In my last blog, I brought out that Federal law makes Social Security benefits exempt from creditors’ claims, including retirement benefits and disability benefits from Social Security, and about the fact that, with the exception of the IRS, even creditors who have legal judgments against a debtor cannot intercept Social Security payments or take that money from  after it’s been paid to a recipient.

Well, by coincidence, right after I had posted that blog, neighbors who receive the AARP bulletin brought over an article they had saved for me from the October issue called “When Creditors Seize Social Security Payments“.  The article told the story of a Brooklyn, New York gentleman whose creditors had a court order to seize funds from his account.  This action caused the bank to freeze his account for three weeks.  Now, as mentioned above, freezing or garnishing accounts that hold Social Security, SSI, or veterans’ benefits is illegal, but, since this man’s benefit checks were being deposited electronically into his account along with other money, the bank was obligated to comply with state laws about garnishment or risk paying big fines. AARP has filed court briefs to stop bank garnishments of Social Security funds, urging federal regulators to take steps to protect Social Security recipients.

Social Security disability payments present yet another sort of problem relative to my practice of bankruptcy law. As the Indianapolis Star reported last summer, “Getting On Disability Is A Real Pain”. Statistics quoted in that article included 141,510 people in Indiana who have Social Security disability, with 12,094 cases pending at that time.  The average time for a judge in Indiana to hear a Social Security disability appeal is 749 days, almost two full years!

Think about what that means. Without a job, some applicants can lose their homes or their cars, and some end up going on welfare.  Quite a number end up filing bankruptcy. In the bankruptcy process, If it is expected that the debtor will in fact qualify for social security disability, that anticipated income will have to be taken into consideration when the judge is assessing the all the reports on income, assets, and debt.  So, while the Social Security benefits themselves are off-limits to creditors, those benefits are very much a part of the picture when a debtor files bankruptcy.

With one of my four bankruptcy law offices in Anderson, Indiana, I was interested in several alerts issued by the Better Business Bureau of Fort Wayne, Indiana as a public service to the northern Indiana communities.

One alert had to do with consumers getting calls on their home or cell phones, telling them their debit or credit card has been suspended.  Of course, the customer is asked to provide an account number.  Do not reply, advises the BBB. Another form of this scam has the caller pretending to be from Ball State Federal Credit Union.  The voice asks call recipients to provide their sixteen-digit credit card accounts. Rule of thumb:  NEVER give out your credit card number unless you initiated the call to a number written on your statement or your credit or debit card itself.

In a totally different scammer approach, consumers received unsolicited mail offers to obtain certified copies of real estate property deeds for a fee of $59.60.  The company has a Washington, D.C. address, but orders are to be sent to Illinois.  Don’t respond to this, BBB urges.  In any event, a certified deed is not something that homeowners need to have. For most reasons you might need a deed, a simple photocopy is sufficient.

In a third scam type, individuals receive a letter stating they won funds in a sweepstakes, and that they will receive $150,000 after they cash an enclosed Purdue Credit Union cashier’s check to pay for processing fees. These checks are fake. If you receive a questionable check, BBB says, you should contact Purdue Credit Union’s Danna Puterbaugh at 765 497 7447.

As a bankruptcy attorney, I am especially outraged at scams that prey on innocent people, many of whom are already struggling with difficult financial issues and may be trying to stave off bankruptcy.  While job losses, medical bills, divorce, and foreclosure may make bankruptcy the only option for financial survival, I hate the idea that identity theft and scams like these have the capacity to make people’s lives even more difficult.  Being a realist, I understand, as BBB of Fort Wayne explains, that “with the economy on the minds of Americans, easy money can sound very exciting.”  In my earlier blog, Worse To Worser – Adding Identity Theft To Bankruptcy, I stressed that being a victim of Identity theft can, in fact, be “exciting”, but not in any way you’d choose for yourself.

Not only can the additional credit problems created by identity theft and scams add to individuals’ financial woes, there are predators that specifically target victims who have filed bankruptcy (see Beware of Predators – Before, During, And After Bankruptcy).

Remember, the purpose of the bankruptcy system is to provide relief from overwhelming financial problems too severe for people to handle on their own.  As a professional who’s spent almost twenty-five years doing my part to help that safety net work, it angers me no end to learn about criminals who prey on others.  If those predators can’t help, at least they should be asking for the proper kinds of help for themselves!

