A New Home For A Clean Slate

Beginning today, A Clean Slate will be at its new digs at acleanslateblog.com. Please update your browser bookmarks and RSS feed accordingly. Thanks.

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The "Alphabet Problem" For Dummies

Because I am a nerdy restructuring and bankruptcy attorney, I am on a fair number of email listervs with colleagues. One recurring item in our discussions is what legendary bankruptcy attorney Max Gardner calls the "Alphabet Problem." If you click on that link, you get a wonderful, in-depth explanation of the Alphabet Problem that Max wrote. If you are like me, though, and have a short attention span, you need a simpler explanation if you want to understand the Alphabet Problem.

Fortunately, I explain the Alphabet Problem to many of my bankruptcy clients because I want them to understand the approach that I will take to the real estate in their case. Although some of my clients are attorneys, most of them are not. So I try to put Max's explanation into something that most folks can understand. As with any simplification, some of the nuance will be lost in the translation. But with luck you will understand the basics.

At some point a couple decades or so ago, banks started selling the right to receive the payment from your mortgage and turning that right to payment into mortgage-backed securities. Along the way, the banks established a basic protocol for these transactions. To make this easier to understand, Max gave each of the cast of characters a nickname consisting of a letter. So the originating bank, the one whose name you see on the loan documents, is called A. A sells the right to payment to an entity called the sponsor, whom we call B. B in turn transfers the right to an entity called the depositor, C. C then sells the right to a trust, D, who ultimately holds the right to payment on behalf of the holders of the security. In theory the trust, D, holds all of the loan documents related to your loan and the evidence of each true sale from A to B, B to C, and C to D.

Everyone understands that: A to B, B to C, C to D. Simple, right?

In the most straightforward bankruptcy case, D, the trust, ends up being the entity trying to enforce your mortgage. To do so lawfully, D needs to show an unbroken chain of true sales of original note from A to B, B to C, and C to D along with corresponding assignments of the mortgage, true sale agreements, transfer and delivery receipts, true sale opinions, etc.

In theory, this should not be hard. I remember as a law clerk at the bankruptcy court (this was maybe fifteen years ago) reviewing the documents that lenders provided. The documents contained endorsements of notes and recorded assignments from A to B, B to C, etc. But that was before the days of securitization.

These days, you almost never see a proof of claim that attaches all of the necessary documents. Why is that?

There are a couple of obvious reasons Either: (i) the documents don't exist; or (ii) the attorneys for the creditor do not want to take the time to find out if the documents exist.

A typical Pooling and Servicing Agreement (aka the PSA), one of the main documents that controls the securitization of mortgages, does not require the parties (i.e., A, B, C, and D) to execute proper endorsement of the notes and recorded assignments of the mortgages. In fact, a typical PSA requires the parties to endorse the notes to no one; the endorsement should say "Pay to the order of _____, without recourse" and there will be no name in the blank. With no contractual requirement to document the transfers properly, and arguably a contractual requirement to do so improperly, the parties selling these rights had little incentive to execute proper endorsements and assignments.

So how does the typical D manage to enforce its rights in a bankruptcy case in light of the Alphabet Problem? There are at least two ways:

First, it happens often that no one challenges D's loan documents. Bankruptcy lawyers and trustees vary in their approach to this issue. At one end of the spectrum are Boot Campers like me who tend to probe the bank's documents at length. At the other end are people who barely look at the documents.

Second, and I want to say this as delicately as I can, banks have been known to create documents after the fact to give the impression that they documented the transaction properly. Again, this is the type of thing that Boot Campers have been working to expose.

As an easy example, one of the most typical versions of the fraudulent documents is an "A to D" transfer. When we see an A to D transfer, we know that it is bogus. For reasons that are beyond the scope of this post, the securitization process is designed to include at least two true sales. If we see an A to D transfer, we know that the lender by-passed the protocols imposed by the securitization process. We know that A didn't sell to D, A sold to B. So when we see an endorsement from the originating bank to the trust, we know that document is a fake.

So why does this matter? There are a few points worth making here.

First, on a big-picture level, if you ever wonder why the mess that the banks created is so hard to fix, consider what I have discussed here. The securitization process made it difficult for the banks to enforce the mortgages they wrote. Rather than having a neighborhood bank holding your mortgage note in its records down the street, some securitization trust might hold the right to some payment from your mortgage while some other entity holds the right to foreclose on your home. It is not an easy task to match all those up to turn your mortgage into a useful asset for a bank.

