Be wary of products promising to reveal ‘bankruptcy secrets’

July 26th, 2010 by Mike Hinshaw

We’ve alerted readers several times about shady companies in the “debt-settlement” industry (most recently here) who take advantage of consumers. The problem is so severe and widespread that Congress and the GAO had to get involved.

Well, now we’ve noticed a new angle, but no officials are warning about this, yet.

You’ve probably seen  those seemingly endless, “let-me-tell-you-a-story,” ad pitches (so-called “long-copy”  in Web marketing lingo that’s derived from the older, direct-mail industry) that seem to go on forever, usually presenting a personal story along the lines of “how I stumbled upon these secret methods.” Typically they have lurid, multi-deck headlines that scream (BECAUSE IT’S EXCITING!!!!!) and have key phrases highlighted (often in yellow) and “code word,” take-action-now phrases that are underlined or otherwise set off by some graphic device.

‘Secrets’

OK, now we’re not saying all such ads are for scams or for bogus products. However, we do read a variety of news and business publications and search the Net in order to stay abreast of bankruptcy-related topics. Lately, we’ve noticed such long-copy ads turning up in news searches (that is, not just Web sites, but copy that slips past the “news” filter of Yahoo! or Google, etc. ), and these ads are for books or reports that promise to deliver “secrets” of bankruptcy–yes, SECRETS!!! and, moreover, secrets that ATTORNEYS WON’T TELL YOU!!!

In short, pure bunkum.

What’s insidious, though, is such an ad that weaves in just enough facts to:

  1. sound somewhat credible, and
  2. pique the imagination.

By the way, no–we’re not going to supply any links–somebody might take that as an endorsement. But after reading this, you should be able to spot ‘em.

Look for careless, sloppy writing

One claim, for example, starts out like this:

The new bankruptcy law is very different from the old bankruptcy law. Unfortunately the new law was written by the credit card banks so it should come as no surprise that it’s loaded with clever traps each designed to punish consumers who seek debt relief through personal bankruptcy.

The good news is – you can still use the new bankruptcy law to wipe out your debts but the new bankruptcy process is much more complicated than before. Bankruptcy used be such a simple process but today it’s like tap dancing through a minefield! Make one small mistake and you’ll end up being forced into five long years of financial security!

One clue, perhaps too subtle in the Internet  extant, is the number of grammar and logic errors, especially in a relatively short passage. ( The word each is unnecessary, as punctuated; otherwise a comma should precede. Then, the word to is missing in “Bankruptcy used be . . .”). In an era in which almost all publications have cut back and therefore miss copy editors, we might overlook such errors.

But this one is a thought-killer: after warning us about “tap dancing through a minefield,” we learn that if we make one crucial mistake–which sounds DEADLY!!!–but, no, we arrive instead at “five long years of financial security.”

See what we mean? By the structure of the argument, the phrase five long years should result in something like financial slavery or indentured servitude. Or anything along those lines–but not “financial security.”

OK, we’ll quit parsing in just a another line or two…in recognition that too many editors have been laid off during the Panic, the Great Recession…

The next clue is the inflated language, the embroidery, the emotions-directed diction:

  • no surprise
  • loaded with
  • clever traps
  • designed to punish
  • tap dancing/minefield

etc.

Be wary of inflated claims

But the really big problem is out and out misinformation. Take this passage, for instance:

The first trap is the biggest one – the dreaded Chapter 13 bankruptcy trap. With a Straight Bankruptcy or Chapter 7 bankruptcy the judge in bankruptcy court bangs his gavel and all your debts instantly vanish – once and for all. Believe me, this is the kind of bankruptcy you want!

But under the new bankruptcy law it’s more difficult than ever to qualify for a Chapter 7 bankruptcy. Under the new bankruptcy law the bankruptcy court has a formula it must use to determine whether or not you can qualify. If you fail this important test, your debts remain and you’re forced into a very different kind of bankruptcy – the long and drawn-out Chapter 13 bankruptcy.

Under the Chapter 13 bankruptcy all your debts remain. You’re forced to repay each and every one right down to the last penny! All a Chapter 13 does for you is extend the terms of the loans giving you more time to pay. In most cases you get five long years to repay everything.


First, it’s true that Chapter 7 and Chapter 13 are very different; yes, Chapter 7 is basically a liquidation vehicle; yes, Chapter 13 is basically a re-payment plan. It’s also true that the Bankruptcy Reform Act of 2005 made it more difficult to qualify for Chapter 7, and yes, it’s true that the credit-card companies wanted Chapter 7 qualification to be more difficult.

However, the plan backfired on Wall Street when the products of its financial engineers cratered the economy. Since the crash, millions of consumers have qualified for Chapter 7 protection. But it’s not true that “all your debts instantly vanish.”  For example, Chapter 7 can not address child support or student loans (except in rare “hardship” cases); neither can it help with taxes, court fees, DWI-related costs, and a few others.

And this is just false: “Under the Chapter 13 bankruptcy all your debts remain.” We can’t emphasize this enough: that statement is not true.

What happens under Chapter 13 is that debts get restructured. The main thing is a certain amount of income is required because the court-appointed trustee takes monthly payments from the debtor and applies them  to the total debt, over time– first to secured debt (e.g., a mortgage) then to the most important unsecured debt (e.g., back taxes). By the time the trustee gets to unsecured credit cards, the creditors will likely be receiving only percentages of the original claim.

A very good, very thorough explanation can found in this July 24 article at CNNMoney.com.

So what’s the lesson, here? Easy–keep your money: there’s no “secrets” that a good, experienced attorney won’t share with clients. Ask if you can file bankruptcy yourself (you can); ask if you can hire an “advocate firm” to help with your filing (yep, you can do that, too); in fact, ask any and every thing you can think of.. Most experts agree that your safest route to a well prepared bankruptcy filing is by using a trained, experienced attorney.

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13