Whenever in the course of my work day I’m not meeting with Indiana bankruptcy clients, representing them in court, or lecturing to attorney or civic groups about bankruptcy, you’ll probably find me reading.  In order to offer the most up-to-date legal advice to my clients, I consider it crucial to stay on top of the latest developments in my field. Then, as one of a very few Consumer Bankruptcy Specialists (see Bankruptcy Lawyer Certification: Not Just Paper On The Wall) I am required to take at least sixty hours of continuing education courses every three years.

In practice, I find valuable information and insights come from many different sources. I read professional journals on financial planning, estate planning, and employee benefits, because this information sometimes relates to different client situations. I read newspapers and newsletters to stay on top of any news which can affect my Indiana bankruptcy clients, news about job opportunities or layoffs, or news about changes in legislation that can affect bankruptcy clients. Friends, neighbors, and colleagues often clip articles that they think will be of interest to me and perhaps to my blog readers. Of course, I gain much information online.

The other day in my online browsing, I came across a fascinating article on BCS Alliance.com. The article was about researchers who are trying to find out why some states (our state of Indiana included) have bankruptcy filing rates that are double the national average, while other states have much lower bankruptcy rates.  Some of the factors the researchers compared (in order to learn if there was a direct correlation with bankruptcy statistics) were unemployment rates, income levels, medical debt levels, gambling, and state bankruptcy laws.  I’ve explained in several earlier blogs that there are federal bankruptcy laws, but that each state has some leeway in how they handle bankruptcy; I helped write the exemption portion of current Indiana state bankruptcy law.

The study itself was done in 2004, and it examined bankruptcy rates from 2000 – 2004.  For that period of time, Indiana was second only to Missouri in bankruptcy filing rates.  The results of the study were not as expected, not at all.  Missouri, highest in number of bankruptcies, had lower unemployment than states with much lower filing rates. It also did not prove true that states with higher average incomes had lower bankruptcy rates.  Gambling wasn’t a clear culprit, either; Utah was fourth highest in bankruptcy filings, but has almost no gambling. There did seem to be a slight correlation between state bankruptcy laws and the number of bankruptcy cases actually filed. The connection appeared to relate to how much property a debtor is allowed to keep in bankruptcy and how much garnishment of wages creditors were allowed to do.  Still, none of the data provided a clear connection between any one of these factors and bankruptcy filing rates.

Interest in bankruptcy has obviously increased in recent years due to the economic downturn. Still, none of the research was able to prove exactly which factors most influence bankruptcy rates in any one state.

During the almost twenty-five years I’ve served Indiana bankruptcy clients, both federal and Indiana bankruptcy law have continued to evolve, job markets have continued to change, the economy has gone through changes, but several things have remained constant for me.  As I wrote in one of my very earliest bankruptcy blogs back in the summer of 2007 (see “Ten Is Not The Number”), what I see out there with clients who have taken the big step of talking with an attorney and getting started on a plan of action, is the most incredible sense of relief combined with resolve.  “For these guys”, I remarked, “the word ‘hope’ comes way before the word ‘kaput’!”

The New Yorker magazine carried an article called “Mind Games: What Neuroeconomics Tells Us About Money And The Brain”. Author John Cassidy discusses behavioral finance experiments that were done to help the financial industry better understand how investors behave.

One scenario presented to different people was this:  You are sitting next to a stranger on a park bench.  Someone comes up, offering to give you $10.  The catch is that the stranger gets to decide how to divide the money. If you accept the offer, you must be willing to accept whatever part of the $10 the stranger lets you have (even if he decides to keep $10 and give you zero).

The results of the experiment were very interesting.  Most people said they’d reject the offer if they stood to benefit any less than $3 out of the $10. (Remember, they are giving up free money!) The explanation was that it wasn’t about the money.  People have a very negative emotional response to what they perceive as unfairness.

Many months ago, in my blog entitled Lying In Bankruptcy Court: The Straw That Broke The Camel’s Back, I talked very frankly about the U.S. bankruptcy system, and about the thousands upon thousands of hours I’ve spent in bankruptcy courts representing clients from all over central Indiana.  I explained that the bankruptcy system is there to provide a much-needed safety net for honest debtors, who, often due to forces beyond their control, have reached a point where they cannot take financial care of themselves and their families without help. The other side of the story is that, for the system to continue to function, the facts of each debtor’s situation have to be fairly and completely stated in order for the creditors to also be treated as fairly as possible.

