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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