My friend David Leibowitz explores the fears his clients have of bankruptcy on Bankruptcy Law Network.  I encounter clients with the same emotions, fear that life as they know it will end if they file bankruptcy.  Well, at some level, the miserable life of living in debt; sleepless nights;  having no financial  reserves will end.  But their fears are of something more horrible yet, bankruptcy.

Why aren’t they afraid of being penniless in their old age? This seems to me to be a real fear.  Almost every client who’s struggling to repay credit cards, now at 29% interest, is skimping on saving for retirement.  Courtesy of the Great Recession, they have no equity in their homes.  If they have a job, there’s no pension attached.  They have little or nothing set aside to augment Social Security.  Yet fear of bankruptcy keeps them paying on debt they can never repay.

My last post talked about the institutional purveyors of this fear.  I’m on this soapbox and don’t want to step down til I make some headway on this issue.

As one of the Peanuts characters said, “Arghhhhhhh!”

Usually I’m bewailing the lack of attention with which bankruptcy clients handled the incorporation of an ongoing business.  In variably, the vendor accounts are still in the name of the proprietor, the stock may not have been issued, and it’s unclear whether there was an explicit transfer of the assets to the corporation.

But last week, such inattention promised to pave the way for the stockholder to walk away from a failed corporation, taking the phone number, which was undoubtedly the most valuable assets in the business.

For, you see, they never transferred the phone account of the proprietorship to the corporation. My individual client still owned the phone number and should be able to use that number in a new business started from the ashes of the present corporation!

If the phone number had been transferred, then we would have been faced with tricky questions of how to sell it to the individual before the corporate bankruptcy and how to value the number such that the transfer wasn’t a fraudulent transfer.

Spared that headache by the ineptitude of the incorporating professional. Yipee!

I saw another facet of the underwater home mortgage when my client was considering whether to cure the mortgage arrears or walk away.  If he cannot hang on to the property until it regains the $85,000 negative, he will not be able to sell the property in the future without the active cooperation of the lender for a short sale.  After our current experiences with lenders and underwater properties, who wants to bank on that?

The homeowner was a single man and the property was a one bedroom one bath condo.  Life wouldn’t have to change much before a 1 and 1 is too small for a married man.  He’s filing bankruptcy now and will take the credit hit and get on the way to a fresh start.

If he elects to keep the condo and cure the arrears, he sets himself up for another possible credit hit when he needs to sell a property still underwater.

The UST has posted new median income figures for cases filed on or after March 15, 2009.  This is the source of numbers used in the means test and Form B22 to determine whether the below median, safe harbor rule applies.

The median income for a single person in California is $49,182.  Two person households: $65,097;  three persons:  $70,684; and four person:  $79,971.

Below this income level, a Chapter 7 debtor presumably passes the means test .  A Chapter 13 debtor applies their actual, reasonable living expenses against this income level.

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.