In my bankruptcy alphabet, R stands for Retirement.

Retirement plans and IRA’s are safe in whatever chapter of bankruptcy you file.

Your rights in an employer’s pension plan or a union pension plan are not even part of the property of your bankruptcy estate.  The Supreme Court held almost 20 years ago that ERISA qualified retirement plans are beyond the reach of bankruptcy trustees and of your creditors.

Perhaps the only good thing to come out of bankruptcy “reform” in 2005 was a provision that created an exemption available to everyone who files bankruptcy for up to a million dollars in an IRA.  That’s found in 11 USC 522(n).

Note that whether retirement savings are excluded from the estate or included in the estate but exempt, the law protects savings that are formally dedicated to retirement.

But, you cannot simply earmark some asset or investment as your “retirement” savings and have it sail through bankruptcy.  To be protected, the account needs to be part of a legally recognized, tax-deferred retirement vehicle.

Bankruptcy enables retirement savings

One of the most distressing fact patterns for me is the person who insists on paying minimum payments on credit card debt and has nothing left to save for retirement.

If you are both young and not too deep in debt, it may be doable to postpone retirement savings until the debt is gone.

But the older you are or the larger your debt, the more likely that you are creating a problem for yourself at retirement by lining the pocket of the banks today.

I may be like a broken record on this issue, but it is a theme that I pound on:  personal responsibility involves not just paying your debts but also making provision for your old age so you are not dependent on family, friends or Uncle Sam.

A bankruptcy discharge can free up cash flow to make regular contributions to retirement savings.  Think about it if you plan to live long enough to retire.

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Which comes first: paying debts or starting to save?

Do seniors need to file bankruptcy?

How does bankruptcy work?

 

Image courtesy of Leo Reynolds.

My friend Jay Fleischman insists R is for Redemption.

Ryan Caldwell chose reaffirmation  along with Bill Balena.

Bob Doig votes for repossession. as did Stuart Ing.

 

 

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.

 

J stands for Justify in my Bankruptcy Alphabet.  Or rather, it stands for “no need to Justify” your decision to file bankruptcy.

Those considering bankruptcy imagine the first meeting of creditors as an inquisition by the trustee.

They fantasize that they will have to justify their choice of bankruptcy and that the trustee could disallow bankruptcy relief if he isn’t satisfied.

Not so. No one gets to sit in judgment over your decision to file bankruptcy.

There are laws about whether the debtor gets a discharge, and laws about what property the debtor is entitled to keep.

But no laws say you have to be insolvent, or delinquent , or even entitled to a discharge in order to file bankruptcy.

There is no requirement that you be “worthy” or that the decision be sound, or your misery deep enough to file.

It’s Just your call.

Jay Fleischman thinks “J” is reserved for him in the bankruptcy alphabet.

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Should bankruptcy be a last resort?

 

Image courtesy of Muffet.

 

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

 

 

In my Bankruptcy Alphabet, F is for First meeting of creditors.

Lots of rumors exist about the first meeting; it garners a level of notoriety that it cannot sustain on closer look. Let’s check it out.

The first meeting of creditors is often the only time a debtor has to appear in public in connection with their bankruptcy case. It’s as close as most filers get to “going to court”.

But it’s hardly “court”, as the trustee in the case presides.  Most of those filing bankruptcy never even see a bankruptcy judge.

You’d think from the title, first meeting of creditors, that there would be further meetings. Not so. Usually, once the first meeting is concluded, there are no further meetings.

It’s called a “meeting of creditors“, though creditors seldom come.

Certainly the large institutional creditors don’t come. Not going to see Citibank, Chase, or Bank of America there.

The meeting is really between the debtor and the trustee in the case.

The trustee is tasked to ask some standardized questions and to gather information about any assets that might be available to pay the claims of creditors.  In the vast majority of cases, the debtor’s bankruptcy exemptions protect everything he owns.

Where I practice in Silicon Valley, the most difficult thing about the first meeting of creditors is getting into the building where it’s held.  Produce ID, take off your shoes, empty your pockets: for all that fuss, you’d think we’d get a plane flight somewhere.

ID is important however.  The most frequent reason for requiring the debtor to come back a second time to meet with the trustee is failure to bring  current, government-issued picture identification to the meeting.

I haven’t mentioned that the first meeting of creditors has an alias: it’s also known as the 341 meeting, since that’s the section of the Bankruptcy Code that requires that the debtor be examined about his petition and schedules under oath.

I have five simple rules for testifying at the 341 meeting.

Master those simple rules and you are good to go.  If you have taken care with supplying information for your bankruptcy papers, the first meeting of creditors is a piece of cake.

