Chip Parker today added to the discussion of the decision to file bankruptcy with a post including consideration of the future consequences of filing bankruptcy.

Chip listed possible adverse employment issues and rental housing as areas that might be impacted by a bankruptcy filing.

In my view, these possibilities need to be weighed against the equally real consequences of not solving a debt problem. For most considering bankruptcy, their credit record is already blotched; a bankruptcy filing is not going to be the first adverse entry on their credit report. Bankruptcy might be the first step to improved financial health.

I find myself fighting the fear clients have of the ” bankruptcy unknown”, closing their eyes to the precariousness of their current situation as though doing nothing is a worthy choice.

The usual question for a bankruptcy attorney is “can I keep the (fill in the blank)”. Whether it’s a house, or a car, or a computer, clients want to know if filing bankruptcy will strip them of their “stuff” bought on time. Frequently the answer is that they can keep the asset as far as the bankruptcy system is concerned.

Whether they should keep the property is another question that I want to raise. Jed Berliner suggests that homeowners with recent adjustable rate mortgages may have no equity to preserve and would be better off letting the house go.

I would expand the analysis: if the choice is to pay $900/month to keep the current car on which you owe more than it’s now worth, what is point in keeping it? I wish for my clients a truly fresh start with living expenses they can afford. Paying more than something is worth clouds that fresh start.
It’s tough to surrender your purchases, but having filed bankruptcy should bring more clarity to financial considerations.
Paying more than the house or the car is worth may not be the wisest choice.

I saw a client this week who insisted that his tenant’s debt to him survived the bankruptcy “because it was listed on Schedule G”. The debtor “explained” to my client that Schedule G was the list of debts the debtor didn’t seek to discharge.

Get your legal advice from your adversary, your brother in law or the internet and be prepared to get a surprise. Schedule G is not a list of debts the debtor wants to continue paying on; it’s a list of executory contracts and unexpired leases. The debtor’s obligation for each of those debts is discharged just as the debts listed on Schedule F.

The fund of information in our world is immense, and more accessible with the advent of the internet. Not all of that information , however, is equally reliable. If anything important to you rides on the information you seek, seek out a lawyer for some input. Free legal advice can be really costly, and the cost of a lawyer to fix the situation is usually far greater than the cost of getting it right the first time.

I wrote earlier about the erroneous assumptions that clients make when they are served with a suit for money owed. The first is that there is an immediate, life changing emergency. The second, which I want to explore today, is that they have a court date some months in the future. Wrong.

California law provides that a defendant, the person sued, has 30 days from the service of the summons in which to answer the complaint. The answer tells the other side and the court what are the disputed issues in the suit. Does the defendant claim he’s not the person who owes the money? that the amount of money is incorrectly stated? that he’s paid it in full? Unless the parties settle, the court will decide those disputed issues at trial.

However, if the defendant does not answer the complaint, the court assumes that the defendant does not dispute the contentions of the complaint. If there is not dispute, and the plaintiff has followed the procedural rules, the court will enter a judgment for the plaintiff just as soon as the plaintiff submitts the correct papers. There is no need for that hearing date in the papers if there is no properly teed up dispute for the court to resolve.

So, the moral of this story is that the defendant must file a timely answer to the complaint in order to prevent entry of a default judgment for the relief sought in the prayer of the complaint.

If the defendant agrees that they owe the money, which is most often the case among my clients, then the real issue is what to do about debts you can’t pay. We discuss their bankruptcy options.

Cathy Moran

Bankruptcy in Brief

What often brings a prospective bankruptcy client to my office is the filing of a collection suit by a creditor. Almost invariably, the client has leapt to two incorrect assumptions: one is that the world as they know it is coming to an end; and two, they don’t have to do anything until the date set for the case management conference, months down the road.

On the issue of the implications of a lawsuit, it is a step toward a judgment in favor of the creditor. A judgment is a determination that the debtor owes the amount of the debt and usually the creditor’s expenses to get the judgment. A judgment entitles the judgment creditor to enlist the coercive power of the state to collect that judgment by levy, lien or garnishment.

A judgment in California does not automatically constitute a lien on the debtor’s assets, as it does in Georgia where my colleague Jonathan Ginsberg practices. Jonathan writes that a judgment creditor is automatically a secured creditor.

In California a creditor with a judgment must take an additional step to create a judgment lien. A judgment lien on real estate is created when an abstract of judgment, issued by the court after entry of judgment, is recorded in the records of the county recorder. A judgment lien on personal property is created by filing a notice of judgment with the Secretary of State.

