With the limited exception of realizing while in court that I have worn two different colored socks and I am convinced that everyone can tell, there’s nothing that drives me more nuts than exaggerated and half-baked claims about bankruptcy. A recent article on TheStreet.com proves my point. Lauren Tara LaCapra writes in “Bankruptcy Can Hurt For Decades”:
Rules enacted in 2005 made it harder and more costly for Americans to file for Chapter 7, in which assets are liquidated and given to creditors, or Chapter 13, which structures a repayment plan for certain debts over a term up to five years. (Debts outside of the plan would not have to be repaid.)
Harder, no. Costlier, yes. It’s hard to really chide the writer for this lack of understanding because I know many people have it. But, there is also this: “Debtors outside of the plan would not have to be repaid.”
Um….No. If debts are not in the plan, they need to be paid. A best example I can give is with a car loan. If the debtor wants to keep the car, the loan needs to be paid. That loan is paid outside the plan. If it doesn’t get paid, the car gets repossessed. I could (and perhaps will at some point) get into some long analysis as to whether a deficiency must be paid through the plan and why. I could (and perhaps will at some point) blog about what happens when debtors attempt to pay only certain creditors through a plan, while paying others on the side. Suffice it to say, the claim that debts not included in the plan need not be repaid is flat out wrong. (I could reasonably infer that the term “Debts” might really mean “Regular monthly expenses” such as the electric bill and the phone bill. Those do get paid outside the plan…but they are not debts. They are expenses.)
Then, the article refers to an Ohio State University study:
…it can take over 20 years for bankruptcy filers to reach the same financial status as those with similar social and economic backgrounds who did not file for bankruptcy. It took more than a decade for a bankruptcy filer to catch up to peers in terms of savings, income and home ownership, according to the study. It took more than a quarter of a century to reach the same level of net worth.
Translated: people who file bankruptcy will not be in the same financial station in life as their peers who do not file bankruptcy. I imagine that most people facing bankruptcy know this…I also imagine that if they are in so much debt that they probably already know this. I also imagine that some of “their peers” are also quietly suffering with a boat-load of debt while all the while trying to put a good face forward to as not to lead anyone to suspect otherwise.
Jay Zagorsky, co-author of the study and a research scientist at Ohio State, notes that high prices for gas, food and housing, combined with crushing debt, can make bankruptcy seem like an easy way out with a clean slate.
“But,” he adds, “to experience what people may heard of as a ‘fresh start,’ that may take longer than they expect or would like.”
True. But it’s going to be easier to pay the higher costs for food, gas and home heating oil if the other debt is dealt with in bankruptcy. As far as getting credit again, it can happen. I have had clients who have been in bankruptcy (chapter 13) and gotten credit cards (without my knowledge and without court permission…which is actually not a smart thing to do at all). I have had clients who have received their chapter 7 discharge and within weeks were receiving credit card offers (and in some cases, receiving cards). Of course, in those days, if you had a pulse, an address you could get a credit card.
Today, it’s not so easy. We are in a credit crunch. Underwriting standards are changing, and some merchants are rethinking whether they will accept credit cards. Just this week, I received a letter from Filene’s Basement telling me that they were discontinuing their credit card after September 1. They were also kind enough to send me a coupon for 15% off of one-item. But I digress…
Gas and food costs are going to make it difficult for people. Actually, it is making things difficult for people…which includes people like me. Then, the article offers this not-particularly-sage advice:
Those grappling with high costs and excessive debt should seek out other options first — whether restructuring or consolidating debt, negotiating a payment plan or lower interest rates with creditors, selling off assets or simply cutting back on costs — before putting a 20-year “scarlet letter” on their credit scores.
You cannot restructure your mortgage if your lender will not return your calls. You cannot consolidate your debt if you cannot qualify for a consolidation loan. You shouldn’t consider repaying debt with credit counseling without exploring whether chapter 13 is actually a better and more cost effective route. Selling assets: sure. So long as it’s not a house you need to sell anytime soon, and so long as you’re not selling something to a buddy because you’re concerned about losing it in a later bankruptcy filing. And as for cutting back on costs, some cannot cut back anymore.
Finally, the bankruptcy filing does not stay on the credit report for 20 years. It’s on the credit report for 10. It’s also not a Scarlett Letter…harkening back to that Nathaniel Hawthorne novel about an adulterous Demi Moore who is forced to wear an “A” so as to let the world know how sinful she is.
For the overwhelming number of people who walk through my office door, that bankruptcy filing is exactly what they need to move on. The bankruptcy is exactly what it will take to get things back on track and to help them face the new economic challenges that face us all. While I encourage debate with others with different points of view, I urge anyone who is “knee-deep in debt” to get the facts. It’s a shame that this article is short on them.
“I Need to Get Through the Winter”
For weeks I have wondered what impact the high price of home heating oil was going to have on people who need it. Would it push them into bankruptcy (or worse)? Since it is usually an accumulation of things that leads one to file bankruptcy, there is no clear way I can predict that the price of oil is going to push people over the financial edge. But last week, I spoke with a client who found himself standing on the proverbial financial precipice, and it was that realization that lead them to think about filing bankruptcy.
The client recently ended a long term relationship. As many of us know, it is far cheaper for two people to live under the same roof than it is for one. The household income had dropped, and every day expenses increased. There was also some debt that continued to linger such as credit cards and consolidation loans. While he was paying a modest rent (less than $1,000 per month), it did not include the price of home heating oil.
To meet his obligations, the client did what many people do: he decreased expenses. However, he did so to the detriment of his health. A few years ago, he underwent a gastric by-pass. Instead of buying the protein and vegetables that his doctor expected him to eat (and that frankly, we all need to eat), he was instead eating the less expensive pasta and starch that he should not be eating.
Since it’s July, his oil use in the summer is limited to heating the hot water, and just ½ tank (100 gallons) can get him through most of the summer. But from December through April, it is not uncommon for his tank to be filled at least once per month. What prompted him to call me was that when he got his summer oil delivery last month, that 100 gallons cost him $429.
Making things more difficult: many (if not all) oil companies are refusing to lock in prices or offer budget plans.
The client realizes that unless the other debt is somehow compromised, he either will not be able to heat his apartment, or his other creditors will not get paid. In other words, he sees that at some point, a choice will need to be made. Without the debt, the client could get through the winter assuming that that there are no dramatic increases in the prices. And it is this scenario that causes me to ponder this: “how many other people are wondering how they are going to do it?”
It’s not an easy question I can answer. However, for this client, who is struggling with the increasing prices on consumer goods and debt, and facing a cold and expensive winter, he has answered that question by considering bankruptcy. For him, it might be the only way to get through the winter.
Tags: Bankruptcy, Chapter 13, Chapter 7, Commentary - Legal
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