Karma in Bankruptcy, or the Lack Thereof

This week, I was working on a Reaffirmation Agreement. A Reaffirmation Agreement basically extends a contract through a bankruptcy. In Chapter 7, the bankruptcy discharge is very broad, and it will sever almost all obligations, include auto loans. In order to keep a car that one is making payments on in Chapter 7, a debtor has to Reaffirm the debt. By Reaffirming, the debtor is taking on all the obligations and risks of the contract, including liability if the vehicle is repossessed.

The Reaffirmation Agreement in question was with Chrysler Financial. The interest rate was a usury-level 23%, so I contacted the creditor to attempt to negotiate a lower rate. After all, if the debtor doesn't reaffirm, the creditor will just take the car back and notch a big fat loss in their ledger. The response: "Chrysler Financial does not negotiate on reaffirmation agreements."

F*ck you Chrysler. (I do realize that Chrysler Financial and Chrysler the auto company are different, but *vent rage*).

Bailout funds + Chapter 11 and you won't negotiate? I wish your bond holders had liquidated you. I wish they had said "We don't negotiate" and drove you to Chapter 7. Their stance only makes sense if they presume a debtor needs/wants the car. At 23% interest, my recommendation was to dump it; a Buy Here/Pay Here place would charge them the same, or perhaps even less in interest. Sadly, the debtor wants to keep it. Personally, I would have told Chrysler where to stick it.

I hate creditors, especially when they are simply patently unreasonable.

The Hard Way . . .

I caught this article the other day, and I'm still amazed at how hard-headed and, well, dumb these people are.

Quick summary: four person household, $106,000 in GUC (general unsecured debt), no major assets. They spent five years funneling $2,000 a month through CCCS to pay off their debt.

Several family friends recommended that they file for bankruptcy. That was out
of the question, Russell says. "We were committed to paying off our debts."
They also resolved to continue to tithe and home-school their daughters.

Now, without knowing the exact details, I can't be sure of where they would fall on the bankruptcy continuum, but I image it would either be (a) a Chapter 7, or (b) a low-payment Chapter 13. Under federal law, they would be able to continue their tithing, and the extra educational expenses from home-schooling can be included, to a limited extent, under the Form 22 means test.

So, this couple spends five years scrimping and saving, working two jobs, the husband rarely seeing his family, just so they can get out of debt. While admirable, it is also silly and ignores the point and policy of bankruptcy law. It would be the equivalent of cutting down a redwood with a handsaw, or tunneling through a mountain with claw hammer. Sure, it is possible, and it is one hell of an achivement, but why would you do it?

I get really tired of people who look down on bankruptcy. It isn't theft and it isn't a moral failing. In life, things happen that you can't control. For that family, medical bills and indiscretions killed them financially. So, Congress, in its infinite wisdom, has provided a way out of debt, for a fresh financial start. They then chose to ignore that start and go the hard way.

There's a term for that: pride. Also, masochism.

Now, as a bankruptcy attorney, I have a somewhat cavalier attitude toward the entire process. However, I can't help but wonder what the family could have accomplished had they filed bankruptcy, then put for that same effort toward rebuilding their credit and for the health and welfare of their family.

For starts, the could have likely paid off at least half their mortgage. Or, the could have greatly improved the quality of life for their friends and family.

Bankruptcy is designed to help people. It really bothers me when people look down on the helping hand and benefits of bankruptcy. In my own experience, I've done more good for more people in bankruptcy than I ever did volunteering in college or working in family law in the Domestic Violence clinic in law school.

Nonsense and Bankruptcy Exemptions

I've come to realize that my posts are lacking a certain amount of polish and coherence, so I have decided to make an effort to post more often and to make my posts more pithy and generally more intelligent. After all, I can write very well when I put for the effort.

Now, some more on bankruptcy exemptions.

The Illinois Homestead Exemption, or . . .
punishing those who actually try to pay for their homes.

I touched on this topic with my last post. Bankruptcy clients in the current real estate market (read: down the drain and minced in the garbage disposal) either have (a) zero equity or negative equity, or (b) a ton of equity.

Rarely is there a situation, in my experience, were a debtor has, say, $50k in equity. Most often, in those situations, the debtor would have already tapped that with a HELOC or other form of second mortgage. While practical in theory, these "debt consolidation" 2nd mortgages are just a way to eat into home equity while preserving the unsecured lines of credit that debtors horribly mismanaged in the first place and will quickly resume to horribly mismanage.

In Illinois, the homestead exemption is $15,000 for an individual, and $30,000 for a married couple. Federal exemptions are worth $20,200 , and the rest very by state. Some are as high as $100k or even unlimited (Arizona and Texas, respectively).

So, in general, Illinois has dinky exemptions.

As a policy standpoint, these exemptions do not encourage people to build equity in property, since it it easy to lose your home in the event of misfortune. I had a client who had over $100k in equity, but minimal income sufficient only to pay the small mortgage on the property. The debt level was median, between $40k and $75k, with a judicial lien.

If she had been mortgaged to the hilt, we could have filed ch. 7, avoided the judicial lien, and made her life easy as pie. Instead, she's looking at a 100% repayment ch. 13 at over a $1,000 a month (unfeasible and unaffordable). Or she can sell the house and loose that which she struggled long and hard for.

