There’s a popular maxim in law: “ignorance of the law is no excuse”. What does it mean? Put simply, you can’t kill a man, then walk into court and claim you didn’t know that homicide was illegal. But this legal doctrine extends to all laws, not just homicides.
I’ve often joked that if this statement is true, why do people need lawyers? If everyone is expected to know and understand the laws, why do lawyers need to exist to interpret laws and give counsel to our clients?
Nevertheless, ignorance of the law is no excuse. And so today, I wanted to address some common misconceptions in bankruptcy law. By no means do I expect that someone without training in law to know and understand bankruptcy law as well as I do. This is why I try to educate my clients on how to conform their behavior before filing for bankruptcy – so they don’t make any bad decisions. Sure, some of my clients ignore my advice and end up screwing themselves over in the process. But what about the clients who make a mistake before they even meet with an attorney?
So with that in mind, here are some things for you to keep in mind…
Rule #1. Read the stuff you sign.
I know very few people actually stop and take the time to read a lengthy contract, mortgage, or service agreement. But if the other party to the agreement does something that you don’t like, but it is permitted in the contract, you’re not going to gain the sympathy of a judge when you say “I didn’t know my mortgage had a variable rate, even though it says so in the paperwork I didn’t read.”
Rule #2. The words on documents have meaning!
“That’s not my car – that’s my daughter’s car.”
The title to your daughter’s car is in your name because your 17 year old daughter isn’t old enough to own property. It doesn’t matter if the car is used by her exclusively. Your name is on the title. It’s YOUR car.
“The credit card is not in my name, it is in my dad’s name. I use the card, so it’s my debt, and I pay it.”
No, it’s your dad’s debt. That your dad was willing to let you rack up charges on the card doesn’t make it any less his responsibility. Your discharge won’t wipe out his debt, even if you were the sole user of the credit card. Now, if you cosigned on it, the discharge will eliminate your liability. But dad is still on the hook for the card. Oh, and any payments that you make on the card are for his benefit, and constitute a preference.
“This credit card is a business debt because I use the card exclusively for business purposes.”
LLC’s and corporations are separate legal entities that can owe separate debts that the owner of the LLC or corporation is not individually liable for (notwithstanding any personal guarantees, which are essentially cosigned debts between the business and the business’ owner). However, having a business does not automatically convert certain debts into business debts, just because you use a credit card for business purposes. Did the LLC or corporation sign the credit agreement? Or did you sign it?
The first two examples demonstrate that there are a lot of informal agreements that exist between families and friends that have little or no legal bearing. Let’s do the opposite. What about a credit card that is only in your name? Is your spouse liable?
Rule #3. Sometimes, the words on documents have no meaning!
Just because I want to confuse you… If you live in a community property state (like Wisconsin), are married, and rack up debt after you are married, then your spouse is most likely liable for those debts. There are exceptions to the rule, of course. But generally, it doesn’t matter that the credit card is only in your name. If it is a post-marital debt, both you and your spouse bear liability on the debt.
Rule #4. Unless you’re renting or living with mom and dad, you own the real estate.
“I don’t own my home. The bank does.”
Okay, you own your home. The bank has a lien against your home – known as a mortgage. This is not the same as ownership. Check the deed. It’s your name on the deed, not the mortgage company’s. You own it. The mortgage company can seize the property if you don’t pay the mortgage. But until that happens, you own it.
Rule #5. Bankruptcy is good against the world.
“I’m not filing bankruptcy on that.”
Yeah, that’s not how this works. Except in asset cases, debts are not dischargeable or non-dischargeable because you did or didn’t list them on your schedules. You can choose to reaffirm a mortgage or car loan. But you still have to list those debts as a matter of due process. Same is true of non-dischargeable student loans, child support, and taxes. The laws and what you do after a bankruptcy case is filed will determine what goes away and what doesn’t. Don’t get cute with your lawyer and conceal debts that you “don’t want to include.” That’s now how this works, and you’ll end up screwing yourself over when you do this.
I could go into a lot more detail about this rule, but suffice to say, I’ve written about it extensively in the past.
Rule #6. Just because you hide your assets from your family or the IRS doesn’t mean you should hide them from your lawyer.
“Do you own any firearms or jewelry?”
“Not that anybody knows about.”
“Well, now I do. What do you have?”
“Let’s pretend that I didn’t tell you.”
“Let’s pretend you did.”
“These are well hidden. Nobody would ever find out!”
“Care to test that theory under the penalty of perjury?”
Don’t get cute with your lawyer. Especially when it is unlikely that such disclosures would even have a negative impact on your case. Do you really want to get sentenced to federal prison for committing perjury over something that wasn’t going to get you in trouble in the first place?
Rule #7. A good lawyer will grill you and make you uncomfortable. It’s better that your advocate do it, rather than the trustee or a judge.
“I haven’t had any income in the past six months.”
“Really? Well, you indicated that you are current on your mortgage payment. You have kids that you’re feeding. How are you paying all of these bills without any income?”
Sound insulting? Maybe. But it’s better that I know [about the $50,000 you have squirreled away under your mattress, or the under-the-table cash job you have been working and concealing from the IRS, or that you’re charging $5k a month to your credit cards] now, rather than waiting for the judge to ask you this question in court, when it’s too late for me to do anything to help you. Attorneys don’t catch every inconsistency, but a good lawyer will catch most of them. Rather than be insulted that your attorney is grilling you, be grateful that he uncovered the issue before someone else did.
Rule #8. Your emotions are seldom relevant.
Sure, there is a fair share of unfair and unjust laws on the books. Bankruptcy laws are no different. For as much as I can bash legislators for being corrupt and stupid, the fact of the matter is that they strive to write laws that are fair and balanced, and laws that take into consideration the interests of all parties, laws that protect the rights of all parties, and laws that produce just results.
Accordingly, many laws (particularly bankruptcy) is written in very sterile and formulaic terms. A lot of the emotional appeals people make – about how they tried really hard to pay their bills, or that the debt isn’t their fault, or that an acquaintance duped them into losing all sorts of money. Most of that won’t matter.
Which is not to say I discourage my clients from telling me these stories. But you need to understand that the bankruptcy laws are written in a very formulaic and sterile manner. In exchange for a discharge, the court demands information about the money you earn, the money you spend, the stuff you own, the debt you owe, and information on recent transactions. It’s a very bureaucratic process.