John Ventura, in his book, The Bankruptcy Handbook, says that for centuries now, society has been debating the ethics of bankruptcy.  Our present system of bankruptcy law is a compromise between two perspectives.  One side says that debtors should be forced to pay their debts no matter what, and punished if they cannot.  The other perspective considers that well-intentioned people make mistakes and have bad things happen to them that they cannot control.  Over the years, the “pull and tug” between these two extremes has resulted in a middle ground – a system of bankruptcy law that tries to be as fair as possible to creditors as well as to debtors

A fellow attorney remarked to me (see I Never Thought I’d Be Here), “No one can work in this field of bankruptcy law without thinking every day, “There but for the grace of God, go I.” I couldn’t have said it any better.

Back at the end of 2007, I quoted an MSNBC article devoted to comparing bankruptcy and foreclosure in my blog titled Dis Or Dat? Foreclosure Or Bankruptcy?. I explained in that blog that a foreclosure is a very serious thing to mortgage lenders, even more serious than a bankruptcy.  I went on to say that if a foreclosure is on your record, you’re probably going to have a lot of trouble when looking for another home or even when trying to rent a place to live.

As a bankruptcy attorney in Indiana for close to twenty-five years, finding a compromise with mortgage lenders is one of the things I work on with my bankruptcy clients, and I talked about that. I reminded blog readers that some forms of bankruptcy allow you to keep your home.  Since each client situation is different, I stressed, designing just the right plan for each situation is what being an experienced bankruptcy attorney is about for me.

The point I want to make here is that, even though the two issues of foreclosure and bankruptcy are related, they have been totally separate legal issues.  The bankruptcy court system did not have the power to modify mortgage debt obligations, and so any decisions I discussed with clients having to do with problem mortgages had to be made separately from the decisions about bankruptcy process. The law allowed bankruptcy to discharge your mortgage obligation but not modify or change the terms of the mortgage.

Well then, in March of 2008, I blogged about the proposed Mortgage Modification Bill. The idea that was being debated in the U.S. House of Representatives was to allow bankruptcy judges to modify the terms of a debtor’s mortgage loan and make it easier for debtors to avoid foreclosure.  I pointed out the fact that the Mortgage Bankers’ Association had strongly opposed the bill, feeling that a dangerous precedent would be set if courts were given power to alter contracts after both parties had agreed to them.  Efforts to pass that bill failed. Bankruptcy courts can deal with vacation homes, boats, and cars, but not the homeowner’s primary residence.

By December, 2008, Senate Banking Committee Chairman Chris Dodd was pursuing legislation to allow homeowners facing foreclosure to seek protection in bankruptcy court.  With the change in the political landscape, the concept of bringing down the “wall” between bankruptcy and foreclosure was on the table once more (see Finally A “Fix” For Foreclosures?)

In the weeks since that blog was posted, foreclosures have continued to mount, and this month of January 2009 brought news that Democratic lawmakers have reached a deal with Citigroup, Inc. on a plan to allow bankruptcy judges to alter home loans.  Other lenders are being urged to follow Citigroup’s example.  The plan is to present the new foreclosure/bankruptcy tie-in as part of the Obama economic stimulus package. Let’s cross our fingers that the new law passes!

Back before Thanksgiving, I had a feeling this was going to happen.  As a bankruptcy attorney, every year I urge folks to be cautious in their holiday spending, but this past November I found myself urging people to spend any retailer gift cards they’d received, and cautioning them against buying cards for others. My reasoning? With corporate bankruptcies on the rise, I knew some card holders would end up in the same boat as airline ticket holders when their airlines went bankrupt. A gift card holder is an unsecured creditor, and that means if the retailer that issued the gift card goes bankrupt, the court can declare that any assets must be sold and the proceed used to pay secured creditors first. Card holders might find themselves at the back of the line. (See In Bankruptcy, Gift Card Holders In Line Along With Airline Ticket Holders As Unsecured Creditors.)

Two weeks later, I repeated my warning in Got A Gift Card From A Bankrupt Retailer? Get In Line!, explaining that, while I hated playing Scrooge, and while, under normal circumstances, gift cards represent a great idea for merchants, buyers, and recipients, I had a very bad feeling about the cards during the current economic crunch.

Well, it’s happened, at least to one of my blog readers.  A. has a gift card issued by a retailer called KBToys; KBToys is not honoring it. What A. has to say about the situation is this: “Allowing a company like KBToys to continue to sell merchandise during bankruptcy but at the same time not honoring gift cards is theft…I hope consumers will wake up after this and refuse these cards.  I will.”

After A.’s comment was posted on my blog, I did a little bit of research.  According to the December 11, 2008 Wall Street Journal, KB Toys has returned to Chapter 11 bankruptcy, and will be liquidated by its parent company, Prentice Capital Management.  “Going Out Of Business Sales” are going on at the all retail stores, and WSJ points out that sales of gifts cards have been suspended. At the Indiana Attorney General’s office, I was informed that this consumer could, in fact, file a claim, and could contact their office to get the proper claim forms.  A call to the KBToys Customer Relations Department yielded no further information, other than to confirm no gift cards were being honored.  (A., believe me, this is one instance where I hate having been right!)

