Debt Warriors—Wrong Soldiers Fighting the Wrong War

As the economy continues to worsen, businesses offering credit counseling, debt management and other "quick fix" plans continue springing up to offer debt relief services to consumers. A colleague forwarded me a blog article from an organization called Debt Warriors entitled "7 Facts That The Average Bankruptcy Lawyer Will Not Tell Debtors". Author J. Carlton Ford describes himself as a "former Legal Assistant in a Bankruptcy Prevention Law Firm". He is also a sales associate for Pre-Paid Legal Services, Inc. It is not clear whether or not Mr. Carlton is in fact a licensed attorney. However, it appears he is not.

Debt Warriors purports to offer to teach consumers how to stop creditor harassment and eliminate their debts without filing for bankruptcy. Based on misinformation contained in the article about "average" bankruptcy attorneys, I would seriously question the value as well as the credibility of the services offered by Debt Warriors. As the old saying goes, "if it sounds to go to be true then in most cases it is simply not true."

Mr. Ford is unclear on what he believes is an "average" bankruptcy attorney. Of course, if Ford is not an attorney himself, so it would be difficult for him to evaluate licensed members of the bar. I have been in practice for more than 15 years, representing both creditors and debtors. I have limited myself to representing consumer debtors since 2005 and I am a member of the National Association of Consumer Bankruptcy Attorneys ("NACBA"). So far this year, I have helped my clients discharge more than $3.7 million of debt in Chapter 7 bankruptcy cases. I have no idea if Mr. Ford would consider me to be an "average" or "typical" bankruptcy attorney, but I offer the following responses to the "facts" about bankruptcy that "average" attorneys allegedly hide from their clients:

1. Ford Claims that Bankruptcy is Not Easy to File. Bankruptcy has never been "easy" to file. It is complex and difficult in many cases, which is exactly why every consumer needs an experienced bankruptcy attorney. Ford then goes on to make the nonsensical statement that Congress eliminated Chapter 11 from the Bankruptcy Code with the 2005 Amendments. Besides being a completely untrue statement, Chapter 11 is meant for large businesses to restructure their debts. It is very rare that a consumer debtor would even file a Chapter 11 case. However, some individuals must file for Chapter 11 relief because of the amount of the debt they owe. Chapter 13 is available for the "average American wage-earner" so the debt limits for Chapter 13 relief do not apply to high-income wage earners and individuals with substantial and significant secured and unsecured debts.

2. Ford Asserts that Consumers seeking Bankruptcy Protection have to take a 'Means Test'. The 2005 Reform Act does include a financial means test for consumers who seek to discharge their debts under Chapter 7 or repay their debts under Chapter 13. Of course a bankruptcy attorney would discuss the means test with a potential client. It is the most highly publicized change from the 2005 Reform Laws and the most burdensome change to debtors. However, it is not a "test" like a true-false exam in high school. It is a historical analysis for the consumer’s average monthly income for the 6 months before the bankruptcy case is filed, not including the month in which the case is filed. It is somewhat like filing out a tax return. The bankruptcy attorney is the one who completes the form based in the payroll and tax records provided by the consumer and income from other sources. A consumer debtor cannot file for bankruptcy without completing the means test analysis form. But, it is a form, and not a test.

3. Form Claims there is a Presumption of Bankruptcy Abuse By The Debtor. The author seems to be discussing the financial criteria of the means test: "Did you know that if a Consumer has income of over $100 per month (after deductions) and they seek Bankruptcy Protection, that Consumer may be ‘Presumed’ guilty of Bankruptcy Abuse? The average Bankruptcy Lawyer will not inform you of this fact."

This statement by the author is utter nonsense. Mr. Ford to be referring to the financial criteria of the means test. If a consumer debtor "fails" the means test, then it might be a presumption of abuse for them to file for Chapter 7 bankruptcy. In such cases, the debtor might need to file for a Chapter 13 repayment plan and pay back a small portion of those debts. Or, the debtor may be able to claim "special circumstances" that would negate the presumption of abuse and proceed with the Chapter 7 case. The bottom line is that a bankruptcy attorney cannot "hide" the means test from a debtor and in fact completes the form for the debtor.

4. Ford Claims that Consumers Seeking Bankruptcy Protection Must Wait 180 Days (6 Months) Before Filing. This statement is simply false. Prior to filing for bankruptcy, a consumer debtor must take an approved class in credit counseling and file their certificate of completion with the court when filing their bankruptcy petition. The class must be taken within 180 days before the filing date of the debtor's bankruptcy petition. There is no requirement to delay filing for bankruptcy. The only limitation on the credit counseling is that you cannot take the course and then file for bankruptcy the same day you complete the course. But, the 180 Rule as stated by Ford is simply false.

5. Ford then Claims that Bankruptcy Filers Must Seek Accredited Credit Counseling Before Filing. Of course an attorney would mention this to a potential bankruptcy client. If a consumer debtor does not take the class, the court will dismiss their case. Not only do I mention this class to my clients, I arrange for them to take it! The filing of a certification from the counselor and a sworn statement from the debtor is an essential part of the bankruptcy court filing and as noted the case will be dismissed without these mandatory documents. The class is not an embarrassing or burdensome task. In most cases, debtors may take the class in the privacy of their own home via the Internet or over the phone. The classes generally take up to 90 minutes to complete.

