A lesson from the past

Early Debtors Faced Jail at Own ExpenseUntil All Was Repaid
January 30, 2006
Cynthia Crossen - The Wall Street Journal Online

One piece of baggage America's first settlers carried with them from England was the belief that not repaying one's debts was a moral failure. As in England, the colonists' penalty for such wickedness was often prison.

The theory behind jailing debtors was that the threat of incarceration might persuade them to reveal hidden assets. Or their families might take pity and pay their ransom. But if the debtor was truly penniless, he could be sentenced to what amounted to life in prison. Unlike murderers, rapists and thieves, the debtors were also responsible for paying their own upkeep, thus putting them even further into debt.

As a 16th-century English judge declared, "If a debtor can't feed and clothe himself, let him die, in the name of God, if he will and impute the cause of it to his own fault, for his presumption and ill behavior brought him to that imprisonment."

Two centuries later in New Hampshire, an aged Revolutionary War veteran remained in prison for almost four years because he couldn't pay his debt and the bill for his imprisonment. During that time, his original $8 liability grew to almost $300.

And if a debtor had dependents, wrote Peter Coleman in his 1974 book "Debtors and Creditors in America," jailing him "threw the burden of caring for them on friends, charity or the public."
But the Old World attitude toward debt as a breeding ground for extravagance and sin proved difficult to sustain in the New World, where cash was in short supply and economic growth would have been stunted without credit. Furthermore, imprisoning healthy workers deprived the labor force of badly needed hands. So some colonies allowed debtors -- without their consent -- to be bound in service to their creditors for as long as seven years.

This had its own unintended consequences: Some Northern merchants kept their workers on the fishing grounds off Newfoundland by plying them with rum and then declaring them defaulting debtors when they couldn't pay their liquor bill, Mr. Coleman wrote.

The colonies gradually developed more forgiving laws on debt, recognizing that owing money could be the result of bad luck rather than evidence of fraud or indolence. "Crops fail, prices fall, ships sink, warehouses burn, owners die, partners steal, pirates pillage, wars ravage, and people simply make mistakes," wrote Bruce Mann in his 2002 book "Republic of Debtors." "Failure was the down side of entrepreneurial risk. This made failure the potential common fate of all merchants."

Colonial lawmakers began taking a more charitable view toward debtors, but they were likelier to excuse a rich defaulter than a poor one. In Connecticut a legal commentator argued that rich people who couldn't pay their debts shouldn't be forced into servitude, the way poor people were, because "where a man has lived in affluence and by some unforeseen misfortune and unexpected accident is reduced to poverty, it would be cruel to aggravate his wretchedness by subjecting him to servitude."

Indeed, when some large speculative financial schemes collapsed after the Revolutionary War, many wealthy men were suddenly bankrupt. One of them, Robert Morris, who had signed the Declaration of Independence and provided critical financing for the war, lost his fortune speculating on land. Sentenced to debtors' prison in Philadelphia in 1798, Morris rented the best room in the jail and outfitted it with a settee, writing desks, a bed, a trunk of clothes and other comforts of home.

However lavishly they could outfit their prison cells, though, rich and poor faced the same dim future. There was no way an insolvent could get a fresh start -- the "holy grail of debt relief," as Mr. Mann put it. In prison or out, debtors were expected to repay every penny they owed their creditors, even if it took them the rest of their lives.

Although the Constitution gave Congress the power to pass "uniform laws on the subject of bankruptcies," Congress first began seriously debating bankruptcy laws in 1797. Northern federalists believed a uniform bankruptcy law would encourage economic growth because honest merchants who had suffered from unforeseeable misfortunes could "begin the world anew." Jeffersonian Republicans feared the increased power of federal courts. They also worried that because people could be thrown into bankruptcy involuntarily, farmers would lose their property to impatient creditors, whose eagerness to sell would result in unfairly low prices.
Congress passed a bankruptcy law in 1800 but then repealed it three years later. Not until 1831 did New York abolish prison for most debtors; Pennsylvania kept its debtors' prisons open until 1842.

William Keteltas, a lawyer who had been sent to debtors' prison in New York in 1800, published 25 issues of a jailhouse newspaper called "Forlorn Hope." "What can the relentless creditors of many who have died under the infliction of their torture expect from the throne of grace," a letter writer to the newspaper asked, "when they pray with the words, 'Forgive us our debts as we forgive our debtors'?"

