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In performing financial autopsies for my bankruptcy clients over the past 25 years I have noticed one common mistake people make. They fail to prioritize their money.

Priorities matter. Successful people have a common trait–they prioritize their day and do he most important tasks first. They write lists. They have WRITTEN goals for their day. They plan their day in advance, and then they go out an kick butt.

But when it comes to money, especially money in marriage, even organized people get messed up about how to set priorities with their money. Why is that?

I think part of the answer lies in those sappy marriage courses we take before our weddings.  You know, the ones that say how a man and women become one and cease to have separate identities. No secrets in marriage. Everything is shared. Mutual submission. Love is generous and we support one another give all that we have to each other. Sound familiar? And somehow out of this marriage class people conclude that in marriage you should have a single joint bank account that is shared and all money earned goes into it and all expenses are paid out of it. No secrets. Complete transparency. Mutual submission. Yeah, what could go wrong with this plan?

When all of your money sits in a single bank account you effectively have no money priorities.

It is moronic for a married couple to handle all of their finances out of a single bank account. This is pretend land. It’s crazytown. When all of your money sits in a single bank account you effectively have no money priorities. Buying pizza has the same priority as paying the mortgage or insurance or saving for emergencies because when money is not divided into separate accounts there is no priority to the spending, and that is just not true.

Some expenses are more important than others.  We all know that. Paying the mortgage or the insurance premium or saving for emergencies is vastly more important than paying for temporary needs, like a slice of pizza. And even if we verbally agree with this statement, if we just nod our head and do nothing more, then nothing has changed. Establishing priorities means taking action. It means dividing money into separate accounts based on their priority level.

Continue Reading Pay Yourself First Part II: How to implement it.

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There is one simple habit that all financially successful people do–they pay themselves first.

That phrase has always annoyed me.  Pay myself first?  What exactly does that mean? I heard financial gurus say that phrase over and over, and it just came off as cocky and glib.

“Want to become rich boy?  Well, it’s simple. Just pay yourself first!”  What?  You can’t just pay yourself into wealth. You have to create the wealth.  Build the business. Land the great job. Earn the money, and THEN you save money and become rich.  Right?

Wrong. Want to get rich? Pay yourself first. Want to pay off the mortgage in retire with money in the bank? Then pay yourself first. Have financial problems? Pay yourself first.

In fact, the less money you earn the more important it is to pay yourself first.

Continue Reading Pay Yourself First

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The Eight Circuit Bankruptcy  Appellate Panel denied an application seeking to discharge student loans because the debtor voluntarily quit a full-time job eight months prior to filing bankruptcy.

The debtor, Erin Kemp, is a 36-year-old single mom raising a 13-year-old daughter in Arkansas.  She obtained a psychology degree in 2010 and for the past 17 years she worked for a bank earning up to $45,000 per year.  However, eight months prior to filing bankruptcy she quit her full-time bank job due to problems with depression and anxiety and took a part-time job at Lowe’s earning $13.46 per hour. She supplemented her income by performing home daycare services as well.

Continue Reading 8th Circuit BAP Denies Discharge of Student Loan

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Since February 5, 2018  debtors filing bankruptcy in Nebraska have been allowed to sign their petitions and other court documents using digital signatures pursuant to  General Order 18-01.  So what have we learned about the use of  digital signatures in bankruptcy since then?

I recently had the pleasure of speaking to an official at the Administrative Office of the U.S. Courts who was seeking some feedback on how digital signatures were affecting the bankruptcy practice. (Nebraska is the only bankruptcy court the nation that allows debtors to sign documents digitally.)  Here are some of my observations:

Continue Reading Digital Signatures in Bankruptcy Update

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The 8th Circuit Court of Appeals has turned away an appeal of a $28.1 million dollar judgment awarded to 6 plaintiffs (commonly referred to as the Beatrice Six) for damages imposed by a federal jury for a reckless investigation and manufacturing false evidence orchestrated  by the Gage County Sheriff’s department. The plaintiffs spent two decades in prison for the rape and murder of Helen Wilson, but DNA testing revealed that the murder was actually committed by another individual.

Gage County previously hired a law firm to help plan a potential Chapter 9 bankruptcy case to avoid payment of the judgment (see Can Gage County Discharge Intentional Wrongdoing in Bankruptcy?),  and now that the appeal has been lost it appears that the county must make a final decision on whether to file a case.

