12 Oct Mainstream media feeds bankruptcy misinformation
It’s not just dubious sources that are feeding the misconceptions about bankruptcy, it’s the big boys.
Business Week and AP both had stories this week replete with erroneous explanations and dubious analysis about bankruptcy relief after BAPCPA. Business Week stated that fewer consumers can get relief from debt in bankruptcy.
Fewer people filed after the “new” bankruptcy law became effective. True, in large part because many filed in the rush before the law became effective. That piece was missing from the Business Week analysis. Business Week went on to assert that bankruptcy is “much more onerous and expensive and the benefits more limited, making foreclosure seem appealing by comparison.” Not so.
Bankruptcy filing is now more tedious and full of make work, but the basic relief remains available. Tedious is not the same as “onerous”. The author went on with blatant mistruths:
Previously, anybody could file for Chapter 7, the quick and cheap proceedings that liquidate financial assets but not the home to cover debts and dismiss unpaid bills. Now only low-income borrowers qualify, and Chapter 7 doesn’t stave off foreclosure.
Where do I start to straighten this out? First, Chapter 7, before and after “reform”, might liquidate a debtor’s home, depending on exemptions available under state law and the amount of non exempt equity in the home. Next, above median income debtors often qualify for Chapter 7.
Below median income filers get a largely unexamined right to file. Those above median have to complete a further financial analysis that was supposed to divert those who could pay something back to their creditors.
As it works out, the more secured debt or back taxes a consumer has, the more likely they qualify for Chapter 7. Finally, the utility of Chapter 7 to stave off foreclosure is unchanged before and after BAPCPA. But it gets worse. The next paragraph on Chapter 13 gets nothing right.
As a result, many struggling borrowers have no other option but Chapter 13, which requires that people follow a court-mandated repayment plan for all their debts, including medical, credit-card, and other bills typically discharged under Chapter 7. Going the Chapter 13 route can halt a foreclosure already in process. But that’s often only a temporary salve, since other debts aren’t eliminated, and banks can resume foreclosure proceedings as soon as the payments begin to slip anew.
The author suggests that a Chapter 13 requires that debtors have to repay all their debts in Chapter 13. No so; what a debtor has to repay in Chapter 13 is driven by the means test formula. In my experience, Congress’s formula yields an obligation to pay nothing to medical or credit card debt.
Next, the reporter implies that the beleaguered debtor has to submit his financial fate to a judge who writes the plan for repayment. Not so: the debtor proposes the Chapter 13 plan, which must meet the statutory requirements.
In reality, Chapter 13 resembles far more a debt settlement plan, written by the consumer, and enforced by the judge.
Finally, Business Week’s report suggest that Chapter 13 is ineffective to save homes. Maybe, maybe not. Filing bankruptcy brings with it the automatic stay that stops foreclosure (and any other collection action).
In order to resume foreclosure, the lender has to persuade the court that the debtor is unable to cure the arrearages and make the current payments as well. Some debtors have the financial where withal to do that; others don’t.
But what is important in the structure of Chapter 13 plans is that generally nothing in the way of payments to unsecured (non mortgage creditors) get payment until the mortgage debt is brought current. So, I guess I have to lighten up on my clients who have “researched” bankruptcy before they even meet a bankruptcy lawyer and come loaded with misinformation about the utility of bankruptcy.
Cathy Moran, Esq.
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