Second, and by the same token, if you happen to be eligible for a home loan modification under a program like HAMP and cannot seem to get your mortgage lender to process the modification, you might consider the complexities described here. If one entity held both your note and mortgage, that entity could determine whether you are eligible for a modification and make the economic decision of whether to grant the modification. As it is, there are too many different parties with different incentives to want to manage your mortgage situation.

Third, there is a substantial tactical benefit in a bankruptcy case to finding the weakness in a secured creditor's claim. No mortgage lender wants to be turned into an unsecured creditor. If there are defects in the mortgage lender's documentation, and there almost always are, finding those weaknesses gives us leverage. Whether the ultimate goal for the client is a mortgage modification or otherwise, being able to put a bank on its back foot carries a substantial advantage. I use this both to get better results for my clients and also to take clients whom otherwise I would not be able to represent. Sadly, using this type of "leverage" is the best way to force a bank into sustainable mortgage modification.

Readers of A Clean Slate come from all walks of life, but a couple specific types might be particularly interested in the Alphabet Problem.

If you are an attorney and want to learn more about mortgage securitization works and the problems that it causes, you might want to get some training from Max Gardner. In addition to his regular Bankruptcy Boot Camps which I reviewed here, Max has a special weekend seminar in September on mortgage securitization and servicing. 

If you are a consumer having difficulty with your mortgage lender and maybe facing foreclosure, you could do worse than finding an attorney who is versed in the Alphabet Problem. If you are in North Jersey, Central Jersey, or nearby parts of New York, feel free to contact me. Otherwise, the Bankruptcy Boot Camp alumni list would be a good place to start.

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Zombie Debt: What Is It And Why Does It Matter?

"Zombie Debt" is a term that people in my business use for debt that is not legally enforceable. The debt generally has been either paid, settled, or discharged in a bankruptcy.

So how does it happen?

There an industry of debt buyers who buy debt -- both good and bad -- and try to collect it. The debt buyers usually purchase the debt at a discount. Because the debt was purchased at a discount, the debt buyer does not need to collect on 100% of the debt to turn a profit. The debt buyers then use the usual ways to try to collect the debt. They report it to credit agencies, they bring lawsuits, they make telephone calls, etc. Often times, consumers will simply pay the debt or settle it rather than fight.

To be clear, trying to enforce zombie debt is illegal. In addition to the obvious violations of state law, attempts to collect debt that has been discharged in bankruptcy violate the discharge injunction in the U.S. Bankruptcy Code. Reporting zombie debt also often violates the Fair Credit Reporting Act.

How should you handle this? Find a lawyer who handles consumer law who can help.

When one of my clients receives a discharge in bankruptcy, we check the credit report shortly thereafter to make sure that all the debts are listed as discharged in bankruptcy. If any are not, we demand that the creditor make the correction. We check the credit report again, and when debt appears, we bring an action against the creditor for the discharge violation. I handle these matters on a contingency basis. We can use similar techniques against creditors trying to enforce debt that has been settled or paid.

If you think that you might be affected by zombie debt and live in North Jersey or Central Jersey, feel free to contact me even if I did not handle your bankruptcy or the initial settling of the debt. If you live in another area, you might want to start with the alumni list of Max Gardner's Bankruptcy Boot Camp to find an attorney to represent you. And if you want to read more about zombie debt, there are more articles here, here, here and here.

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New York Times: Peddling Relief, [Debt Settlement] Firms Put Debtors in Deeper Hole

A recent New York Times piece confirms a lot of what readers of A Clean Slate already know: A lot of debt settlement outfits are scams and don't deliver anywhere close to what they advertise.

I have written about debt settlement here and here. These are some of the most visited posts on A Clean Slate. To summarize my views of debt settlement, it is a good idea for relatively few people and for the rest it's a really poor approach. And if you are going to do debt settlement, use a local attorney rather than a debt settlement firm.

I happened to have had this discussion a few days ago with an unlikely source. I was riding with my son, who has just finished seventh grade, in the car listening to the radio. An advertisement came on for a debt settlement company. My son said to me, "It bothers me to hear these ads about debt settlement. They advertise getting rid of the debt but they charge a lot of fees. The people could just call you and you would get rid of their debt for a lot less money."