Unfortunately, this won’t be the last toy story involving gift card holders. Two weeks ago, the parent company of BabyUniverse filed bankruptcy in Delaware, along with nine affiliates, one of which is eToys Direct. Meanwhile, in clothing retail, 15 Indiana Goody’s stores are liquidating, including stores in Martinsville, Shelbyville, Crawfordsville, and New Castle, and Franklin. Couture designer Bill Blass has filed bankruptcy, and a Dow Jones report quoted turnaround advisory firm AllixPartners as predicting many more filings by retailers in the year to come.

I wish my bad feelings would go away.  Meanwhile, get out those gift cards and redeem them quickly – if it’s not too late!

One topic that frequently comes up in my conversations with Indiana bankruptcy clients is mortgages, and how foreclosures on mortgages relate to bankruptcy. In recent years, with a greater number of seniors visiting my four bankruptcy law offices around the state of Indiana, I’m beginning to get quite a number of questions about reverse mortgages and about the way those reverse mortgages relate to bankruptcy. Sometimes I’ll learn that clients took out a reverse mortgage years ago, and have drawn down almost all their equity just to keep up with expenses.  They are in my office because they have run out of alternatives to bankruptcy.

By way of review, a reverse mortgage converts home equity into cash.  Homeowners age 62 or older who have paid off their mortgage or have only small balances remaining are allowed to borrow against the equity in their home.  Many seniors who would not have had enough income to qualify for a second mortgage are able to qualify for a reverse mortgage, because reverse mortgages do not require repayment as long as the borrower is living in the home.  The bank gets repaid only when the house is sold. The size of the loan is determined by the borrower’s age, the interest rate, and the home’s value.  The older the borrower at the beginning of the transaction, the greater percentage of the home’s value is available on a reverse mortgage loan.

Seniors who take out reverse mortgages choose among three basic ways to receive the money.  They can have a line of credit from which they draw as needed; they can opt to receive a fixed monthly payment for a period of years; they can receive a smaller fixed payment for as long as they live.

As I explained in my earlier blog, What Happens To A Home In A Chapter 7 Bankrukptcy?, when a homeowner files Chapter 7, some of that individual’s assets might be sold by the bankruptcy trustee and the proceeds used to pay creditors.  If the debtors’ equity in the home doesn’t exceed the exemptions our state allows, they can keep their home.

When a bankruptcy is filed, the situation becomes more complicated with a reverse mortgage, and it’s crucial that debtors obtain experienced legal advice.  Most important to remember, though is that the filing of a bankruptcy itself is NOT a default under the reverse mortgage agreement, and therefore the bankruptcy will not automatically lead to foreclosure on the mortgage.  The remaining equity in the home that can be accessed through the reverse mortgage will be considered under the exemption rules (I was involved in drafting the exemptions portion of Indiana’s bankruptcy law).  In a Chapter 13 bankruptcy, where there is a three-to-five year debt repayment plan, the remaining payments to the homeowner will be taken into account for the plan.

As I’ve often repeated, each bankruptcy client’s situation is different, and designing just the right strategy for each situation is what being an experienced bankruptcy attorney in Indiana is all about for me.

With the ability to earn steady income the key to my Indiana bankruptcy clients’ ability to rebuild their financial lives as they emerge from bankruptcy, I’m always alert for both good and bad news about employment markets.  With four bankruptcy law offices serving 38 different Indiana counties, I’m interested in hiring and layoffs all over the state and even in adjacent counties in neighboring states.

In Closings and Cuttings Pose Challenge For Post-Bankruptcy Rebuilding, I reported on layoffs in Indianapolis, North Manchester, and Lafayette, as well as on closings planned for 2009 in Kendalville, Howe, Ligonier, Crawfordsville, and Greenwood.  Later in December, I had better news to report (see It’s Holiday Time, With Glimmers of Hope In Indiana Job Markets) about the Rockes East Express East natural gas pipeline in western Indiana, Avon’s new CSX railroad hub, and the new Really Cool Foods distribution facility in Cambridge City.  I reported on Dollar General’s and Dollar Tree’s Indianapolis expansion plans, as well.

