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Bad Advice About Bankruptcy in Parade Magazine:

Parade Magazine (a common supplement to many Sunday newspapers) is the highest-circulation magazine in the country. And I know that they try to keep things simple for readers. But this week's Parade has some disastrously bad advice about bankruptcy for people in financial distress in an article "Is There Any Escape from Debt?"

Here's the entire article:

Last year, 822,000 American families declared bankruptcy—a 38% increase. But how much does declaring bankruptcy really help strapped consumers? A 2005 bill made it harder to file by increasing fees and mandating credit counseling. In addition, if you make more than the median income in your state, the law may prevent you from getting a fresh start. Instead of having your debt wiped clean, you'll often be required to repay it over three to five years. The rules also allow credit-card companies to receive repayment based not just on the original charges but on accumulated interest and late fees, too. For example, a $2000 doctor bill and an $800 credit-card bill that swells to $2000 with penalties and fees are both treated as $2000 bills.

If it's your mortgage that's the problem, bankruptcy offers even less relief. "There is very little that bankruptcy can do about mortgage debt," says Elizabeth Warren, a bankruptcy expert at Harvard Law School. "It can handle other debt, freeing up money to make mortgage payments." Politicians in both parties have recognized a need to amend the law and allow more help with mortgage debt, but no new bankruptcy legislation is likely to pass until 2009. In the meantime, says Prof. Rich Hynes of the University of Virginia School of Law, more people may declare " informal bankruptcy." How does that work? "The consumer just fails to pay and endures whatever pressure the creditor can apply."

There are some major problems here that could confuse people who need bankruptcy.

"In addition, if you make more than the median income in your state, the law may prevent you from getting a fresh start. Instead of having your debt wiped clean, you'll often be required to repay it over three to five years."

This is the most important error because of the negative impact it can have of deterring people to file who need to. The "means-testing" provisions of the bill does not prevent you from getting a fresh start. You can still get a discharge--you may just have to file chapter 13 and enter a 3-5 year repayment plan (usually 5 if you are means-tested). But you can still get your debt wiped clean. Also, the article implies that you are required to repay all of your debt--this is not correct. You will be required to repay what you can of your unsecured debt out of your disposable income, whatever that percentage may be (30, 60, or 100%). But you still get a discharge.

"The rules also allow credit-card companies to receive repayment based not just on the original charges but on accumulated interest and late fees, too. For example, a $2000 doctor bill and an $800 credit-card bill that swells to $2000 with penalties and fees are both treated as $2000 bills."

This is a terribly confused passage. First, it implies that this was a change made by the 2005 legislation--it isn't. Second, it implies that this is unique to credit cards--it isn't. If the doctor's bill has collected interest before bankruptcy (and most do), then the accrued interest is part of the claim as well. Third, this is completely beside the point for bankruptcy--you get to discharge this stuff. All the accrued interest issue relates to is how much the doctor collects versus the credit card company, not the impact on discharge. The reporter seems confused about this point. Put more bluntly, if it is unsecured debt, from the perspective of a bankruptcy filer it doesn't matter who the claimant is or how much of the claim consists of interest versus other charges.

With respect to mortgages, the author is basically correct--bankruptcy provides little relief for purchase-money mortgages.

Overall, this is a really confused little article. If you think you are in need of bankruptcy relief, please see a lawyer or someone else you trust and don't rely on this little article. Contrary to what the article says, the answer is that filing bankruptcy helps strapped consumers a lot.

Barbara Skolaut (mail):
Todd, thanks for posting this. I read Parade this morning while I was waiting for a haircut, and thought that article seemed off-base, but have no expertise (or experience) in the bankruptcy industry.

