrowers in good standing and twice that again to borrowers in default.  The FRB proposed rules don’t deal with that issue.

At base, the problem with an indebted middle class is more profound than accounting rules on how payments are to be applied will solve.

My friend Kurt O’Keefe writes about the 6 trillion dollars in home equity than has evaporated in the mortgage meltdown. When I look around me in the Silicon Valley and environs, I question just how real that equity really was. Reckless lending practices made a vast pool of people potential buyers for a limited quantity of homes in a desirable part of the world. More buyers chasing fewer homes lead to huge increases in home prices.

This “equity”, the increased value in the surrounding homes, never would have existed had it not been for mortgage lenders passing out money like flyers at a rally. It was artificial from the beginning.

The correction is painful to those who bought or borrowed at the top, but the top was a man- made illusion.