In my bankruptcy alphabet, T stands for Tension. I’m not talking so much about the tension the person filing bankruptcy feels, though that is real and not to be discounted.

I’m talking about the tension in the law that balances the interests of creditors with the interests of debtors.

Bankruptcy law in the US recognizes that the society as a whole benefits when individuals are relieved of oppressive debts.? Tom Friedman of the NYTimes in particular applauds the positive impact on innovation when the price of failure is not lifelong indebtedness for the entrepreneur.

Where in the past, those unable to pay their bills were tossed into prison until they paid (please tell me about the logic of that approach), now debtors walk out of bankruptcy with their exempt assets to facilitate a fresh start.? Here in Silicon Valley, they often join a start up, or found a start up.

Creditors, in the push-pull of a bankruptcy case, share in any non exempt assets the debtor has, according to the priority of their particular claim.? The means test provides an (imperfect) brake on high income individuals dumping their debts in Chapter 7.? Some debts are simply non dischargeable because we’ve made a collective decision that policy reasons favor the creditor.? Think recent taxes, child support, drunk driving judgments and intentional bad acts:? they are all non dischargeable and survive the bankruptcy.

Creditors who bargained for collateral generally get to keep their lien on the asset despite the bankruptcy.

In reorganization cases, judges have to modulate the tension between the desire of the debtor to reorganize and the creditor’s desire to cut their losses and get out.

The recognition in law? of the interests of both sides of the debtor/creditor tension is a strength of our American approach to debt and credit.? Don’t let anyone tell you that bankruptcy costs our economy too much.

This sermon has been brought to you by the letter T.

Jay Fleischman, from his lookout in New York City, thinks T is for Trustee.

Image courtesy of Leo Reynolds.

“D” is for discharge in my bankruptcy alphabet.

Getting a discharge of debts is the goal of most bankruptcies.? The discharge is the court order, issued at the conclusion of a case, that wipes out the filer’s personal liability for most debts that existed when he began the case.

Not everything is discharged. The Bankruptcy Code lists a number of debts that will survive the proceeding.? Some are nondischargeable just because of the nature of the debt:? recent income taxes, family support, drunk driving judgments.

Some debts are non dischargeable only if the creditor files a timely adversary proceeding in the bankruptcy case and proves that his claim falls within those debts non dischargeable because of the debtor’s bad behavior:? debts incurred by fraud, misrepresentation, breach of fiduciary duty, theft or willful and malicious injury.

Student loans are dischargeable only if the debtor brings a successful adversary proceeding to prove that repaying the debt imposes an undue hardship on the debtor and his family.

The discharge can be denied as to all of the debts if the debtor commits one of those all encompassing bad-acts:? lies on the schedules, destroys or fails to keep appropriate records, or hinders the trustee’s work in the case.

Remember that the discharge eliminates the debtor’s personal liability for his debts.? Personal liability is the exposure that a person has to having their wages garnished or their bank account levied to pay a judgment.? Liens on assets survive the bankruptcy, but only as a charge on the asset.

A creditor with a lien on property of a debtor with a discharge can only take the property that is security for the debt.? The lienholder cannot look to the debtor to make up? any difference? between the value of the property and the original debt.? The discharge protects the debtor from that exposure.

Today’s explanation of bankruptcy was brought to you by the letter “D”.

In my friend Jay’s lexicon, D is for Debtor. What does he know?

Image courtesy of dumbledad.

Counseling, delivered by an approved provider, before the bankruptcy case is filed, is now a requirement enforceable by dismissal of the case.

That’s my “C” word in the bankruptcy alphabet.

Prebankruptcy counseling is supposed to insert an objective third party between the beleaguered individual who needs relief and the greedy lawyer who, according to legend, is hustling everyone into bankruptcy, even those who may have other alternatives.

The requirement for such counseling is largely built on myth.  Most importantly, in my 30+ years of experience, very few people are willing to even meet a bankruptcy lawyer unless their debt problems are serious, usually really serious.  So bankruptcy lawyers rarely come in contact with people who don’t need to file.

When I interview a potential client and recommend they don’t file, it’s usually because they have significant assets they’d lose in bankruptcy.  The cost of debt relief is simply too large relative to the cost and the loss.

But let’s assume I was more interested in my fees than my client’s welfare, Congress’s remedy in credit counseling doesn’t look at the value of the debtor’s assets and the exemptions available.  If they did, the “counselors”  would be practicing law.  The person at the end of the phone is certainly not licensed to practice law in California, or in reality, anywhere.

By requiring credit counseling, Congress managed to increase the cost to the debtor of filing a bankruptcy case.  It also spawned an entire industry. At the recent NACBA convention, there had to have been two dozen providers of credit counseling, clamoring for the attention of bankruptcy lawyers.

That’s the venial part of the story.  The sad part is that those who try to file bankruptcy without a lawyer frequently don’t know about the counseling requirement or the mechanism to seek a waiver.  Since 2005, the bankruptcy code requires the dismissal of cases where there is neither a credit counseling certificate or a properly obtained waiver.

Pro pers look dumbstruck when they learn that, having navigated the system sufficiently to have filed their case on their own, the case will be tossed out because they didn’t get credit counseling before they filed.

Maybe my “C” word should have been “Congress” who created this travesty. (Jay’s bankruptcy  “C” word is Creditor.)

As it is, this post is brought to you by the letter “C”.

Image courtesy of takomabibelot

May make you a felon.

Funny, the Las Vegas PR doesn’t mention criminal prosecution for unpaid gambling markers.

Yet Nevada treats gambling markers like negotiable instruments (i.e. checks) and failure to satisfy a marker within 30 days can lead to criminal charges.

Most bankruptcy courts have held that gambling debts are dischargeable in bankruptcy, since everyone who gambles expects to beat the odds and win. So, there is no intent to defraud within the meaning of §523.

But in the last couple of months, two of my bankruptcy clients whose bankruptcies successfully discharged gambling debts have been contacted by the Clark County DA’s office with respect to criminal prosecution.? Of course, what the county is trying to do is to pressure the gamblers into a restitution order rather than jail time.

Be forewarned if a jaunt to Vegas beckons.

Image courtesy of kaloozer.

Perhaps I shouldn’t be surprised that? folks who didn’t take filing tax returns seriously in the first place continue to blow it off when bankruptcy is filed.? But filing returns is mandatory and dismissal automatic under the provisions of bankruptcy reform.

What debtors need to understand is that bankruptcy is a benefit and to get the benefit, you need to play by the rules on the timeline created by the Bankruptcy Code.

But if a dispute arises, say about the allowance of an exemption or the application of the means test, and the debtor and the trustee can’t resolve the difference, it is the bankruptcy judge who makes the call.