Going for Broke : Attorney Cites Chapter and Verse of Bankruptcy Law : BRUCE WHITE

When Bruce White moved his half of the law firm of Kent & White to Orange County from San Diego last year, he wasn’t too worried about making a go of it in what is arguably one of the most heavily lawyered places on Earth.

White is a bankruptcy attorney and the Santa Ana office of the federal bankruptcy court is one of the busiest in the nation. White did get a few surprises, however.

The 42-year-old lawyer grew up in Washington--his father was assistant special counsel to Presidents John F. Kennedy and Lyndon B. Johnson--so he is no stranger to fast-growth, high-income areas like Orange County.

But he went to school in Lincoln, Neb., began his practice there and spent seven years with the U.S. attorney’s office in St. Louis before relocating to Southern California in 1984, so his professional roots are thoroughly Midwestern.

And the differences between lifestyles in the Midwest and the California coast are pronounced, he says--enough to make this a great area in which to specialize in bankruptcy law.

In a recent interview in his Garden Grove office with Times staff writer John O’Dell, White discussed bankruptcy issues in Orange County.

Q. What kind of market study did you do that made you decide to expand into Orange County?

A. My partner and I checked the statistics for the Los Angeles and Orange County areas and found that bankruptcy filings in Orange County were up 40% in 1990 from 1989. That made us think this might be a growth area. And as a matter of fact, I was just in a first meeting of creditors (for a client) and the bankruptcy trustee said that filings in Santa Ana for the first three months this year have increased 60% over the same time a year ago.

Q. As a small, new office in Orange County, what sort of clients do you get? Many businesses?

A. Most are individual consumers, people who are employees of someone else. But there also are people who have businesses. There are a lot of small business owners in Orange County and business is down in this recession, so a lot of them can no longer make ends meet.

Q. Does a bankruptcy make it more difficult for an individual or small business owner to operate, or is bankruptcy now an accepted form of debt management?

A. I don’t consider it a form of debt management at all. It is a last resort. But it certainly has less stigma than in the past. Bankruptcy is no longer unusual, so lenders, employers and even possible investors in business ventures don’t automatically run you out of their offices when you tell them you’ve been in bankruptcy before. It is just a sign of the times. With the weak economy and the recession we’ve been in during the last year or so, there are a lot of people, especially in Orange County, who have filed and will file for bankruptcy.

Q. You say “especially in Orange County.” What’s different about Orange County residents?

A. This is an area where people’s expenses tend to match their income, exactly. People spend as much as they make every month. And so if you are an auto salesman and people stop buying cars, then all of a sudden your income goes from $5,000 a month to $2,000 a month and you still still have that $5,000 in expenses. I’m a newcomer, but it seems to me that it is very important for people here to keep up with the Joneses. You just have to have that new car and a new house and nice clothes. Image is very important, and very expensive to maintain.

Q. With apologies to Madonna, we’re all “material girls” here?

A. Much more so than in the Midwest. In Orange County what seems to count is where you live, how expensive your house is and whether you have a Mercedes. In the Midwest people also have these things, but they are not as important. There is not as much flash. It seems to me that people are more financially conservative in the Midwest.

Q. One criticism of bankruptcy laws is that they make it pretty easy for people who have run up a lot of debt to throw in the towel and walk away.

A. That’s pretty harsh. If someone wanted to do that, to use the process to abandon responsibility, then yes, it is easy to do. But the majority of the people who file for bankruptcy aren’t like that. Most of the people I see don’t want to be in my office. Bankruptcy is the last thing they want to go through. I don’t think I’ve ever run into anyone who just ran up all their credit cards and they walked in and said “OK, file it and screw the creditors.”

Q. What does it mean when someone has a bankruptcy on their record?

A. That’s what everyone who files wants to know. No bankruptcy is the same. The conditions that caused it aren’t the same and the creditors look at each one differently. So the best I can say is that if you file a Chapter 7, you cannot file one again for six years. And whatever form you file, it goes into the public record and anyone can look at it. And credit-reporting agencies like TRW typically keep a bankruptcy in your file for 10 years.