I wonder how many people in the country will mess their financial lives up even more based on the "information" in this article. Any possibility Parade could be held liable for the consequences of their bad info? (I'm guessing not.)
11.2.2008 2:23pm
Vermando (mail) (www):
" You can still get a discharge--you may just have to file chapter 13 and enter a 3-5 year repayment plan (usually 5 if you are means-tested). But you can still get your debt wiped clean. "

I think that the Parade interpretation of "debt wiped clean" is more consistent with the understanding of everyday Americans (I don't have to pay it) than yours.
11.2.2008 4:41pm
ak47pundit (www):
In addition, the required credit counseling is an absolute joke and no deterrent to filing for anyone who wants to file. You can even do it online in moments and it counts so the mandated credit counseling has no real deterrent effect on potentail bankruptcy filers.
11.2.2008 7:30pm
Sagar:
why would any VC readers need to know about filing for bankruptcy?
(except perhaps the lawyers in their professional capacity, whom we assume already are aware of it:-)
11.2.2008 9:44pm
Bruce_M (mail) (www):
I'm not a bankruptcy expert, bu if you have to enter a repayment plan, then that sure sounds like your debt is not discharged. I agree with Vermando - "debt wiped clean" is the common understanding of "discharge" vis a vis bankruptcy. If you have to repay the unsecured debt (even only a percentage of it) over 3-5 years, then how is your debt wiped clean? I think you're nitpicking a legal term of art that obviously no longer means what people think it does. What, a bankruptcy judge grants a discharge which requires you to pay back X% of your debt over 5 years? Or does the 3-5 year repayment plan not apply to everyone and true discharges (all debt wiped clean) are still possible?

Like I said, I don't know very much about bankruptcy - I took the class in law school and have not looked at or thought about it since (and I took the class before the new reform bill).
11.2.2008 11:24pm
Michael Franco (mail):
Well, while I am not a state bar certified specialist, it just so happens I spend 2-5 days a week every week in bankruptcy court. When consulting potential clients I take pains to explain that while a chapter 7 is designed to "wipe out" unsecured debts, a chapter 13 repayment plan may achieve the same end - if the plan is confirmed below 100% to unsecureds, which happens all the time. If the debtor in a chapter 13 cannot repay 100% of their unsecured debt, then (provided it is not a student loan or other exempt obligation) the obligation IS discharged. Furthermore, the courts are allowing a chapter 13 debtor to make a determination if second or third mortgages are secured at all - based upon the current value of the property. Unsecured second = discharge of underlying obligation at conclusion of plan. What then? We are in a very interesting time in bankruptcy right now. ( I really enjoy this area of law.)
11.3.2008 1:26am
theobromophile (www):
My bankruptcy knowledge is limited to a post-2005 reform class in law school. Nevertheless, the Parade article seemed off to me.

Re: discharge of debt. The difference between the discharge in Ch. 7 and Ch. 13 is the time of the discharge: in the former, it is after liquidation; in the latter, it is after three to five years. The author ought to have pointed out that both involve discharging the remaining debt that cannot be paid out of the money set aside for unsecured debt repayment.

Ultimately, the problem with these types of articles is that they are often written by people who have a very rudimentary understanding of the subject matter, rather than by people with a deep understanding who also have the rare talent to explain complex concepts in a straightforward manner.
11.3.2008 1:28am
Eli:
Sagar
Why would you assume that none of the readers here went bankrupt? I did.
And if anyone is in the mood of offering some advice, my financial aid advisor said that makes me ineligible for student loans in NY. Is that true? How would I check up on something like that.
11.3.2008 5:53am
Zywicki (mail):
Sagar: First, I thought about that but my hope is that if someone is looking for information they'll find this. I also sent a note to Parade notifying them of this.

Eli: That is not necessarily right. It may depend on the nature of the lender, especially if it is a governmental lender. The issue would relate to the anti-discrimination provision of section 525. You might want to check further.

Let me emphasize that this is not legal advice and I am not licensed in New York. This is just a suggestion that you might want to get a second opinion, perhaps by contacting a lender directly or a local legal aid lawyer.
11.3.2008 11:14am
Georg Felis (mail) (www):
I'm suprised nobody has mentioned the Dave Ramsey approach to Bankrupcy. Don't do it. Get your life under control, get your crazy spending under control, negotiate with your debtors, start eating beans and rice and paying off your bills one painful payment at a time. It's a long and hard road, but if you don't attack the root cause of 75% of bankrupcies (i.e. your dumb spending habits), you're just going to wind up in the same hole all over again.

I know this contradicts the quick and easy approach that most of us have been sold for years, but its working for me.
(and yes I know you guys involved in Bankrupcy court don't take it lightly, you're in much the same boat as the tow truck guy who shows up to dig out the 4-wheel drive stuck up to the windows in the mud. God bless you.)
11.3.2008 2:40pm