The stupidity of the means test as a metering device in bankruptcy was apparent as I worked through the case of a single debtor. Because she is a renter with an old, paid-for car, and no unpaid taxes, the means test will compel her to pay a significant amount monthly to her Chapter 13 plan.

Whereas, if she had mortgages that were double or triple the amount of her rent, or an upscale new car, or years of unpaid taxes, those payments would be deductions from her income in calculating what she must pay in Chapter 13. Her unsecured creditors would get nothing: all the available money would be diverted to secured claims or taxing authorities.

Does it seem to anyone else that we are rewarding the wrong sort of behavior?

The fact that debt collectors are only marginally acquainted with the law was highlighted today when a client reported that her ex husband had been told by a debt collector that the former marriage made him personally liable for his exwife’s debts.

There must be an emphatic, yet polite, word for b***s****. Wish I knew it… “Balderdash” seems so weak. In my most generous view, this could be debt collectors from outside of California who are clueless about community property law. Or, more realistically, they’ll say whatever they think will scare a payment out of someone.

For the record, living in a community property state such as California does not make each spouse personally liable for the contractual debts incurred by their spouse. If your spouse in California takes out a credit card and runs up a balance, you are not liable to the card issuer for the debt. The community property is liable for the debt, but you are not liable. If there is no community property, by reason of divorce or a marital property agreement, then only the person who contracted the debt is liable for it.

This is but one of the “whoppers” told by debt collectors. Engage skepticism when dealing with this breed.

I’m accustomed to advising clients about big ticket debts like mortgages, auto loans and back taxes. I was surprised when a client, resigned to letting her house go to foreclosure, was absolutely delighted to know that she could free herself from her unhappy relationship with Verizon Wireless at the same time.

Bankruptcy terminates executory contracts in place when the case is filed. So the balance of the two year contract with the unsatisfactory provider could be terminated, and the early cancellation penalty treated just like any other unsecured creditor.

I’m adding to my list of things to do before you file, like change banks and cancel automatic payments from your checking account, consider dumping your cell phone provider.

Sometimes you need reminding about what you know. I’ve been so involved in looking for Truth in Lending violations or other defenses to my clients’ awful mortgages that I forgot the line of attack that is dependent on market value not wrong doing.

Karen Oakes reminded me that a Chapter 13 debtor can avoid a mortgage where there is no equity to secure the debt. At least in the 9th Circuit, even a voluntary lien, such as a mortgage or deed of trust, is avoidable if senior liens equal or exceed the value of the property at the time the bankruptcy is filed.

Supposing that you avoid a junior mortgage, you are still left with the question of whether it makes sense to keep the house: making payments on a loan that equals or exceeds the value of the house is not obviously a smart use of money.

I think, on today’s news, we have to figure that it will be a long while before property values recover from the hit they have taken. More and more, I am advising clients that the best use of the property is to live in it without making payments for as many months as possible before the lender takes it back.

Dana Wilkinson wrote about questions to ask a bankruptcy lawyer you are considering engaging. The questions are absolutely on point. What she didn’t address is the quality of the answers.

Bankruptcy is stressful. People considering bankruptcy are stressed. It’s complex (more so and needlessly so after the 05 amendments to the bankruptcy law). You need answers that you can understand. After all, both the decision to file and many decisions after that are decisions that only the client can make.

So, one of the criteria for selecting a bankruptcy lawyer ought to be the clarity of the answers you get and the willingness of the lawyer to restate or further explain things you didn’t get the first time through.

Know, too, that there are many questions about how the “new” law works that we simply don’t know yet. The law is poorly written and judges are just beginning to make decisions and write about how they think the new law ought to be applied. Ask about whether there are undecided points of law presented by your case.

Get a lawyer you are comfortable with; disclose everything; and move forward. While sometimes scary, bankruptcy relief can make all the difference in the world about your financial situation.

Every bankruptcy debtor must attend the first meeting of creditors in their case; this meeting is nicknamed the “341 meeting” from the section of the Bankruptcy Code that requires it.

Susanne Robicsek wrote about what to expect at the first meeting. Here are my rules for how to behave:

Rules for Testifying Under Oath.

1. Tell the truth
2. Listen to the question, all the way to the end.
3. Answer in as few words as possible
4. Don’t explain, expand, justify, or speculate unless asked
5. If your attorney starts talking, you stop talking

The first meeting of creditors has two basic purposes: to have the debtor validate the information in the bankruptcy papers under oath, and to provide the trustee any information needed to determine exemptions or administer any non exempt assets.

It is not a test or an inquisition. Usually, each debtor’s testimony is concluded in a few minutes.

While I have seldom had clients blow a case at the 341 meeting, they can certainly either prolong the meeting or confuse the trustee or the issues by babbling on, or by not listening to the trustee all the way to the question mark at the end of the question.

Bring your identification; be familiar with the information in the schedules; and answer questions in short sentences and all will be well at your first (and probably last) meeting of creditors.

