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.

The threat of a lawsuit being filed is often what causes the first call to my office. Some collector has said he will take 25% of your wages, or will serve a lawsuit, or even will send the account to collection, and the hearer panics. Can I file bankruptcy today? the caller asks.

Remember high school civics, and the Bill of Rights’ promise of due process? Due process, at its simplest form, means that you get legal notice and a right to contest the claim of any creditor before they take your property. So, the only way the average unsecured creditor can take your wages or your assets is to file a lawsuit, serve it on you (notice) and provide an opportunity for you to resist the suit. In short, you will see this kind of creditor coming after you long before they have a legal right to take anything from you.

The unsecured creditors who can take your money without suing you are your bank and the taxing authorities. Your bank has a right of offset under state law: it owes you the return of your money on deposit and you owe it on a credit card or other loan. The bank may take the money in your account to satisfy your debt to it.

The IRS also has a right to levy on your account for unpaid taxes. The Internal Revenue Code has requirements about giving you notice of your tax debt, but the IRS does not have to file a lawsuit to collect its money.

So, in my book, the bank and the IRS are the creditors that have real powers to snatch your money on short or no notice. The collector for a credit card company wants you to think they have immediate and horrific tools to collect their bill, but it isn’t so. It’s just so much easier for them to collect if they gloss over your right to due process.

My colleague Brett Weiss echoes my experience with those in financial trouble: they wait far to long to see a bankruptcy attorney. Many have long since passed the point where they can hope to pay off their debt. They have invaded or neglected their retirement savings in a futile struggle to keep up with their debts. The minimum payments have only postponed facing financial reality.

Those lobbyists and legislators who argued that too many people took the easy way out of financial trouble via bankruptcy clearly never met real debtors who would rather be anywhere else than talking with me about admitting financial failure.

An amazing number of clients are willing to spend the last penny in the bank making payments before declaring bankruptcy.

Those that say that consumers take bankruptcy too lightly simply haven’t talked to anyone in financial distress.

The elderly are a growing percentage of bankruptcy filers. The reasons are myriad: health care costs, inadequate retirement savings, and financial entanglements with family. The trend to market home equity loans as a way to live better makes it less likely the mortgage is paid off when retirement arrives.

The question, “Should I file bankruptcy?” is usually most easily answered for the elderly. Younger clients with a significant remaining working life may have options for avoiding bankruptcy. Those options are not generally available for those at the end of their working lives. Incomes will not increase over time. Minimum payments on credit cards are calculated to pay off even small balances over 20-40 years! Seniors don’t have 40 years.
The stress of being in the bill collectors’ cross hairs is less tolerable for the elderly, even if nothing they have would be available to satisfy a judgment.

Discussing money with a senior generation is not easy, but it needs to be done. I’ve seen a number of cases where it is not until there is a crisis that adult children learn that their parent has been living with unmanageable debt. Too often, the senior has stinted on food or medication in order to make the minimum payments on credit cards.

The rational choice may be bankruptcy and a debt free old age.

Adam Savage, the speaker at my son’s graduation Saturday as a mechanical engineer, made a point equally applicable to his audience of newly fledged engineers as to my audience of those shouldering lots of debt: Look at the big picture.

For engineers, Savage hoped that they would look beyond the technical challenges of any task at hand to see where they, and the gadget they were making, fit in the larger world. For debtors, I want clients to look beyond making this month’s minimum payments to assess whether there is any meaningful chance of paying off the debt and achieving economic stability.

Short term thinking was exemplified recently for me by a client considering refinancing her home mortgage to a smaller payment “like her friend has.” I cautioned about loans with appealing initial payments that soon morph into monsters that the borrower can’t afford, putting the home at risk. Her response, to my dismay, was “I’ll deal with that when it adjusts.”

Looking at the long term was the theme of my recent post on the Bankruptcy Law Network, looking at the differing results if you paid off credit card debt with the contractual minimum payment or put the same money into an IRA over the same period.

Making good decisions about how to deal with a technical or a financial challenge requires that we lift our eyes from the desk in front of us to the future, and look at the bigger picture.

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.