If you’d like to read more about F in bankruptcy, try Jay’s exposition on F as for Future Flow Agreements. Gotta be really stuck on F for that<g>.

This piece was brought to you by the letter F.

Image courtesy of milesopie.

 

 

The letter Q stands for Questions in my bankruptcy alphabet.

Like the storied Light Brigade, “stormed at with shot and shell” , we in bankruptcy are peppered with questions, not cannons.

Those considering bankruptcy have the profound questions:

will bankruptcy improve my situation?

what will I give up to get a bankruptcy discharge?

what is life after bankruptcy like?

Bankruptcy attorneys in turn have questions of the client:

what do you own?

who do you owe?

what has recently changed about your finances?

Then, the bankruptcy trustee has questions:

did you read these documents before you signed them?

is everything true, correct, and complete?

do you owe any domestic support to anyone?

All three players, debtor, attorney, and trustee need to have their questions answered for the system to work.

When it’s your turn to provide answers, it can be make or break time. Get sloppy, indifferent or inattentive, and one or more of the central players in the bankruptcy triad gets less than is necessary to assure a good outcome.

Let me suggest that one of the most important qualities in a superior bankruptcy lawyer is the ability to answer client questions simply and directly.

The companion quality is the ability to make the client feel comfortable enough to ask the perplexing or distressing questions. If client questions are not met with respect and openness, then find another lawyer.

The person who gets a smooth and predictable bankruptcy filing is the one who takes his lawyer’s questions seriously. Don’t just tell me about the obvious; engage and tell me about everything, whether YOU think it important or whether you believe it has value or not. I ask for a reason.

Questions and their answers are at the heart of the bankruptcy filing process.

This post has been brought to you by the letter Q.

While I think Q is for Questions in the Bankruptcy Alphabet, consumer protection lawyer Jay Fleischman proposes Q stands for Quiet.

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Questions you should ask a bankruptcy lawyer

Going to court in your bankruptcy case

Getting the bankruptcy papers right

Image courtesy of Leo Reynolds.

 

Business is my bankruptcy “B’ word. Business debt of the individual filing bankruptcy is dischargeable just as other personal debt.

In Silicon Valley, the very innovation and risk taking that makes the Valley vibrant brings with it the risks of not making it in the marketplace.

Bankruptcy can be the “do over” vehicle, freeing manpower and resources to move on with life. People here inevitably move on to try again, which is what makes this place exciting.

At the conclusion of his book The Lexus and the Olive Tree, Thomas Friedman, writer for the New York Times, (@NYTimesFriedman) imagined the characteristics a society needed to thrive in the global economy. 

Generous bankruptcy laws, he proposed, were essential for that society to prosper.

 a country with a system of bankruptcy laws and courts that actually encourages people who fail in a business venture so declare bankruptcy and then try again, perhaps fail again, declare bankruptcy again, and then try again, before succeeding and starting the next Amazon.com without having to carry the stigma of their initial bankruptcies for the rest of their lives.

In Silicon Valley, says renowned venture capitalist John Doerr, it is O.K. to fail and in fact it might even be important that you failed before on someone else’s money: In Silicon Valley, bankruptcy is viewed as a necessary and inevitable cost of innovation, and this attitude encourages people to take chances. If you can’t fail, you won’t start. Harry Saal, who founded one of the most successful software diagnostic systems in Silicon Valley, after being involved in several start-up ventures that went belly-up, once told me over coffee in Palo Alto: The view here is that you are always better and wiser for having failed. Which is why when people here fail after having tried something, they often have an easier time raising money the next time around. People say, Oh, he went bankrupt on that first venture. I bet he learned something from that, so I’ll bankroll him again.

In Europe, bankruptcy carries a lifelong stigma. Whatever you do, do not declare bankruptcy in Germany: you, your children and your children’s children will all carry a lasting mark of Cain in the eyes of German society. If you must declare bankruptcy in Germany, you are better off leaving the country. (And you’ll be welcomed with open arms in Palo Alto.)

Some struggle with the concept that when the business is a sole proprietorship, rather than a corporation or an LLC, there is no dividing line between business debts and personal debts. When a person files bankruptcy, all of their debts of whatever origin, must be listed. One cannot just “file bankruptcy on the business debts.”

While our bankruptcy laws became less generous with the changes of 2005 for those with largely personal, consumer debt, bankruptcy remains open and forgiving for those with business debts.

This post was brought to you, as they say on Sesame Street, by the letter “B”.

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Image courtesy of TooFarNorth.