It's what we don't know that hurts us!

This secret score can hurt your credit

A credit score looks mainly at your history of paying bills, but a ‘bankruptcy risk score’ looks ahead at how likely you are to file -- and lenders are paying attention. You probably already know about your credit score. That's the number that helped increase your credit card limit or perhaps prevented you from purchasing your dream car. Well, there's another influential scoring tool you should know about:

It's called the bankruptcy risk score.

According to financial experts, this score is used secondarily to the credit score when financial institutions scrutinize a consumer's credit history. Kept tucked away from consumers for nearly 20 years, this number differs from the credit risk score, because it's a little more specific. It measures how likely a person is to file for bankruptcy.It is used by credit reporting agencies and geared specifically to lenders.Researchers say the score typically surfaces when a consumer gives the bank permission to pull his credit report during the application process for a new loan, bank card or credit card, and during the periodic review of clients' accounts to determine whether to increase a consumer's credit limit.

Karen Gross, director of the New York Law School Economic Literacy Coalition, believes some lending institutions are using the score for their own compliance risk."Banks are required, by law, to keep a reserve based on potential bad debt losses," she says."In other words, to ensure the solvency of our lending institutions, we require that they maintain a certain capital-to-risk ratio. Bankruptcy scores give banks a more finely tuned instrument by which to assess true risk within their portfolio. As such, the bankruptcy scores could enable lenders potentially to lower their bad debt reserves because they can more accurately assess and hence narrow potential risk."

Aim for a low score

Credit reporting agencies weren't the only ones dabbling in this innovative approach.Researchers say a few credit card companies in the late '90s developed a means to make the score a more powerful tool based on a combination of factors, including information that was right in front of them: consumers' spending habits and types of charges."They could see that level of granular detail. So what they tried to do is combine credit bureau information and transactions to get a better idea," says Mike Staten, director of the Credit Research Center at Georgetown University in Washington D.C. "They would use that and make the score available and even go as far as sending to issuers, that subscribe to their service, specific alerts when a person exhibits warning signs of higher bankruptcy risk."

Analysts at credit reporting agencies say advanced mathematics and data analytics are used to determine the complex score.However, they say, some variables come directly from your credit report, such as how the credit is used, how often a bill payment is late and the number of inquiries made."For a conventional credit score, you want a high number," Gross says. "For a bankruptcy score you want a low number. And to increase the complexity, the range of the numbers is not the same. The credit score has a range of 350-850. The bankruptcy score range starts in the negative numbers and increases to possibly 2,000."

Ready to go public?

Why is it kept from the public? "The argument is that people spent time and money researching the scoring model, and no one wants to disclose the model because they are giving away the value of the research that they've conducted," says Gross.However, Experian is considering making its score available to consumers."We feel that it may help consumers if they are getting in trouble with their debt," says Samah Haggag, manager of analytics at Experian.

A July study by Experian is giving consumers some insight. The study ranked the states with the highest propensity to have consumers file for bankruptcy within the next year. The top five are:· Texas· Nevada· New Mexico· Louisiana· Arizona

Economist Mark Lauritano, of Global Insight in Massachusetts, says from a broad economic view you can see the reasons why Texas would be at the top of the list."Based on studies we've done: It's a relatively young state, people are moving to Texas, there's a lot of immigration from south of the border, it has a below-average income and it has a relatively low homeownership rate," says Lauritano.The things that improve your bankruptcy risk score are the same ones that improve your credit score: Pay your bills on time and apply for credit sparingly.

Foreclosures are on the rise - Don't become a statistic

Experts foresee a wave of loan defaults as easy credit standards come back to haunt buyers. For astute investors, though, opportunities will abound.

By Steve McLinden, Bankrate.com

It might be the best time in years to buy a foreclosure home, which would mean it's perhaps the worst time for thousands of financially strapped U.S. homeowners struggling to hang onto their homes.

Many economic experts are predicting that mortgage delinquencies will rise up to 15% in 2006 among homeowners with higher-cost or "subprime" loans. About 19% of all U.S. home loans are now subprime, in contrast to just 5% 10 years ago, according to the folks at Fitch Ratings, an investment-analysis firm. A lot of those homeowners with adjustable-rate subprime loans will see their loans reset at higher interest rates in the coming months, and that will spell trouble.
The buyers are circlingOther factors expected to contribute to the default phenomenon are already-high consumer debt levels, rising energy costs and the advent of somewhat risky interest-only mortgages. So expect to see a lot of defaults on low-to-mid-level homes in 2006, although your opportunities will vary from market to market, of course.

