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

Bill collectors are taking advantage of the confusion surrounding last year’s bankruptcy bill by telling consumers that bankruptcy isn’t available any more. I’ve heard variations from clients who’ve been told that you can no longer discharge medical debt or credit card debt in bankruptcy.

Other bankruptcy attorneys report collectors claiming that they’ve “investigated” the debtor and the debtor “isn’t eligible for bankruptcy.” Others go further and claim they will “report to the appropriate authorities” the debtor if he files bankruptcy.

Balderdash! Bankruptcy remains available to virtually all consumers. It’s more expensive and more paper intensive, but it’s there, and it works.

Collectors rely on creating an atmosphere of fear, shame, helplessness to get their targets to write a check. They count on their ability to convince the debtor that he has no legal options. Not only are they wrong in this case, they’ve violated the Fair Debt Collection Practices Act as well.

Cathy Moran

The most frequent search terms that bring visitors to Bankruptcy in Brief have to do with getting credit after bankruptcy. New clients, saddled with enough debt that they will engage a bankruptcy attorney, at our first meeting either ask about the impact of a bankruptcy on their credit score, or proudly tell me that they have “perfect credit”: that translates as “never having missed a payment.” What they miss in their decision making process is that they can never pay off the credit they have! And their first concern seems to be how soon they can get back into the credit market.

Identity theft and the misuse of credit scores for employment and insurance purposes have heightened our awareness of credit reports and credit scores. This legitimate concern is hyped by those who, having created the credit scoring “game” and cemented their lock on the rules of the game, then want to sell us services to protect us from damage to our scores.

What most consumers don’t understand is that credit scoring is a purely arbitrary analysis, with changing rules controled by each score provider. It is not regulated, objective, or transparent. It seems your score can suffer from having too much credit, too little credit, or even for astutely shopping for better interest rates on purchases.

Let’s focus on our personal balance sheet, rather than our ability to acquire more debt, as a salutory exercise. Let’s look at our savings, our preparation for retirement, the adequacy of our insurance protection as the measure of our financial health. Let’s ask ourselves first how long it will take us to repay the debt we already have . What would we save if we weren’t paying interest on credit card debt?

Let’s learn to find our self worth in something other than the kind of credit card we carry or the credit score someone else assigns us.