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 met with a couple yesterday with over a $100K in credit card debt. When the bankruptcy schedules are filed, this will look like a case of consumer spending run amok. What, the casual observer will ask, did they buy for that amount of debt?

Medications, gas, and groceries, is the answer. Because this 50ish couple are both diabetic in addition to having been in a horrific car accident several years ago. When they moved to California from the midwest, their insurance premiums went from $800/ month to $1900/month. Their insurance does not cover doctor visits or medications. Credit cards help mitigate the desperateness of their situation for a while.

This supports my contention that credit cards simply mask, for a while anyway, the squeeze on the middle class. We can delude ourselves for a while that things are OK, when they are not.

In the space of 24 hours this week, I saw two clients with substantial credit card debt who had been servicing that debt faithfully and at a substantial sacrifice , hanging on to the slippery financial slope, when a single irregularity in payments to one creditor sent their interest rates from 4-9% to 30%. For each client, that was the triggering event: they made an appointment with a bankruptcy lawyer.

An objective look at the impact of using universal default as a “reason” to increase the interest rate on a card that is being paid according to terms suggests this is horrible policy. In the cases of my clients, the card issuers turned a performing account being paid by someone who could probably never have paid off the balance in full, and thus would be paying interest forever into a bankruptcy write off. Good going guys.

As the heat in Congress increases on credit card issuers, some claim to have abandoned the practice of universal default. Consumer Action’s latest study of credit cards says it isn’t so.

In a macabre way, I guess in my line of work, I should applaud universal default: it instantly brought home to my client base that credit cards are rigged against the consumer and that pretending that you can pay them off is self deception. Anyway, I have two new bankruptcy clients.

Cathy Moran

Bankruptcy in Brief

Chip Parker today added to the discussion of the decision to file bankruptcy with a post including consideration of the future consequences of filing bankruptcy.

Chip listed possible adverse employment issues and rental housing as areas that might be impacted by a bankruptcy filing.

In my view, these possibilities need to be weighed against the equally real consequences of not solving a debt problem. For most considering bankruptcy, their credit record is already blotched; a bankruptcy filing is not going to be the first adverse entry on their credit report. Bankruptcy might be the first step to improved financial health.

I find myself fighting the fear clients have of the ” bankruptcy unknown”, closing their eyes to the precariousness of their current situation as though doing nothing is a worthy choice.

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.

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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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

The Bankruptcy Abuse Prevention and Consumer Protection Act became effective little more than a year ago. The net of our experiences thus far with the amended Bankruptcy Code is that bankruptcy relief remains widely available. What has been sacrificed is economy and predictability.

Lawyers and judges struggling with applying the statutes amended by BAPCPA find the sloppy draftsmanship of this law painful to encounter. So much of what has been added isn’t compatible with the balance of the code and applying the words as written in one place produces either idiocy or the opposite effect somewhere else in the Code. My favorite judicial comment was by Judge Markell who analogized it to the White Queen who reported she was required to believe six impossible things before breakfast.

I have not yet seen a client who could not get relief in bankruptcy by reason of the changes to the Code. I have been surprised at how seldom the IRS collection standards used in the means test result in trouble for clients. Unfortunately, all of the additional steps in the bankruptcy process have required a substantial increase in the cost of a bankruptcy case. Further, about many of the issues raised by the new amendments, there are no clear answers about how these provisions will be applied in the real world.

Prepetition credit counseling has proven to be a farce. No one who has made the long postponed visit to a bankruptcy lawyer can manage his way out of a financial pit. The counseling requirement has just raised the cost and the number of ways a debtor without a lawyer can screw up.

I have greater hopes for the financial management class required to get out of bankruptcy. Most all of my clients have absorbed some self taught lessons about money; they are usually ripe for an attempt to learn to manage better. Of course, there is a limit in this economy to what good management can do for a family: you can hardly “learn” to avoid illness, unemployment or divorce. These are the three factors that account for more than 90% of bankruptcy filings.

BAPCPA was intended to reduce the number of folks filing bankruptcy. The initial numbers show that filings are down. There is no evidence that is because all the alleged “abusers” aren’t seeking bankruptcy relief. It is because, in part, an enormous pool of people considering bankruptcy last fall, took the plunge before October 05 to beat the harsh changes in the law. Many of those who didn’t file in 05 mistakenly believe that bankruptcy is no longer an option. This misconception is being fed by bill collectors who are telling debtors that “you can’t file bankruptcy on credit card bills”, or medical debt or whatever it is that they are collecting.

The financial precariousness of the American middle class has not been remedied by closing the door to the bankruptcy court. I hope this dawns on our political leaders.

Cathy Moran

The U.S. Armed Services recently disclosed that a significant number of service personnel cannot be deployed overseas because of their personal debts. The military says that excessive debt both distracts from job performance and makes the G.I. vulnerable to corruption.

Civilians buried in debt try, to their credit, to soldier on through debt, reluctant to recognize that they can’t ever pay off the debt they have. They would do well to recognize, as the armed services do, that debt is debilitating. It impacts families. It sucks energy, optimism, and focus from the debtor. It stands between the consumer and the savings necessary for a secure retirement.

Cathy Moran

The IRS’s list of its annual “Dirty Dozen” tax frauds includes credit counseling.

Credit Counseling Agencies. Taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment plans or impose high set-up fees or monthly service charges that may add to existing debt. The IRS Tax Exempt and Government Entities Division is in the process of revoking the tax-exempt status of numerous credit counseling organizations that operated under the guise of educating financially distressed consumers with debt problems while charging debtors large fees and providing little or no counseling.

The debt settlement model heads my personal list of scams, since it so seldom produces any meaningful settlement, provides no protection to the consumer while the money is accumulating, and lines the pockets of the organization in the meantime.

This is the industry that Congress made the gatekeeper to bankruptcy for individuals. Go figure.

Cathy Moran