A somewhat misleading article in the LA Times

The Sunday LA Times Real Estate section printed an article on bankrutpcy today, demonstrating the way that a Chapter 13 can help prevent a foreclosure. All in all, it is a good article, and does get across the point that a Chapter 13 can help prevent a foreclosure, and can be a good tool in states with a "non-judicial" foreclosure process (Missouri is this kind, Kansas requires judicial intervention to foreclose). In Missouri, after the notice of right to cure, you have as little as 50 days to either file bankruptcy or otherwise satisfy the mortgage lender before a sale. After the sale, there is almost nothing to do to save the house.

The article is not without flaws. We begin with the following statement:

But whether to file for bankruptcy can no longer be a spur-of-the-moment decision. Under a change in the law that went into effect in October 2005, before you can file you are required to go through credit counseling from a nonprofit agency approved by the Justice Department's U.S. Trustee Program.

Bankruptcy has never been a spur-of-the-moment decision. The filing of a case may be a last-minute affair, but any attorney worth their bar license requires an in-depth interview before recommending a bankruptcy, and certainly requires significant records and documentation before a filing can be completed (save for true emergencies, but that is a different matter). And I doubt seriously that any of my Chapter 13 clients have come in to file on a whim. This is the kind of hackneyed portrayal of consumer debtors that allowed the deeply flawed 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (which neither prevents abuse nor protects consumers) to pass in the first place. The author apparently could not find either a debtor or debtor's attorney to contribute to the article, so he went with the poor stereotype.

Stepping momentarily from my soapbox, the author oversimplifies the qualifications for a Chapter 7 bankruptcy, stating "If you earn less than the median income for your state, you can file under Chapter 7...." This is not entirely true. One could, in theory, still have sufficient excess income with a below-median income to disqualify them from a Chapter 7. Additionally, many over-median debtors still qualify for Chapter 7, if the "means test" shows they have little or no disposable monthly income. A debtor with a large mortgage payment will often qualify for a Chapter 7 despite being above-median.

The above matter speaks to one of the great myths of the 2005 act: That you can no longer qualify for Chapter 7 Bankruptcy. Many debtors in my office have asked just that question, and it is disappointing for the newspaper to help perpetuate that myth.

The final problem with this article falls a bit lower, when the Times author claims that if a Chapter 13 fails, everything is liquidated. That is far from the truth - a Chapter 13 that fails is most often dismissed, which does not require the liquidation of any property (though often leads to a foreclosure). Liquidation only happens after a debtor converts a Chapter 13 to a Chapter 7, assuming they qualify as a Chapter 7 debtor.

The article seems to attempt to reach the conclusion that filing a Chapter 13 is the worst thing you can do, even to the greater detriment of your credit than a foreclosure. This is simply oversimplistic. Before you reach the stage of imminent foreclosure, call a bankruptcy attorney. They are ethically required to give you the options as they apply to you. Additionally, the credit counseling process ensures you get a second opinion before choosing bankruptcy. Sometimes bankruptcy is the best choice for you, sometimes not. But if you shut options out before you start, you may do more harm than good.