This case is familiar to us, as it is to Nebraskans and much of the nation. It returns after three prior opinions by this Court, two trials, and, now, one jury verdict that is contested on this appeal. We are asked here, in large part, to sweep the pieces off the board—to overturn our prior rulings—in order to vacate the jury’s verdict. We decline to do so. And, after careful examination of the remaining claims on appeal, we find no other reason to disturb the verdict or rulings by the district court. Thus, we affirm.

There is little doubt that a county whose annual budget is roughly the same amount as the judgment in question cannot afford to pay the judgment in one financial year, but there is also little doubt that the county would have no problem paying the judgment over a term of years with modest real estate tax hike.

Ultimately, the Nebraska bankruptcy court will have to decide whether a Chapter 9 case filed with the sole purpose of denying just compensation to 6 plaintiffs wrongfully incarcerated for 20 years of their lives can be approved when the county has ample revenue sources to pay the debt in full over a reasonable period of time.  Should the bankruptcy court even entertain the notion of allowing a Chapter 9 plan to be confirmed until the county shows a good faith effort to pay a significant portion of the judgment? Can the county actually propose any plan in good faith if it fails to increase taxes by even 1% to pay some of this judgment?

Money is a complicated topic. It is often very obvious what a person must do to improve their financial situation, but getting someone to change their financial habits and attitudes is hard. Good financial advice seems to go in one ear and out the other as clients continue to repeat the same destructive patterns over and over again.

At a core level, we generally know when we are behaving badly. An alcoholic is aware that they drink too much.  An obese person knows they need to eat a healthier diet. A gambler knows they cannot win back their losses at a slot machine.

Money disorders share this problem, but what makes them even more challenging is that a person may not even be aware that they have a disorder.  Instead, those who suffer from money disorders may actually think they are making wise money choices and they are at a loss to explain why things do not go well or they blame others for their failures.

Professor Brad Klontz has written a great deal about the psychological aspect of money behavior, including a book I recently read entitled Mind Over Money, Overcoming the Money Disorders That Threaten Our Financial Health.

According to Klontz, adult money behaviors are generally learned in childhood and they are often related to a traumatic event or “financial flashpoint.”  Conclusions formed by a child experiencing an emotional event involving money tends to flow over into their adult life. These early emotional money experiences create a “money script” that are played out repetitively in our adult life, both good and bad.

In our experience, financial pathology typically manifests itself in one of three ways.  We might repeat destructive financial patterns learned from our early socialization . . . We might also flee to the polar opposites of those patterns in an attempt to avoid repeating the experiences . . . Or we might alternate between those two extremes”

Everyone acquires a Money Script during their childhood that they put into play as an adult.  Such internalized money scripts become part of our personality and shape the way we view the world. Parents have a lot to do with shaping a child’s view towards money and the money scripts that play in their heads as they grow into adults.

There are may types of money scripts.  Some view the spending of money as a way to express love, so to not spend money on others as they request is to deny them love.  Some equate the acquisition of money as a sign of evil and greed so they give away all their money to stay pure and holy. Others view the spending of money as dangerous and they save every penny they earn while they wait for financial disasters to jump out of nowhere. Many spend money publicly to show their success to others and derive a sense of self-worth in the process.

But if you are not aware of what money scripts you are running, how can you determine if they are correct? Is spending money on your child the same thing as showing love? Is not spending money on your child a way to show dislike or disapproval? Obviously one can refuse to spend money on a child if more important items–like paying rent or utilities–need to be paid first, but that doesn’t mean you don’t love your child. But in the mind of many, such refusals mean just that, and so they take care of the child’s wants first and then scramble to pay the rent.

The beginning point in financial therapy is to review the financial history of your family and then to write down some of the spoken and unspoken money rules leaned in childhood. Does saving money really mean your greedy? Does spending money really show love? Are the money scripts in your head really the right kinds of rules to have? Who is in control of your money, the little child whose parents were less than terrific with money or the adult you have grown to be? For most of us, the child still rules. Maybe it is time for the adult to update the rules.

 

 

Nebraska becomes the first bankruptcy court in the nation to allow debtors to sign bankruptcy petitions digitally.