Now, just a couple of weeks into 2009, I have some more good news to relay.  Indianapolis-based AIT health-testing lab company will be adding 130 new jobs over the next few years. Monarch Beverage’s continuing construction of its $45 million warehouse and distribution center in Lawrence Township will not result in new hiring, but moving 500 employees to Lawrence should attract retail and restaurant businesses to the area, which could result in new jobs.

On the negative side, the developer of a tract of land at 86th and Keystone has gone bankrupt before ground was broken, and the River Place project at 96th and Allisonville Road has been put on hold.

The Indianapolis Star reports that unpaid furloughs are on the rise. Unpaid furloughs are temporary layoffs, and Indiana has had its share of these, including Lafayette-based truck-trailer maker Wabash, which is extending its holiday shutdowns.

The availability of jobs and bankruptcy are joined at the hip, no doubt about it.  Even as our economy begins its climb out of recession, many hardworking, responsible people will find themselves turning to the bankruptcy system for help in making a much-needed fresh start.

Neighbors shared with me an article called “The Fear Economy” out of the January/February issue of AARP Magazine. There’s a paragraph in the article on which they thought I’d want to comment:

“Also high on consumer advocates’ agenda is repeal of the bankruptcy reform act of 2005, which passed with overwhelming bipartisan (and lender) support.  ‘By restricting eligibility for a bankruptcy that fully discharges debts, Congress made it harder for families to get a fresh start, and less risky for lenders to target those already living on the edge,’ NACA (National Association of Consumer Advocates) Rheingold says.”

By way of background I have served as an Indiana bankruptcy lawyer for the past twenty-plus years.  When interviewed recently for an Indianapolis Business Journal article, I wanted to debunk the myth concerning those 2005 changes to bankruptcy law.  Because consumer advocates spoke out so vehemently against the changes, many people falsely assume they would not qualify to file bankruptcy.  Unfortunately, this misunderstanding prevented some who might have benefited from seeking the professional help they needed.  The message I wanted to convey in the interview is that debtors should not assume the new law precludes them getting relief through bankruptcy.

On October 17, 2005, the very day the bankruptcy law changes went into effect, CNNMoney.com explained that lawmakers who favored the changes argued it would prevent consumers from abusing bankruptcy, while consumer advocates argued the new law was meant to protect only creditors, not consumers.  It is true, I want to explain, that one of the intentions of lawmakers was for it to be more difficult to file Chapter 7 bankruptcy and force more debtors to file Chapter 13 (debt repayment plan).  In actual practice, though, most debtors (see Bankruptcy Abuse Prevention and Consumer Protection Act), most debtors are either not subject to the “means test” or are able to pass the test, in that their monthly income is at or below the median income for our state.

My neighbors were right.  There is much I have to say about the AARP article and about the 2005 changes in bankruptcy law.  But the most important thing I want to emphasize in my blog is this:  Don’t assume the new law means you won’t be able to make use of the bankruptcy safety net.  And, as I said in the IBJ interview, please seek legal halp at the first signs of financial trouble!

Ever since launching this Bankruptcy in Indiana blog series, I’ve kept coming back to the topic of debt consolidation, debt settlement, credit counseling, and debt repair, all forms of help being offered to debtors as alternatives to filing bankruptcy.  Under the new legislation adopted at the end of 2008, consumers will begin to see some relief from abusive credit card company practices.  But many, many people are in need of solutions now.  Unfortunately what I’ve found is that many of them are grasping at any advertised form of debt help, getting themselves into even deeper financial trouble, as I pointed out in Be Careful With Credit Repair.

Three weeks ago, in the “Personal Finance” section of the Indianapolis Star, three Indianapolis financial planners offered answers to the question “Can debt relief services really help me climb out of a financial hole?”.  Liz Hoover of Hoover Financial Advisors differentiates between debt writeoff negotiation services, which “have a significant negative impact on your credit score”, and DMPs (debt management programs), which consolidate all or part of your debt into one payment, explaining that “your credit score will not be reduced as long as you’re still paying the debt off on time.” (For those who would like more information on the difference between the two types of services, I found an e-zine article on the subject.)

Hoover mentions the same non-profit DMP I cited in my blog, Momentive Consumer Credit Counseling Services, which has been serving central Indiana for many years. Two other financial planners, Julie Erhart-Graves and Elain Bedel, cautioned consumers to contact their own creditors to ask for interest rate reductions and alternative payment arrangements.  Only if you are unable to resolve your own debt issues, the two advisers agreed, should you turn to debt relief services for help.

From my viewpoint as a Board Certified Consumer Bankruptcy Specialist, I never claim that bankruptcy is the one and only solution for all debt situations.  However, I do urge debtors to obtain legal advice at the first sign of financial distress in order to explore all options.