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Your Guide to Personal Bankruptcy without Shame
By James P. Caher, John M. Caher
Henry Holt and CompanyCopyright © 1996 James P. Caher and John M. Caher
All rights reserved.
DEBT FREE AND SHAME FREE
When we were kids, a close friend of our father's made some unfortunate financial decisions and was forced to declare bankruptcy. We'll never forget the sight of this man, who had been a proud and successful scholar, athlete, and businessman, sitting on an empty beer case after pawning all of his furniture, weeping like a child over the humiliation and shame he brought to himself and his family. He was the neighborhood pariah, a shunned man. Surely, there was nobody else we knew who had been forced to bankruptcy court, or so we thought.
Today, bankruptcy is recognized as a perfectly respectable solution to financial distress, a legal avenue followed by all kinds of people, ranging from tycoons like the Hunt brothers to nationally known political figures like the late former Texas governor John B. Connally, to the secretary who overextended his credit cards and the executive who lived beyond her means.
In just the last eight years, filings have doubled. According to the National Coalition for Consumer Credit Rights, someone files for bankruptcy once every nine seconds. Statistics indicate that one out of twelve Americans is overwhelmed with debt. The number of filings is now more than double the level recorded in any year prior to 1986. And for every person filing bankruptcy, there are several others who should file but are deterred only by the propaganda of the credit industry.
Who are these people?
Seventy percent of the folks seeking help from the National Coalition for Consumer Credit Rights are white-collar.
Almost 60 percent of bankruptcy filers are baby boomers; the median age of filers is now thirty-seven, about ten years older than people filing in the 1960s.
Bankruptcy filers are more likely than the national population to have graduated from high school and twice as likely to have completed some college.
People filing bankruptcy are, overwhelmingly, homeowners.
Many are single women, frequently those who were recently divorced.
In essence, the image of the sleazy, deadbeat bankruptcy filer is a phantom. A more accurate portrait is an ordinary, honest, hardworking, educated middle-class consumer who fell for the aggressive and sophisticated credit marketing techniques, lost control, and unwittingly surrendered his or her financial soul to the devil that is debt.
However, while bankruptcy no longer carries the scarlet letter of the past, it remains a heart-wrenching option for people who, through their own poor judgment or, more often, circumstances beyond their control, cannot make ends meet.
Sometimes people get into trouble because of ill-advised investments, failed get-rich-quick schemes, or outright foolhardiness.
As never before, educated, middle-class Americans are falling victim to a terrible con job and sinking under a consumer debt load that frequently exceeds a whole year's net income. Credit card companies are furiously pumping out cards; there are enough currently in circulation for every man, woman, and child in the country to carry four of them. Americans are living in a virtual house of (credit) cards that will topple with the slightest wind, the smallest income disruption.
Creditors are more than willing to ignore the dangers of tomorrow so they can reap exorbitant interest rates today. They are counting on — literally banking on — your ignorance. They encourage robbing Peter to pay Paul by using credit card advances to pay off credit card bills. They have convinced many middle-class consumers to bleed all the equity out of their homes through aggressively marketed home equity loans.
The early experience with our father's friend taught us that most debtors are not necessarily reckless spendthrifts or deadbeats. Rather, they are people who, without the help of the court, would remain caught in a downward spiral of debt.
Whatever the cause for a person's financial difficulty, the U.S. Bankruptcy Code was enacted to help the honest debtor start over. With the aid of the bankruptcy court, our father's friend was able to climb out of a financial abyss, resurrect his career, raise a family in a nice home, and eventually retire comfortably.
And so can you.
The key is to recognize the subtle, and not so subtle, pressures of the credit industry and, most important, to acknowledge that the ultimate responsibility is yours. Bankruptcy can be a viable and rational first step to regaining control. The courts and the law will show you the way and your lawyer should be a comforting guide, but you have to begin blazing this trail by yourself.
THE "FRESH START" PRINCIPLE
Bankruptcy has been around since there has been money and ways to lose it. What's changed over the centuries is the way society deals with the people who can't pay their bills.
For eons, debtors were tossed in prison to be punished for their financial miscues. The Enlightenment thinkers who formed the government in this country, however, realized that jailing honest debtors was unfair and kind of stupid. They set the stage for today's bankruptcy relief by giving Congress the muscle to enact uniform laws. Congress took the hint and adopted various bankruptcy statutes, most recently the Bankruptcy Reform Act of 1994.
