Debtors are required to list all of their property in their bankruptcy schedules, and a claim against another party is considered an asset. Unless the proceeds of the claim are exempt under the Bankruptcy Code, the trustee in the bankruptcy case may be entitled to step into the shoes of the debtor and receive any money that is collected. That money will then be distributed to the debtor’s creditors.

You should be careful to tell all your clients that they should inform you if they are currently or later become involved in a bankruptcy case, and also to inform their bankruptcy lawyer of any possible claims or lawsuits they have. You may be required to apply to the bankruptcy judge for approval of your employment to continue with a lawsuit in which you represent the plaintiff if your client becomes a debtor in a bankruptcy case.  The best course of action is to contact your client’s bankruptcy attorney as soon as you become aware that the client plans to file a bankruptcy case, so you can work together to protect your client’s rights.

Even if you or your client has not received official notice of the bankruptcy case filing, actual knowledge is enough to support damages for violation of the automatic stay.

Some types of cases are not stayed by the bankruptcy filing, such as child support enforcement actions, paternity suits, and some other types of actions. But state court judges often want a “comfort order” from the bankruptcy court that specifically states the litigation will be allowed to continue, and under what conditions. If in doubt, it is best to consult with a bankruptcy attorney or reach an agreement with the debtor’s bankruptcy attorney before continuing to prosecute any action against a bankruptcy debtor.

For example, the filing of the bankruptcy case prohibits the foreclosure sale of a home, repossession of a vehicle, levy of a bank account, or even a phone call to the debtor attempting to collect a debt. If a creditor ignores the stay and continues with collection action, the debtor may file a motion in bankruptcy court for violation of the automatic stay. The creditor may be found liable for monetary damages and attorney’s fees to the debtor, and other penalties may be imposed by the bankruptcy judge for the violation.

The automatic stay is one of the most powerful remedies available in any court, and obtaining the stay is often the reason for filing the bankruptcy case. If a debtor is facing foreclosure, repossession of a vehicle, has been served with a lawsuit, or is being harassed by creditors, the immediate effect of the automatic stay protects the debtor so that he or she will have an opportunity to restructure or eliminate their debt without losing property.

Some of the exceptions to the automatic stay include family law matters, such as paternity suits, custody and visitation actions, child support proceedings, divorce, or actions regarding domestic violence. Criminal proceedings are also unaffected by the automatic stay.

If you are a creditor, it is very important that you consult a lawyer before taking any action to collect a debt once you are aware that a bankruptcy case has been filed. If you are a debtor considering the filing of a bankruptcy case, you should obtain the advice of an experienced bankruptcy attorney who can advise you how the automatic stay may help you deal with your creditors and protect your property.

Politico reports House Financial Services Chairman Barney Frank led Democrats in attacking “banks and other financial players for employing an army of lobbyists to fight against” the proposed agency. The lawmakers “have teamed up with a coalition of labor unions, consumer groups and civil rights activists, and they vowed to fight back all summer long.” Frank “intended to mark up legislation to create the agency next week, but delayed action until September largely because of the pushback from the industry.”

The Washington Post reports Frank “said that the financial industry’s ‘highest priority is killing this agency.’” At a news conference, he said, “I’ve been disappointed. I didn’t expect them to cheer for this. But I’ve been disappointed at the energy they’re putting” into opposing it.

In a Wall Street Journal (7/23, A15) op-ed, Judge Richard Posner writes, “Will the epitaph of the Obama administration be ‘too much, too soon, too costly’? Among worrisome signs is its proposed Consumer Financial Protection Agency Act of 2009. The agency would have regulatory authority over retail financial products such as mortgages and credit cards, with the aim, the bill says, of ensuring that consumers ‘have, understand, and can use the information they need to make responsible decisions.’ But the agency will go beyond the conventional consumer-protection function of providing information. It also will design ’standard’ consumer financial products that will contain whatever ‘features or terms [are] defined by the Agency for the product or service.’ The seller of a mortgage or credit card, for example, will be required to offer the customer the agency-designed product.”

From the American Association for Justice news release.

Recently, I was watching the “Today” show and heard that an upcoming segment would address bankruptcy. I looked forward to hearing what Carmen Wong-Ulrich, a financial reporter for CNBC, had to say. I was deeply disappointed to hear her say that in a Chapter 7 case, “you lose all of your assets.” That is completely incorrect, yet millions of Americans now believe what this “expert” said on national television.

However, there is some good, accurate information available, and I recently found an excellent article on the U.S. News and World Report website. The author, Kimberly Palmer, interviewed several bankruptcy attorneys, and in particular quoted Carey Ebert, president of the National Association of Consumer Bankruptcy Attorneys, who is a bankruptcy attorney and Chapter 7 trustee in Hurst, Texas. Those attorneys offered the following tips:

1.  Take a close look at your budget. Consumers are required to take a credit counseling class before filing a bankruptcy case, in order to give them a chance to consider other ways to resolve their debt. A bankruptcy attorney can give you the names of credit counseling organizations that are approved by the bankruptcy courts in case you decide to file a bankruptcy case afterward. If you take such a course from an unapproved agency, you will have to take the course again from an approved company before filing bankruptcy.

