Total Bankruptcy

Harvard Law Professor Elizabeth Warren and the other professionals affiliated with the Consumer Bankruptcy Project have collected significant data about the American families who file for bankruptcy protection and the reasons they file.  That data has been crucial in painting an accurate picture of the average American bankruptcy petitioner that stands in sharp contrast to the "deadbeat" portrait painted by the credit industry and presumed by the 2005 bankruptcy reforms.  You may even have seen Professor Warren on PBS recently, talking about debt in America, or on 20/20.

Now, the Consumer Bankruptcy Project is expanding its scope, and for the first time reaching for a national sample in its research.  That means bankruptcy petitioners across the country may be contacted or receive a Consumer Bankruptcy Project questionnaire.  If you've filed, or file, for bankruptcy protection and you receive the questionnaire, please consider participating in this important study.

Professor Warren assures us that the study has been approved by the human subjects review boards of several Universities and that all responses will be confidential. 

 A news release popped up in my email this morning headlined "Bankruptcy Won't Stop Foreclosure for Troubled Borrowers".   As an attorney who does a lot of research and writing about bankruptcy law, that came as quite a surprise to me.  After all, I knew that Chapter 13 bankruptcy could provide the relief a homeowner needed to catch up past-due payments over time while making current payments.  I also knew that Chapter 7 bankruptcy, while it didn't provide a long-term solution to foreclosure, would in most cases automatically stay foreclosure proceedings temporarily, allowing the homeowner much-needed breathing room in which to assess his options.

So what might that headline mean?  Apparently, this:  "...filing for bankruptcy will not permanently stop a lender from foreclosing on a home if the borrower stops making payments."

In other words, you can't file for bankruptcy, discharge your mortgage debt, and keep your house.  I suspect that's not a big surprise to anyone, and the fact that you don't get a free house in bankruptcy is quite a bit different from the assertion that "bankruptcy won't stop foreclosure".

So why do we so often see these misleading "news" items, spreading the idea that bankruptcy isn't a viable solution for most debtors, furthering the myth that bankruptcy will "ruin your credit for ten years"? 

In the case of this particular news release, it's not hard to guess at the answer.  The only person quoted in the release, and the contact for further information about the release, is Patrick McGilvray of The Home Buying Center, LLC.  A quick glance at  The Home Buying Center's website reveals images strikingly similar to those corrugated plastic signs you see in depressed neighborhoods offering to pay cash for your home fast.  The message in this release seems to be, "Bankruptcy won't save your home, so instead you should avoid foreclosure by quickly selling it to us." 

In other news items, the connection may be more subtle.  The banking and consumer credit industry has a powerful lobby and a massive public relations machine at their disposal.  And bankruptcy isn't the right answer for everyone, nor something that should be entered into without research, professional advice, and an understanding of the options.

But when direct misinformation like, "bankruptcy won't stop foreclosure" and "you won't be able to get credit for ten years after you file bankruptcy" is part of the "news", question the credibility of the source and seek out the unbiased facts.

The Administrative Office of the United States Courts published a 67 page report titled "Bankruptcy Basics".  Consumers who are considering filing a Chapter 7 bankruptcy petition or a Chapter 13 bankruptcy petition may want to review the document.

If 67 pages on bankruptcy sounds too intense and time consuming, consumers may prefer to contact a personal bankruptcy attorney who can summarize the report and highlight the specific bankruptcy information relevant to their particular financial situation.

For those who like to read in depth reports, the "Bankruptcy Basics"  manual provides plenty of detailed information about bankruptcy including 7 pages just on bankruptcy terminology alone.

The Fifth Circuit Court recently ruled in Darby versus Time Warner Cable, Inc.  that cable television is not considered a utility as it is defined in the Bankruptcy Code.  This means that a debtor's cable television service will not be protected after a he or she files for bankruptcy.

The court reasoned that cable is not a necessity like electricity, water, sewer and telephone which means it should not be considered a utility protected under section 366 of the Bankruptcy Code.  Critics disagree with the court's decision arguing that the 2005 Bankruptcy Code provides this protection simply because a debtor usually has no other utilities to choose from, not because the utilities are a necessity.