The key feature of American bankruptcy is the "fresh start" principle, which recognizes that society as a whole benefits when debt-ridden people are given a chance for financial rebirth, permitting them to get back on their feet and start building financially secure lives for themselves and their families. Bankruptcy laws are designed to give you an opportunity to begin your financial life anew.
The concept was eloquently articulated by Justice William R. Day in the Wetmore v. Markoe decision of 1904: "Systems of bankruptcy are designed to relieve the honest debtor from the weight of indebtedness which has become oppressive and to permit him to have a fresh start in ... life, freed from the obligation and responsibilities which may have resulted from ... misfortunes."
If you qualify, federal law will allow you to reorganize your finances and gradually pay off your obligations under the protection of the court — without having to sacrifice your belongings.
BANKRUPTCY IS NOT ABOUT GUILT
Much more recently, the U.S. Supreme Court noted in the 1991 case of Grogan v. Garner that "... a central purpose of the Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt."
Very few debtors, viewing their financial instability as a sign of character weakness and fearing social stigma, go through bankruptcy without paying a stiff emotional price. They toil for years, making partial payments, but because of exorbitant interest rates, never even make a dent in their bills. Often, people struggle, painfully and needlessly, to avoid bankruptcy, reasoning that their credit history will be better this way. The cruel truth is just the opposite: a person is actually a better credit risk after bankruptcy because he or she has no other debts and can't file bankruptcy for another six years.
Aside from getting a lawyer to sue you, the two most powerful weapons of bill collectors are the use of guilt, sort of a psychological warfare technique, and the threat that bankruptcy will destroy your ability to get future credit.
Don't let them snow you.
When the bank lent you money or the credit card company sent you a "preapproved" card inviting you to "live your dreams today," they knew full well that someday you might have to take advantage of the relief Congress provided under the Bankruptcy Code. In fact, they planned on it.
Lending institutions try to predict what portion of their accounts will end in bankruptcy. If there are fewer bankruptcies than predicted, they conclude that their credit policies are too strict, and become even more aggressive in trying to attract new borrowers. Even though bankruptcies have risen sharply over the years, the competition among credit card companies remains fierce, with new companies entering the market all the time.
Consider the following facts and conclusions from national surveys:
Despite their incessant complaining, creditors spend more for postage stamps to bill current customers and lure new ones than they do to cover their losses.
Creditors are at least partially to blame for any losses because of irresponsible lending practices.
Although the credit industry would have you believe that people recklessly and shamelessly turn to bankruptcy so they can stiff their creditors, the facts show that people are far more inclined to make every effort — even unreasonable efforts — to avoid bankruptcy.
Two bellwether studies of bankruptcy filers — by researchers Teresa A. Sullivan and Jay Lawrence Westbrook of the University of Texas at Austin and Elizabeth Warren of the University of Pennsylvania — came to the same, clear conclusion: with few exceptions, the people who file for bankruptcy are drowning in debt; cases of abuse are rare and atypical; credit card companies are increasingly reaching out to low-income consumers.
Some major credit card companies are now using computer programs to predict not only how many customers will file for bankruptcy but which ones. Yet they still extend credit to those people, despite the risk.
Regardless, you — the debtor — are ultimately responsible. While the credit industry vultures may have preyed on your weaknesses or exploited your ignorance, you got yourself into this mess. And only you can get yourself out.
HANDLING BILL COLLECTORS
Under the federal Fair Debt Collection Practices Act (see appendix 1), debt collectors cannot communicate with other persons concerning your debt, may not call you before 8 A.M. or after 9 P.M. or at any other time they know to be inconvenient, and can't bug you at work without your employer's permission. Moreover, if you tell a debt collector, in writing, to leave you alone, that individual may not be allowed to contact you further. In any case, a debt collector can't threaten you with force or use foul or abusive language.
Some debt collectors are stereotypical bullies. If you let them intimidate you, they will. If you tell them to buzz off, they'd better, or they may face legal sanctions themselves.
Neither the courts nor juries are willing to tolerate such bullies. A case in point is a 1995 jury verdict in El Paso, Texas. A couple with a $2,000 credit card debt was subjected to harassing, profanity-laced telephone calls from collection agents. Jurors found that the credit company violated the Texas Debt Collection Practices Act, and awarded the couple $11 million in compensatory and punitive damages.
DO YOU NEED A LAWYER?
