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Is Bankruptcy the Right Thing for Your Family?

The news seems bad, all over. After jobless claims rose to a seven-year high last week, and compounded by the Congressional vacillation over the bailout legislation, the stock market continued a downward trend. Factory orders fell by the largest amount in four years, and if that wasn’t enough to get you good and depressed, the auto industry also saw its lowest moments in September 2008.

And the only remedies being discussed seem to offer no real, concrete help for you, the consumer stuck in the middle of this mess.

I’ve seen a substantial increase in calls to my office seeking bankruptcy consultations in the last three or four weeks. I don’t know about Dana’s experience, but since she’s been noticeably quieter on the bankruptcy law list to which we both belong, I’m guessing her experience has been similar to mine. Solos don’t have the luxury of pawning off work to their associates! When business picks up, our hours at home simply decrease. (Or in my case - my hours at home, in another part of the house from where the fun stuff usually happens, since my office is in my home.)

It struck me that this is a really good time to write about who is most helped by bankruptcy - and perhaps even more importantly, who is not.

I can conclude then that a lot of consumers are contemplating a solution they’ve perhaps never considered before, or are finally acting on an option that, for whatever reason, they had not previously acted upon: bankruptcy. It struck me that this is a really good time to write about who is most helped by bankruptcy - and perhaps even more importantly, who is not.

Who Should Consider Filing For Bankruptcy?

It might sound strange but there’s no test for going into bankruptcy, as a general prerequisite. You don’t have to have a certain amount of debts (though having more than a specified amount of secured or unsecured debt might keep you out of Chapter 13). You don’t have to make less than a certain amount of money. Heck, you don’t even have to be behind in your payments to your creditors.

Bankruptcy is not a “flow chart” kind of choice. You can’t just tick off a few boxes on a questionnaire and scan the answer key for the right interpretation. It’s a personal choice, to be sure, and it’s one that must rest on several factors:

1. Are you in economic distress — i.e., you’re having trouble making your minimum payments to the credit card companies, you’re barely making ends meet and keeping the essentials (food, clothing, shelter), you’re robbing Peter to pay Paul, etc. ?
2. Do you live paycheck to paycheck, and just one moderate health problem away from crisis?
3. Are you facing a significant judgment for some personal injury that was not willfully caused or occasioned by drunk driving, and your assets are at risk?
4. Are you judgment proof? In other words, do you have no assets at all that can be seized and sold to pay back your financial obligations? If so, you may not need to file for bankruptcy. (On the other hand, judgments stick around for awhile - the exact amount of time varies by state - and so even if things are bad now, but might improve in the future, you could be facing seizure of those future assets. A lawyer can help you suss this one out.)
5. Are you being harassed by creditors and collection agencies? Bankruptcy can stop that. Of course, so can a well-timed FDCPA or state-law-based lawsuit. But if it’s a rampant issue, and you are also in economic distress (i.e., can’t pay your bills, even the minimum due, when due), bankruptcy might be better option.
6. Last, but by no means least, are you facing foreclosure? Chapter 13 is a very effective way to stop a foreclosure, allow the homeowner to restructure other debts, and pay off the mortgage arrears over time.

Who Won’t Be Helped By Bankruptcy?

In a nutshell, bankruptcy won’t put more income in your life. If your problem is really one of not making enough money to support the lifestyle you lead, then bankruptcy isn’t going to help with that. You’ll have to either ratchet down your spending (lower grocery bills, move to cheaper housing, sell new cars in exchange for cheaper used vehicles or public transportation); increase your income (second job, new job, overtime, whatever); or both.

Bankruptcy also won’t help if your primary problem is a non-dischargeable debt. What’s non-dischargeable is prescribed by the bankruptcy laws - specifically, section 523 of Title 11.

Here’s a quick and non-exhaustive list:

• Recent taxes and government penalties
• Child support
• Criminal fines or restitution ordered by a court
• Personal injury awards where the debtor was intoxicated at the time of the incident
• Debts that weren’t listed in the bankruptcy filing (or “scheduled”)
• Student loans (unless repayment would constitute a substantial and undue hardship - note that this is a very hard “test” to pass and so the vast majority of student loans are nondischargeable)
• Debts that were part of a prior bankruptcy case but where debtor did not get a discharge

(Note that this is for Chapter 7. In Chapter 13, debtors get a slightly broader discharge. However, the biggies - child support, student loans - are still nondischargeable.)

Answering the Question for Yourself

It’s not an easy decision to make. Trust me. I DO know.  You have to bring all of yourself to the table on this issue: your emotions, your rational mind, your upbringing, your religious/spiritual beliefs, your values and morals.

I recommend you take a reasoned and balanced approach:

1. Do your research. Find out all you can about bankruptcy - especially as it really is in your state. (For more on bankruptcy in South Carolina, see “What to Expect in an SC Consumer Bankruptcy Case.”)
2. But do it on reputable sites. There is a great deal of inaccurate, old, or just flat-out wrong-headed information floating around out there on the web. Stick with attorney-written sites, and preferably ones written by attorneys who practice in this field regularly in your state of residence. Another excellent source for general bankruptcy information is the SC Bankruptcy Court website.
3. Think about the future. Try to envision how you’ll feel once the case is over, and try to envision the same time frame (about 6-12 months out) if you don’t file. How will you feel about yourself and your choice in each scenario - filing, and not-filing?
4. Shop around for the right lawyer for you, but consider making your final decision on something other than price. It’s tempting, in a financial crisis, to go with whoever’s cheapest. But consider another approach: interview the lawyers. Why not? They’ll be working for YOU. Shouldn’t you be as careful choosing a lawyer as you’d be selecting an employee to care for your kids? Make sure it’s a good “fit” - that you understanding and approve of their general approach, that you know who you’ll be dealing with (hint: it’s not always the lawyer who speaks with you), and that you feel positive about working with these people. Above all, don’t settle for someone who makes you feel less than good about yourself, or from whom you sense judgment and disapproval.

Finally, a word about morality: anyone who says it isn’t a moral decision is kidding themselves - of course it is. You do have to make the decision that’s right for you and your family.

But consider this: is it more moral to continue to fight losing battles, to put your family’s assets and futures at risk, to subject yourself to debilitating, crippling stress, all in order to pay off old debts, or to admit that you tried, that it didn’t work, and that you need a fresh start, and thereby be able to devote your time and energy to more positive actions?

I can’t answer that for you - but you can. Take your time, make the right decision for you and your family, and then, once you’ve done that, have faith in the decision you make.

© 2008 SC Bankruptcy & Consumer Law Blog.