My clients sometimes ask for advice about financial management for their life after bankruptcy. I’m often reduced to two rather bald thoughts: live beneath your means and save for retirement. But this month’s AARP magazine had some sound real world advice about slashing your food bill.

The bit of advice that was new to me had to do with how supermarkets are laid out, with the staples along the outer perimeter of the building. AARP’s expert suggests cruising the edge of the store first for staples that should make up the bulk of your purchases before venturing into the interior where the pricier, prepackaged food lurks.

The article also talks about managing your food purchases to reduce waste and spoilage.

Then you can take the financial advice my plain spoken partner delivered recently to a bankruptcy client: learn to cook!

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.

One of the most frustrating things after the debtor gets a discharge is establishing just what debt was affected by the discharge. Creditors and some debtors expect to find a single document telling them what is no longer enforceable and what survives the bankruptcy. No such luck.

The official form used by most bankruptcy courts merely states that the debtor is granted a discharge. The general information on the second page of the form suggests that you might need an attorney to understand the application of the discharge in a particular case.

That’s why Gene Melchionne’s article on saving your bankruptcy papers is so on point. In this era of debt buyers and zombie debt, most debtors can expect to get a collection letter on a debt that was discharged in their bankruptcy.

In California, where 9th Circuit decisions are controlling, the Beezley opinion (994 F.2d 1433 1993) tells us that even a creditor who wasn’t listed or didn’t get notice is discharged in a no asset bankruptcy. The caveat is that if the creditor has a claim to non dischargeability because of the debtor’s bad acts, the claim survives until the creditor has a chance to challenge the discharge of his debt.

Usually what it takes to make a zombie debt collector go away is a copy of the discharge order and a copy of the schedules showing that the original creditor was listed in the bankruptcy.

So, save your bankruptcy documents, and if copies of the schedules don’t make the creditor go away, contact a bankruptcy lawyer to pursue an action under the bankruptcy code for sanctions against the creditor.

The usual question for a bankruptcy attorney is “can I keep the (fill in the blank)”. Whether it’s a house, or a car, or a computer, clients want to know if filing bankruptcy will strip them of their “stuff” bought on time. Frequently the answer is that they can keep the asset as far as the bankruptcy system is concerned.

Whether they should keep the property is another question that I want to raise. Jed Berliner suggests that homeowners with recent adjustable rate mortgages may have no equity to preserve and would be better off letting the house go.

I would expand the analysis: if the choice is to pay $900/month to keep the current car on which you owe more than it’s now worth, what is point in keeping it? I wish for my clients a truly fresh start with living expenses they can afford. Paying more than something is worth clouds that fresh start.
It’s tough to surrender your purchases, but having filed bankruptcy should bring more clarity to financial considerations.
Paying more than the house or the car is worth may not be the wisest choice.

While most folks considering bankruptcy believe they can live without credit cards, they worry that they will need a loan to replace a car at some point in the near future. The debt management/debt settlement industry has conditioned them to believe that no credit is available for eons to those who have filed bankruptcy. Hogwash.

Steve Otto has some good advice about applying for a car loan after bankruptcy. He points out that under the credit scoring system used by Fair Isaacs, your credit score improves after bankruptcy.

The most compelling evidence that credit for a car is available after bankruptcy is the fact that many debtors currently in Chapter 13 (meaning they haven’t even gotten the discharge of their debts yet) get loans to replace old cars. The auto industry can be counted on to see that you can get a loan to buy their product!

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.

Car manufacturers lobbied Congress to make it harder for debtors to keep their cars through bankruptcy. In Chapter 7, that was accomplished by eliminating the “ipso facto” clause, which said that merely filing bankruptcy was not a breach of the purchase contract. The expectation was that debtors would reaffirm their car loans, giving the car lender the right to sue for a deficiency judgment against the debtor should the debtor later default, rather than risk losing the car.

Reaffirmations would diminish the debtor’s discharge and lock the debtor into paying for a car that might well be worth substantially less than the loan balance.

Debtor’s attorneys were expected to certify that repaying a car loan would not create a hardship for the debtor; if the attorney wouldn’t/couldn’t so certify, the reaffirmation agreement needed to be approved by the bankruptcy judge after a hearing. Most bankruptcy judges were less than enthusiastic about this new role.

Debtor’s lawyers have wondered about the continued existence of “pay and drive”, the practice of car lenders allowing the debtor to keep the car for so long as the payments were current and the car insured. Putting debtors to the test of reaffirming a badly upside down car or returning it to the lender might not be such a great idea for the auto industry if debtors shucked their greatly depreciated vehicles.

At last weekend’s banrkuptcy seminar, judges and lawyers reported that in practice, only Ford Motor company is routinely repoing vehicles where the post bankruptcy debtor has not reafffirmed the debt but remains current on payments and has insurance. All the rest of the lender community has apparently figured out that they do not want to “eat steel” and take possession of a flood of cars worth less than what is owed from debtors willing to continue paying for them.

Perhaps, a bit of common sense has inserted itself in the world of BAPCPA.

Cathy

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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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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