Exactly. Debt settlement is generally a more expensive path to a less desirable result.

A chapter 7 bankruptcy might cost a couple thousand dollars in fees and a chapter 13 bankruptcy maybe twice that amount. How much debt will that get rid of? Probably all of it. And I usually can tell before we file which debts will be discharged and what the total cost will be.

You can't say that about debt settlement. I know this because I represent clients in debt settlement under certain circumstances. Even in bankruptcy representations, I routinely field settlement offers from credit card companies and the settlement percentages are all over the map. It is a lot harder to predict what the results will be in a debt settlement situation. As noted by the FTC, the success rate for debt settlement companies that the FTC studied was less than ten percent. No one can predict with any degree of certainty what settlements can be achieved or on what terms.

Something to keep in mind if you are having financial difficulties.

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How I Learned To Stop Worrying And Love The Automatic Stay

The Automatic Stay.

It is one of the greatest and most powerful provisions of the Bankruptcy Code. If sections of the Bankruptcy Code were literary characters, the Automatic Stay would be a superhero.

The Automatic Stay comes from section 362 of the Bankruptcy Code. Section 362 provides that the commencement of a bankruptcy case stays pretty much any action that creditors can take against a debtor or the debtor's property.

So, actions to collect a debt? Stopped.

Wage garnishments? Stopped.

Telephone calls to collect? Stopped.

And, importantly for the way that I practice, attempts to record or perfect a lien on property? Stopped.

When we file a bankruptcy petition, every creditor receives a notice that the case has been filed. And so all creditors become aware of the bankruptcy case and therefore should cease collection activity except through the bankruptcy court.

Do they? Usually. The vast majority of creditors try to obey the law.

But not all do.

When creditors don't stop their collection efforts, if they continue to call or send letters, they are subject to sanctions. Section 362(k) of the Bankruptcy Code provides that an individual debtor may recover damages from a creditor who violates the stay. So when we see that a creditor has, for example, made telephone calls that violated the stay, we might bring an action for damages.

This includes a supposedly secured creditor that didn't document its loan properly and tries to get the infirmities resolved post-petition. In these days of securitized mortgages, many banks in the mortgage industry discover after a bankruptcy petition has been filed that there are problems with the documentation of the mortgage. Those problems simply cannot be fixed after the bankruptcy case has been filed.

When a secured creditor tries to fix problems with the documentation, whether by transferring an interest, trying to record an assignment, or any other action that should have taken place long before, that creditor is subject to the same kind of suit for damages that the creditor who made an improper telephone call.

Which brings me back to the title of this post. I used to do a lot more work on the creditor side of cases. I understand the pressures that creditors' lawyers face. No one wants to be the lawyer who made a goof and subjects his or her client to a stay violation. In fact, under some circumstances not only is the client liable, but the lawyer's firm would be as well.

So I used to worry a lot about the implications of the Automatic Stay. Then I started representing debtors.

And now it doesn't bother me at all.

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Quoted In The New York Times: Student Loans And Bankruptcy

New York Times columnist Ron Lieber writes about student loans and bankruptcy in his Your Money column this week. Ron spotted this post from A Clean Slate about how student loans are like a tattoo and called me to chat about it. Ron happens to know me from years ago so this was a good opportunity to catch up on things.

I don't get too involved in the legislative battles over changes to the bankruptcy laws. Ever since the banking industry used its muscle to get Congress to pass the the disastrous and ill-conceived 2005 amendments to the Bankruptcy Code, I have had little faith in the legislative process when it comes to the bankruptcy laws. So I won't be holding my breath whether Congress manages to overturn one of the many foolish provisions contained in the 2005 revisions.

Our conversation was much more involved than Ron could reflect in his column. Such is the nature of the media process, of course, where a sound bite or two ends up making the cut and much of what is discussed gets turned into background learning for the reporter. But I was pretty pleased with how the column came out.

