Words I hate to tell new clients: “If only you’d come to talk with me sooner.”
Bankruptcy attorneys are in this area of law because we really want to help people. What makes me want to come to the office every day is the privilege of listening to people’s tough stories and then giving them good news about how I can help make their life much better—how they can now get relief from their debts or a feasible plan to save their home, or a way to solve some other seemingly impossible situation, like a back child support or income tax garnishment. Every day I get to help intensely anxious people suddenly become hopeful as they learn about solutions they did not realize they had.
Not that it’s always so pleasant. Some goals are beyond reach even with the strong medicine of bankruptcy. Difficult choices sometimes have to be made. Life can be tough.
But the toughest situations are those in which the person took some action—usually not long before seeing me—which may have made some sense at the time but ended up being a mistake, a self-inflicted wound.
The goal of my next few blogs is to help you avoid these.
Here’s what we will be covering.
1) Preferences: If within a certain amount of time before filing bankruptcy, a debtor pays any significant amount of money (or anything else of value) to someone she owes, the bankruptcy trustee could under certain conditions force that creditor to pay to the trustee whatever amount the debtor paid to the creditor. That creditor could be a relative or friend who had lent the debtor money, and the debtor felt a deep obligation to repay it before filing bankruptcy. This relative or friend could be sued by the trustee to make him or her “return” the money (but to the trustee, not to the debtor).
2) Wasting exempt assets: New clients constantly tell me how they’ve borrowed against or cashed in their retirement funds in a desperate effort to pay their debts. Or they’ve sold a vehicle or some other precious asset. Then they learn that whatever they’ve sold or borrowed against would have been completely protected in their subsequent bankruptcy case. And the debts they paid with the proceeds would simply have been “discharged” (legally written off) in that bankruptcy. They have lost something of significant value in effect for no real benefit. This is especially true of IRAs that are exempt up to one million dollars or more.
3) Surrendering a vehicle that could have been saved: People often really need a vehicle but owe on it more than it is worth and can’t afford the payments. So they either voluntarily surrender it to the creditor, or wait to file bankruptcy until after it gets repossessed. Instead with a “cramdown,” they could well have been able to keep that vehicle by paying much lower monthly payments and paying much less for it overall.
4) Letting a creditor sue and take a judgment: If a debtor is sued by a creditor and waits until after a judgment is entered, in some situations, that judgment could make the debt harder to discharge in a subsequent bankruptcy case.
5) Selling a home out of desperation: Bankruptcy—and especially Chapter 13—provides some amazing tools for dealing with debts related to a home, including the first mortgage arrearage, the second mortgage lien, judgment liens, income tax and child support liens, and other liens of all sorts. Homeowners may hurriedly sell their home because of pressure from any of these kinds of creditors. But if they do so, they could lose out on the opportunity to hold onto their home by saving tens of thousands—or possibly even hundreds of thousands—of dollars. Or at least they could likely sell it at a higher price with more market exposure and/or sell it when the timing is better for their family.
As you can see, doing what seems right and sensible can really backfire if you don’t get legal advice about these kinds of unexpected consequences. In the next few blogs I explain these in more detail so that these mistakes will make sense to you and you can avoid them.