An amendment to Nebraska Rule of Bankruptcy Procedulre 9011-1 became effective February 5 allowing attorney to use services like DocuSign and SignEasy to obtain client signatures on official court pleadings.

The immediate reaction? One central Nebraska attorney emailed me this:

This is fantastic! My client signed, we were notified, I signed, all before I could even drop her hard copy in the mail (mail leaves [our small central Nebraska town] at 12:30, so timing wise we have a completed document before the mail left the building)!  I am so pumped!

Nebraska is a big state spanning 450 miles across. It commonly takes 7 to 10 days to get documents signed and returned in the mail, and that is especially vexing when a client’s wages or bank accounts are being garnished. Allowing the use of digital signatures is truly a blessing for small town debtors who do not have quick access to a lawyer, let alone a bankruptcy attorney. (12 of Nebraska’s 93 counties have no lawyers at all.)

Debtors in our largest cities also benefit by not having to take time off work to sign routine documents they have already viewed via email.

Nebraska bankruptcy attorneys are lucky to receive this historic change in court procedure. Allowing digital signatures will encourage them to make changes to documents that improve the accuracy of bankruptcy schedules since it will be so much easier to get updated signatures on the fly.

Most attorneys will continue to gather old fashioned ink signatures on paper, and there is nothing wrong with that. But for those of us who represent clients in all 93 Nebraska counties and who are in constant email contact with clients to view and discuss developments in their case, the use of digital signatures is truly welcome.

Sincere thanks is due to Judge Thomas Saladino who was willing to review the signature process and to make changes to Nebraska’s court procedures.

Image courtesy of Flickr and Charles Knowles

Before a person can file bankruptcy they must take an approved credit counseling class and their attorney must file a Certificate proving the class was taken with the court.  The idea is to make sure that consumers are being educated about alternatives to bankruptcy, and when this new requirement was introduced in 2005 there was hope that such a class would significantly decrease the number  of bankruptcy cases being filed each year in the United Sates.

Well, it’s been more than 12 years since these classes have been required, and I have yet to meet a single person who chose not to file bankruptcy because of it. I suppose there probably is a person out there somewhere who was persuaded to avoid bankruptcy, but I can’t name a single person in the thousands of people I have met since 2005 that actually decided to not file bankruptcy because of that class.

Nevertheless, I support the concept of educating clients of each available debt solution. In fact, that is pretty much we do on the initial meeting with new clients.  I’m not here to “sell” anybody a bankruptcy case. My job is to identify possible debt solutions and then to help the client select the appropriate course of action. Ironically, the better I explain how non-bankruptcy alternatives work and how much each alternative costs, the more likely it is that a client will choose to file bankruptcy.

But I have to wonder, what would it be like if those who wanted to enroll in a credit counseling repayment plan had to speak to a bankruptcy attorney first?

I wish Jim and Francine Bostick would have spoken to me before they enrolled in a debt management plan in 2010. They owed $120,000 of credit card obligations at the time.  Jim, age 67, was in the early stages of dementia.  Jim and his wife, Francine, age 57, were persuaded by Housing and Credit Counseling Inc. of Topeka, KS, to enter into a 5-year repayment plan.  Instead of spending time with her husband in his last years of life, Francine took on a second job to make ends meet. When they completed their $2,496 monthly payment plan, the National Foundation of Credit Counseling sent out a press release touting the wonderful job done by their counselors. Not everyone thought this was such a wonderful result. See NFCC Celebrates Utter Stupidity and Puts Older Dementia Patient in Debt Management Plan.

Financial writer Liz Weston has criticized the credit counseling industry for not being forthcoming about the failure rate of credit counseling programs and for failing to point out more feasible debt solutions, like filing bankruptcy.  See Do Debt Management Plans Work?

Yet there’s one change needed that isn’t coming: Borrowers need to be told that bankruptcy could be a faster, cheaper solution.”  Liz Weston.

So what would I have advised Jim and Francine?

  • I would have closely examined a list of all their property to see if any of it would be at risk in a bankruptcy case.
  • I would have reviewed their current and past income to see if they qualified for Chapter 7 relief and, if that income was too high to qualify for Chapter 7, I would have assessed what they would have to repay each month in a Chapter 13 case.
  • I would have looked at debt settlement options and looked for possible assets they could sell to offer creditors without making monthly payments or entering bankruptcy.
  • I would have examined their lifestyle to see if they could downsize their home or sell of unnecessary assets to settle or pay the debts.
  • If their income was very high I may have recommend they look at a credit counseling repayment program, but since they had to take on 2nd jobs I doubt that was the case.
  • I would have considered doing nothing at all.  Elderly debtors living on Social Security income who own no real estate are often best off doing nothing at all.  Social Security cannot be garnished so if they could endure the collection calls and collection letters, senior debtors are often best off doing nothing at all.

