As a bankruptcy lawyer I want to help my clients resolve their financial situation and eliminate their debts. One of the largest frustrations I encounter is when a client can't use the bankruptcy laws nearly as well because of actions he or she took instead of first getting legal advice. Or sometimes it's clients' lack of action which then limits their options.
So today we'll focus on the avoidable problems that happen in two sets of circumstances. When delay in getting advice from a bankruptcy lawyer limits your options because:
- your situation has gotten worse
- your situation has gotten better
DOESN'T IT MAKE SENSE TO CONSIDER FILING BANKRUPTCY BECAUSE YOUR SITUATION HAS GOTTEN WORSE?
The bankruptcy laws provide many, many ways of protection you, your assets, and your income. Overall, people wait longer than they should before seeing a bankruptcy lawyer, for a bunch of understandable reasons.
- They think and hope their financial situation will improve. Sometimes it does improve but often it doesn't.
- Clients think they can't be helped. They often simply have big misassumptions about how bankruptcy works, and would be surprised to learn about the kinds of help that are in fact available.
- They are afraid of getting bad news. So they avoid getting advice, not realizing that they would likely actually feel much better than they thought possible.
- They are embarrassed about their situation. They feel guilty for making actual and imagined mistakes, and are afraid of being judged and put down by the lawyer. They don't know that most consumer bankruptcy lawyers work in this area of law because they are compassionate and like to help people.
The problem with waiting until things have gotten worse is that you can seriously miss out on the benefits of bankruptcy.
HOW COULD DELAYING SEEING A BANKRUPTCY LAWYER UNTIL THINGS ARE WORSE HURT ME?
In cold practical terms, delay could cut you off from bankruptcy protection altogether, at least for a certain length of time.
If you wait until you've been sued and your wages and/or bank accounts are being garnished, you would likely be intensely cash-poor. And that's not good because it costs money to file bankruptcy. The filing fee alone for a Chapter 7 and 13 cases are $335 and $310, respectively. It's very unwise to file bankruptcy without a lawyer, and for sensible reasons competent lawyers will not file a case for you without a certain amount paid up front.
So waiting until you are desperate is—as in many things in life—not a good idea. You could get into a vicious cycle of being cut off from the protection that you need just when you most need it.
BEYOND NOT WAITING UNTIL I'M FINANCIALLY DESPERATE, WHAT OTHER DISADVANTAGES CAN COME FROM WAITING UNTIL THINGS GET WORSE?
The different bankruptcy options can protect your property and possessions in diverse ways. However, before getting advice you might:
- sell or use up precious property to survive financially, instead of preserving that property
- sell or give away things because you're afraid you'd otherwise lose them to creditors or the bankruptcy court
DOESN'T IT MAKE SENSE TO SELL THINGS TO RAISE CASH AND PAY DEBTS?
Sure, sometimes that's the responsible and sensible thing to do.
But often it's not. Here's a fact: my clients often deeply regret having sold something or used up a fund to pay debts when, if they still had that possession or fund it would be fully protected and the debt would simply be written off. For example, they wish they had not used up their 401(k) or IRA instead of paying it over time to creditors.
Sure, you can't predict the future, and it may be possible that you can end up not needing bankruptcy help. But in the meantime doesn't it make the most sense to get practical, legal advice about your options? Then you can have your eyes open about the potential advantages and disadvantages of using up what you own. Your choices will then be honest ones, not ones made in the dark, impulsively without knowing the potential consequences.
DOESN'T IT MAKE SENSE TO SELL OR OTHERWISE GET RID OF POSSESSIONS BEFORE CREDITORS OR THE BANKRUPTCY COURT WOULD TAKE THEM?
In many, and probably most, situations it's dangerous to sell or give away possessions to prevent your creditors or the bankruptcy system from taking them from you. It could really backfire.
First, there are often legally safe ways to protect what is important to you without trying to sell or hide them. Sometimes they can be protected from your creditors without you filing bankruptcy. California has two alternate sets of property exemptions that can protect much or maybe even everything you own. Then federal bankruptcy law incorporates those California exemptions, and strengthens them is many ways.
Second, you can jeopardize those protections by selling or giving away what you own before filing bankruptcy. A bankruptcy trustee may be able to undo such a sale or gift, and you can lose your property exemption protecting that item of property. (See Section 522(g) of the United States Bankruptcy Code.)
There MAY be wise and legally safe ways of selling or otherwise disposing of possessions to raise money for creditors and/or living expenses. But given the potential dangers, it is only sensible to do so only after getting thorough legal advice about it.
HOW COULD FILING BANKRUPTCY AFTER MY SITUATION HAS IMPROVED HURT ME?
It could hurt you in many ways. It could disqualify you from filing a Chapter 7 "straight bankruptcy" altogether.
If you have "primarily consumer debts," to qualify for Chapter 7 you must pass the "means test." This is a multi-step test that focuses a lot on your income. If you hold off filing bankruptcy until after you get a better job or more working hours, or until after you get a particular chunk of money, that could disqualify you from the Chapter 7 option.
Then you may have to fall back on filing a Chapter 13 "adjustment of debts." If so, instead of writing off all or most of your debts within about 100 days under Chapter 7, you would have to pay all you could afford to pay to your creditors for a period of from 3 to 5 years! You'd likely pay thousands or even tens of thousands more dollars. On top of that you would not be free of your debts for years longer, and usually would not be able to clean up your credit record for that much longer.
There are circumstances appropriate for filing Chapter 13 (such as catching up on a home mortgage and dealing with serious income tax debts). But you don't want to be forced into one just because you didn't see a lawyer until your hands were tied income-wise.
BESIDES BEING CUT OFF FROM THE CHAPTER 7 OPTION, ARE THERE ANY OTHER ISSUES ABOUT WAITING UNTIL MY FINANCIAL SITUATION HAS SOMEWHAT IMPROVED?
Yes, if you want and need a Chapter 13 "adjustment of debts" case, your income determines whether you pay into a payment plan for 3 years instead of 5. So, delaying filing the case until your income improves could cost thousands more dollars and delay your fresh start for two years.
Let's illustrate this concretely with an example. Assume that your 3-year Chapter 13 payment plan requires you to pay $500 per month, with that $18,000 (36 months times $500) mostly earmarked to catching up on a mortgage arrearage and paying off some recent income taxes. As a result nothing is going to your other creditors. At the end of that 3-year plan you'd be current on your home mortgage and your income taxes, and all your other debts totaling $75,000 would simply be discharged (legally written off).
But here's what happens if you wait until your income increases, maybe even just modestly. If your income (as calculated for "means test" purposes) climbs above the "median income" for your family size, that triggers requiring you to pay 5 years instead of 3. And more likely you could afford to pay more per month to your creditors.
Applying the dollar amounts, assume you can now afford to pay $700 per month to all of your creditors instead of $500. That's about an extra $200 per month for the first 36 months ($7,200), and then 24 months of $700 payments ($16,800), or a total of $24,000. This is money that would all be going to debts that otherwise you would have simply discharged after 3 years (if you would have filed before your income increased).
Waiting to get legal advice is often detrimental, whether your circumstances end up improving or getting worse. And sometimes the downside for delaying is seriously detrimental.
Knowledge is power. Most consumer bankruptcy lawyers, including highly competent and experienced ones, do not charge for an initial consultation meeting. You will almost certainly learn a lot about your situation, and be much better armed with knowledge about your options and about how to avoid legal traps.