A Little Humility Can Do Wonders

Sometimes bankruptcy lawyers do, in fact, meet folks who are in debt trouble because they were living a lifestyle well beyond their means. The cost of living didn’t catch up with them so much as the cost of living their (unrealistic) dreams. They misunderstood the difference between “need” and “want.” Bankruptcy can help get a fresh start out of such debt traps, too. But it is important to leave the illusions at the door before beginning the process. Otherwise, the case could go very badly indeed.

This harsh lesson was taught to an Ohio couple in March. The family of five had a household income of $11,500/month and yet had managed to accumulate over $500,000 of secured debt and over $100,000 of unsecured debt, at least $40,000 being credit card debt. A combination of sustained high-income (for the region) and large unsecured debt typically is a sign of someone getting in trouble trying to keep up appearances, not just trying to get by.

In this case the family initially indicated they would reaffirm all their secured debt and keep everything, even though their budget was in the negative by over $2,000/month! This included over $4,000/mo. to pay for and maintain their home and $1,560/mo. for three cars (a 2005 Volvo, 2004 Mercedes Benz, and 2002 Ford Windstar), along with payments for a mobile home and a pop-up camper, over $300/mo. in cell phone charges, and $645/mo. being paid into 401(k) savings plans.

It doesn’t look good when you are asking a bankruptcy judge to get rid of a lot of debt accumulated “keeping up with the Joneses.” But it happens. It makes judges downright ornery if you add a “and we want to keep doing it” at the end of the plea.

In this case, it would be hard for things to have gone worse for the family. The United States Trustee challenged their case under Sec. 707(b) as an “abuse” of the bankruptcy process. While the case was pending, the husband lost his job and took a much-lower paying job and the wife was advised her job was in jeopardy. Due to this change, they changed their plans and were surrendering all their secured property and were seeking a complete fresh start.

Now typically, most bankruptcy lawyers will tell you that a post-filing disaster that forces folks to give up everything will encourage judges to give the debtors another chance to “get it right.” After all, bankruptcy is about fresh starts. Chief Judge Richard Speer remained unsympathetic. The judge concluded that some of the disclosures the debtors made were suspect, but more importantly the judge emphasized that a bankruptcy petition has to be filed in “good faith.” He cited a legal dictionary definition of ‘good faith’ as “a state of mind consisting in honesty in belief or purpose or the absence of intent to defraud or seek unconscionable advantage.” The judge concluded that, in effect, the debtors’ decision to finally match their income to their expenses came only after external forces — including the job loss and the bankruptcy system’s questioning of their conduct — forced them to do so. Their previous desire to continue what he perceived as an unreasonably expensive lifestyle at the expense of their creditors was enough reason to kick them out of bankruptcy.

The important lesson to take away from this sorry tale is simply this: Come to court with a plan that makes sense financially from the beginning not that sends the message you intend to continue on exactly the same path you voluntarily took before that got you in trouble in the first place. Despite the opinion of the credit industry, bankruptcy court is not a refuge for folks who want to live “high on the hog” and routinely write off their debts so they can start all over again. An understanding of how you got into trouble and how best to avoid it is important. And a little humility doesn’t hurt either.