That said, foreclosure buying is a very competitive game right now, with so many real estate gurus advocating the strategy in books and seminars, and on TV and the Internet. Just do a Web search under "foreclosure opportunities" and you'll see what I mean. Obviously, more and more buyers -- particularly investors -- are looking for an advantage in the game.
While there's not space here to go through all the strategies, buying a "pre-foreclosure" from a defaulting or financially strapped owner might be the best way to go on the consumer end. The county clerk's office keeps lists of such pre-foreclosures. Seek out titles where a "lis pendens" notice has been filed by the lender.

Be tenacious – and cautious

Before contacting and engaging in negotiations with the owners of these properties, make sure you are pre-qualified for a loan. You'll probably want to enlist a buyer's agent to make sure your best interests are represented and that you make the right offer -- which would ideally be at a below-market price.

Finding an agent with foreclosure experience would also be a plus.

The foreclosure-property auctions that you see advertised are usually the realm of more heavily bankrolled professional investors who stand ready to pay cash for a property.If you are brave and well capitalized, you might try your hand at it. You might want to attend one or two for observation before acting. Whichever approach you try, don't give up if your first few efforts don't pan out. Eventually, your tenacity will pay off in substantial savings.

Bankruptcy Myths

Myth 1: Under the NEW bankruptcy law, there's no more bankruptcy (or it's too late to file).

Not True. In fact...nothing could be further from the truth. Sure you heard it in the press, but it's just not true. The news media overcooked the whole story. The truth is that you can do almost everything under the NEW law that you could do under the OLD law. In some ways, the new law actually increased the benefits of filing bankruptcy.

Myth 2: Everyone will know you have filed for bankruptcy.

Unless you're a prominent person or a major corporation and the filing is picked up by the media, the chances are very good that the only people who will know about a filing are your creditors and the people who you tell. While it's true that your bankruptcy is a matter of public record, the number of filings is so massive, that unless someone is specifically trying to track down information on you, there is almost no likelihood that anyone will even know you filed. However...telling someone that someone else filed bankruptcy is good gossip...just like telling a someone you heard so-and-so is getting a divorce. So...if you don't want everyone you know to know you filed bankruptcy....you need to keep the information to yourself. As for newspapers...my experience is that most papers don't include information about who filed bankruptcy.... and even if they did...think about it....who would be interested enough to read that stuff.

Myth 3: You will lose everything you have.

Nothing could be further from the truth. The fact is....most people who file bankruptcy don't lose anything.

First....while laws vary from State to State, every State has exemptions that protect certain kinds of property. Using North Carolina as an example.....there are exemptions to protect such things as your house, your car, your truck, household goods and furnishings, IRAs, retirement plans, the cash value in life insurance, wages, and personal injury claims. There is even a "wildcard" exemption of $3,500 per person that can be applied wherever you want it. In those rarer situations where you have more property than can be protected by available exemptions...there is Chapter 13. In Chapter 13...you can even keep this property by paying a higher Chapter 13 plan payment.

Second.....as mentioned above (Myth 2)....filing bankruptcy does not generally wipe out liens. Therefore...if you want to keep a car, truck, home or business equipment that serves as collateral for a loan....you need to keep paying on the debt. If you make these payments and have exemptions to cover any value above what is owed....you can rest assured you will be able to keep these items.

Myth 4: You will never be able to own anything again.

A surprising number of people believe this....but this is completely false. In the future...you can buy, own and possess whatever you can afford.

Myth 5: You will never get credit again.

Quite the contrary. Filing bankruptcy gets rid of debt....and getting rid of debt puts you in a position to handle more credit....and this makes you look more attractive to would-be lenders. In my experience.....unfortunately....it won't be long before you're getting credit card offers again. I say "unfortunately" because I don't want you to get right back in debt again. At first...the would-be lenders will want more money down and will want to charge you higher interest rates. However....over time....if you are careful, and keep your job, and start saving money, and pay your bills, and do things that will put good marks on your credit report....the quality of your credit will get better and better. Generally...in my experience...if a client has not re-established good credit in 2 to 4 years...sufficient to buy a car or even a house....it's not because they filed bankruptcy. It generally means that something else has happened after the bankruptcy to hurt their credit.

