My colleagure at Bankruptcy Law Network Peter Orville wrote

It is natural to be afraid of doing something you’ve never done before, like filing for bankruptcy protection. This is especially true if you’ve heard stories about why you shouldn’t file bankruptcy

My beef is that the fear of bankruptcy is promoted by those with something to gain by demonizing bankruptcy. It’s the creditors, their cohorts the credit scoring folks, and the debt settlement companies who want you to think that filing bankruptcy is the end of life as we know it.  They all profit if consumers are scared off of filing bankruptcy.

My charge to my clients is that bankruptcy is not painful, or at least, any pain is self inflicted.  You can make yourself (or allow yourself) to feel as miserable and worthless as you choose to do so.  No one associated with the courts, including trustees, is judgmental.  A debtor does not have to justify his choice of bankruptcy relief and does not have to prove he is “worthy” of a discharge.  Eligibility for a discharge, even after bankruptcy reform, is presumed.

I have a perverse admiration for clients who have endured the pain and dispair of financial distress for as long as most of them have before seeking me out.  But life does not have to be that way;  bankruptcy is an honest and effective choice.   There is nothing to be afraid of.

Liz Weston, L.A. Times financial writer, walked a room full of bankruptcy attorneys at the Sacramento Valley Bankruptcy Forum through the impact of various credit events on your credit score last weekend.

She recounted how, after meeting some debtors as she worked on stories, she no longer saw debtors as deadbeats. She saw the challenges in their lives and the soundness of electing bankruptcy.  Her candor about the change in her world view was refreshing.

Having written a book on credit scoring, she naturally was caught up in the interface with bankruptcy.  But I as one who is frustrated by the fixation of those drowning in debt on their credit score, I wanted to stand up and shout:  Ruin your credit score, not your life!

The financial media sounds a drum beat that one’s life and worth is wrapped up in that credit score, something we don’t fully understand and based on credit reports which are notoriously inaccurate.  Life will end, we’re told, if our credit score declines.

That fear keeps American consumers struggling to pay debt that they can never, in this life or the next, repay.  They appear to consider a lifetime of minimum payments rather than a fresh start in bankruptcy to preserve their credit score.

As Liz pointed out, the credit score is dynamic:  it is constantly changing, and heals over time.  My call is to fix your balance sheet. Get rid of dischargeable debts.  Save for retirement.  Live beneath your means.  Don’t walk the financial tightrope.

I usually assure clients that institutional creditors are generally very observant of the automatic stay. Once they have notice, they cease collection.  But this month, in two of my pending Chapter 13 cases, Chase Home Loans has run off and set or actually conducted post bankruptcy foreclosure sales.

To make matters worse, given notice of the problem, Chase’s counsel has been either indifferent or ineffectual in moving to unwind the actions taken in violation of the stay.  I’m not sure whether this is simply happenstance, or presages a general meltdown of default mortgage servicing, but it is worrisome.

Susanne Robicsek’s post on the futility of keeping a home through bankruptcy brought to mind Professor Brent White’s paper on the use by government and financial counselors of fear and shame to keep people paying on mortgages on underwater homes.

White cites a litany of messages from apparently credable sources who chant that a foreclosure will scar your life forever onwards.  Further, these messages suggest that the law and morality require that you pay for something that no longer has value or no longer makes economic sense.

Somehow, I didn’t hear that electing to default on a mortgage was immoral when a couple of huge real estate investment companies walked from projects in New York.  Is it immoral only for individuals, but just good business for corporations?

I see my job as a bankruptcy  professional to ask the client to consider walking away.  Is the house genuinely affordable now?  Will the loan reset making it unaffordable in the future?  How much would the housing market have to appreciate just to be able to sell it for what you owe?  Do you want to take a further credit hit down the road when you need to leave this house?

Given the breadth of the current financial morass, I have doubts that what we take as gospel about the future availability of credit to those filing bankruptcy will be the rule in the future.  I doubt that credit availability will return to the norms of the past two decades anytime soon.  Who knows what the rules will be in the future?

I have to ask clients:  just what kind of financial pain are you prepared to endure in the expectation that the old rules will prevail?