Q. Even though the number of bankruptcy filings is way up, most of us are still ignorant of how the system works. What occurs in a straightforward, uncomplicated case?

A. First, not everyone is a candidate for bankruptcy, even if your debts seem out of control. Sometimes people come in and they are only a few thousand dollars in debt or they have a lot of debt but there seems to be a good way to work things out. In cases like that, I usually refer them to a credit counselor. If you are a candidate, then we go through all of your financial records and business history. We list the debts and the assets, monthly expenses and monthly income. Then we consider the options. There is a Chapter 7 filing, which can be used for individuals or businesses and is a complete liquidation, and there are Chapter 11 and Chapter 13 debt-payment plans.

Q. How do these differ?

A. A Chapter 13 is a wage-earner repayment plan for individuals or businesses that are sole proprietorships. You can have up to $100,000 in unsecured debt and $350,000 in secured debt and file a Chapter 13. A Chapter 11 can be used by businesses and individuals and there are no limits on debt. In a Chapter 7 liquidation, the end result is that all the unsecured debt is wiped out and the secured creditors either get their property back or the debtor reaffirms the debt and continues making payments. In a Chapter 11, the court approves a repayment plan that must be endorsed by a majority of the secured and unsecured creditors. The plan usually makes provisions to pay off all of the secured debt and a percentage of the unsecured debt over a period of time and often involves reorganization of management and business plans. In a Chapter 13, the debtor comes up with a plan to repay all of the creditors over an extended period. A Chapter 13 is good if you have a lot of nondischargeable obligations or if you have a lot of credit card debt but also have a ton of equity in your home and don’t want to have to sell it.

Q. Nondischargeable debt?

A. Debts that cannot be wiped out by a bankruptcy. Taxes, alimony, child support. If a creditor is able to prove that fraud was involved in obtaining the credit, then that debt is not dischargeable, either.

Q. And once a repayment or liquidation plan is worked out, the creditors have to accept it?

A. There are a lot of complex maneuverings, but once the court approves a plan, the creditors are deemed to have accepted it.

Q. What happens in a Chapter 7 if there are no assets to liquidate?

A. You have the first meeting of creditors about 30 days after the bankruptcy petition is filed. Then the creditors have a certain period in which to file objections to the dismissal of the debts. If no creditors object, then the debtor is discharged from bankruptcy and starts all over. If there are objections, then a hearing is held to iron things out.

Q. What is the pecking order for creditors?

A. The costs of administering the case come first, then any taxes--the government always gets its share--then the secured creditors and, finally, the unsecured creditors.

Q. Doesn’t filing bankruptcy also stop creditors’ actions against a debtor?

A. Yes. One of the key elements of filing a bankruptcy petition is that you get an automatic stay. It is applicable in any type of filing and it basically says that the bankruptcy court has jurisdiction now and anything else that is pending is stopped. If your house is in foreclosure, that is stopped. If you are a tenant and haven’t paid the rent and the landlord is trying to kick you out, that is stayed. If someone has sued you and they have a $50,000 judgment and are garnisheeing your wages, that is stopped. Any pending civil suit is stopped. The only thing not stopped would be a criminal action.

Q. Do the creditors have any recourse?

A. Yes. They can apply for relief from a stay and usually get it if they can show that removing the order won’t be harmful to the debtor. Another aspect of bankruptcy is that there are exemptions from assets that can be sold. And the limits were just increased in California as of Jan. 1. An individual now gets $50,000 of equity in a home, which is up from $30,000. And if you are married the home equity exemption now is $75,000. It used to be $45,000. And if you are disabled or over 65--or 55 with a limited income--the equity exemption has been increased to $100,000. That might sound like a lot of equity in your home, but most people in Southern California who bought a house more than five years ago are going to have that much equity.

Q. So if I am married and have $60,000 equity in my house and file for bankruptcy I get to keep the house?

A. Correct. And if the house does get sold, you get your equity before any creditors get paid. Q. And what if I have $90,000 equity and file for bankruptcy and don’t qualify for the $100,000 exemption?