Myth 6: Filing bankruptcy will hurt your credit for 10 years.

Not true. You are getting 2 completely different concepts confused with each other. You are getting the fact that bankruptcy is reported on your credit report for 10 years mixed up with the effect that reporting will have on your credit. Just because something is reported on your credit report does NOT necessarily mean it will have a negative effect on your credit standing.
First...let's get one thing out in the open. By the time you need to make an appointment to see a bankruptcy attorney.....your credit is already messed up or maxed out...or both. This being the case....you have no credit for bankruptcy to hurt.
Furthermore...as I mentioned above...in my experience...if you have not re-established good credit in 2 to 4 years after you file bankruptcy.....most likely....it has nothing to do with the fact that you....once upon a time....filed bankruptcy...and it certainly has absolutely nothing to do with the fact that your credit history still shows an old bankruptcy.


Myth 7: If you're married...both you and your spouse have to file for bankruptcy.

Not true. In many cases...where both husband and wife have a lot of debt....it makes sense and saves money for them to both file....but it is never a requirement under the law. We have many cases where only one spouse has filed. The good news is that generally....if it makes sense for both spouses to file together....they can both file for the price of one filing.

Myth 8: It's really hard to file for bankruptcy.

No....it's not....at least not in the hands of an experienced bankruptcy attorney. In the hands of an experienced bankruptcy attorney...filing bankruptcy is easy. The decision to file may be hard...but once the decision is made...the filing part is easy.

Myth 9: Only deadbeats file for bankruptcy.

Not true. Most of the people who file bankruptcy are good, honest, hard-working people...just like you and me....who file as a last resort....after months or years struggling to pay the bills that left over from some life-changing experience, such as a divorce, the loss of a job, a failed business venture, a serious illness, or some family emergency...or because they honestly and mistakenly fell into debt at a young age before they knew better...before they knew anything about budgeting or how to manage money.

Myth 10: Filing bankruptcy means you're a bad person.

Not true. There's a reason over 1,000,000 Americans file bankruptcy each year...and it's not because they're bad people. Lots of good, honest, hard-working people fall on hard times. Let's face it....life can be brutal....and sometimes...the money's just not there. The bankruptcy law were created with this in mind...to make sure you have a way....if need be....to get free from the burden of debt...so that you...and your family....can have a second chance at a "fresh start".


Myth 11: Filing for bankruptcy will hurt your credit.

That's not true. Think about it. By the time you come to a bankruptcy attorney....your credit is already either messed up or maxed out. And if it's already messed up or maxed out....how can bankruptcy hurt it?The big surprise for my clients is when I tell them that filing bankruptcy can actually help them re-build their credit. Bankruptcy gets rid of debt....and getting rid of debt puts you in a better position to handle new credit....if only someone will give it to you. Therefore....bankruptcy is the first step in the process of re-building your credit.

Myth 12: Even if you file for bankruptcy, creditors will still harass you and your family.

This is NOT true. In fact, nothing could be further from the truth. The minute you file bankruptcy, the Bankruptcy Court issues an order telling all of your creditors to leave you alone. No more phone calls. No more collection letters. No more lawsuits. No repossessions. No foreclosures. Nothing. This order has a name. It is called the "automatic stay"; and it is issued pursuant to 11 United States Code, Section 362. The automatic stay prohibits you from any and all collections actions. After you file bankruptcy, the creditor is not even allowed to talk to you. In addition, the creditor must stop any collection attempts already started. The automatic stay is very powerful, and puts the full weight of the United States Courts to work for you, to make sure your creditors leave you alone. If a creditor violates the automatic stay, you have the right to bring the creditor before the Court for Contempt of Court, and to be compensated accordingly. Believe me, Bankruptcy Court Judges do not take kindly to creditors who ignore the automatic stay, and these Judges have been known to punish creditors severely. Very simply, once you file for bankruptcy, creditors must leave you alone or suffer the consequences.

Myth 13: If you file for bankruptcy, it may cause more family troubles and may even lead to divorce.

