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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Got Debt? Got Stress? Debt Stress Syndrome

Every person in financial distress has his or her own unique story. There are lots of different paths that can lead to my door. But there is at least one very common trait that I see in a lot of my clients.

They are stressed.

It is relatively rare to see someone with serious financial issues who doesn't have something else going on as well. They often have personal troubles such as a recent divorce. Even more often, they have health issues that helped contribute to their financial troubles.

I'm not a therapist but I recall hearing the term "stacking" to describe how one tough situation can affect another. Years ago, a brother of a friend had Type 1 diabetes that he was struggling to control. He changed jobs to a much less stressful position and suddenly his diabetes was much better.

Debt can have the same effect as a stressful job. The stress that comes with unmanaged debt can exacerbate existing health conditions. Consumer clients often tell me that they have: (a) gained a lot of weight recently; (b) lost a lot of weight recently; (c) are in therapy for depression or anxiety; (d) have ulcers or other gastric issues; or (e) have some other serious health issue.

There is a term coined for the effect that debt stress can have on the rest of someone's life: Debt Stress Syndrome. Here is a little primer on Debt Stress from CBS News with a video presentation here.

I am a restructuring professional, not a doctor or therapist. People like me can't treat your heart disease or your depression.

But we can help with your debt.

Odds are that just talking to a restructuring professional will help. I can't count the number of times that a new client has said to me, "I feel better just having talked to you."

Why is that?

Because understanding your options can help bring clarity and certainty to your thought process. If you have some idea about what is involved in addressing your debt, it won't seem so scary.

So make the call. It probably will make you feel better.

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Do I Need An Attorney To File Bankruptcy?

Do you need an attorney to file bankruptcy?

If you are an individual, technically, no.

Is it a good idea to file a bankruptcy case without an attorney?

No.

Why?

Because bankruptcy law is hard. It is full of arbitrary rules, complex procedures, and odd results.

I have been practicing restructuring law almost exclusively for fourteen years. Have you heard of the 10,000-hour rule and how it takes about 10,000 hours to become and expert in something? I probably am in my fourth set of 10,000 hours. And I still learn something new about bankruptcy law most days. Even the brightest of folks cannot get up to speed on bankruptcy law in one case. So you probably shouldn't try it.

What will happen if you file your own bankruptcy without an attorney?

Maybe nothing. Maybe you'll still get your discharge and everything will be fine.

Or maybe you won't know which assets are exempt, not schedule them properly, and have the trustee try to take something you could keep.

Or maybe you'll omit a creditor and not have that debt discharged.

Or maybe you'll omit an asset and have the trustee bring an action to deny your discharge. If that action succeeds, you face the prospect of having your debts become permanently barred from discharge. That's a very high price to pay.

Under current bankruptcy law, you are eligible for a chapter 7 discharge only once about every eight years. That's a long time between bites at the apple.

If you enjoy risk and won't mind if you don't get your debts discharged, feel free to try to file your case by yourself. Otherwise, call an experienced, competent bankruptcy attorney.

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Should I Do Debt Settlement?

I get this question a lot. "Should I do debt settlement?"

The answer is easy: "Almost certainly not."

Why? Because there is almost always a better alternative.

The basic idea of debt settlement is simple: You stop paying your credit cards. You build up a "war chest" of funds. You offer the lure of funds to credit card companies to convince them to take less than the full amount of the balances. You hope that the credit card companies agree to the deal. After some number of years you end up debt-free. Sounds great, right?

There are three main problems.

Problem #1. Way too many debt settlement outfits are scams.

I don't want to paint with too broad a brush here, but the chances of your finding a debt settlement company that provides good value for the money that you pay them is extremely low. Debt settlement companies get very high fees and vary rarely deliver the kind of results that their clients expect. Clients routinely tell me that they have paid $10,000-20,000 to debt settlement companies and have barely made a dent in their total debt.

If you are going to try debt settlement, please use a local attorney. Don't use a random company that you saw on TV or found on the Internet. And don't use an attorney from out of state. If you use a local attorney, at least it will be easy for you to complain to your local bar association if things don't go well.

Problem #2. The debt forgiven is taxable as ordinary income.

This is usually the deal-breaker. If you can get the credit card company to take less than the amount of the balance, the amount of the reduction is taxable to you as ordinary income.

How does this work?

Suppose you have $50,000 in credit card. And suppose you manage to get the credit card companies to agree to 50% reduction. So now you owe only $25,000. The other $25,000 that you don't owe anymore, the IRS taxes that as if your employer just gave you a nice bonus. The credit card companies will send you a 1099 and you will have to report the debt forgiven as income on your tax returns.

For most folks, debt forgiveness just doesn't make sense when you take into account the tax effects.

Problem #3 The cost of debt settlement is crazy

Seriously, it blows my mind what clients tell me they have paid debt settlement companies. I routinely hear about fees of $4,000-5,000 before any payments go to the creditors.

For that price, and perhaps substantially less, most folks can do a chapter 7 or chapter 13 bankruptcy that probably will address all issues better than debt settlement would. There are very few people who would benefit more from debt settlement than a chapter 13 bankruptcy. Yet, for whatever reason many people think that debt settlement is a better option.

It very rarely is.

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