Jay Fleischman discusses whether the failure to correct a credit report after a bankruptcy discharge is really a violation of the discharge injunction. I have experienced two very real examples of how the continued reporting of discharged debt shadows a debtor’s fresh start.

The first is in the insidious use of credit scores for pricing of insurance. I find no linkage between credit worthiness and insurance claims. It appears to me to be a situation where Fair Isaacs, or other providers of credit scores, has sold insurers on the idea. Why should the insurers resist? It gives them a reason to increase premiums.

More distasteful in my mind is the situation where a homeowner has a refinance or home purchase in process. When the lender finds a credit report still studded with apparently unpaid debt, the would be borrower must chose between paying the discharged debt or losing the loan. Nice work for the creditor: do nothing, even when the law requires you to report correctly, and garner money to which you have no right.

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.

Those in a financial bind have to make hard decisions about who to pay when there isn’t enough to pay everyone. The most aggressive creditors, the credit card companies, have the lowest priority in my view of who should get paid. Shorting your obligations for housing, car payments, taxes and student loans all have far larger and more immediate consequences for non payment than unsecured credit card debt.
Student loans? you say. It’s tempting to put repaying student loans on a back burner. The availability of deferments suggests that regular payment on student loans may not be all that important. Consider that unpaid interest on student loans is added to principle, so that you incur interest on last month’s unpaid interest in the following month. You don’t need to have been a math major to understand how expensive compound interest gets over time.

A less well known consequence of not paying on student loans is that any hope of discharging student loans in bankruptcy requires that the borrower have made a good faith attempt to repay the loan before seeking its discharge.

Courts have found that borrowers otherwise eligible for the discharge of their student loans in bankruptcy are barred from relief because they paid other debt instead of their student loans. Paying the squeaking creditor rather than the student loan had enormous and unanticipated consequences. Borrower beware.

Thanks to my colleague Wendell Sherk for the pointer to the site of Americans for Fairness in Lending

I found their 10 Top Tricks of the Lending Trade right on point. The day before I had seen an earnest couple with a loan on their only car on which they owed twice what the car was worth. They were poster children for the techniques employed to sell bad deals to consumers. Given the age of this loan, a Chapter 13 will allow us to strip the secured obligation down to the present value of the car. I haven’t calculated how much they have overpaid before they got to my office.

This is all on point for me as I ponder what can I expect clients to learn from the circumstances that brought them to bankruptcy. In the case of my car buying couple, the fundamental problem of the couple was insufficient work in the husband’s trade and low wages in the wife’s restaurant industry. But the bad car loan may have been a precipitating factor that kept them from scraping by.

Is it reasonable to think that Joe Average can become sophisticated enough to avoid the rip offs? Is there a legislative strategy that won’t cripple honest business? Wish I knew, but it’s clear we need to think about it.

I saw a promotion for savings on the TV last night. ING, bless their heart, was touting the benefits of savings.

One of my criticisms about our consumer society and the level of financial literacy in this country is the huge expenditure of time and talent to get us to spend more. There is no counter-campaign reminding us that we need money in the bank for emergencies and retirement. Media has the predictable result of skewing our thinking about money.

So, hats off to ING and the savings account.

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.

JumpStart, a national coalition of financial education organizations, tested high school seniors on financial literacy: the average score was an F-! No wonder young adults get caught up in the credit trap right out of school.

I see financial illiteracy in their parents, as well. So many of my clients seem to measure their financial management skills by their ability to make the minimum payments on overwhelming credit card debt on time. Too few of them have considered that it may take 30-40 years to pay off credit card debt making minimum payments. Meanwhile, they have no cash reserves and no retirement savings.

As a society, we have a real reluctance to speak openly even within our families about money matters. Our kids grow up knowing only what we tell them about how they manage their money, not about the financial realities of our family money situation. Educating kids about money is not just a task for the schools; it needs to be discussed and modeled at home.

I don’t believe that a more money savvy populace will necessarily significantly lower the rates of bankruptcy filings; bankruptcy is driven in the most part by illness, job loss, and divorce. I can hope that consumers with some financial skills may recognize earlier that they can’t escape their money woes by making minimum payments, and consider a fresh start sooner.

Technorati Tags: bankruptcy, financial literacy, kids & money

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.

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 sat this afternoon in a 341 meeting for Chapter 13 in which another debtor testified that he had converted his Chapter 7 case to one under Chapter 13 because the UST objected to the support he provided to his 70 year old mother. The UST proposed to take the mother’s deposition in a city 200 miles away. To save his mother from this inquiry, he converted his case to a Chapter 13.

What kind of public policy is it that tells an adult son he can’t support his aged mother because MBNA or Citibank has a prior claim on his earnings? Where is this compassionate conservatism?

Remember, the policy makers at the UST’s office are political appointees of our President. All hat and no cattle? All talk and no substance?

Cathy Moran
Bankruptcy in Brief

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