This is NOT true. Usually, it works just the opposite. Filing bankruptcy is not the problem. The problem is not being able to pay your bills. All good, honest, hard-working people feel a strong need to pay their bills, and not being able to do so, causes them to feel tremendous stress. Unless you do something to relieve this stress, the stress can quickly build to the breaking point....the marriage breaking point. Bankruptcy is designed to get you out from under the burden of debt, to protect your property and to lower your stress level. If your experience is like that of other couples, you will find that filing bankruptcy... and lowering the stress level.... can be a crucial first step in bringing the love and caring back into your relationship....which.....in turn.....gives your marriage a fighting chance.

Myth 14: You can't get rid of back taxes through bankruptcy.

We get rid of old "income" taxes for our clients all the time. By "old"...I mean income taxes more than 3 years old. Under the law...there are 3 or 4 qualifications that have to be met....but once these are met....these taxes are gone. Please note: Filing bankruptcy does NOT get rid of withholding or sales taxes...no matter how old they are.

Myth 15: You can only file once for bankruptcy protection.

The truth is....you can only file for a Chapter 7 bankruptcy once every 6 years....but after 6 years...if need be...you can file again. As for filing a case under Chapter 13 of the Bankruptcy Code....there is no such restriction. Hopefully...however...you will never need to file more than one bankruptcy.

Myth 16: You can pick and choose which debts and property to list in your bankruptcy.

I'm sorry...but you can't. Doing so would be against the law. Under the law...when you file bankruptcy...you have to list all your property and all your debts. Most people want to leave out a debt because it is their intent to keep paying on it. The good news....on this score....is that you can achieve the same goal, even though you have to list the debt. If you want to keep paying on a debt...after bankruptcy....you can. After bankruptcy....you can go back and pay anybody you want. In fact...after you file bankruptcy....there are some debts you have to keep paying on. For instance....if you have a car, truck or house loan....even though you list the debt in your bankruptcy....if you want to keep the car, truck or house....you have to keep paying on the debt. More importantly....you need to know this. As long as you stay current on the loan...and keep the property properly insured....you are protected under the law .... and you get to keep the property....because...under the law...the creditor is stuck with you and can't do anything about it.

Initial Post

I've long considered writing a book on the experiences of my clients. Every day families and individuals sit across from me at my desk and tell of their financial woes. The stories usually run along the same theme. A spouse or child became ill, the company was downsized, the mortgage interest rate increased, etc.

The bills simply got away from them. They aren't sure where it happened or when, but one morning they woke up and realized that they were too far behind and had no hope of catching up. These are the people that come to see the Jump Law Group.

Oddly, the public perception is that people who file bankruptcy have brought this on themselves. Sadly, the people who come to see me also believe that they have brought this on themselves. Nothing could be further from the truth. A lot of my time is spent counseling people on the nature of debt and how it works. That also means I have to show my client's why it is not their fault that they have to declare bankruptcy.

No one ever is happy about declaring bankruptcy and I suppose that is a good thing. But neither should people come into my office carrying the burden of the 'guilt' that they feel about declaring bankruptcy.

Do we think less of United Airlines for filing bankruptcy? Do we think less of MCI for filing for bankruptcy? No. In that case, it was merely a strategy decision for the company to protect its assets.

The same is true for the regular consumer. Filing bankruptcy is a financial decision and nothing more. It is not a moral fault as your creditors would like you to believe. Filing bankruptcy is taking advantage of your right to get a fresh start and begin anew.

The purpose of this blog is to reach out to wider audience than the clients who come to my office. 72% of all Americans qualify for bankruptcy relief. That is a significant number. We are a nation of debtors and massive debt, but we don't speak about it. Our measure of self worth is equated to the size of our paycheck or our material possessions.

This blog is a way for all of us to openly discuss how debt affects our lives. Many of my client's find it useful to write down what has happened in their lives to bring themselves to bankruptcy. I hope that this blog will allow you to do the same and show others that they are not alone.

With that said, I yield the floor to you. I have only one rule.

(1) Do not use your real name. Please post a username or something else so you won't be identified. This is a public blog and I would hate to see someones post used against them.

I wish you luck and I look forward to reading these posts as this blog takes shape. If you have questions about bankruptcy or debt, you can view the Jump Law Group website at www.jumplawgroup.com

Jay S. Jump
Principal - The Jump Law Group
528 2nd Avenue South
Kent, WA 98032
(253) 479-0241
(253) 479-0245 Facsimile
www.jumplawgroup.com