Yes. But how are you going to pay for a lawyer if you don't have any money? Don't worry about it now. In chapter 2, "Questions and Answers," we will give you some pointers on raising the money to file bankruptcy. Also, in some cases, part of the attorney fees can be covered by the bankruptcy plan. In any event, don't let the fear of legal expenses keep you from hiring a lawyer.
In the last few years, partially in response to the relatively high fees of attorneys, a number of paralegals and "document" preparation services have offered do-it-yourself bankruptcy programs. Good idea? Put it this way: You could try to cross the highway with your eyes closed, and you might make it. But do you really want to try?
Sure, you can buy the fill-in-the-blank forms and do it yourself. But if you goof or overlook something or the form doesn't reflect some obscure change in the law, you may permanently jeopardize your rights. And then what are you going to do, sue yourself for malpractice?
Bankruptcy appears simple only to those who don't know any better. While the Bankruptcy Code is only a single volume, since 1978 the courts have produced 185 volumes of decisions interpreting the law, and this continues at the rate of about 12 volumes a year.
Not only is it a mistake to try to handle your own bankruptcy, it's also probably a mistake to seek advice from anyone other than a bankruptcy specialist. You may want to think twice about hiring your cousin Oscar, the divorce attorney who occasionally dabbles in bankruptcy. Despite his best efforts and intentions, he may inadvertently make a mistake that seriously compromises your rights.
Why, then, should you take the time to learn about bankruptcy when you may end up paying a lawyer anyway? There are several reasons:
The information in Debt Free! will enable you to judge whether the lawyer you are considering knows what he or she is doing. Unfortunately, some lawyers still try to practice bankruptcy law on a part-time basis, and they can't possibly keep up on everything they need to know.
Many bankruptcy lawyers, in order to reduce fees, rely heavily on paralegals or other nonlawyers. Some of these folks are wonderfully competent; others are bumbling buffoons. If they screw up, it's you who will pay.
Debt Free! will help you make a wise choice in lawyers and serve as a safety net to clear up any miscommunication between you and the lawyer. If the lawyer or paralegal tells you something that doesn't jibe with what's in this book, check it out.
It might be that, because of some peculiar feature of local law, the lawyer is right. On the other hand, by bringing the discrepancy to the lawyer's attention, you might clear up a misunderstanding that has developed without your realizing it.
Make no mistake about it: filing bankruptcy is a serious matter and can have serious consequences. This book is a supplement, not a replacement, for professional advice. There's an old saying that a lawyer who represents himself has a fool for a client. Nowhere is this more true than in bankruptcy.
GETTING YOUR LIFE BACK IN ORDER
Bankruptcy is never an easy decision to make, nor is it an easy process to endure. However, in many, many instances it is a financial lifeline that grants you a chance to put your financial life back together.
Just as our father's friend took hold of his problems and put the difficult years behind him, so can you. The Bankruptcy Code was created to help people like him, and perhaps people like you.CHAPTER 2
QUESTIONS AND ANSWERS
WHAT TYPES OF BANKRUPTCY PROTECTION ARE AVAILABLE?
Depending on your individual situation, you are probably eligible for either a Chapter 7 bankruptcy, in which your debts are wiped out and some of your assets may be transferred to a court-appointed trustee; or a Chapter 13 bankruptcy, in which you hang on to all your assets and have an opportunity to establish a workable repayment plan.
In sum, Chapter 7 discharges all your debts, in return for the surrender of what is called nonexempt property of the estate; Chapter 13 involves a repayment plan where you pay all or a part of your debts over a period of thirty-six to sixty months.
For more information, see the section on types of bankruptcy in chapter 3, "A Bird's-Eye View."
WILL I LOSE MY HOME?
But that depends on whether you are behind in mortgage payments, how much your house is worth, and the state in which you live. When all is said and done, few people lose their home solely because they filed bankruptcy.
See chapter 9, "Home Sweet Home."
WILL I LOSE MY CAR?
If the car is financed, you will have to continue making payments if you want to keep the vehicle. In a Chapter 13 case it may be possible to reduce the payments to a more affordable amount. If you don't want to keep the car, you can simply give it back without further obligation.
See the section on automobiles in chapter 8, "Cars and Household Goods."
WILL I LOSE MY PERSONAL BELONGINGS?
In the vast majority of consumer bankruptcy cases, debtors retain all of their personal and household belongings.
See chapter 5, "What Do You Have to Lose?"
Excerpted from Debt Free! by James P. Caher, John M. Caher. Copyright © 1996 James P. Caher and John M. Caher. Excerpted by permission of Henry Holt and Company.
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