A. The rule is that equity is determined after the expenses are taken out. So if you have $90,000 equity and the costs of selling (the house) would reduce the amount you would get to less than $75,000, then the court won’t sell it.

Q. So if you are about to go bankrupt you should take out a big loan against your house to reduce your equity?

A. You cannot do that because the court would expect an accounting of all the proceeds of the loan. But there is nothing wrong with converting nonexempt assets into exempt assets.

Q. How so?

A. If you are married and own a home and have $40,000 equity in it and $10,000 cash in your bank account, there is nothing improper in taking that $10,000 and putting it into your house by prepaying mortgage payments or paying down the principal before filing for bankruptcy.

Q. In personal credit cases, counselors suggest people call their creditors and explain their situation if they get into trouble and cannot make the minimum monthly payments. Does that stave off many bankruptcies?

A. You would think that would be the case. But I don’t know. I have had many clients who have contacted creditors and been told that the creditors absolutely will not accept less than the agreed upon minimum payment. I’ve filed bankruptcies in cases where, if the bank credit card department had been minimally reasonable there would have been no reason to file and the creditors would have been repaid. But by not agreeing to a modified payment schedule, they forced bankruptcy and got nothing.

Q. Is this because the debtor is dealing with credit department people who are working from a rigid set of rules and don’t have the authority to bend them?

A. There are a lot of bill collectors who go through life with a set of blinders on. They have one function, to collect the payment. They are told that they have to move that file off their desk. That’s how they get paid. They have to move that file and if they collect the payment, the file moves. And if the people file for bankruptcy, the file moves. But if they agree to take a smaller payment, the file doesn’t move, so they don’t get paid.

Q. Is that kind of system inflexibility at the root of a lot of bankruptcy?

A. A lot of personal bankruptcy, yes. Banks are worst. They are sending us the credit cards in the mail, which is like putting a little kid in a candy store and saying “Here, get what you want and you don’t have to pay for it now.” The kid eats for an hour and gets sick and at the end of the month he gets a bill for what he ate that made him sick. The banks make it easy to get a credit card or a line of credit, and they are charging 19% or more interest even though their cost of money keeps going down. I had one recently where the man’s work schedule was cut from five days to one day a week so it became impossible to make payments. He called the credit card company and told them his situation and they said they were sorry but if he missed a minimum payment they would turn it over to a collection agency. That was after 20 years of never missing a payment.

Q. Is it overindulgence in credit cards that gets most people you see into financial trouble?

A. No. I think that what gets most people into trouble is a decline in their income. Whether it is a second job that has to be eliminated, or a cut in pay or hours, or the loss of the primary job. Somehow their income decreases and their expenses don’t.

Q. That gets us back to your contention that people in Orange County tend to fix their expenses at their income levels, so they don’t have much to set aside for a cushion.

A. My experience is that most people live from paycheck to paycheck and feel really good if they can break even at the end of the week.

Q. Are people spending half or more of their real disposable income on housing?

A. Real close to that. And then if you are leasing or buying a new car, it is not unusual to have car payments of $500 a month. That’s $1,000 for two cars so both of you can get to work. Add the $2,000 house payment and you are talking about $3,000 a month, right off the top, before food or clothing or medical or insurance or entertainment.

Q. As bankruptcy filings have increased, has there been an increase in abuse of the system?

A. There are an inordinately high number of cases in which people are filing bankruptcy solely to avoid eviction.

Q. How does that work?

A. People don’t pay their rent, so they get a three-day notice and an unlawful-detainer action is filed and then they are notified they will be kicked out of their place within a couple of days. So they go down to the court and they file bankruptcy, and even though they have no intention of pursuing the filing any further and it gets dismissed a month or so down the road, in the meantime the automatic stay takes effect and the landlord cannot evict them.

Q. How long can that stall an eviction?

A. It probably gets them another 30 days. What normally happens is that the landlord files for relief from the stay and it is granted. But it only costs the tenant $120 to file the bankruptcy petition, so if the rent is $600 or $700 a month and the tenant can stay for another month for just the $120 petition fee, then it is a good deal--for the tenant.

Q. What is your advice on staying out of bankruptcy court?

A. The only answer is to live within your means.