When Chapter 13 Debtors Run Amok

8632883494_62b7ddd71f_zWe’ve had a string of them….

[Hint: in a small practice, a "string" means "three. " ]

But three clients in the past month with confirmed Chapter 13 plans have contracted to sell their homes without mentioning it to us, their attorneys.

The degree of chaos varied:  inadequate time to get approval of the sale from the trustee within the contractual closing date;  mortgage stripping issues when the plan is paid off early; and taxing authorities who decided to claim the post petition appreciation.

But the bigger problem is clear:  operating successfully in Chapter 13 requires debtors to absorb a bunch of information about how bankruptcy works.

  • What can they, and can’t they, do without prior consent?
  • What does the vesting option mean in the real world?

When is the best time to learn?

When we first meet prospective debtors, we’re dealing with people experiencing stress, shame, and overload.

Clients are overwhelmed with the information they must process on bankruptcy choices, procedure, and consequences.

When the case is confirmed, and all the client has to do (they think) is make the plan payments, they relax and tune out.

Yet we find clients borrowing money without the trustee’s consent; signing car contracts without considering their Chapter 13 plan; and selling stock to make ends meet.

If the only issue is covering our behinds, as professionals, we can write all the do’s and don’ts down, hand the client the tome, and get a receipt for its delivery.

That solves my problem, but isn’t likely to assure that the client reads, absorbs and recalls the admonitions when an issue arises a couple of years down the road.  The client who screws up is unlikely to be comforted by the fact I clearly told him what the rules were.

And the client who is injured by transgressing is likely to be resentful, at best, and vocal at worst, about the quality of the representation that he got.

Let’s trade fixes

What I learned from this string of fiascoes is that I need to deliver the “living in Chapter 13″ commandments, in writing, after confirmation of the plan.  That doesn’t assure they get read or followed, but it ups the odds.

I can see a web page on the firm’s site, reciting the rules.

Maybe an instruction in our Chapter 13 representation agreement should reinforce the “ask first” directive.

How do you deliver this kind of information to clients?  What works better than others?

I’ve shared my train wrecks- it’s your turn to share solutions.

Image courtesy of Flickr and Shoji.k