But in the end, I am sure I would have recommend that they strongly consider the bankruptcy option and spend more time focusing on Jim’s health.

You see, my job is to help clients chose their optimal debt solution.  I’m not here to sell bankruptcy.

I’m fine if debt settlement was their preferred option since we handle those matters as well.  I frequently advise clients to try credit counseling programs when I think a bankruptcy will do more harm than good. I even encourage clients to manage their own debt reduction plans and to empower themselves by learning about the Dave Ramsey “debt snowball” approach.  It’s all good.  All debt solutions have their place, but when you sit down with a debt professional you should receive an unbiased opinion. That’s what it means to be a professional–to put the client’s needs first.

If credit counseling clients had to see me before they started a debt repayment program, I’m guess half would opt not to start the program.  Given that 50% to 75% of all credit counseling repayment programs fail, it appears that credit counselors are pushing clients into programs to make the agency money regardless if that is their client’s best option.

If you are trying to figure out how to get out of debt, look at all your options.  Get the best advice from the most professional folks in Nebraska.  Consider these options.

 

Image courtesy of Flickr and Rachel Kramer

I meet lots of people who desperately need to file bankruptcy, but they lack the money to file. A typical Chapter 7 case costs $1,300, and paying the fee is probably the biggest stumbling block to filing a case.

A company called BK Billing provides an answer: borrow the money.  Under the BK Billing model, bankruptcy attorneys divide the Chapter 7 case into two parts: Services rendered before the bankruptcy petition is filed with the court, and services provided after the petition is filed.  In bankruptcy lingo we refer to this as pre-petition and post-petition services.

Attorneys using the BK Billing system charge clients a small amount for pre-petition services, typically from zero to $500, to get a case filed. They limit pre-petition services to filing an “emergency petition” that reports nothing more than a list of the creditors.  Then, after the case is filed with the court, the client must enter into a new fee agreement to complete the post-petition services, including the filing of asset and liability schedules, income and expense schedules, attendance of the court hearing before a Chapter 7 Trustee, etc.  BK Billing then buys the account from the attorney at 70% of face value for the the post-petition services.  Since the post-petition fee agreement is signed after the case is filed it is not discharged.

In theory, the BK Billing system makes it easier to file Chapter 7.  Instead of having to come up with $1,300 or more to file a case, they just have to pay a small initial deposit.  Bankruptcy attorneys win too since they can file more cases and increase profits.  What could go wrong?

The Ashcroft Firm of Murrieta, California recently found out how much can go wrong.  They advertised “$0 Down Same-Day Filing” bankruptcy services using the BK Billing business model and increased their monthly filings by more than five-fold.  But the US Trustee’s office recently sued the law firm for multiple counts of misrepresentation and violations of the bankruptcy code.

There are multiple problems and complications presented with the bifurcation business model for Chapter 7 services.

First, the vast majority of chapter 7 work MUST be performed before the case can be filed.  An ethical and competent chapter 7 attorney cannot just file a skeletal petition consisting of nothing more than a list of the creditors.  To file a case in such a manner is to commit gross professional malpractice.  BEFORE a case can be filed the attorney MUST review ALL of a debtor’s assets to determine if any are unprotected.  Whether these asset and exemption schedules are filed with the petition is immaterial.  The fact is, to competently represent a debtor the attorney must prepare the asset and exemption schedules.  The attorney must also prepare income and expense schedules to see if a debtor even qualifies for chapter 7 since debtors with too much disposable income cannot receive a chapter 7 discharge.  The attorney must also prepare a Means Test review prior to filing a case to see if the income received by a debtor in the preceding 6 months is too high to qualify for chapter 7. Property transfers must also be scrutinized to see if fraudulent conveyances have occurred.  Bankruptcy attorneys have an ethical and legal duty to perform a “due diligence” investigation before any case is filed, and that means that the majority of legal work must necessarily be performed prior to filing a case.  The BK Billing business model suggests that most of the work can be performed after the case is filed, and that assumption is simply false.

