on the Bankruptcy Soapbox

It was a good day at my desk, if one has to work on Saturdays.

• I gave notice that one client was rescinding a $180,000 mortgage for Truth in Lending violations.
• I found three clients whose second deeds of trust can be eliminated as liens on homes because they are completely underwater.
• I sent out three Qualified Written Requests under RESPA to lenders whom I suspect have played games with the servicing on my client’s mortgages.

My conclusion about the mortgage meltdown is that there is not one universal approach to getting clients some breathing room on their mortgage debt, but there are a number of approaches that can lessen the pain borrowers are feeling, and raise the odds these people can keep their homes.

My great friend Doug Jacobs identified finding a lawyer you can talk to and listen to as important points in selecting a lawyer. He points out that the client will be disclosing lots of information normally held confidential.

But I would take it a step further: it’s not just a lawyer you can tell your secrets to. You need to find a lawyer whom you can question, over and over if necessary, until you understand the choices that you must make in filing bankruptcy.

Some things a client doesn’t have to truly understand to file bankruptcy: how the means test works, or doesn’t work, is one of them. The debtor need only validate some of the information in the form.

But other bankruptcy issues require the client to make choices and perhaps confront risks. Is the loan repayment to your parents a recoverable preference? Does the recent use of your credit card make you susceptible to the charge of incurring debt by fraud? Are you at risk of a UST challenge to your Chapter 7 case as an abuse?

Decisions surrounding these issues are, in the end, the client’s decision. The factors are complex, and in this day of “new” bankruptcy law,sometimes uncertain. The client needs to feel absolutely comfortable asking their counsel to explain the issue, assess the risks, and explore alternatives with them. The lawyer needs to be capable of explaining without jargon or presumption.

So I would add to the list of qualities in superior bankruptcy counsel openness to the layman’s questions and the willingness to restate and reanalyze the options until the client understands. A lawyer who is not capable of making you a partner in the conduct of the case may end up excluding you from considerations that rightfully belong to you, the client.

A bankruptcy court in Oakland recently rebuffed a mortgage lender who claimed it had been defrauded by borrowers who lied on the loan application. The judge agreed the debtors falsely inflated their income, but found that the lender had not reasonably relied on the false representations. The lies were not enough to make the debt non dischargeable when the lender was asleep at the switch.

The broader question in the mortgage meltdown is whether the Wall Street firms that bought these liar loans from the sleeping lenders have any recourse against the lender. Can the seller of the loan escape responsibility for selling a financial instrument of questionable value? Did the Wall Street buyer have to investigate the actual bona fides of the loans or is it entitled to rely on the lender’s representation that the loan was sound?

Street smarts suggest that Wall Street was content not to look too closely at these loans so it could pretend that all of this profitable paper was what it was puffed up to be. Under the theory of the Hill case, they, too, may be found not to have been reasonable in their reliance.

You never know just how a client hears your advice, until you hear yourself quoted back to yourself as the reason for a client doing something stupid. In my case, I’m unclear about whether the message received was really as reported, but it’s made me think about my choice of words.

I was asked in the initial consultation if gifts of money from the debtor’s parents in the past year presented “a problem”. No, I replied, thinking that such gifts don’t change the analysis, or the expected outcome of the case. The client now claims that my words were a license to fail to disclose the gifts. Huh?

For some clients, it is clear that full and complete disclosure is emotionally very hard. The fearful and the stressed somehow are simply sure that telling the whole truth imperils the bankruptcy, when just the opposite is true. Just as sunshine is the best disinfectant, disclosure in the bankruptcy paper work is the best insurance for a good outcome.

So, I will be looking for new phrases that will penetrate the understanding of those disinclined to hear what I’m trying to convey and reiterating that the client is the one ultimately responsible, under penalty of perjury, for the completeness of the schedules.

The “new” bankruptcy law set out to make bankruptcy complex and laden with booby traps, including the restrictions on choice of exemptions. John Bates has performed a truly marvelous service with his table of exemption systems available in each state and the options for those who have moved within the statutory periods.

ExemptionsExpress collects all of this highly technical information and is a god send for attorneys in one state who have to figure out whether the exemptions of another state are extraterritorial.

Now, if I could just find a reliable, up to date collection of the exemption amounts in each state, I’d be a happy camper.

