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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Over on the bankruptcy board at Lawyers.com, where I contribute, an Idaho consumer posted a poignant story of engaging a debt settlement company to “get them out of debt”. Using the “services” of this company, the poster now has six judgments of record and two garnishments in process. The debt settlement company, however, has its full fee.

Such stories, and there are lots of them, are emblematic of the profit that debt settlement firms and credit management outfits make on the consumer’s fear of bankruptcy. Most folks will do anything to avoid bankruptcy, either out of ignorance of how bankruptcy works or a moral preference for paying their debts.

Bankruptcy isn’t for everyone, but it would improve the lives of a great many more working families than now avail themselves of a fresh start. Everyone considering paying money to an organization promising to get them out of debt ought to see a bankruptcy lawyer before parting with a dime. Chapter 13 as a debt management alternative. With a handle on the alternatives, there would be fewer of these sad stories.

Cathy Moran
Bankruptcy in Brief

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Perhaps the second most frequent question would-be clients ask me is whether the fact that they filed bankruptcy will be 1) in the paper, 2) disclosed to their employer, or 3) discovered by their family or friends. Those who aren’t living the American dream of upward mobility and financial security seem to think that’s a matter for shame.

A couple of objective observations are in order: a university study of some years ago found that one in seven American families would be better off if they would file bankruptcy. Second, between 2001 and 2005, over 8 million American families filed bankruptcy. Chances are very good that serveral of the families around my petrified client have filed bankruptcy, unknownst to them.

The study about being “better off” resonates particularly with me, as I see individuals struggling to pay credit card debt, where the interest has tripled when a payment was late, while at the same time, they have no emergency cash reserves, no retirement savings, and no health insurance. While their choices are noble, they aren’t wise. These people live on the financial edge so that the credit card companies get their minimum payment.

I tell my questioner that bankruptcy is a matter of public record, so anyone who wants to find out who has filed can do so. But, I ask, have you recently read the news of individual bankruptcy filings? Such is not the fare of papers where I practice and they begin to realize how insignificant the fear of exposure is next to the finanical realities of their situation.

The human creature is pretty amazing that it will live with the constant stress of overwhelming indebtedness rather than risk that others learn of its pain.

Cathy Moran

I looked back to see how my advice to clients considering bankruptcy has changed since the amendments of 05 took effect. Deceptively dubbed bankruptcy reform, the changes were designed to narrow the door to the bankruptcy court and shackle debtor’s attorneys whom Congress blamed for inciting people to file bankruptcy.

Where I used to tell most clients who were unemployed that there was little point in spending precious cash on filing bankruptcy when they had nothing that creditors could take from them. Wait until things have improved and you have a salary to protect, then we’ll file your case.

Now, with the uncertainty about just what constitutes abuse in Chapter 7 and the varying judicial decisions about whether CURRENT MONTHLY INCOME, the backward looking six month average income or the actual income at filing control, I am far more inclined to say file now, when you have neither CMI nor actual excess income. Scrape up the money and file while there can be no doubt that you have no ability to pay existing debt. Funny that the new law has made me a far more vocal promoter of filing bankruptcy than before.

I am also much more likely to promote Chapter 13, not because the client must file a repayment plan, but because it allows a client to pay the increased cost of the bankruptcy over time. These plans usually pay little or nothing to creditors, but they do let the financially strapped buy my help on credit. Ah, the unintended consequences… Between increased attorneys fees, prebankruptcy counseling and post filing financial management classes, higher filing fees, and the production of all the required paper, it simply costs more to be broke.

The Congressional attempt to prohibit lawyers from advising clients to take perfectly lawful acts, such as buying a replacement vehicle or borrowing to file the bankruptcy, has been ruled unconstitutional by the trial courts who have considered the matter. We can hope that the new Congress may eliminate some of the worst of the other idiocies in the amended law.

Cathy Moran

The U.S. Armed Services recently disclosed that a significant number of service personnel cannot be deployed overseas because of their personal debts. The military says that excessive debt both distracts from job performance and makes the G.I. vulnerable to corruption.

Civilians buried in debt try, to their credit, to soldier on through debt, reluctant to recognize that they can’t ever pay off the debt they have. They would do well to recognize, as the armed services do, that debt is debilitating. It impacts families. It sucks energy, optimism, and focus from the debtor. It stands between the consumer and the savings necessary for a secure retirement.

Cathy Moran