A judgment lien allows a creditor to execute on that lien through the courts. In that process, even outside of bankruptcy, the judgment debtor may claim an exemption in certain kinds of property. The California state exemptions are set out in Bankruptcy in Brief.

In short, getting a judgment is just a step toward actually taking something from the judgment debtor. All these steps take time and cost the creditor something. The filing of a suit may be a good indicator that the client needs to do something proactive about their financial situation but it is not an emergency.

More about the second erroneous assumption tomorrow.

Talking about our financial difficulties is taboo in this society. We lionize those who make a fortune; everyone expects to live the middle class life. Most of those meeting with a bankruptcy lawyer for the first time manifest some kind of shame, the sense that their financial hole is the sign of a moral as well as financial failure.

As long as no one will talk about it, each person imagines that they are the only one with this sort of problem. ( see a profile of the typical bankruptcy filer). They imagine that they will have to justify their situation to the bankruptcy system in order to get a discharge.

The cult of silence may be why the debt settlement/debt management businesses do so well. For a price, you can hire someone to get you out of the hole without declaring bankruptcy, and therefore failure. Only those models seldom work for one of two reasons: writing one check for the same amount as you wrote a bunch of smaller checks is still the same amount of money. It’s not the number of checks that is the problem, it’s the amount of money necessary to retire that debt, even over time.

The debt settlement model fails because creditors don’t stop trying to collect when contacted by one of these for profit outfits. The first money paid by the consumer goes to the company, not the creditors. So the consumer gets hassled by creditors or sued by one of more before the debt settlement folks have paid anyone but themselves.

Individually and societally we would be better off with more openness about personal finance. As I wrote earlier,we should practice candor about money with our kids. Collectively, have an honest dialogue about the role of credit in our economy and about the massive transfer of money from the middle class to the financial industry in the form of credit card interest, fees and penalties. Look at the extent to which borrowing on credit cards has replaced a societal safety net.

How will filing bankruptcy change your life? Rachel Foley over at BankruptcyLawNetwork pondered about how bankruptcy might not change clients lives if they continue to confuse “wants” with “needs”.

My short, irreverent answer to that question from clients is that they will sleep better at night. They will experience a drop off in telephone calls from collectors and their mail will shrink in volume. The more serious answer has to reflect how they got to my office to file bankruptcy.

When the driving force was gambling or some other irresponsible behavior, I tell them that I can dig them out of this hole with bankruptcy relief, but I can’t save them from a recurrence of that kind of spending. When the driving force is one of those things beyond their control, like job loss, divorce or illness, I can be far more certain that they will cherish a fresh start. pay for insurance or savings rather than minimum payments on credit cards, and savor relief from crippling debt.

How many of us hit the internet when we need information? The computer has replaced the library as our first response to an unknown. Linda Hamm writes about the dangers of relying on bankruptcy “information” found on the web
on the Bankruptcy Law Network. She reminds us that not everyone who write on the web knows what they are talking about.

A second problem with internet message boards is that the question posed contains only the facts, or the view of the facts, that the poster thinks are important. So often, things that the layman overlooks are the issues that drive the legal result. That is why the give and take of an interview with a lawyer is essential to pin down the applicable law.

It is essential for those researching their bankruptcy options on the internet to see time online as background for a meeting with a lawyer. Become familiar with the terminology and the concepts. Create a list of questions to discuss with counsel. Don’t rely on what you read on the internet.

I try to dissuade clients from fixation on their credit score as a measure of financial health. I’ve seen too many clients sitting in my office with winning credit scores and so much debt they can’t pay it off in this world or the next. I have to wonder what that score is measuring.

Atlanta bankruptcy lawyer Jonathan Ginsberg writes about the use of credit scores in the insurance industry. I have always found the alleged connection between one’s credit worthiness and one’s safety as a driver to be spurious. Let’s hope the Supreme Court sees this as a pernicious practice as well when it considers Geico v. Edo this term.

To a distressing extent, people in dire financial straits still worry that escaping overwhelming debt via bankruptcy will destroy their credit score. This article in Smart Money shows why filing bankruptcy can improve the debtor’s credit score and offers tips to get the most improvement following bankruptcy.

While I resist the growing importance of credit scores in non financial parts of our lives and the obsession among consumers with credit scores rather than “assets and liabilities”, it’s nice to have confirmed my contention that a discharged debtor is objectively a better credit risk after bankruptcy than he was before.

Cathy Moran
Bankruptcy in Brief

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