The availability of parking at the BART (light rail) station has been my measure of the depth of the recession.  Lots of parking means that not very many folk are working and riding public transit to work.

On my way to Oakland bankruptcy court today, I had to park in the auxiliary parking lots.  Ah, I thought, recovery is on its way.

My partner suggested an alternative explanation: everyone in the parking lot was on their way to a job fair…..

When the house is unaffordable,  homeowners often look to a short sale or deed in lieu in the belief that avoiding foreclosure means avoiding the credit score hit.  Not so.

Sharon Epperson’s bit in USAWeekend today points out that a deed in lieu or a short sale will likely be reported as “not paid as agreed.” Put another way, you don’t get any points for trying to make the lender’s life easier.

This reinforces the pitch I often make that, if losing the house is inevitable, live there as long as possible for free.  Those months without mortgage payments and property taxes may be the only return you get on your housing investment.  Don’t lose out on that “return” by leaving earlier than you have to.

I’ve launched a new web site, www.bankruptcymastery.com, dedicated to being a resource for lawyers new to the practice of consumer bankruptcy law.  I envision it as being a tool to learn, systematically, those things beyond the Code that are necessary to be an effective bankruptcy lawyer.

I’ve been mentoring an increasing group of local young lawyers, one on one, and that simply isn’t sustainable.  After all, I’m supposed to be in the business of helping my clients.

Content at bankruptcymastery.com is focused on transmitting those things I’ve learned in 30 years of doing this.  While I can’t eradicate “learning by doing” and “trial and error”, I’m going to try to offer an alternative:  teaching that is focused, available, and systematic.

If you’re a lawyer new to this practice, check it out: www.bankruptcymastery.com.  There’s a free ecourse available now, with new things in the hopper.  Join me there.

Cathy

Start the new year with a new skill set:  Chapter 13 Bankruptcy.  I’m doing a four hour class on Saturday, January 9th in Mountain View looking at the basics of Chapter 13 bankruptcy, with an emphasis on how to craft a plan that’s confirmable.

We’ll talk about the best interests of creditors test, how to do a liquidation analysis, the application of the “hanging paragraph”, Till, Kagenveama, and Smith.  Time allotted to do some hypothetical plans and discuss the results.

You veterans out there can send your new associates for a systematic introduction at Chapter 13.

Sign up is available at www.law-full.com/13workshop.html.

Seating is limited and there are only 25 places remaining.

Remember the maxim that all politics are local?  All of bankruptcy law is local, too, despite the fact that it’s federal law, since bankruptcy looks to state law to determine property rights.  What happens to those property rights in bankruptcy is a matter of federal law.

My friend David Leibowitz’s statement that in a community property state, one spouse is liable for the debts of the other is,  at best, misleading under California community property law.  David practices in Wisconsin.

In California, the community property is liable for the debts of either spouse.  Property acquired during marriage is presumed to be community property, but the spouses can agree to the contrary.

The non contracting spouse has no personal liability for the spouse’s debts:  a creditor with a judgment against the spouse cannot reach the other’s separate property.

Further, in California, there is no liability for garden variety debts of the other spouse once the marriage ends:   your spouse’s debts don’t follow you after the marriage unless the judment of dissolution so provides.

My word picture in trying to explain community property and community claims to clients is that from a creditor’s perspective, the marriage really involves three entities:  two spouses and the community property:  a menage a trois, sanctioned by the law<g>.

The other point to draw here is that even input from a highly capable lawyer such as David, while accurate about the law of the state in which he practices, is not fully applicable in other states.  You cannot “research” your legal questions on the internet and get information that can be reliably applied to your situation.  That’s what lawyers are for, and why we have licenses from the state in which we practice.

Save January 9, 2010 (can you believe that date?) for a workshop on Chapter 13 basics, with an emphasis on drafting Chapter 13 plans.

We’ll gather at the Computer History Museum (101 and Shoreline) in Mountain View at 9:30 for a four hour exploration of Chapter 13.  The room will be set up to allow use of your laptop;  I expect to have several hypotheticals where computer or calculator would be handy.

Cost will be $250;  4 hours of MCLE credit has been applied for.

Sign up on line at www.law-full.com/13workshop.html.  Space is limited to 45 participants.