Use All Channels to Educate Bankruptcy Debtors

teach clientsThe skill set of a consumer bankruptcy lawyer must include a healthy dose of  the skills of a teacher.

The client has to master any number of legal issues and procedures to make informed decisions about the case.  An effective lawyer has a plan for how to convey all those things the debtors need to know.

As the parent of children with learning disabilities, I learned that each person has a preferred learning style:  some learn best by seeing; others learn best by hearing; others by feeling; and some by movement.

And the indisputable fact is that individuals contemplating bankruptcy are generally not functioning at their best.

Stress makes us stupid

The challenge for a bankruptcy lawyer  to teach the client enough about bankruptcy to make the necessary decisions is daunting.

So, how to do it?

Many roads to wisdom

Maybe we don’t need to aim for “wisdom”.  Maybe it’s enough to convey sufficient information that the client can participate in the necessary decision making.

After all, there are lots of decisions to be made in filing a bankruptcy case.

Use each learning channel:

tell the client what they need to know, and,

give them written summaries of the material.

Different clients will pick up the information better in one fashion than another.

Put basic information on your web site.  Remind them of basic points when you meet.  Summarize important decision points in a letter.

Belt and suspenders, put the information in several forms and you increase the chances that your client absorbs the information.

When all else fails

Recall that there is a another learning channel:  some folks are tactile learners.

So I am often tempted slap them alongside the head, and pound the information in.  I try, however, to resist temptation….

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What makes a bankruptcy lawyer great

Image courtesy of Pixabay.

New Bankruptcy Lawyers Targeted by Trustee

Chapter 7 trustees plan to sue debtor’s lawyers for undisclosed assets, I was told yesterday.  In the course of discussing the flood of rookie bankruptcy lawyers into local court rooms, this veteran trustee’s counsel was licking his chops  at the opportunity to make creditors whole at the expense of the debtor’s attorney.

The stories of bad advice and dishonest behavior that accompanied that announcement were extreme, to be sure.  But the view that attorneys representing consumer debtors have greater exposure for shortcomings in the schedules under BAPCPA is not so extreme.

Bankruptcy attorneys can get into trouble two different ways:  one is indifference to accuracy. The more complicated your client’s economic life, the longer it takes to put together complete and consistent schedules. Taking time with the filing eats into slim profits.  But fail to cross check the end product against the debtor’s input and against your notes and you risk avoidable error.

The second path to trouble is turning a blind eye to the debtor’s intentional omission of pertinent facts.   The story my source recounted was a lawyer who told the client that it was the trustee’s job to find the assets, rather than the debtor’s duty to disclose them.

Remember the sergeant’s daily admonition in Hill Street Blues?  ” Hey, let’s be careful out there.”

Exemptions & Property of the Estate

Sometimes, as an inexperienced bankruptcy lawyer,  it’s hard to get your head around the idea that your client can have an asset of substantial value and not need to exempt it when filing bankruptcy.

That’s because only property of the estate is potentially available to pay the client’s creditors in a bankruptcy, and some assets, by definition, are not property of the estate.  The most prominent example of value that isn’t property of the estate is a 401(k) account.  It is excluded under §541(c)(2) by reason of the anti alienation provisions of the trust.

By contrast, an IRA account lacks anti alienation provisions and it is included in property of the estate.  So, to retain the IRA, the debtor must use an exemption to protect the asset from creditors.  Perhaps the only positive thing BAPCPA introduced was a nationwide exemption for IRA accounts up to one million dollars.  See §522(n).  Retention of IRA’s is no longer a problem.

Other examples of assets not property of the estate include the debtor’s interest in a spendthrift trust, since it has an anti alienation provision, and certain contributions to college savings accounts, by terms of the statute. § 541(b)(5).

So, start your analysis by determining whether the asset in question is property of the estate, and only if the answer is yes, go looking for an exemption to protect it.

Surrendering Property in Bankruptcy

Your client’s statement that he is surrendering property in his bankruptcy case is nothing more than a statement of future intentions.  It does not serve to transfer the property from the debtor to the secured creditor, or any one else.

I was reviewing a draft bankruptcy petition for a new lawyer where his client’s  husband had just gotten a discharge in a Chapter 7 case.  His schedules had elected to surrender a piece of jointly owned real estate where he was merely an accommodation party on the loan for a relative.  My young friend proposed to exclude this property from the wife’s Chapter 13.

Whoa!  Just because the husband announced he did not intend to attempt to keep the property, that announcement did not divest him of title.  It is just a statutorily required courtesy to the secured creditor who then does not have to guess the debtor’s intentions.

Likewise, the grant of relief from stay does not take the debtor off title to the real property involved.  It simply lifts the bankruptcy court injunction that that interposed itself between the debtor and the secured creditor.

This distinction between intention and a legally effective transfer is important not only for purposes of the schedules.  It is worth thinking about in terms of the liability of a property owner.  The debtor remains the owner until sale, foreclosure, or deed in lieu. He has exposure for injuries that occur on that property while he holds title and is well advised to maintain insurance  covering public liability until the point when the property belongs to another.

New Bankruptcy Lawyer: Meet Old Car Allowance

Bankruptcy courts have embraced an unwritten deduction for older cars for purposes of the means test.  You won’t find this deduction in the official forms and I’ve had a hard time finding the text in the  on- line Internal Revenue Manual, but the cases repeatedly cite Internal Revenue Manual 5.8.5.5.2 as authority for allowing debtors an extra deduction for an older car.

Where there is no debt secured by the car, courts that disallow an ownership allowance for the vehicle will allow an additional $200 in operating allowance for cars over 6 years old or with mileage of 75,000 miles or more.

I question the  soundness  of pretending that a debtor with an old car can pay unsecured creditors over a 5 year Chapter 13 plan rather than replace a worn out vehicle, but until that becomes accepted wisdom,  add the old car allowance to the standard  allowance in preparing the b-22.