Alabama Bankruptcy Blog

Do I need to file bankruptcy?

Filing for bankruptcy is a heart wrenching decision.  On the one hand you want to do what you promised your creditors you would do, but on the other hand you have to house, feed, and clothe your family and yourself.  There is no question that bankruptcy should be the last resort, but as to whether you should file or not, my classic lawyer answer is “It depends.”

First, we need to look at why you are considering filing bankruptcy.  The most common reasons are the following:

• Are you behind on payments on your house and/or car and being threatened with foreclosure and/or repossession?
• Are you using credit cards frequently to supplement your income with cash advances or purchases of necessities such as groceries and payments of utility bills?
• Has your house been foreclosed on or have you had a vehicle repossessed?
• Do you have more than one credit card maxed out or nearly maxed out?
• Do you have more than $10,000 of debt with credit card companies and/or finance companies?
• Have you frequently been using payday loans and/or check cashing lenders to make it through the next week or two?
• Have you been sued by a creditor and/or are you currently or soon to be garnished?
• Are you getting numerous calls and letters daily from creditors or collection agencies?
• Are you borrowing from one lender to make the payment to another lender, i.e., are your robbing Peter to pay Paul?
• Have you had your license suspended for causing an auto accident where you were not insured?
• Do you have large outstanding medical bills that insurance did not pay and you cannot negotiate a payment you can afford?

If your answer to any of these questions is “Yes”, then it may be a good time to see a bankruptcy attorney.  This does not necessarily mean you should file bankruptcy, but it does mean you may need some legal advice.  The attorney may suggest some of the following alternatives to bankruptcy:

• Tightening your budget.
• Downsizing homes and vehicles.
• Looking at consolidation loans (and then destroying all credit cards)
• Getting a second part-time job for more income
• Having a stay at home spouse or of age child obtain employment.
• Temporarily getting financial assistance from family or friends.
• Negotiating with creditors.
• Doing nothing.

If any of these alternatives allow the possibility of a LONG TERM solution, then they should be greatly considered even though it may call for tough decisions and hard work.  Why?  Although bankruptcy can be a “quick fix”, it comes with some serious long term consequences to your financial future.

The bottom line is I and many other bankruptcy attorneys offer free initial consultations, so it will not cost you anything to see what your options are.  If after talking to an attorney, you think you can dig yourself out of the hole you are in without bankruptcy then definitely try that.  But, if it does not work out you will be prepared and should have a plan.

If you have further questions regarding this or other bankruptcy, debt, or budgeting questions please email me.

What happens if I have a claim or lawsuit that I may get some money from in the future, but I need to file bankruptcy now?

When “Jane” came to me about filing bankruptcy she was in dire straits.  She had been sued by at least one creditor and was about to have her wages garnished.  If her wages were garnished, the loss of 25% of her wages not have left her enough income to keep her mortgage and utilities paid and meet her other necessities.

Jane met all the qualifications to be able to file a Chapter 7 bankruptcy, but there was an issue.  Jane’s father had died about one year earlier and his estate had a lawsuit against the nursing home where he died.  A person having a claim of some type, but currently being in poor financial shape is fairly common. Often times an on the job injury (Worker’s Comp) or a car wreck (Personal Injury) results in a loss of income and an inability to pay debt.  Jane had been told by the estate attorney that her father’s type of case, a wrongful death due to alleged malpractice by the nursing home, rarely settle and it could be years before the case went to trial.  Even then there was no assurance they would win.

So, what do you do?  First, I explained to Jane that if she wanted to file bankruptcy, it is absolutely required that the lawsuit/claim be listed as an asset.  This is very important and there has been a lot of litigation over this issue in the past few years.  Lawsuits and estates are public records and are impossible to hide, do not try.  Failing to list a claim or lawsuit on your bankruptcy petition may damage your chances of recovering any money from that lawsuit or claim.  Second, I informed Jane that if and when she becomes entitled to any money from the lawsuit, the money would have to be paid to the bankruptcy trustee of her bankruptcy case and she may receive very little of the proceeds.  The amount she would receive would depend on her remaining personal property exemption, the amount of the proceeds, and the amount of claims filed by creditors.  With knowledge of the possible outcome, Jane decided she still needed to file bankruptcy immediately.

Although Jane’s situation was different, it is normally required that the attorney representing the debtor in their lawsuit or claim file a motion with the bankruptcy court to be approved as the attorney and to have their fee contract approved as well.

About a year after filing, her father’s wrongful death case settled.  Jane’s share was about $20,000.  What happened to the money?  The $20,000 was paid by the estate’s attorney to the bankruptcy trustee.  Jane still had $1,000 of her $3,000 personal property exemption available, so she was allowed the first $1,000.  The trustee received a fee out of the proceeds, normally 10%.  Then creditor claims were paid.  In Jane’s case only $12,000 of creditor claims were filed which was much less than her debt at the time she filed.  After all creditor’s claims were paid, Jane received the remainder.  So, all in all Jane received about $6,000 from the settlement.

I am sure Jane would have rather had the entire $20,000 share of the settlement, but her actual outcome really was not that bad.  If she had had the $20,000 immediately before she filed, she would have had to have paid all or almost all of it to creditors.  At least she was able to eat and pay her bills during the year before the case settled and was even able keep a good portion of the settlement after bankruptcy.  Remember, this is not always the case.  If all her creditors had filed claims, she would have only received the $1,000 exempt portion.

What does a bankruptcy do?

Here is a brief overview of a bankruptcy.

There may come a point in a person's life, whether its due to health problems, spending problems, employments problems, etc., where a person owes more money than even the tightest budget will allow him to pay.  When this happens and monthly payments begin to be missed, the people and businesses who are owed the money (the creditors) start calling and sending letters.  Eventually, if the creditors are not satisfied, there are foreclosures and repossessions of vehicles and/or lawsuits getting filed which will then lead to judgments, garnishments and liens.

A bankruptcy can stop most of these bad things from happening.  A bankruptcy can immediately stop the phone calls, letters, lawsuits, garnishments, foreclosures, and repossessions.  This is called the Automatic Stay and it "stays" all collection efforts.  A Chapter 7 bankruptcy will wipe out almost all unsecured debt, like credit cards and medical bills.  Most of the time under a Chapter 7 you will be able to keep your house and vehicles if you are current or almost current on those payments and continue to make your payments to those creditors as agreed to in your contract.

A Chapter 13 allows you to create a plan to pay some or all your debt back to the creditors.  A Chapter 13 can stop your house from being foreclosed on or your car from being repossessed by allowing you to pay back your arrearage over time.  It will also protect a house or vehicle in which you may have too much equity under the State of Alabama's exemption laws.  Alabama's exemptions are very low, so this comes in handy frequently.  The amount you pay back is based on your income and expenses and the amount of debt you need or want to pay back over the length of the plan.  Most plans last for five (5) years which is the maximum length of the plan.

So, the bottom line is a bankruptcy can stop collections of debt by creditors, wipe out all or part of your debt, and/or create a plan to pay back some or all of your debt while normally letting you keep the real and personal property you want to keep.

It is not all rosy though.  There are issues that can make filing bankruptcy very tough.  Bankruptcy also has long term effects on your credit.  I will deal with these issues in later posts.