Pam Stewart writes about debt collectors suggesting a cash advance on the card they were collecting on to pay the arrears. That one ups the story I’ve heard twice in the past 2 months: the collector offers a new credit card if you will settle the amount due on the card he is collecting on!

Clearly, it’s a crazy world in the realm of debt collectors. Collectors have to be imaginative or compelling to get you to write the check, or authorize the bank account debit for money they can’t reach otherwise.

Debt collectors rely on fear, shame or harassment to get you to pay them money they can’t get at. As long as you understand their game, you can be resolute and pay first things first.

The changes to credit card billing practices proposed by the FRB are welcome, but just scratch the surface of the crushing quality of credit card debt. My sense, talking to financially stressed people day after day, is that credit cards have merely postponed for many Bay Area residents the recognition that they cannot live a middle class life in this high cost region.

The cost of living in the Bay Area is some 150% of the national average; our salaries are higher, but not 150% higher. The vital, start up, high tech, high risk economic climate makes huge winners of some, and economic losers of others. The availability of credit cards and the energy with which those cards are marketed have made it easier to mask the fact that a middle class life is more expensive than some can afford.

The other issue that makes credit card debt so poisonous is that it bears interest that a generation ago would have been criminal. California concepts of usury generally prohibit individuals from charging more than 10% on loans, yet banks can regularly charge twice that to borrowers in good standing and twice that again to borrowers in default. The FRB proposed rules don’t deal with that issue.

At base, the problem with an indebted middle class is more profound than accounting rules on how payments are to be applied will solve.

My friend Kurt O’Keefe writes about the 6 trillion dollars in home equity than has evaporated in the mortgage meltdown. When I look around me in the Silicon Valley and environs, I question just how real that equity really was. Reckless lending practices made a vast pool of people potential buyers for a limited quantity of homes in a desirable part of the world. More buyers chasing fewer homes lead to huge increases in home prices.

This “equity”, the increased value in the surrounding homes, never would have existed had it not been for mortgage lenders passing out money like flyers at a rally. It was artificial from the beginning.

The correction is painful to those who bought or borrowed at the top, but the top was a man- made illusion.

While there are an endless number of misconceptions about filing bankruptcy, the one I’ve encountered more often in the past weeks is the belief that participation in a debt management program or debt settlement program meets the new requirement for a “credit briefing” as a condition of filing bankruptcy.

To be clear, the credit briefing that is required in order to file bankruptcy must be from an organization approved by the UST in the district in which the bankruptcy case is to be filed. Most commercial debt settlement outfits are not approved. Here’s the list of approved agencies . The briefing must be completed within 6 months of filing the case.

Among the bad information out “there” about credit counseling is that the counseling takes 6 months. No. The usual credit briefing session is between 30 minutes and an hour. It must take place within 6 months of filing.

Another complexity that I’ve seen twice in three weeks are individuals who attempted credit counseling on the internet and encountered a computer or connection glitch such that they didn’t “complete” the session. In each instance, the bankruptcy case was dismissed for failure to complete the briefing before filing.

While there is no evidence that credit counseling serves any useful purpose, it is the law. Fail to get credit counseling and the case is likely doomed.

One of the petty struggles I have with clients is convincing them that they need to include all of their debts in bankruptcy. Sometimes, they will tell me they don’t want to include their car loan in the case because they “need the car”. Sometimes I find the student loan payment in the budget but not on the list of creditors.

Part of the issue is grounded in confusion between scheduling a debt and discharging the debt. Debtors are required to list all of their debts and risk denial of discharge if they don’t. However, debts are not necessarily discharged just because they are listed. The Bankruptcy Code specifies a number of debts that simply aren’t dischargeable in bankruptcy. Those debts still must be listed.

The desire to exclude debts from the schedules is sometimes fanned because debtors don’t know that they can reaffirm debts during their case. A reaffirmation agreement essentially waives the discharge as to that particular debt and puts the parties back on the same legal footing as they had before the bankruptcy was filed.

Clients are frequently surprised when they learn that they can continue to pay a discharged debt voluntarily if they wish. “Pay the dentist after the case is filed if you wish, but list them in the bankruptcy if you owe money when the case is filed. ”

Then, there are the clients who “love” their credit card issuer and want to keep paying because of loyalty or out of fear of being without plastic. I have to tell them that for some card issuers, the love is one sided, and the issuer will cancel the card independently of being listed or not in the case.

Moral of the story, there are a number of options for debts post filing, so don’t get tripped up by leaving out creditors.