In today's market, anyone contemplating bankruptcy should first determine if bankruptcy is right for them and whether it truly is the solution to their financial woes. While it might seem as though this is a simple answer, it's not! Keep reading if you or someone you know is considering bankruptcy.
The purpose of this blog post is to help the reader take pause before calling a bankruptcy attorney to file their bankruptcy petition. As this blog post explains, there are situations where bankruptcy can cause more harm than good and/or situations where other options are preferred and more practical to filing bankruptcy.
Good Ole Days
In the "olden days," when people had actual equity in their homes, modest assets, and job security, these folks ran to bankruptcy court to wipe out (discharge) the bulk of their debts to get a fresh start. Today, running to bankruptcy court should be a strategic move and a course of last resort--not first. Let me explain by illustrating the case of Maria, who is a typical caller that I receive in my Solano County consumer law practice, a Solano County, California-based consumer, bankruptcy and family-law practice:
Maria calls me asking me to file a Chapter 7 bankruptcy petition on her behalf. She says she has about $15,000 in credit card debt and is starting to receive harassing calls from her creditors--at home and work. For this reason, she urges me to file a "Chapter 7" bankruptcy petition on her behalf.
As I gather information about Maria (age 52), I learn that she has lost her government-based job (with high security clearance) and that she has been unemployed for over two years "due to the recession", that she owes more debt on her car than what it's currently worth, has completely liquidated all her savings accounts, and that her house is "under water" (she owes much more than what it is worth). I further learn that Maria is being medically treated for depression and other medical issues--and might be going on medical disability. She has no medical insurance and pays out-of-pocket whenever she receives any type of medical care. When I probe further, I learn that Maria is not sure what she is going to do with her "underwater" home (such as loan modification, foreclosure, short-sale, etc.) In fact, Maria tells me she is completely lost and confused about her options in connection with not only her debts, but also with her home. When I probe even further, I learn that Maria purchased her home back in 2001 (for $150,000) and she, like many people from 2002-20010, refinanced the home numerous times. By 2011, she had refinanced her home approximately 3 times and has three loans, with a combined total of $475,000.) In 2011, Maria's home value is only $210,000. Her home is underwater. To make matters worse, her elderly mother is suffering from signs of dementia and Maria might need to go to court and have a conservatorship established for her mother--for both her "person" and her mother's "estate". Maria has no other siblings.
In sum, Maria has no assets or earnings to protect--no savings, her house is "under water", no job (except unemployment that is expected to run out in a few months), car with no equity, no health insurance, etc. Things look grim for Maria.
The problem with Maria running off the bankruptcy court at this time is that she faces the following problems--after filing bankruptcy: 1) additional future bills relating to medical expenses that will not be included in her bankruptcy; 2) being possibly disqualified to serve as her mother's conservator (from the court's perspective, how can Maria handle her mother's estate, if she can't even handle her own estate?); 3) security-clearance issues if Maria is seeking another job with sensitive security-clearance issues. The list goes on.
When I talk to Maria about her debts, we learn that even if all the debts were "wiped out" in bankruptcy, she would still have more expenses than income and need to contend with certain types of jobs! In other words, bankruptcy has not solved her problem! Now, we get to the nitty-gritty. It appears the problem was not such much Maria's creditors, but her monthly mortgage payment. Her banker at "CountryWide", back in 2006, put Maria into an Option-Arm loan in connection with her first mortgage. This means that her "minimum payment" of $1,200 was "recasting" to $4,500/month in the coming weeks. This was the primary source of her financial woes! I educate Maria about her various options in connection with her underwater home. Maria comes to realize that she must first resolve the home problem before considering bankruptcy, e.g. working with an HUD-approved counsel to modify her loan. And, if she decides to have her mother conserved, she should consider non-bankruptcy options first, e.g., loan consolidation with a non-profit credit-counseling agency, credit-card settlement, etc.
At the end of the 2-hour consultation, Maria learns that given her unique set of circumstances, bankruptcy is not an option for her at this time--that she has other issues that are paramount to bankruptcy--and in certain respects, bankruptcy will matters worse for her. However, Maria knows, as I explain to all my clients, the "bankruptcy ticket" is always there! Just use it when you need it. Bankruptcy should be the course of last resort--not the first!
I hope Maria's case illustrates an important point for all my readers: many factors need to be considered before heading to bankruptcy court. For some folks, bankruptcy could make matters worse--not better! Below is a list of some resources you might want to check out. Good luck!
List of Additional Resources
To locate an attorney in your area to discuss mortgage/creditor/debt issues, go to National Association of Consumer Advocates
To locate an attorney in your area to discuss bankruptcy issues, go to National Association of Consumer Bankruptcy Attorneys
To independently learn if bankruptcy is right for you, I recommend the following book at Nolo.com "
2. To learn if foreclosure is right for you, I recommend the following book at Nolo.com The Foreclosure Survival Guide.
To speak to a free HUD approved counselor, go to Housing & Urban Development website.
If you have any questions regarding bankruptcy and non-bankruptcy options or wish to set up a consultation, contact Linda Garrett at the Law Office of Linda C. Garrett to set up a consultation.
Copyright © 2011 by Law Office of Linda C. Garrett. All rights reserved.