Here is one point that Ron and I discussed that did not get as much attention in his column as I would have liked: Anyone who tactically chooses to incur dischargeable debt with the intention of discharging it in a bankruptcy case runs the risk of having such debt declared non-dischargeable. And any person in a bankruptcy case who turns down available government student loans to incur private student loan debt is providing the private student loan lender with a good circumstantial case to render such debt non-dischargeable anyway. So the argument that students might incur dischargeable debt with the intention of filing a bankruptcy case is probably a red herring.

Another point that Ron addressed tangentially is that the vast majority of my potential consumer clients are not the kind of people who would ever think about running up large amounts of dischargeable debt and filing a bankruptcy case. The very small percentage that I have seen who seemed to have taken such a tactical approach I simply decline to represent. As all of my consumer clients know, the first little speech I give every one of them before we ever enter into an attorney-client relationship is the need for candor. If I thought there were any chance that my client had incurred debt with the intent to discharge it, I would have a very serious talk with the client and possibly decline the representation. Just about every other bankruptcy lawyer I know would do the same.

But in any event it was a lot of fun to chat with Ron about this stuff. As I told him, I love what I do and very much enjoy talking about these kinds of things. So it was nice to have a small part in educating people in the broad scale that the New York Times can provide.

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How Can We Sleep When Rule 2019 Is Burning?

I wrote a short article on a very nerdy commercial bankruptcy litigation issue for the American Bankruptcy Institute. The article was published in the spring newsletter of the ABI's Bankruptcy Litigation Committee. I have received good feedback on it so I thought it might be worth sharing a link here.

Regular readers of A Clean Slate might recall that I discussed Rule 2019 a little back in January. I had forgotten that I promised to follow up when I had more information. Better late than never I guess.

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When Should You Consult With A Restructuring Attorney

A couple times recently that people have asked me the same simple question and been surprised by the answer.

The question: "When should people call you?"

The answer: "When the first really bad thing happens."

Let me give a little context. The first time I heard this question, it was from a consultant who was only vaguely familiar with a bankruptcy and restructuring practice. The second was from another attorney who has clients who might need my services. Both wanted to know at what point in someone's life they should contact me. And both expected something to the effect of, "When debts are so bad that people are having trouble paying bills."

You certainly can contact me then, but it would be better if you did it when you saw the first sign of financial trouble. That might be illness, job loss, hours being cut, divorce or anything else of the sort. You don't have to wait for the train to hit you before you look for help. When you see the train coming and don't know whether you might be able to get out of the way, that's when you should call.

When I am involved early, we can look and see whether you might be able to avoid bankruptcy through some decisions. If bankruptcy is inevitable, we might have more flexibility about under what chapter to file, the timing of the filing, and some choices we can make. When I get involved as things are spiraling out of control, our options are often more limited. I personally don't charge for initial consultations and often meet with people a couple times before they retain me.

So remember that you don't have to wait for the train to hit you before you seek help.

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How I Practice And Why

In the TV show M*A*S*H, there is a scene in which Colonel Potter is trying to reach a general who happens to be the head chaplain for the U.S. Army. He calls the general's office and asks for the general. He is surprised to discover that he is speaking to the general himself. Colonel Potter then utters the famous line, "The general answers his own phone. He must be a Unitarian."

I like the story for two reasons. First, I happen to be a Unitarian. Second, I also answer my own phone.

I was reminded of the story last week when a prospective client called and was surprised to reach me immediately. This has happened to me a fair number of times. People calling an attorney often expect to have a receptionist answer the phone. I do happen to have a receptionist for when I am on the phone, with a client, or away from my desk. But I usually answer my own phone.

Why?

Because people who call me want to talk to me. They don't want to talk to someone else.

The idea is the same throughout my practice. When a client comes to meet with me, they meet with me. When they email me, I respond directly. Although I regularly work with paralegals and other attorneys on certain cases, almost all contact from my firm goes through me. I go to 341(a) meetings with my clients rather than having an appearance attorney or associate cover the meeting. And I do most of the work myself.

Now I happen to have a lot of backup when I need it. In addition to my paralegals and receptionists, I am active on multiple email listservs with other restructuring professionals and have professionals with whom I consult on various issues.

Still, I manage just about everything in my practice myself.

Why?

Because it works better for both my clients and me.

It works better for clients because they get direct representation. Clients don't want to be pawned off on junior attorneys and support staff all the time. They want contact with their primary attorney. They want to receive counsel directly from him or her.

