Friday, December 20, 2013

Carrying Debt vs. Bankruptcy.... Would you rather save your behind or save your face?


Bankruptcy can seem so scary or humiliating that lots of folks resolve to just keep paying the minimums on their debts.
You know what it feels like to have more bills than you can pay.  You don’t know how bankruptcy will affect you.
It seems easier to stay the course, pay the minimums, and plod along.
It may be sort of comfortable, and knowable, but it may be a  life sentence of being in debt.
You won’t get ahead, for sure, but you  don’t have to face the uncomfortable fact  that you can’t really ever pay off  your debts.
On the surface, it seems like a rational choice.
  • It’s allowed by the terms of the credit card agreement.
  • It saves you from looking at the big picture of your finances.
  • You still have plastic in your wallet.
But what’s the real and total cost to you of paying forever?

The non monetary cost

If you decide to live with overwhelming debt  you’ll encounter  costs  that don’t  appear on your balance sheet.
Being in debt is stressful.
One of the old surveys  measuring stress listed financial problems as a major cause of stress, along with death in the family, divorce, birth of a child, and serious illness.  Having a mortgage of more than $150,000 was deemed to be a serious source of stress.  These days,  I regularly deal with Californians whose mortgage debt is $500,000 to $900,000.  By that definition, everyone I see is stressed.
Health professionals have long cataloged the bodily consequences of stress.  It is not just something you live with and tough it out.  It shortens life as well as detracts from the quality of  life.  I worry about the life expectancy of some of my clients.
However, new academic studies have expanded our understanding of stress.
They found something absolutely new.

Stress makes you stupid

And it’s not that it is the stupid who get into debt.  It’s not that getting into debt was necessarily stupid.
The stress caused by debt reduces your ability to perform intellectually.  You make new, bad decisions because of stress.
The researchers from Harvard tested IQ’s in a controlled setting in a shopping mall in New Jersey and in the field in a farming community in India.
Constant worry about paying bills intrudes on your thinking, and diminishes the mental resources you have to apply to all of life’s decisions.
In the American  lab setting, financially worried subjects lost 13 IQ points.  In the field, Indian farmers who got paid just once a year improved their IQ by 25%  after the harvest when they had money in their pockets and no immediate money troubles.
Wherever it’s found, stress over money  makes you less intellectually capable.  No matter how you got into debt, being in debt reduces your ability to make good decisions about anything.

Challenging myths

So, the challenge for those stressed by debt is to make good decisions about the alternatives to being in debt.  That can be a tall order when you aren’t thinking well.
Get good information.  There’s lots of it here on this site, from highly experienced bankruptcy lawyers.
Good financial counselors can assess whether you have a realistic chance to become debt-free in a reasonable time outside of bankruptcy.
Confront the myths about bankruptcy.  Many are just that:  myths.  Fanciful tales unconnected to reality.
Recognize that lots of the “avoid bankruptcy at all costs” hype comes from people who profit by your continuing to pay on impossible debt, or people who want to sell you an alternative solution.

Get smart

A first step is to recognize  that your debts may be impairing your thinking.
Get the facts, enlist some help, and consider whether the alternatives to living in debt are viable for you.
Just hunkering down and  paying the minimums, and remaining impaired may be stupid.


Cheung v. Wells Fargo Bank, N.A., 2013 Westlaw 6017497 (N.D. Cal.).

Facts:  Following a nonjudicial foreclosure, the defaulting borrower brought suit against the foreclosing creditor, claiming that the foreclosure itself had been wrongful because the original lender had improperly transferred the mortgage to a securitization trust after the deadline contained in the securitization agreement itself. As a result, the mortgage was never owned by the party that conducted the foreclosure sale.  The creditor moved to dismiss the action on the ground that the borrower had not tendered the balance due.

            Reasoning:  Citing Fleming vs. Kagan, 189 Cal.App.2d 791, 11 Cal. Rptr. 737 (1961), the court held that tender is not required when the transaction itself is void due to fraud. Therefore, the wrongful foreclosure cause of action was properly brought. For the same reason, the court held that the mortgagor could seek cancellation of the written instruments, since the title documents themselves were void.

            Author’s Comment:  I think that Fleming is distinguishable.  In that case, the underlying debt had already been paid off, and there was evidence of fraudulent behavior.  Here, the underlying debt was never paid, and there is no evidence that the borrower in this case was defrauded by anyone.

            But the larger issue – the tardy assignment of the mortgage to the trust after the deadline – is terribly troubling because there are thousands of mortgages that fall into the same category. A few other courts have validated the theory that a borrower can challenge a completed foreclosure on the ground that the mortgage securitization trust had no standing to foreclose. See, e.g., Glaski v. Bank of America, N.A., 218 Cal.App.4th 1079, 160 Cal.Rptr.3d 449 (2013).  Surprisingly, the court in Cheung did not cite Glaski, a California state court decision, even though the result in Cheung was purportedly governed by California law.

            For a complete discussion of Glaski, see 2013-32 Comm. Fin. News. NL 66, Commercial Finance Newsletter Borrower May Sue for Wrongful Foreclosure When Assignment of Mortgage to Securitized Trust Occurs After Trust's Closing Date.