Decisions that seem to make sense at the time can end up being against your best interest. Here’s what to look out for.
Giving Our Clients Good News
As bankruptcy attorneys, we chose this kind of law to work in because we really want to help people. We have the privilege of listening to people’s tough stories and then giving them good news about how they can greatly improve their lives. We show how they can now get immediate relief from their debts, create a workable plan to save their home, or a great way to solve a seemingly impossible situation involving unpaid child support or a wage garnishment for income taxes. On a good day we help anxious people learn about solutions they did not realize they had.
On a tougher day we find out that we could have helped someone much more if only they would have not have made some seemingly sensible-at-the-time decision.
The goal of our next few blog posts is to help you avoid these self-inflicted wounds.
Here’s a quick preview.
1) Wasting assets: New clients often tell us how they’ve borrowed against or cashed in their retirement funds in a desperate effort to pay their debts. Or they’ve taken out a second (or third) mortgage on their home. Or they’ve sold a vehicle or some other precious asset to scrape up some money to pay necessary expenses. Then they learn that this sale, or borrowing, would have been unnecessary. They find out that whatever they’ve sold or borrowed against would have been completely protected in their subsequent bankruptcy case. They learn that the debts they paid with the proceeds would simply have been “discharged” (legally written off) in that bankruptcy. They gave up something, or gave up significant equity in it, for what turned out to be no real benefit.
2) Preferences: If you make payments on a personal or some other special debt within a certain amount of time before filing bankruptcy, months later the person you paid may be required to give that money back. And that money would not be paid pack to you but rather to a bankruptcy trustee. These payments are called “preferences.” The person you paid could be a relative or friend who had lent you money when you needed it, or some other creditor you really wanted to pay like your doctor or some local merchant. You may have been motivated to pay the obligation before filing bankruptcy to avoid getting the person mixed up in your case. You may have even not wanted that person to find out about you filing bankruptcy. There are safe ways to deal with this situation and avoid the frustrations of a “preference.”
3) Losing a vehicle that could have been saved: People often really need a vehicle but they can’t afford the payments. And they may owe on it more than it’s worth. So they either voluntarily surrender it to the creditor, or wait until after it gets repossessed to file bankruptcy. If they would have acted sooner they could likely have kept the vehicle. Getting rid of other debts could make the payments (and insurance and gas and repairs) affordable. Or with a “cramdown,” the monthly payments may be significantly reduced, along with the total amount to be paid on the vehicle’s balance.
4) Letting a creditor sue and get a judgment: If get sued by a creditor and know you owe the debt but have no way of paying it, you may think that there’s nothing much you can do about it. You may even think that there’s not much harm in doing nothing. But what happens next is that the creditor gets a “default judgment,” a court’s determination that as a matter of law you do owe the debt (usually with a big bunch of fees added on top of it). Besides opening you up for garnishment of your paychecks and bank accounts, in certain situations that judgment could make the debt harder to discharge in a later bankruptcy case. It’s much more sensible to get legal advice before getting sued, or certainly right away once you do get sued. Doing so would likely avoid you painting yourself into a corner.
5) Selling a home out of desperation: Bankruptcy—and especially Chapter 13—gives you some powerful tools for dealing with debts related to your home. Not only does bankruptcy often help you afford your mortgage payment. Chapter 13 in particular provides a way to pay any accrued first mortgage arrearage, possibly “strip” the second mortgage lien, get rid of judgment liens, and favorably address income tax and child support liens and then get them released from your home’s title. You may otherwise be tempted to hurriedly sell your home (or just give it up to your mortgage lender) because of financial pressures specifically from such home-based debts, and/or from all your other debts. But if you rush to sell your home (or surrender it) you could lose out on the opportunity to keep it through the tools of bankruptcy. Some of those tools may even create equity in your home, thus making it economically more worthwhile to save. Or maybe you could still sell it, but do so later (even a couple years later) at a higher price, when the timing is better for you.
With these examples you can see that doing what seems right and sensible can really backfire if you don’t get legal advice about the possible unexpected consequences of your decisions. The next few blog posts will explain these 5 situations more clearly so that they will make more sense to you and you can avoid making these mistakes.