Alabama Bankruptcy Blog

I have seen and heard lots of advertising by companies saying they can settle my debts for very little and help me avoid filing bankruptcy. Does this work?

Unfortunately, debt settlement falls under the “if it sounds too good to be true, it is” category.  While I am sure there may be a few success stories from people using these companies, I have yet to personally hear of one.  Instead I have heard many complaints from clients who have wasted thousands of dollars on these “settlement” plans before having to turn to bankruptcy because of lawsuits and garnishments.  The Wall Street Journal has a good article on this subject – Debt-Relief Firms Attract Complaints.

 

The problem is most people cannot afford to pay enough monthly to settle each credit card debt before at least one of the credit card companies file suit, obtains a judgment, and attempts garnishment.  Also, if you can afford to save enough to do this, you could settle your credit card debt on your own without paying the high fees these debt settlement companies charge.

 

Speaking of the fees, remember that even though these companies may call themselves “non-profit” and a few may technically qualify under the tax laws (this is apparently being questioned by the IRS), it does not mean they are a charity.  These companies are clearly making lots of money.  Why else would they be multiplying like rabbits and how else could they be buying all of that advertising?

 

Many people think they are saving their credit by using these debt settlement companies.  If your credit score has not already been significantly lowered before you use one of these companies, it will be by time you finish (which I have yet to see) or drop out.  Settling for less than the amount owed is a negative on your credit report in itself.  Add to that charge offs and judgments from the card companies that are not settled early and your credit score will show tremendous damage.  A bankruptcy’s effect on your credit would be very similar and allow a quicker recovery.

 

A bankruptcy may or may not be the answer for you, but do not buy the hype of these debt settlement companies and fall for their anti-bankruptcy propaganda.  Do your research on these companies by checking with the Better Business Bureau and educate yourself about bankruptcy by getting your free (for Alabama residents) copy of my The Alabama Bankruptcy Book.

 

Richard L. Collins - Attorney at Law practicing extensively in Bankruptcy Law in Alabama - 422 Third Ave SE, Cullman Alabama

A debt collector called me and said “We will garnish your next paycheck.” Can they do this?

      I am continuously amazed at the depths some collectors will go to in order to scare unwary debtors into making payments they cannot afford at the time.  The statement “We will garnish your next paycheck” is probably a lie. 

     In Alabama in order for a creditor to obtain a writ of garnishment against your employer to withhold money from your paycheck, that creditor must have a judgment against you.  In order to have a judgment against you, that creditor must have filed a lawsuit against you and won either after a trial or by default, that is, because you did not file a response.

     Normally when this threat is being made, a lawsuit has yet to be filed.  How do you know if you have been sued?  First, if suit has been filed against you, you should have been served with a Summons and Complaint by either the sheriff’s department of your county or by certified mail.  However, if you cannot be found by the creditor, the creditor may have you served by publication, that is, by running a notice in the newspaper in the county of your last known address.  If you are still unsure, you may call the clerk of court of your county.

What if I have been sued?  See a lawyer immediately.  Depending on which court, Small Claims/District or Circuit, you have either 14 or 30 days respectively from the day you were served to file an answer.  Filing an answer generally denying the allegations in the lawsuit will prevent the creditor from obtaining a default judgment against you and will lead to your case being set for court after a few months.  This will give you time to save money and/or get your bankruptcy filed.

What if I already have a judgment and/or garnishment against me?  If you already have a judgment and/or garnishment against you, I would again suggest you see an attorney immediately.  You may be able to have the judgment set aside or appealed, but only if you act very quickly.  This may also be a good time to take a strong and hard look at bankruptcy.  With a bankruptcy you should be able to discharge the judgment prior to garnishment and stop any garnishment that is already in place.  Upon filing a bankruptcy, you may even be able to have a portion of any money garnished from your check returned to you.

The bottom line is do not let calls from creditors or debt collectors scare you into giving them money you cannot afford to give them.  Many will say anything they think will frighten you.  If a debt collector says anything that worries you, make an appointment with an attorney and see what your rights are.  It’s probably a good time to take a look at your financial situation anyway.

Please email me with any questions regarding the topic of garnisments or any other bankruptcy or debt related topic.

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.