2.  Prioritize your payments. Pay for your important assets first, such as your house and cars. Credit card payments should come last, after your home, vehicles, food, utilities, and other necessities. If you are unable to buy groceries, gasoline, clothing, and other necessities, but are still making your credit card payments, you should seriously consider speaking to a bankruptcy attorney.

3.  Exhaust your other options. Some people are able to negotiate alternate payment plans with their creditors or obtain loan modifications. However, most people who enter into even reputable debt payment plans are not able to complete the programs, and end up back where they started, sometimes after paying thousands of dollars. Often, a bankruptcy case will cost much less than the amount of money spent on a failed attempt to complete such a program.

4.  Consider your credit score. Most people who are considering bankruptcy already have troubled credit reports, and wiping the slate clean enables many people to recover and begin improving their credit after the bankruptcy case is concluded. A bankruptcy case does stay on your credit report for 10 years, but has less effect as time goes by. If a debtor continues to make on-time mortgage and car payments during and after the bankruptcy, their credit score will improve quickly.

5.  If it’s the right decision, don’t wait. Once you consider your other options and decide bankruptcy may be the best decision for you, there is no reason to wait. Continuing to make payments to creditors is usually a waste of money if you have decided to file a bankruptcy case.

6.  Get professional help. Bankruptcy attorneys usually offer free initial consultations and arrange for payment plans. And bankruptcy attorneys know how to protect your assets and avoid unnecessary loss of your property. Often, people do such things as use up their retirement funds or transfer property in the mistaken belief that they would otherwise lose those assets in bankruptcy. It is much better to learn the facts before making any bad decisions.

7.  Stay away from scams. Ads in newspapers, on the radio and TV, and on the internet that promise to cut your debt without bankruptcy are often scams. Normally, the companies charge up-front fees, and then require large monthly payments to build up a fund to use for settlement with creditors. During that time, creditors continue to add interest and late fees, and the balances on the accounts grow to a point where settlement is impossible. By the time the debtor realizes that, the settlement companies have already received their fees, while the debtor is left with the same or higher debts than before.

8.  Keep your car and house after filing. In most cases, debtors are able to keep their homes and cars after filing bankruptcy, along with most or all of their other assets. Often, adjustments can be made to interest rates on vehicles, and in a Chapter 13 case, affordable monthly payments can be made to catch up on past-due mortgage and vehicle payments.

9.  “Hang in there”. Bankruptcy is not a simple process, but with the assistance of a good lawyer, most people find they are much happier after filing bankruptcy than they were before. Protection from creditor harassment and the opportunity to get a fresh start enable you to provide a solid financial foundation for your family.

Carolyn Chesnutt, a bankruptcy lawyer with Addison-based Charles R. Chesnutt, P.C., stated, “Often the most responsible, loving, hardworking, bill-paying people file for bankruptcy because of medical debt.”

Todd Mark of Frisco, who is vice-president of education at the Consumer Credit Counseling Service of Greater Dallas, found himself in the same situation as many of his clients. In February 2006, his two-year-old son, Josh, needed kidney and bladder surgery at Children’s Medical Center in Dallas. Mark was left with a $19,000 bill, even after the insurer paid 80% of the medical costs. Mark was fortunate to have enough money to pay the bill, but recognizes that many others do not.

Mark’s average client in 2008 had a gross income of $39,000 and unsecured debt of $28,000. According to Mark, most of that debt was related to divorce, layoffs, medical bills, or a combination of the three. “If you don’t have emergency savings, you’re one step away from financial crisis, whether your one step is a twisted ankle or a car wreck,” Mark said.

Hurst bankruptcy attorney David Ebert of the Ebert Law Offices PC confirmed that his clients follow the same pattern. “For those without cash or other liquid assets, the alternative is credit cards,” Ebert said. Ebert said that he processed 300 bankruptcies last year, and 60% involved high medical bills.

The rise in uncollectible debt is tied to the unemployment rate, which reached 8.9% in April 2009. The credit card defaults could stifle attempts by the Federal Reserve to get credit flowing to consumers through the $1 trillion Term Asset-Backed Securities Loan Facility, which went into effect in March. And it is likely that the money that does flow to consumers will reach those who need it least.

The TALC program is meant to expand credit by providing money to investors buying bonds that are backed by mortgages, auto loans, and a variety of other debt. Credit card issuers rely upon the asset-backed market to free up their balance sheets and finance new lending, by packaging and selling credit card loans to trusts that turn them into bonds and sell them to investors.

Credit card lenders have reacted to mounting losses by closing unused accounts, pulling in credit lines, and raising fees and rates. Outstanding credit card debt has dropped by $21 billion since September 2008, due to a lack of desire to lend and reduced demand from consumers to borrow. Even so, the loan portfolios of the top six credit card issuers fell by only a 1.9% annual rate in the first quarter of 2009.

Even if unemployment rates level off as expected, charge-offs and delinquencies could continue to climb as many consumers deal with reduced incomes and breaks in income. Many consumers are also angered by reduced credit lines, increased fees and rates, and are increasingly turning to bankruptcy protection to free themselves from credit card debt.