It works better for me because I get to practice law rather than spending a lot of time supervising other attorneys. I know from my days at large law firms that one of the tougher issues is "leverage" -- how many younger attorneys are being supervised by older attorneys. I would much rather spend my time practicing law than supervising a large staff. I would much rather have a reasonable number of cases and handle those well than try to be a huge bankruptcy mill that practices assembly-line law.

So when you call, don't be surprised if I answer the phone.

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FTC Finds Less Than 10% Success Rate In Debt Settlement

Readers of A Clean Slate might recall that I have written about Debt Settlement in the past and have suggested that it generally isn't a good idea. I received a number of interesting comments in response to the post, few of which agreed with me. The federal government recently weighed in the matter though and their findings are consistent with what I have seen.

The basic allegation will surprise few in my field: Debt settlement firms are being accused of "fraudulent, abusive, or deceptive practices that leave consumers in worse financial condition" than they were in before. The United States Government Accounting Office did some investigation. The GAO covertly contacted twenty debt settlement firms while posing as consumers, interviewed industry stakeholders, and reviewed legal actions at the federal and state level.

What was the result of the study?

"GAO's investigation found that some debt settlement companies engage in fraudulent, deceptive, and abusive practices that pose a risk to consumers."

What practices are these?

Collecting fees ahead of settling consumer debt. The FTC has labeled this practice "harmful" and has proposed banning it. Yet seventeen of the twenty firms contacted do it.

Informing consumers to stop paying their creditors, even the accounts that are current. Nearly all of the companies that the GAO contacted advised this. Frankly this is arguably the unauthorized practice of law.

Providing false information about the success of debt settlement. Some debt settlement companies "to its fictitious consumers, such as claiming unusually high success rates for their programs--as high as 100 percent." The FTC and state investigations generally found a less than 10% success rate in debt settlement.

Linking debt settlement services to government programs. The government actually does provide a vehicle for debt settlement; it's called the Bankruptcy Code. Rates of success in individual bankruptcy cases are a lot higher than 10%, by the way.

Here is the kicker. "GAO found the experiences of its fictitious consumers to be consistent with widespread complaints and charges made by federal and state investigators on behalf of real consumers against debt settlement companies engaged in fraudulent, abusive, or deceptive practices."

And I found the experiences to be consistent with what my clients have described.

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Where Should You Go To Find A Bankruptcy Attorney?

Do you think that you might need a bankruptcy attorney? Would you like some help finding one?

If you are an individual who might be in financial distress, whether it is from unemployment, a failing business, a divorce, illness, or any other of the typical reasons, and could use a consultation with someone like me, there a couple relatively easy ways to find someone who might be able to help.

The first and easiest way to find a bankruptcy attorney who deals in individual consumer cases is to use the referral service that the National Association of Consumer Bankruptcy Attorneys provides. NACBA is probably the leading trade organization for consumer restructuring counsel. NACBA has a referral service right on its home page where you can plug in your zip code and get a list of bankruptcy attorneys near you.

NACBA is a tremendous resource for both consumers and attorneys. For consumers, it is a place where you can find someone who specifically represents consumers in bankruptcy cases. If I were an individual in financial distress, there is no way I would hire someone to file a bankruptcy case who isn't at least a NACBA member. I don't know anyone whom I would trust to file an individual consumer bankruptcy who isn't a NACBA member. Why is that? It is because of the support resources that NACBA provides for its attorneys.

Bankruptcy is a complex area of practice. Anyone who wants to do it well has to spend a lot of time at it. Among other resources, NACBA has a fantastic listserv that gets hundreds of emails a day from consumer bankruptcy attorneys. It is one place where we tend to go to get answers and consult on issues that we face in our cases. It is open only to NACBA members. I cannot imagine practicing in the area without having that kind of resource at my disposal.

The second place I would go would be to Max Gardner's Boot Camp alumni list. I talked about Boot Camp in a post a few weeks ago. It is a remarkable experience and the "survivors" get tools to help them and their clients that are hard to acquire elsewhere. Right on the home page of Max's Boot Camp is a map where you can find a Boot Camp lawyer. [Ed: Max changed his website at the beginning of May. There is now a specific page for finding a Boot Camp graduate.] As I write this, there is at least one Boot Camper in all but three states and the District of Columbia. If you can retain a lawyer who is both a member of NACBA and a Boot Camper, your chances of getting excellent representation are high.

