Foreclosure and bankruptcy. Frightening words to most people. I wonder if we, as attorneys, underestimate or completely fail to realize how overwhelming it is for a person going through foreclosure or bankruptcy (or both). I am sure many people have at times considered the “debtor” a bad guy and a loser. Irresponsible, reckless, dishonest, failure… I could go on and on with the experiences my clients share with me.
Interestingly, most of my clients are good people caught in a bad situation. Oh, I certainly realize (and so do my clients) that they made mistakes. Of course, for some, the mistake was choosing a career related to the housing industry. For others, the choice was in selecting a spouse or business partner. And for many, the choice was to try and survive what they thought was a temporary setback by cashing in on the seemingly endless amount of credit made available through their unblemished credit scores. But the setback wasn’t as temporary as they had hoped. The bottom was deeper than they had imagined. And here we are.
The economic crisis we face is devastating to a tremendous number of individuals and families. It is made worse by the flood (or tsunami) of misinformation and bad advice sweeping many away into a sea of bad mistakes. Not unlike looters during a natural disaster the economic crisis created an open window for opportunists disguised as experts. Experts in loan modifications, short-sales, and debt reduction litter every conceivable media forum including our street corners. Most of the ill advice, I’m sure, also comes from well meaning good Samaritans merely doing their best to help. Nevertheless, bad direction leads to the wrong destination regardless of how helpful the direction-giver intends to be. Have you ever had someone stop you for directions and only after they have left to follow your detailed route did you realize you should have said “right” instead of “left.” OK, you get my point.
I was asked to write an article to clear up some of the misconceptions related to foreclosures and bankruptcy. I decided to a series of articles. I welcome your input. The first misconception, and the one I am addressing in this article, is that losing their home to foreclosure or filing bankruptcy means they are losers, dishonest, lazy, reckless, failures or bad guys. Although that may occasionally be the case, it is the exception and not the rule.
I asked a Chapter 7 client today if she was expecting a tax refund. She said she would likely get a few thousand dollars and I advised that she should consider waiting to file bankruptcy until she received her tax refund and had a chance to spend it or convert it to an exempt asset, such as a six month supply of groceries. She responded that she didn’t feel she could do something dishonest like that. Now, I have known this person for a number of years. She has suffered through a tragic divorce and has struggled to raise four children on her own. She faces insurmountable debt related to rescuing her two teenage boys from devastating consequences from their poor choices. She has held her family together and her boys are finally back on safe social paths. But the financial damage is done. It is now she that needs to be rescued.
The Bankruptcy laws were designed to give a fresh start to good people caught in bad situations. It replaced a savage system of severe punishment including debtor’s prison. The Bankruptcy laws contain multitudes of safeguards against abuse and abusers. It is not dishonest to take advantage of every strategy that benefits a debtor.
The Honorable Supreme Court Justice Learned Hand ruled in an opinion about taxes: “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes. Therefore, it what was done here, was what was intended by [the statute], it is of no consequence that is was all an elaborate scheme to get rid of [estate] taxes, as it certainly was.” Helvering v. Gregory, 69 F. 2d 809, 810 (CA2 1934) (citations omitted), aff’d, 293 U.S. 465 (1935).
Like the tax code, a debtor may study and plan strategies, within the law, to take the greatest advantage of every benefit contained in the Bankruptcy laws. For example, if a debtor has a large sum of cash, which is not exempt from the Trustee’s authority to take, the debtor may, even on the day of filing bankruptcy, convert the cash to the debtor’s homestead exemption by paying down the mortgage. See In re Addison, 540 F.3d 805 (8th Cir. 2008). Likewise, the noblest of clients can, without blemish to their integrity, wait for their tax return and convert those much-needed funds into an exempt asset to benefit their families.
As frightening and overwhelming as bankruptcy is, it is wonderful to provide a fresh start to the many good people caught in devastating circumstances.
By, Mark A. Winsor, Esq.
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