Federal law protects Social Security benefits from claims of creditors.  That’s why I often tell those who live on Social Security and/or pension income that they don’t need a bankruptcy discharge, since their income sources are protected by federal law (Social Security) and California law (pensions).

So I was surprised by a recent bankruptcy court decision out of Minnesota ( In re Todd Carpenter:  2008 WL 4567128 (Bankr.D.Minn.)) that held that a debtor who elected to use the exemptions in the Bankruptcy Code forfeited the protection of Social Security law for a substantial back benefits check.

The decision acknowledged that other courts had held differently.  And in California, since the state has “opted out” of the exemption system found in the Bankruptcy Code, this decision should have no effect in my cases.

Yet it is a heads up to lawyers to keep thinking about these issues, since things you take for granted as fixed may not be a certain as you thought.

After I explained the time line for my client getting a discharge in Chapter 7, the client struggled with the concept that the bankruptcy trustee would succeed to a cause of action for a suit that hadn’t yet been filed. How could that be if I get the discharge in four months?, the client asked.

The answer is that the administration of assets in a bankruptcy case proceeds on a separate time line from the discharge. Congress wanted the debtor to know in short order whether he would get a discharge. There is no comparable policy reason to limit the time the trustee has to turn assets into cash for the benefit of creditors.

This client hoped that an asset that hadn’t resulted in a cash recovery before he got a discharge would default to him. No, I explained, the trustee could take his time, evaluate the suit, and settle the suit on terms that seemed appropriate to the trustee. Compromises or sales by trustees are subject to confirmation by the court; courts give the trustee wide latitude in the exercise of business judgment.

The prospect of the loss of control of this asset was a deciding factor in the client selecting Chapter 13, where he would stay in control on the asset.  One more reason to choose Chapter 13.

My friend Peter Orville writes about the procedure for selling a home in a pending Chapter 13.  Peter practices in upstate New York.  He details what you have to do, if you live in upstate New York, to sell your home during Chapter 13.

The most frustrating part of writing about bankruptcy for a national audience is the degree to which Chapter 13 practice differs across the nation. H***, it varies across the San Francisco Bay, where I practice.  I have Chapter 13 cases before three different trustees in three different divisions within the same district, and each has different procedures.

I interact with lots of clients who have found me on the internet doing “research” about bankruptcy.  It’s all too easy to assume that the procedures in upstate New York describe how your case is handled whereever you live.  It isn’t (necessarily) so.

Which is why I uniformly recommend that individuals engage an experienced bankruptcy lawyer to do a Chapter 13 case.  There are simply too many variations, unwritten rules, and local assumptions to master to make representing yourself a feasible alternative.

My clients this week had a number of rental properties on which they owned nearly as much as the properties were worth. The clients thought the properties had long-term appreciation potential and were just certain that filing Chapter 7 meant giving up the properties. Not so.
The bankruptcy trustee is charged with turning non exempt property of the bankruptcy debtor into cash for the benefit of the creditors. The trustee’s focus is on the bottom line. For each asset, the trustee asks:

1. What is the asset worth, today, in its present condition?
2. What are the costs of preserving the property pending sale?
3. What are the costs of selling the asset?
4. Are there tax consequences of the sale?

The trustee’s handbook is clear that the trustee should administer assets only if he expects to be able to make a meaningful distribution to creditors. Each trustee has a threshold that he sees as the minimum amount of money necessary to open a case.

So, for my clients, they are likely to emerge from Chapter 7 with title to these properties still in their portfolio. When you crunch the numbers, for each property, the costs of selling the properties, maintaining them in the interim, dealing with tax returns and possible tax consequences would consume all the sale proceeds.

A basic premise of bankruptcy law is that liens pass through bankruptcy unaltered. Post bankruptcy my clients will still have rentals encumbered to the extent of their value. They will still be subject to foreclosure if they fail to make the mortgage payment. But they don’t have to worry that the trustee will deprive them of the property simply because they filed bankruptcy.

A debtor who becomes entitled to an inheritance in the six months following the filing of a bankruptcy case must contribute that inheritance to his creditors. 11 USC 541 (a)(5). This is one of only three exceptions to the idea that bankruptcy operates to “net out” what the debtor owns and what he owes on the day the case is filed.

As Craig Andresen points out, the contents of a spend thrift trust are not property of the bankruptcy estate, and not, therefore, available to pay creditors in a bankruptcy case. So, if that inheritance comes to the debtor in trust rather than outright, it does not go to creditors.
As awkward as it is, I try to ask prospective debtors if there is any likelihood that they will inherit money in the near future. If that is a possibility, I suggest that the client talk frankly with the source of that inheritance about making any gift to my client in trust, with a spendthrift clause.

While most Americans are incredibly private about their financial troubles, I doubt that anyone leaving money to their loved ones at their passing wants that money to end up benefiting the credit card lenders. It may require that the client swallow their pride to admit to the depths of their financial woes in the process of enlisting the help of the testator to make their gift effective. It requires consideration.