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Maybe Polonius Was Kind Of Right (At Least When It Comes To Family)

"Neither a borrower nor a lender be" is one of the more famous lines uttered by Polonius in Hamlet.

For those of you, like me, who didn't always pay great attention in high school English class, Polonius was counsel to King Claudius' and father to Laertes and Ophelia, Hamlet's girlfriend. Frankly, Polonius was a bit of gasbag. He also was often mistaken in his perceptions. On the occasion of Laertes' heading off to study in France, Polonius offered a rather long-winded speech full of fatherly advice.

I have always felt for Laertes in this situation. As a young person about to start making his way in the world. Laertes probably did not want listen yet another speech from his talkative father. We usually love our parents, want to make them proud, and indulge their eccentricities. But unless Polonius had saved up all his wisdom for the last minute, Laertes must have heard some version of this speech many times before by this point in his life.

Amidst the now trite comments such as "Give thy thoughts no tongue" and "To thine own self be true," Polonius utters this famous little gem:

Neither a borrower nor a lender be;
For a loan oft loses both itself and a friend,
And borrowing dulls the edge of husbandry.

Polonius is making at least two points here. The first is about relationships and the second is about economics. The second, that "borrowing dulls the edge of husbandry," we can put aside for the moment. That debt repayments cut into profit is pretty apparent to most folks.

The first point though, that lending between friends and family carries its own special challenges, is worth addressing. This is one of the few times when it might really be worth listening to Polonius. If you're going to be a borrower or a lender, it is easier to do so with strangers than with family or friends.

People in financial difficulty often turn to family and friends for help. It's great when people have that kind of support structure around them. And I don't want to tell people not to rely on family and friends when they are in trouble.

But I do want to caution people that transactions with family carry risks that doing business with strangers does not. The most common risk that I see with my clients is the Loan That Cannot Be Repaid Anytime Soon. Let's call it the LTCBRAS.

Here is an example:

A client sitting in my office explains that he or she borrowed money from a family member. This client is now contemplating filing a bankruptcy case. Once I hear about the loan from the family member, I explain that the client will be doing the family member no favors by repaying the loan before filing the bankruptcy.

A loan repayment to someone like a family member within a year before filing a bankruptcy case is called a "preference." If the debtor repays the family member within a year before the bankruptcy case, the chapter 7 trustee will sue the family member and have an easy time recovering the money. That money, rather than going to the client or the family member, will go to the trustee, the trustee's lawyers, and to creditors. So the client has the option of: (a) not repaying the debt at least until after bankruptcy; (b) handing the family member a lawsuit; or (c) waiting at least a year after paying back the LTCBRAS before filing the bankruptcy case.

All of this can cause a strain on the relationship. As Polonius said, the loan can lose both itself and a friend.

Here I want to talk about the difference between moral obligations and legal ones. The law does not impose moral obligations by itself. When a commercial lender extends credit to you, you have a legal obligation to repay it. You do not necessarily have a moral obligation to repay it. That is because the law treats commercial transactions amorally. The law requires you repay the obligation not because there is an ethical or moral reason to repay it, but because our system of economics works best when people fulfill their obligations.

When debts are settled or discharged in bankruptcy, the debtor does not have a legal obligation to repay the debt. So for example, the typical client who cannot repay the loan to the family member before bankruptcy no longer has a legal obligation to repay the debt after it has been discharged. Whether they have a moral obligation is another matter entirely.

I often explain to clients that I am their lawyer, not their minister/priest/rabbi/parent or even trusted friend. Whether the client believes that they have a moral duty to fulfill a particular obligation is not for me to answer. But as their lawyer I also can tell them that there is no legal prohibition on repaying that debt after it has been discharged. And with luck the relationship will remain intact regardless of the status of the debt.

As long as both parties to the familiar transaction understand that the debt might not be repaid for a long time (or maybe never) the loan between family members or friends is not necessarily troublesome. But when money is changing hands between familiar parties with the expectation that it will be repaid soon, that can be a real problem.

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Reflections On Boot Camp

I am writing this just before I leave Bankruptcy Boot Camp, a rigorous, four-day seminar that trains a handful of people at a time in specific, obscure areas of bankruptcy practice. Only about four hundred attorneys have completed the course. By my count, I am one of about a dozen or so Boot Camp "survivors" in North Jersey.

