Even if your creditor gets a judgment against you in California, the debt underlying that judgment remains just as dischargeable as it was before the case was filed.  And apparently differently from New York, a judgment in California does not automatically become a lien on the defendant’s property.

The discharge of a debt in bankruptcy depends on the nature of the debt, not whether a court has ruled on the merits of the claim.  So, child support is non dischargeable, whether or not there is a judgment.  Debts incurred by fraud are non dischargeable in bankruptcy.  Credit card debts honestly incurred are dischargeable, judgment or no.

Contrary to  what some dishonest debt collectors will tell you, judgments are just as dischargeable in bankruptcy as the underlying debt is.

What does change the dynamic is if/when the judgment creditor applies for an abstract of judgment or files a notice of judgment lien.  These documents do create a lien on the judgment debtor’s assets, the former on real property in the county in which it is filed, and the later on personal property located in the state.  If the lien cannot be avoided in bankruptcy, the judgment creditor has obtained an advantage.

What my friend Jay Fleischman’s post on BLN about  civil judgments in New York and their bankruptcy implications points out is the way in which state law impacts the operation of bankruptcy, which is federal law.  The rights that each party in a bankruptcy case brings to the bankruptcy case originate in state law.

It also  demonstrates why lawyers are licensed in each state and why my California law license does not entitle me to practice bankruptcy law in New York.

Credit cards the business owner thinks of and uses for business may not be a debt of the business at all.

Andy Miofsky addressed the fact that where the shareholder has guaranteed the debt of the corporation, the shareholder’s discharge in bankruptcy doesn’t relieve the corporation of liability.

Lots of owners of incorporated small businesses have funded business operations on credit cards.  The card may have the business name on the plastic, but often the corporation is not contractually obligated on the debt.

Where that is the case, the discharge of the shareholder’s liability on the card may have no impact at all on the corporation.

The difficulty in these cases is getting possession of the credit application and determining precisely who is liable.

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.

When politicians talk about credit cards, they conjure up images of consumer purchases, and often, of consumer spending run amok. However, the facts that I see in my bankruptcy clients show that credit cards are increasingly used to finance small businesses.

Entrepreneurs use credit cards in two ways: one is to buy goods and services for the business or cash advances to make payroll. The second way is more subtle: the business owner uses his personal credit to support himself in lieu of the salary he isn’t getting from the new business.

Too little attention is paid to the impact on business plans of funding at credit card interest rates. My sense is that it takes a dynamite business operation to retire a business loan carrying interest at 18-24%. Yet small business types resort to their credit cards because that is often the only money available. It further seems to mandate that if the business fails, the entrepreneur is personally exposed.

Today’s experience with credit card issuers topped the tale I was told last week by a new client of hopeless insolvency and an enhanced credit offer from a card holder to whom she already owed half of her annual salary: today’s offer of a new credit card was delivered to my client at the address of her bankruptcy lawyer, me!

This client has not, on my instructions, paid her existing credit card debt of over $200,000 for at least nine months. The link between her name and my address can only have come from contacts between collectors on the existing debt and my staff, who have been telling collectors that we do intend to file a bankruptcy case for the woman. Ironically, we did file her bankruptcy at the end of June.

Add to this the fact the woman has no income of her own, and her spouse owes even more than she does. And Bank of America offered her a “pre approved” credit card delivered to my office.

It is hard to believe, as the creditors lobby claimed, that all the blame for consumer bankruptcies lies on the heads of borrowers when lenders hand out credit like advertising flyers.

I met with a couple yesterday with over a $100K in credit card debt. When the bankruptcy schedules are filed, this will look like a case of consumer spending run amok. What, the casual observer will ask, did they buy for that amount of debt?

Medications, gas, and groceries, is the answer. Because this 50ish couple are both diabetic in addition to having been in a horrific car accident several years ago. When they moved to California from the midwest, their insurance premiums went from $800/ month to $1900/month. Their insurance does not cover doctor visits or medications. Credit cards help mitigate the desperateness of their situation for a while.

This supports my contention that credit cards simply mask, for a while anyway, the squeeze on the middle class. We can delude ourselves for a while that things are OK, when they are not.

In the space of 24 hours this week, I saw two clients with substantial credit card debt who had been servicing that debt faithfully and at a substantial sacrifice , hanging on to the slippery financial slope, when a single irregularity in payments to one creditor sent their interest rates from 4-9% to 30%. For each client, that was the triggering event: they made an appointment with a bankruptcy lawyer.

An objective look at the impact of using universal default as a “reason” to increase the interest rate on a card that is being paid according to terms suggests this is horrible policy. In the cases of my clients, the card issuers turned a performing account being paid by someone who could probably never have paid off the balance in full, and thus would be paying interest forever into a bankruptcy write off. Good going guys.

As the heat in Congress increases on credit card issuers, some claim to have abandoned the practice of universal default. Consumer Action’s latest study of credit cards says it isn’t so.

In a macabre way, I guess in my line of work, I should applaud universal default: it instantly brought home to my client base that credit cards are rigged against the consumer and that pretending that you can pay them off is self deception. Anyway, I have two new bankruptcy clients.

Cathy Moran

Bankruptcy in Brief

At a hearing on the effect of the bankruptcy “reform” bill held in the Senate right after the fall elections, the American Bankers Association piously testified about the care with which its member banks solicit new credit card accounts. The blame for debt that a consumer could not repay was not, they recited, the result of careless or over aggressive lending practices.

This was the chorus that lead to the enactment of the ill titled Bankruptcy Abuse Prevention and Consumer Protection Act in April, 2005. Consumers, they said, were responsible for taking on more credit than they could handle and were calculating in using bankruptcy to escape repayment. The door to bankruptcy relief must be narrowed, they said, and thus we have bankruptcy “reform”.
In February, 2007, CardTrak reported that since bankruptcy reform, credit card companies sent out 8 billion card solicitations, up nearly 1.5 billion over the number send in 2005. I don’t think it overly cynical to say that banks are rushing in to sell more of a highly profitable credit product, secure in the knowledge that the traditional safety valve for the consumer found in bankruptcy had been plugged.

Jed Berliner at Bankruptcy Law Network says he’s getting fewer credit card solicitations in his mail. I, however, have been saving the credit card solicitations sent to my two college aged sons, both of whom are full time students without meaningful employment. They get on average a solicitation a week from one aggressive lender or the other, promising 0% interest, no annual fee, a “confirmed offer.”

I find it hard to construct a portrait of “responsible lending” from these pieces.

The arbitrariness of the credit card world is highlighted in a recent Consumer Action study of reasons a credit card issuer can raise the interest rate on your card. Adjacent to “too much debt” as a reason for a rate increase was “too much credit available”! So if you’re a good credit risk in the eyes of other credit grantors, you deserve to pay more on your existing balance? The mere inquiry about a car loan or a mortgage loan will cause 24% of banks to raise the interest rate.

More support for my contention that the consumer is a pawn in the world of credit cards and the safest place is on the sidelines of this madness.

Cathy Moran

Consumer Action’s report