More on the 341 meeting.

The adjustable rate mortgage mess is with us: no amount of pussyfooting about whether a legislative change is necessary will make the problem vanish. The choice we have is whether we sit back and let hundreds of thousands of homes be foreclosed or whether we give bankruptcy courts the tools to soften the impact of the crisis.

Currently, the only mortgage that a bankruptcy judge cannot alter is a home mortgage; mortgages on vacation homes, apartment buildings, and commercial property can all be modified in bankruptcy. The ability to modify these mortgages in bankruptcy does not seem to have ruined the credit markets to date.

A provision of the bankruptcy code, inserted to encourage the home lending industry years ago, now ties the hands of a bankruptcy alternative to massive foreclosures.

If bankruptcy judges were empowered to write mortgages down to the value of the property when the case was filed, and alter the terms, within a Congressionally mandated standard, both homeowner and lender would benefit. The homeowner gets a shot at keeping his home and paying for it, based on today’s values; the lender gets just what he would get if he foreclosed: a house now worth less than the value at the inception of the loan. Plus the administrative costs of restructuring the mortgage have got to be less than either staffing an n house mortgage modification operation or foreclosing, maintaining and trying to sell the foreclosed house.

The only cost here to the taxpayers is perhaps some more court clerks for the bankruptcy system. We don’t bail out the lenders who made foolish (or deceptive) loans; we don’t provide amnesty to the borrowers who at best were overly optimistic, and at worst were sold snake oil that puts their homes at risk.

Surely, permitting the modification of home mortgages has to be a better solution than neighborhoods of empty, bank owned houses, and displaced families. Because that certainly seems to me to be the alternative.

Springfield MA bankruptcy lawyer Jed Berliner discussed the criteria by which a bankruptcy judge may order a debtor’s home sold, when a non debtor has an interest in the home. The balancing of the hardships test under the bankruptcy code is unlikely, however, to protect investment or vacation property owned by the debtor and others.

Joint ownership of anything has its challenges. I have always urged clients about to pool their money to figure out, at the beginning, how they are going to effect a “divorce” of the joint ownership arrangement, when circumstances change.

One of the possible scenarios is the bankruptcy of one owner. The bankruptcy trustee wants to turn the debtor’s assets into cash for the benefit of creditors. The non debtor property owner finds himself faced with either buying the trustee out, on the trustee’s timeline, or suffering his share of the property to be liquidated as well, with whatever tax consequences or loss of future appreciation that entails.

Investors should build this risk of forced sale of property into their financial planning, rather than looking at only the best-case scenario in a business deal.

Bankruptcy lawyer Kevin Gipson’s piece entitled Your Lawyer is Your Friend only scratched the surface of the relationship between a client and a bankruptcy lawyer. His point was that the client has to share the struggle to get a bankruptcy case on file and obtain a fresh start. The first job of the client is to show up. The lawyer can’t do it without an involved client.

Filing bankruptcy under the BAPCPA amendments to the bankruptcy code requires a substantial amount of information. None of it is esoteric; all of it was at one time in the debtor’s possession.

Calling for gobs of only marginally relevant information was one strategy that creditors included in the bankruptcy “reform” legislation to deter people who needed bankruptcy relief from getting it. They claimed it was to deter fraud; in reality, they counted on the debt ridden to be disorganized, stressed, and discouraged.
My office has encountered a rash of clients lately who can’t seem to get the last little bit of information to us, or who neglected to tell us about the second job or the rent paying roommate. As Charlie Brown in Peanuts said, Arghhhhhhh!

To file a successful bankruptcy, the client has to tell the bankruptcy attorney everything about their income, their household, and all of their financial doings. The reason you hire a lawyer is to guide you through the bankruptcy maze. Even the most experienced lawyer can’t do that without the complete picture.

I tell clients that the only fact that can hurt them in bankruptcy is the one they kept from me.

If a client discloses something that puts the success of the case at risk, I will stop and discuss the issue with the client. Perhaps we wait to file, file a different chapter, or only one spouse files. Only rarely does some single fact make filing bankruptcy unwise. But if I file a case without all the facts, it’s like playing cards with only a portion of the deck.

Treat your bankruptcy lawyer like your confessor: put it all out there and let a professional find the way to bankruptcy relief.

Peter Orville wrote about the impact of the Chapter 13 trustee’s commission

The point he makes goes to the heart of the debate about whether car loans or current mortgage payments are paid by the Chapter 13 trustee or directly by the debtor. Here in California, with mortgage payments regularly in the $3,000-6,000 a month, requiring debtors to pay their mortgages through the trustee increases the debtor’s cash requirements significantly.

Proponents of making payments through the trustee note the advantages in the event of accounting disputes and the added visibility it gives the trustee. My fear is that at 7-10% commission, routing mortgage payments through the plan is just another barrier to a successful Chapter 13 plan.