Bankruptcy Boot Camp is the brainchild of Max Gardner, a legendary bankruptcy attorney based out of Shelby, North Carolina. He holds the Boot Camp at his home in the mountains near Shelby. His home happens to be a remote 160-acre estate filled with about six dozen purebred dogs. Other than one night when we went out for pizza and a short concert, none of the Boot Campers left the property at all between arriving Thursday afternoon and the end of the camp on Monday evening. We stayed either in Max's house or in one of the small lodges on the property. Max's wife, an excellent cook, handled feeding us. Other than the accommodations, nothing about the experience was cushy.

Usually, conferences are enjoyable and kind of relaxing. A typical legal conference might have between six and eight hours of presentation in a day. Those presentations are usually in a big auditorium or conference room. The conference usually lasts between one and three days. In between, we eat leisurely meals and maybe head out with colleagues for drinks or other entertainment at the end of the day.

Boot Camp was enjoyable -- but it also was exhausting. The Boot Camp's days featured between ten and twelve hours of classroom instruction. Our class had eleven students. That meant that we all were welcome to interact and ask questions in a free-form manner. Max has a quiet, gentle manner and skipped the Socratic method that tortured us back in law school. Nevertheless, the intellectual rigor of Bankruptcy Boot Camp is well beyond anything that I encountered in law school or since. Having been in this field for so many years, I was probably one of the Boot Campers with more knowledge of subjects. Still, the breadth and difficulty of the material was astonishing. It was by far the most intense conference I had ever attended. And, as with a Marine Boot Camp, sleep was not a priority.

In addition to Max's instruction through a few thousand pages of printed materials, Max brought in guest speakers to instruct on particular matters of expertise. One speaker was one of his virtual paralegals. Another was a local judge who taught about good practices for presenting evidence. Another was a a former bank lawyer who is now a bankruptcy practitioner. A fourth was a current creditors' attorney talking about the challenges he faces representing his clients.

Of the eleven Boot Campers at my session, maybe six were current bankruptcy practitioners, four were lawyers who are at least tangentially involved in bankruptcy matters, and there was one paralegal. One of the Boot Campers was a Boot Camp survivor coming for a refresher session, one was a former judge, one was a former banker, a few were former IT professionals, a handful were former attorneys at large law firms, and one (me) had substantial experience in chapter 11 and business cases.

The focus of the Boot Camp is Max's "Bankruptcy Litigation Model," a set of techniques and analyses designed to help attorneys serve consumer debtor clients. At its core, the BLM takes aim at the gaps in creditors' strategy and documentation to try to leverage better outcomes for the Boot Campers' clients. Max also focuses on procedural approaches that can limit creditors' options.

As an example, we learned extensively about home mortgage securitization and the effects of that process on borrowers. Having spent roughly a day studying the intricacies and problems arising out of securitization, Boot Campers get the knowledge necessary to challenge the lenders' practices that might violate applicable laws or the terms of the loan.

Knowing what I know now, if I ever were in the position of needing to hire a restructuring professional, I would start with the list of Boot Camp survivors. It would be very hard to find an attorney who would be familiar with much of what people learn at Boot Camp. No one without that knowledge can provide the kind of service that Boot Camp alumni can.

I definitely am looking forward to putting into practice much of what I learned over the weekend. It was a remarkable experience.

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Please Don't Touch The 401(k)

I know it's hard. I know you're desperate. I know you're stressed. I know you're losing sleep.

But whatever you do, don't touch your retirement account. Don't borrow against it. Don't withdraw from it. Leave it alone.

Why?

Because it almost certainly is an exempt asset. That means creditors can't touch it. And more importantly, if you have to file a bankruptcy case, it means that the trustee can't touch it either.

Let me explain.

Whether a debtor in a chapter 7 bankruptcy case is able to keep an asset depends upon whether the asset is "exempt." Most states provide for specific categories of assets to be exempt. If your state doesn't have its own exemption scheme, debtors there will use the federal exemptions. For example, New Jersey does not have state exemptions. So here in the Garden State we use the federal exemptions, which frankly do not provide a lot of protections to debtors. Again, by way of example, the federal homestead exemption is only about $20,000. So if a debtor has equity in his or her home, he or she can protect about $20,000 worth of that equity in a chapter 7 bankruptcy case.