A study by the National Bureau of Economic Research shows families lose $1.5 billion annually by prepaying their mortgage instead of funding their tax-deferred retirement account.  The study also shows that saving for retirement instead of paying off a mortgage does not increase your risk for default.

If you lose your job and can't make your mortgage payments you can always withdraw from a tax-deferred retirement account to make your mortgage payments.  If your financial situations worsens and you do need to file for bankruptcy, your retirement account is protected under the new bankruptcy laws.

Many employers run background checks on prospective employees to find out about felony convictions.  Certain professions and industries have polices in place to avoid hiring applicants with certain types of felonies on their record.  For instance, a bank may not hire someone with a burglary conviction on their record.

A bankruptcy on your credit report will not necessarily stop a company from hiring you.  However, they could deny you employment if you misrepresent any part of your history in the interview or on the employment application.

Bankruptcy is nothing to be embarrassed about when you apply for a job.  It is simply a tool you can use to take control of your financial situation.  An employer should be impressed if you take the initiative to make a fresh financial start.  The employer should realize that you can focus your energy on the job as opposed to another applicant who may continue struggling with the stress of unmanageable debt.

Charitable donations were not addressed in the 2005 bankruptcy reform law, leaving Christians and people of other faiths unsure whether they would be able to continue tithing after filing bankruptcy.  This required the courts to decide the issue on a case by case basis which led to inconsistencies in the courtrooms.  On August 28, 2006, the United States Bankruptcy Court for the Northern District of New York interpreted the new bankruptcy law to require debtors to pay off all creditors before making any charitable contributions.

Before the 2005 bankruptcy overhaul, the Religious Liberty and Charitable Donations Act of 1998 allowed bankruptcy judges to permit debtors to regularly make contributions to charitable organizations.  Proposed legislation to overturn the New York judge's ruling passed the Senate before the last session ended and will head to the House next.

State Senator Jacqueline Collins(D-16th) and Representative Deborah L. Graham(D-78th) intended for HB4050 to prevent homeowners in "at risk" areas from losing their home to foreclosure by preventing mortgage lenders from taking advantage them. The new law requires lenders to properly disclose loan terms so homeowners are clearly aware of what they are signing. The law also requires mortgage loan applicants with a low credit score acquire credit counseling.

Now a group of black and Latino South Side Chicago residents are fighting to change the law. They say lenders are refusing to approve loans in these areas making it impossible for residents to refinance their home in an effort to stay out of foreclosure.

The debate continues on whether this law will help residents keep their homes or push them into a foreclosure and bankrutcy situation.

The Nebraska Appleseed Center for Law in the Public Interest released a study surveying 15 Nebraska bankruptcy trustees. The survey asked the trustees why Nebraska bankruptcy filings increased during 2004 and 2005.

Most of the trustees agreed that the national economy and the state economy drove these consumers into high debt. Medical care, low-income, and high transportation costs due to lack of public transportation create a situation where people don't even have a chance to pay all their monthly expenses. Many of these same people are forced into high debt just to pay their bills each month.

The Nebraska bankruptcy trustees said that they rarely see people file for bankruptcy who have outrageous spending habits or poor budgeting skills. If the economy in Nebraska and the nation remains the same, many hard working families will continue to turn to bankruptcy as a way to balance their household budget.

As the one-year anniversary of the widely publicized bankruptcy law change approaches, one thing is clear: almost everyone who might have filed bankruptcy before the law change can still do so. In fact, early reports from credit counseling agencies indicated that fewer than 4% of those pre-bankruptcy clients who passed through their offices had any other realistic options.

The internet is a great source of information at our fingertips, but there's a downside as well. The downside is that anyone can hold him or herself out as an expert, write some reasonably convincing piece of speculation or propaganda, and it just might be spread all over the world as fact.

That sort of thing appears to have occurred last week, as MSNBC posted a "Motley Fool" article that picked up a post from a message board somewhere...and the next thing we knew, MSNBC appeared to be setting forth reasons you shouldn't file for bankruptcy.