6. Ford Claims Bankruptcy Is Now More Difficult and More Costly To File. Yes, bankruptcy is more difficult and expensive to file than before the changes made by the 2005 Reform Law. That fact is certainly no secret to the public. Before I accept money from a client, we discuss the fees and I provide them with a signed fee agreement that contains all of the disclosures required by the Bankruptcy Code.

7. Ford Claims that Pre-Paid Legal Attorneys Are Way Above Average. Maybe Pre-Paid Legal attorneys are above average. I have nothing neither good nor bad to say about them. I do know that customers of Pre-Paid Legal only have one provider law firm to choose from in the entire state of California. You have very few options if you are unhappy with the provider law firms.

In the final analysis, Mr. Ford's article is nothing more than a biased and inaccurate attempt to promote his Pre-Paid Legal Services Plan and his questionable debt negotiation services while perpetuating blatant and outright false myths about the benefits of bankruptcy. If you are a debtor in need of guidance regarding debt problems, consider using the attorney search function on NACBA's website to find a qualified local bankruptcy attorney. Members of NACBA are far more qualified to advise debtors regarding then debt relief options than a former paralegal promoting service of dubious value. The NACBA website is http://www.nacba.org/. The American Bankruptcy Institute (http://www.abi.org/) also includes a substantial amount of material on consumer bankruptcy law under their "Consumer Bankruptcy Center" link. Finally, the National Association of Chapter 13 Trustees has a website for consumers seeking Chapter 13 information (http://www.nacttacademy.com/).

Update: After engaging Mr. Ford is direct conversation about the problems with his article, he deleted it from his website without further comment.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Bankruptcy and Tax Refunds

Question: I filed for bankruptcy in 2008 and it was also discharged in 2008. Is this going to change my tax refund?

Answer: A tax refund is essentially an interest free loan that taxpayers make to the government by having too much money withheld from their paychecks. The potential for a tax refund is an asset that debtors must list in their bankruptcy petition. In many cases, the debtors can claim the tax refund as "exempt", which allows them to keep the refund.

Although bankruptcy is a federal law, it is usually state law that determines whether a debtor's property is exempt and beyond the reach of the bankruptcy trustee. Most debtors in California are able to take advantage of California's flexible "wild card" exemption to keep any anticipated tax refund.

The amount of the potential tax refund can impact the timing of a debtor's bankruptcy case. If a refund might exceed the debtor's available "wild card" exemption, it might be wise to delay filing of the bankruptcy to allow the debtor to receive the refund and spend it on necessary living expenses.

In other cases, the size of the refund might not warrant a delay in filing. To help properly plan a bankruptcy filing we recommend that debtors file their tax return as soon as possible, avoiding the temptation to file for an extension.

Exemption laws vary by state, so it is important to consult an experienced bankruptcy attorney to determine what impact a bankruptcy will have on your tax refund. Debtors in Southern California are encouraged to contact us for a free consultation.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Does Credit Repair Really Work?

In a recent article, I discussed the impact that bankruptcy might have on a debtor's credit score. However, even the slightest bit of negative information can lower your FICO score significantly. In one case, my client saw their credit score drop by more than 100 points to due a $100 small claims judgment that she had already paid.

Regardless of whether you retain the services of and attorney, credit repair organization or do it yourself, you have the right to dispute inaccurate information in your credit report. However, you will not be able to remove any information that is accurate, current and verifiable.

Most negative information must be removed after 7 years and bankruptcy information can remain on your credit report for up to 10 years. You can obtain a free copy of your credit report at http://www.annualcreditreport.com/. Although creditors must use reasonable procedures to maintain an accurate credit report, mistakes are very common. Once the credit bureau has been notified of a dispute, it must reinvestigate and modify or remove inaccurate or incomplete information. The credit bureau may not charge a fee for this service.

Any pertinent information and copies of all documents you have concerning an error should be given to the credit bureau. If the credit bureau's reinvestigation does not resolve the dispute to your satisfaction, you may send a brief statement to the credit bureau to be kept in your file, explaining why you think the record is inaccurate. The credit bureau must include a summary of your statement about disputed information with any report it issues about you, although some commentators have suggested that this may actually do more harm to your credit.

Companies that offer to help you improve your credit score are governed by The Credit Repair Organizations Act. A credit repair organization cannot remove bankruptcies, judgments, liens, and bad loans from your credit file nor can they legally create a new identity or credit profile for you.

If you have had problems with inaccurate information your credit report, please contact us further assistance.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Seven Big Reasons for the Nation’s Financial Mess

1. The failure of the Federal Reserve Board, the FDIC, the OTS and the DOJ to regulate the subprime mortgage originators and to impose more detailed and informative disclosure statements on the ARMS and Option ARMS. If many of these exotic loans had been classified as consumer products, they would have been banned by the Consumer Products Safety Commission. The failure of the SEC to adequately investigate any of the regulated enterprises under its jurisdiction was also a substantial factor with the Bernard Madoff case being Exhibit Number One.