Generally speaking, it is better to have exempt assets than non-exempt assets. If you are in the unfortunate position of needing to restructure your debts and perhaps file a bankruptcy case, your restructuring professional will try to keep exempt assets "off the table" since they generally are unavailable to creditors and the trustee in bankruptcy. So you almost always get to keep these assets.

One of the best categories of exempt assets is retirement accounts. Your 401(k) account or IRA is almost certainly going to be exempt up to its full value. That value might be substantially greater than any other assets that you are able to shield from your creditors. Did you notice when I mentioned that in states like New Jersey, you can only protect about $20,000 in home equity? There is no hard limit on the amount that can preserved in a retirement account.

So what's so bad about liquidating a retirement account? Aside from the fact that you are spending retirement savings that you probably will need later, there are two very bad legal effects. First, there are serious adverse tax consequences to doing so. If you cash out a retirement account, you will owe the IRS a substantial amount as a result. Second, after we have turned an exempt asset into a non-exempt asset, it is very hard to reverse that process.

If you have cashed out your retirement account and later start working with a restructuring professional, there isn't much that we can do to fix it. You generally end up with a large nondischargeable tax debt and limited ability to replenish the retirement account. We have all sorts of techniques that we can use to help our clients through tough times, but nothing in our bag of tricks provides an easy fix to the problems that a liquidated retirement account causes.

So please, just leave the 401(k) or IRA alone. Or call someone like me first.

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The Supreme Court Upholds Congress Telling Attorneys What We Can And Must Tell Clients

"Our law firm is a debt relief agency. We help people file for relief under the Bankruptcy Code."

You see this odd disclaimer on various documents, websites and advertisements. Where does it come from and why?

It comes from section 528(a)(4) of the Bankruptcy Code.

Congress decided a few years back to get in the business of regulating what attorneys can tell potential and actual clients. There are two bits of this regulation that I deal with pretty much every day.

The first is the odd disclaimer above. I put it on advertisements and various documents that I provide to clients. Section 528(a) requires that a "debt relief agency" make some version of that disclosure on advertisements. Until the last few days, we weren't completely sure whether law firms that represent debtors in bankruptcy fell within the definition.

The second is the prohibition on advising clients to incur debt "in contemplation of bankruptcy" contained in section 526(a)(4) of the Bankruptcy Code. Clients routinely ask me how to handle their finances between the time that they first consult with me and when we file their bankruptcy case. I very often start my answers with explaining that the Bankruptcy Code prohibits me from advising clients to incur additional debt in contemplation of bankruptcy.

Both of these provisions were subject to court challenge on the ground that they violate the First Amendment. On March 8, 2010, the Supreme Court upheld both provisions and ruled that law firms that represent debtors are debt relief agencies. A copy of the decision is available here.

Not many restructuring attorneys are going to say many positive things about these provisions. We have a natural bias against laws that inhibit our ability to serve our clients. I will leave to the constitutional law scholars whether the Supreme Court got the decision correct as a matter of jurisprudence.

I will however point out a couple practical issues arising from these provisions and the decision upholding them.

First, although some attorneys and law firms limit their practice to individuals who need to file bankruptcy cases, many of us practicing in this area do not. I for example have a broad restructuring practice. I represent both debtors and creditors, both inside and outside of bankruptcy.

At what point do I start being a "debt relief agency" for the purpose of section 528(a)? Is it when it becomes clear that a bankruptcy filing is the best option for a particular client? Is it whenever I advertise bankruptcy services? Is it whenever I advertise bankruptcy services to individuals? I really don't know.

Because those of us who work in the law tend to try to follow it, it would have been nice to get a little guidance from the Supreme Court on this issue.

Second, as little guidance as the Supreme Court gave us with respect to when we become "debt relief agencies," the Court was pretty clear that we can talk at length about the legal effects of incurring debt shortly before bankruptcy. Therefore, although we cannot "advise" clients to incur more debt in contemplation of bankruptcy, we can explain the likely effects of doing so. The Court essentially limited the provision to prevent attorneys from advising clients to commit fraud by incurring new debt that they never intended to repay.

Not that we ever would have advised that in the first place.

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