In fact, though, those reasons were provided by an anonymous message board poster in 2003.

The first "reason" is "Bankruptcy will ruin your credit for a minimum of ten years."

"Minimum of ten years," of course, makes no sense, since ten years is the maximum period that a bankruptcy filing may appear on your credit report.

More significantly, however, the assumption that bankruptcy will "ruin your credit" for the duration of the time it appears on your credit report is completely unfounded. Many consumer bankruptcy attorneys report that those clients who use sound financial management and work on rebuilding credit after bankruptcy are able to obtain standard mortgage and car loans within 1-2 years post-bankruptcy.

Additionally, the poster completely overlooks the fact that if you're on the verge of bankruptcy, your credit report is already unfavorable, and that your FICO scores will be low due to issues such as high balances related to available credit and late payments.

It's true, as the poster suggests, that bankruptcy can stay on your credit report for up to ten years. It's true, as he further points out, that some credit applications ask whether you have ever filed for bankruptcy, taking the issue outside even that ten year window. What he overlooks, however (or intentionally avoids) is the fact that it's your most recent transactions that interest new creditors the most, and a year or two of current payments post-bankruptcy will go a long way toward repairing the damage. While there are a few creditors who won't work with anyone who has ever filed bankruptcy, the vast majority won't have much interest at all in a ten-year-old bankruptcy if your current accounts have been kept current and your debt to available credit ratio is low.

One of the common misconceptions about bankruptcy is that a debtor can incur large debts in a short period of time before filing bankruptcy, knowing that he'll ultimately file and discharge those debts. There are a variety of reasons that pre-filing debtors should be very cautious about new credit--or using existing credit--and should consult with a bankruptcy attorney before making any credit-related decisions.

For instance, debtors don't always understand the difference between secured and unsecured debt. Often when goods, especially large goods, are purchased on credit, the creditor retains a security interest in those goods. Secured creditors may still be able to seize property after a discharge is entered.

On the other hand, if there is no security interest in the goods, then those goods themselves--unless exempt--may be subject to sale by the trustee in order to pay the debts of the estate.

Finally, many debts incurred within a certain time period before bankruptcy filing are presumed to be non-dischargeable. If a debt is determined to be non-dischargeable, the debtor may be required to pay that debt even after discharge has been granted in the case.

If you're considering bankruptcy and thinking about incurring additional debts, talk to you bankruptcy lawyer in advance to find out what kinds of debt are acceptable pre-filing.

Many consumers mistakenly believe that the changes in the bankruptcy law that took effect last fall disqualify a lot of people from filing bankruptcy. That's not really true--the vast majority of people who qualified for Chapter 7 bankruptcy before still do, and for those few who don't, there's still Chapter 13.

The number of bankruptcy cases being dismissed since the law change undoubtedly helps to spread the wrong idea--that all of those people are newly barred from filing for bankruptcy protection. In one district in Florida, for example, 89 of the first 200 cases filed after the enactment of the new law were dismissed.

The truth, though, is that the vast majority of those dismissals weren't because the debtor didn't qualify for bankruptcy. Instead, most were based on failure to jump through the right hoops before filing--and most of those were cases filed without an attorney.

Because potentially harmful limitations apply if you refile a case after a dismissal, it's important to get it right the first time. Talking to a bankruptcy attorney before proceeding with a bankruptcy case might mean the difference between a successful petition and a dismissal.

General rules are sometimes taken for gospel, when in fact the bankruptcy code is full of specifics, exceptions, and exemptions.

Two common examples are the popular perceptions that student loans and tax debts are not dischargeable in bankruptcy.

It's true that there are significant restrictions on the discharge of each of these types of debt, but they are not absolute.

Student loan debts may be dischargeable if the debtor initiates an adversary proceeding to demonstrate that being required to pay the student loans would constitute and "undue hardship". And while tax debts incurred within the three years prior to filing are generally not dischargeable, some back taxes more than three years old are subject to discharge.

The bottom line: don't make assumptions. If you're in doubt, talk to a bankruptcy attorney about your specific circumstances and get accurate information to help you make your decisions.