Second, even though there are many services that must be performed after the bankruptcy petition is filed, it is clear that such services are so essential and fundamental to the bankruptcy case that they cannot be severed or unbundled.  For example, attendance of the Trustee Meeting occurring 30 days after a case is filed is fundamental to the bankruptcy process, and attorneys cannot ethically sever their duty to attend such a hearing with a post-petition contract.  The Idaho legal ethics committee has recently issued an opinion on this topic underscoring the inherent danger of attempting to unbundle legal services in bankruptcy cases.

Another recent opinion involving BK  Billing was issued by the Idaho bankruptcy court,  In re Grimmett.  In that case the Idaho court ordered the debtor’s attorney to disgorge all fees paid under that agreement.

The concept of bifurcating chapter 7 attorney services into pre-petition and post-petition categories is inherently flawed.  Too much of the attorney services are essential and fundamental to the bankruptcy process to be severed. It is difficult to show that debtors give an informed consent to such a division of services. A better option is to file the case as a Chapter 13 proceeding and then to convert the case to Chapter 7 after the required attorneys fees have been paid pursuant to a court-approved plan.

 

Image courtesy of Flickr and Iqbal Osman

Bankruptcy courts across the country have embraced the electronic filing of court pleadings since 2001. This system, known as Electronic Case Files or “ECF”, allows attorneys to sign and file documents with an electronic signature instead of using “wet ink” signatures on paper. The system is a great improvement over the older paper file system it replaced. Back in the old days we used to make five photocopies of a bankruptcy petition (one for our files, one for the Trustee, one for the US Trustee, one for the national archives, and one for the court) and then rush to the federal courthouse to file the case before a garnishment or foreclosure took place. ECF made it possible to file cases and motions 24 hours a day and almost every day of the year. It also made it possible for anyone to view court records electronically.

But even though this new electronic filing system allowed attorneys to sign documents electronically, debtors were still required to sign paper petitions with a wet ink signature. Attorneys are required to maintain this document until the case is over and typically for a few years thereafter. Upon request of the court or an interested party, the debtor’s attorney must produce the original document. Such requests are exceedingly rare (I’ve never had to produce an originally signed document since the ECF system was established in Nebraska), but in cases where a debtor has hidden assets and is subject to criminal prosecution for bankruptcy fraud, it is common for federal prosecutors to request the originally singed pleadings.

Since the ECF system was introduced in 2001 a new technology has grown in the area of Digital Signatures. A digital signature is a an electronic signature that has been secured by a process know as cryptography. Once a document is signed digitally, the contents of the document are encrypted and secured. A digital document is typically stamped with an alpha-numeric code on the top margin of every page of the document.  If the document is changed in any way the digital signature panel warns viewers that the signatures are no longer valid. Documents that have not been altered typically flash a green check-mark symbol, but altered documents commonly display a red X mark. The leading company in the digital signature industry is DocuSign.

Department of Justice prosecutors worry that individuals who commit bankruptcy fraud by failing to disclose assets, income or property transfers may attempt to avoid liability by denying that they signed a bankruptcy petition digitally. What if a debtor denies clicking on a “Sign Here” button? What if a debtor’s roommate or child clicks on the digital document? How can prosecutors be sure a debtor signs a bankruptcy petition digitally?

And this is the problem. Because the DOJ is worried that digital signatures may compromise their prosecution efforts they are throwing down a roadblock before the bankruptcy rules committee. Without DOJ acquiesce to the use of this technology, courts are reluctant to adopt this convenient signature method.

The ironic aspect of the DOJ opposition is that these same prosecutors seem to have no problem obtaining tax fraud convictions against taxpayers who file tax returns electronically. This is especially confusing since taxpayers do not enter a federal courthouse shortly after filing tax returns to testify under oath that they signed the tax return electronically, but bankruptcy debtors do just that in every case filed. How can the DOJ convict individuals for tax fraud without any sworn testimony about how a tax return was signed but not convict debtors of bankruptcy fraud when such testimony is present? Fears raised by the DOJ to digital signatures seem exaggerated and disingenuous.