The results are simply not fair and, more importantly, do not serve the purpose of bankruptcy. One's home is one's castle, and, unfortunately in Illinois, your gate is down if you have equity.

The Lameness of Exemptions in Illinois

In bankruptcy, certain property is exempt from a trustee's taking. Under the Illinois code, 735 ILCS 5/12, certain things of value are exempt. The most typical examples are as follows:

• Homestead Exemption, 735 ILCS 5/12-901: $15,000 of equity for your residence ($30,000 for married couples)
• Wearing apparel, school books, Bible, and family pictures. (735 ILCS 5/12-1001)
  
• Motor vehicle equity: $2,400 (735 ILCS 5/12-1001)
• Trade tools and implements: $1,500 (735 ILCS 5/12-1001)
• Personal Property (divisible): $4,000 (735 ILCS 5/12-1001)

It is time to revisit these exemptions. They have been revised in 2006 and 2008, but they are still too low from a policy standpoint.

For exampe, as a bankruptcy matter, the homestead exemption is either irrelevant or not nearly enough. Debtor generally can't manage their finances at all (i.e., underwater on their 12% adjustable 10 year balloon mortgage) or have some recent disaster (medical illness or job loss) that causes bankruptcy. So when the homestead exemption actually is useful, it isn't enough.

A good example is someone I met with a few weeks ago. Age 62, married, not eligible for medicare or medicaid, no health insurance, pre-existing medical conditions, etc. House is worth $200k (typical for the Chicago suburbs) and is paid off. He keeps food on his table and the lights on because his mortgage is paid off. His $60k in medical bills is either (a) a Chapter 13 payment that is way too high for him to afford at 100% repayment, or (b) requires him to sell his home to pay off, or (c) requires him to take out a HELOC, with payments he can't afford and a credit history that means most banks won't lend to him, despite a 100% security interest.

A chapter 7 would help him out tremendously - except the trustee would sell his house. The solution is simple: let's thriple the homestead. Going to $50k/$100k would help families protect hard-won equity and still give them major protections in bankruptcy.

Another good example of how the exemptions are terrible is blue-collor industry - truckers, landscapers, and the like. These folks are selling their skills, essentially. To use their skills though, they need certain expensive equipment. That equipment makes Ch. 7 generally a bad idea. If your truck is worth $40k, or your landscaper is worth $25k, then it is going to be vulnerable to seizure. Generally, these are the things that those in those industries pay off first, to save on expenses. Paid-off equipment is another $1,000 a month or more in the bank.

Their white-collar conterparts (real estate brokers, attorneys, computers, accountants) who are also in the business of selling their skills, can file ch. 7 much easier, then restart their businesses with even less of an issue.

The solution: make the trade tools exemption unlimited, or nearly so. If you need something to secure your livelihood, exempt it permanently. Don't take someone's fishing rod when they need it to eat.

Irony and Reality at Whole Foods

From John Mackey's Op-ed in the WSJ:

The combination of high-deductible health insurance and HSAs is one solution that could solve many of our health-care problems. For example, Whole Foods Market pays 100% of the premiums for all our team members who work 30 hours or more per week (about 89% of all team members) for our high-deductible health-insurance plan. We also provide up to $1,800 per year in additional health-care dollars through deposits into employees' Personal Wellness Accounts to spend as they choose on their own health and wellness

And the fallout.

Reading both articles is rather poignant for me. One of my most recent cases is for a client employed, full-time, at, you guessed it, Whole Foods, for the past several years. Her primary reason for bankruptcy is medical bills. HSA sucks when the deductibles run in excess of $40,000. That "up to" $1,800 a year won't even put a significant dent in those debts.

Good Days and Bad Days

Today was the latter. Since I'm still a new attorney, I haven't really developed the thick skin that armors most others in the rough and tumble world of consumer bankruptcy. Behind every file name is a story, a series of poor choices, easy credit, and lots and lots of regret. We do what we can, and most of the time, for most of the people, we help them.

Today thought, came the exception. The client was an older female, and unfortunately had a whole life insurance policy and a car with a little equity in it - less than $10,000 in total. Some trustees wouldn't bother, but of course we get one who is exceedingly thorough (that is, a more polite way to say something I won't state in public about a bankruptcy trustee).

We had done what we could, but there was little we could really do to help her. So, now she's going to likely lose her car and her life insurance. Perhaps she can get a loan from a family member, or figure something else out, to buyout the trustee interest, but that isn't likely.

That's the thing that pisses me off about bankruptcy. If you have horrible judgment, rack up a f*ck ton of credit debt, your chapter 7 will sail cleanly through. If you have a ton of money and income, and you just made a couple of bad calls and got behind on your mortgage, chapter 13 will help you.

If you're in the middle, and you made some decent financial decisions right alongside the horrible ones, and you have a middling amount of equity, and a car that is worth something but not a lot, you get the short end of the stick. It creates a perverse incentive for asset management.

I feel bad for the client - she was in tears by the end of it. There's only so much we can do, and sometimes it isn't enough.