2. The failure to increase and enhance financial market regulations after LTCM. Long-Term Capital Management was a hedge fund that blew up in 1998 after losing $4 billion investing in complex derivatives, necessitating a federal bailout. A movement quickly began to regulate derivatives like mortgage-backed securities through the Commodity Futures Trading Commission, but then-Fed Chairman Alan Greenspan, then-Treasury Secretary Robert Rubin and others blocked those efforts, which helped set the stage for the 2008 meltdown. And, Greenspan was also a strong advocate for the ARMS and Option ARMS mortgage products.

3. The repeal of the Glass-Steagall Act. In 1999, Congress repealed the Glass-Steagall Act of 1933 after the financial services industry gave more than $80 million in campaign contributions to members of Congress on both sides of the aisle. Former Senator Phil Gramm of Texas led the supporters of the repeal efforts. The repeal eliminated the separation of commercial and investment banking mandated after the Great Depression. This allowed big banks to get even bigger and subjected depositors to the risk of a whole new array of speculative investments, such as MBS and other derivatives.

4. The failure to create any type of regulatory structure to deal with the credit-default swaps and other forms of derivates that created trillions of dollars of contingent liabilities.

5. The failure to rein in Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac were private companies backed (and now owned) by the federal government that buy and then securitize home mortgages from lenders who originate them, thus providing liquidity to the U.S. mortgage market. These companies also created, sold and invested in billions of dollars of MBS and, more than any other player, fueled the MBS market. In 2005, after an accounting scandal at the companies, Congress sought to more closely regulate Fannie Mae and Freddie Mac and prohibit them from owning MBS. The bill failed to pass. Fannie Mae and Freddie Mac then increased their costly participation in the MBS market, which eventually led to their takeover by the federal government.

6. The SEC let banks pile up new debt. In 2004, the five largest Wall Street investment banks convinced the SEC to exempt their brokerage units from an old regulation (the "net capital rule") that limited the amount of debt they could take on. This unleashed the Wall Street firms to borrow billions of dollars to invest in MBS, credit default swaps and other risky, exotic securities. Bear Stearns, for example, was leveraged 33 to 1 when it melted down — for every $1 in capital it had $33 in debt. Lehman Brothers' $613 billion in debt made its bankruptcy the largest in U.S. history —10 times larger than Enron.

7. The abuses of the Community Reinvestment Act. Congress passed the Community Reinvestment Act in 1977, and revised it in 1995, to encourage banks to make home loans to lower-income customers, in part to expand home ownership. The intentions were good, but abuses led to unsafe lending practices, which led to many defaults and contributed to the 2008 credit market meltdown. Many of the subprime originators used the Act as cover to make hundreds of thousands of loans that they knew the consumers could not pay once the first reset date occurred.

About the Author: O. Max Gardner III has been a licensed attorney in North Carolina 1974 and is a member of of the National Association of Consumer Bankruptcy Attorneys. Mr. Gardner is AV Rated with Martindale Hubbell and is frequently a featured speaker on Consumer Bankruptcy Law at numerous National and Local Bankruptcy Seminars and Conferences.

Circuit City Bankruptcy Could Cause Problems for Bargain Hunters

On November 10, 2008, Circuit City filed for reorganization under Chapter 11 of the United States Bankruptcy Code. However, Circuit City was unable to find a buyer or obtain a refinancing deal. Instead, Circuit City will convert to a Chapter 7 liquidation. This will result in the closure of its remaining 567 stores and more than 30,000 employees will lose their jobs.

As Circuit City liquidates the remainder of its inventory, consumers will undoubtedly be looking for bargains. However, those bargains will come with a risk. Circuit City will most likely adopt an "all sales are final" policy, so returns and exchanges of damaged or defective merchandise may be difficult.

The risk is particularly great when purchasing a big-ticket time such as a flat-screen TV, which may be difficult or extremely inconvenient to replace or repair. In some cases, the manufacturer's warranty may be sufficient to protect the consumer. In other cases, the buyers may be protected by extended warranties provided and administered by third parties that may be obligated despite the Circuit City bankruptcy.

With enough care and research, consumers will be able to find fantastic bargains due to the misfortune of Circuit City. The following tips may provide some additional protection to buyers:

1. Make your Circuit City purchases on a credit card. Even with a "no return" policy, you might be able to dispute credit card charges in case you have a problem with the merchandise. Federal law gives consumers broad protections when it comes to credit card purchases.


2. Investigate the terms of the warranty before you buy. Some manufacturers like HP require you to send in an item to be repaired rather than offering an exchange or replacement. Other manufacturers are more generous with their replacement/repair policies and will promptly send replacements for defective merchandise.


3. Avoid extended warranties. This informative article includes a list of 5 important reasons to avoid extended warranties or service contracts. If Circuit City is out of business or fails to transmit the money for the warranty to the third party administrator, the extended warranty or service contract may be worthless. Circuit City also offers an in-home repair service, but it can be difficult to schedule an appointment.

With care and proper investigation, the unfortunate demise of Circuit City may allow consumers to find excellent bargains on electronics. However, care should be taken before making a purchase.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.