THE REAL PROBLEM: ATTORNEYS ALTERING SIGNED DOCUMENTS

What the DOJ should really be concerned about is the fact that bankruptcy attorneys commonly alter bankruptcy schedules after they have been signed. Why does this occur? Because attorneys who prepare bankruptcy cases are under constant pressure to file cases to stop paycheck garnishments or home foreclosures and their clients generally have not supplied them with all the necessary tax returns, paycheck stubs, bank statements, and creditor statements to completely prepare a case prior to the signing.

Bankruptcy clients frequently are slow to provide documents to their attorney until garnishments strike. And when those garnishments hit, debtors flock to their bankruptcy attorney to file cases in a panic. Of course, signing a case under such circumstances is frequently disorganized and messy.

Under pressure to stop creditor activity an alarming number of bankruptcy attorneys have clients sign incomplete petitions or just have clients sign blank signatures pages.  After clients leave the office the attorney then completes the petition and files it electronically with the court.

This process has been documented by the United States Trustee.  In the case of In re Harmon the US Trustee found that debtor attorneys made material alteration to signed bankruptcy petitions in 82% of the files it audited.  In a report prepared by the bankruptcy practices committee, bankruptcy trustees complained that debtors are frequently asked to sign petitions they have not reviewed.

Unfortunately, there is an attorney in my district [who] does not think his clients need to review the petition, schedules, financial affairs before filing and sign these documents with a wet signature.  I have reported his practice to the US Trustee with proof.

This is the real problem the DOJ should be worried about. It is well documented in multiple cases that attorneys frequently change the contents of signed bankruptcy petitions or that they do not allow their client to preview what they sign. If a person charged with bankruptcy fraud can establish the existence of unauthorized changes made after the petition is signed the prosecutor is going to have a problem. Identifying such alterations is not difficult. One such indicator of document tampering is the bank account balance reported. If a case is signed on the 5th day of the month but the case is not filed until the 20th day yet the bank account balance reported exactly matches what was on deposit on the 20th day, it is clear the petition was altered.  (Bankruptcy attorneys frequently call clients on the day the case is filed to update the bank account balance.)

If debtors can prove that the document they signed was altered the DOJ will have a problem prosecuting bankruptcy fraud. Paper documents are inherently unsecured and unreliable. The only thing a wet ink signature on paper proves is that a debtor singed a signature page.  It is not proof that the rest of the document was not materially altered.

HOW DIGITALLY SIGNED DOCUMENTS HELP THE DOJ PROSECUTE BANKRUPTCY FRAUD

If a debtor were allowed to bankruptcy petition digitally, the DOJ would have a much easier time of prosecuting a bankruptcy fraud case.

  1. Debtors have the opportunity to review documents before they are signed.
  2. Every page of a digitally signed document is stamped with an alpha-numeric code which makes it nearly impossible to make alterations to the document after it is signed.
  3. Debtors get an immediate copy of what they sign digitally.  They have proof of what they signed and that discourages the other party to change the contents of the signed document.
  4. Digitally signed documents are encrypted and secured.  The paper schedules of a bankruptcy petition are not secured by anything and are frequently altered.
  5. Debtors must attend a meeting with the bankruptcy trustee about one month after cases are filed.  At such meetings the debtor must testify that they signed the digital documents.
  6. Digitally signed documents provide an “audit trail” showing when the document was signed, how long a debtor reviewed the document, the IP address of the signers and other information that helps prosecutors prove that a document was signed.

The fear that debtors may deny signing a document digitally is understandable.  But if courts update their local rules to add sensible safeguards to the signing process these concerns can addressed.  Such safeguards may include:

  • Requiring debtor attorneys to file a copy of the digitally signed petition with the court so that court is not dependent on the debtor’s attorney for safeguarding the petition.
  • Requiring debtor attorneys to mail a hard copy of the digital document to the debtor with a cover letter to advise of the digital signing.
  • Sending a copy of the digital document to the appointed trustee so they may ask additional questions at the court hearing about how the document was signed.
  • Require debtors to sign an Authorization form, similar to to IRS Form 8879, with a wet ink signature on paper.

Digitally signed bankruptcy petitions are coming. It is time for the bankruptcy court system to craft new procedures to balance the needs of debtor attorneys to obtain updated signatures quickly with the need of the courts and DOJ to have confidence in the integrity of the bankruptcy documents.

Image courtesy of Flickr and Ged Carroll