We got a call about three o’clock the other afternoon from someone who wanted to come in that afternoon and file bankruptcy that day. When my partner hesitated, the caller responded, “Well , you are open now aren’t you?”

I had a mental image of one of those parking lot, drive up coffee vendors, selling “bankruptcy” instead of java. As Mike Doan writes about the information gathering for bankruptcy, would that it was that easy.

The general “bankruptcy bargain” is that the debtor provides full financial disclosure and the system provides a discharge of debts. (It’s somewhat more complicated than that, but that describes the overview).

We’ve experienced a spate of clients who think that because they’ve signed a representation agreement and provided us with some information, their work is done. Wrong.

Usually the information is incomplete, ’cause they either don’t read, don’t think about the “bankruptcy bargain” , or can’t believe that we really need all that information.

Believe me, we wouldn’t ask for it if it wasn’t necessary.

I need to be able to better convey the idea that staggering in our door and paying us money just gets you out of the starting blocks in the Bankruptcy Relay; the finish line is getting the discharge, and there are miles to run between those two points.

It was a good day at my desk, if one has to work on Saturdays.

• I gave notice that one client was rescinding a $180,000 mortgage for Truth in Lending violations.
• I found three clients whose second deeds of trust can be eliminated as liens on homes because they are completely underwater.
• I sent out three Qualified Written Requests under RESPA to lenders whom I suspect have played games with the servicing on my client’s mortgages.

My conclusion about the mortgage meltdown is that there is not one universal approach to getting clients some breathing room on their mortgage debt, but there are a number of approaches that can lessen the pain borrowers are feeling, and raise the odds these people can keep their homes.

You never know just how a client hears your advice, until you hear yourself quoted back to yourself as the reason for a client doing something stupid. In my case, I’m unclear about whether the message received was really as reported, but it’s made me think about my choice of words.

I was asked in the initial consultation if gifts of money from the debtor’s parents in the past year presented “a problem”. No, I replied, thinking that such gifts don’t change the analysis, or the expected outcome of the case. The client now claims that my words were a license to fail to disclose the gifts. Huh?

For some clients, it is clear that full and complete disclosure is emotionally very hard. The fearful and the stressed somehow are simply sure that telling the whole truth imperils the bankruptcy, when just the opposite is true. Just as sunshine is the best disinfectant, disclosure in the bankruptcy paper work is the best insurance for a good outcome.

So, I will be looking for new phrases that will penetrate the understanding of those disinclined to hear what I’m trying to convey and reiterating that the client is the one ultimately responsible, under penalty of perjury, for the completeness of the schedules.

While there are an endless number of misconceptions about filing bankruptcy, the one I’ve encountered more often in the past weeks is the belief that participation in a debt management program or debt settlement program meets the new requirement for a “credit briefing” as a condition of filing bankruptcy.

To be clear, the credit briefing that is required in order to file bankruptcy must be from an organization approved by the UST in the district in which the bankruptcy case is to be filed. Most commercial debt settlement outfits are not approved. Here’s the list of approved agencies . The briefing must be completed within 6 months of filing the case.

Among the bad information out “there” about credit counseling is that the counseling takes 6 months. No. The usual credit briefing session is between 30 minutes and an hour. It must take place within 6 months of filing.

Another complexity that I’ve seen twice in three weeks are individuals who attempted credit counseling on the internet and encountered a computer or connection glitch such that they didn’t “complete” the session. In each instance, the bankruptcy case was dismissed for failure to complete the briefing before filing.

While there is no evidence that credit counseling serves any useful purpose, it is the law. Fail to get credit counseling and the case is likely doomed.

One of the petty struggles I have with clients is convincing them that they need to include all of their debts in bankruptcy. Sometimes, they will tell me they don’t want to include their car loan in the case because they “need the car”. Sometimes I find the student loan payment in the budget but not on the list of creditors.

Part of the issue is grounded in confusion between scheduling a debt and discharging the debt. Debtors are required to list all of their debts and risk denial of discharge if they don’t. However, debts are not necessarily discharged just because they are listed. The Bankruptcy Code specifies a number of debts that simply aren’t dischargeable in bankruptcy. Those debts still must be listed.

The desire to exclude debts from the schedules is sometimes fanned because debtors don’t know that they can reaffirm debts during their case. A reaffirmation agreement essentially waives the discharge as to that particular debt and puts the parties back on the same legal footing as they had before the bankruptcy was filed.

Clients are frequently surprised when they learn that they can continue to pay a discharged debt voluntarily if they wish. “Pay the dentist after the case is filed if you wish, but list them in the bankruptcy if you owe money when the case is filed. ”

Then, there are the clients who “love” their credit card issuer and want to keep paying because of loyalty or out of fear of being without plastic. I have to tell them that for some card issuers, the love is one sided, and the issuer will cancel the card independently of being listed or not in the case.

Moral of the story, there are a number of options for debts post filing, so don’t get tripped up by leaving out creditors.