Can I file bankruptcy?
Should I file bankruptcy?
Is bankruptcy right for me?
My first job out of law school was for a highly profit-driven law firm that believed that everyone could benefit from bankruptcy in some way, and that there was no excuse for an attorney to not get a prospective client to retain our services.
I won’t say who that law firm is, but you can identify firms like these pretty easily. Many of them will have a short survey posted on their website that asks you a few questions to determine if you should file for bankruptcy. The survey is coded and rigged in such a way that no matter how you answer the survey (or if you answer ‘yes’ to even one question, and the questions are designed that 99% of people would), then the result would be a profound warning that you needed to file for bankruptcy right away.
That law firm I used to work for – and other firms like it – are absolutely wrong. Bankruptcy is not for everyone. Admittedly, it is true that there are few people in the world who – if they filed for bankruptcy – would not get any benefit from it. But those people are out there. Sometimes they land in my office. If someone would not benefit from bankruptcy – I will tell them, even though it costs me business. I, as all attorneys do, have a duty and ethical obligation to look out for my clients’ (and prospective clients’) best interests.
So… rather than post a gimmicky survey, I’m going to walk you through some of the factors you should consider if you’re thinking about bankruptcy. It won’t be as easy and fast to go through as a six question survey, but I feel that you will have a much clearer idea of what you need to do after reading this article.
Of course, since I can’t know the specifics of your financial circumstances, this article paints with very broad brush strokes. There is no substitute for getting a consultation from an experienced bankruptcy attorney who can analyze your particular situation. Most attorneys – including myself – offer free initial consultations. There is no risk or commitment. Just an opportunity for you to arm yourself with information and options.
Fundamentally, what is bankruptcy?
Declaring bankruptcy, in its most fundamental sense, is nothing more than asserting that you cannot afford to pay all of your debt obligations as they become contractually due.
Put another way, if your income is X, your ordinary living expenses are Y, and minimum payments on your debts is Z, then X – Y < Z. The shortfall could just be a few dollars a month, or a few thousand. Either way, the equation is unbalanced. Ideally, you want it to look like either X – Y = Z or X – Y > Z.
But I’m not poor…
Bankruptcy is not just for poor people living off of unemployment benefits or food stamps. In fact, many people on public benefits would benefit the least from bankruptcy protection – essentially because they have little or nothing to lose. In Wisconsin, those receiving public assistance are protected from having what little wages they have from being garnished.
People have a tendency to look at key items of their financial circumstances in isolation. “I make $100,000 per year, therefore, bankruptcy isn’t for me.” “I only have $10,000 in debt, therefore, bankruptcy isn’t for me.” Well, if you’re making $100k a year and only have $10k in debt, I might be inclined to agree. But if you’re making $100k a year and trying to pay back $500k in taxes – then you might need some help. And a single mother raising two kids on $30k a year might get a lot of benefit from bankruptcy even if her debt is only $10k.
It’s not just about your debt or your income, but your debt-to-income ratio.
But I have excellent credit…
Have you pulled your credit report and score? Recently? Most people who tell me this haven’t. They think their credit is excellent because they have never missed a payment. But your credit score is much more than just a record of your payment history. Your credit score is affected by numerous factors, including your income, your assets, debt-to-income ratio, minimum monthly payments, number of active accounts, types of credit accounts, your indebtedness relative to your available credit, residential stability, occupational stability, length of credit history, and credit inquiries.
All we’re saying is – if you’re reading this article and you haven’t pulled your credit recently, it might not be as high as you think.
That being said, impact on your credit score is a valid concern. Bankruptcy does negatively impact your credit – there’s no denying that. If there is a feasible way to get out of debt without bankruptcy, it is something worth considering.
But bankruptcy isn’t a permanent black mark against your credit, either. I tell my clients to think of bankruptcy as a reset button on a video game. You start with a clean slate – just like when you turned 18. No credit. You start over and build a new history. If you happen to have a preexisting debt that will survive the bankruptcy (mortgage, car loan, student loan, etc.), that will help you rebuild even faster.
I’m not in trouble… yet.
If you think you’re headed down a path where bad things are going to happen, talk to an attorney now. Don’t wait until disaster strikes.
- Has a creditor filed a lawsuit against you? They may be looking to garnish your wages. Why wait until after your wages have started to be garnished before speaking to an attorney?
- Have you not paid your utility bills all winter? Your services will likely be disconnected on or after April 15. Why wait until April 14 to do something about it?
- Are you behind on your car payment? In Wisconsin, it doesn’t take long for a creditor to repossess a car. If they do, you have a very short window (and limited possibilities) to get it back.
- Are you falling behind on your mortgage payment? Foreclosure takes a bit longer in Wisconsin, but the longer you wait, the more expensive it could be to stop the foreclosure action. Don’t gamble with your home by waiting until the eve of the Sheriff’s Sale to speak to an attorney.
It doesn’t necessarily have to take a long time to file a bankruptcy case. But to do it properly, you should plan on meeting with an attorney several weeks (if not months) before you need to file for bankruptcy. Why so long?
Chances are that you are not your attorney’s only client. Your attorney will need time to prepare a proper petition for you, to review all of the relevant documents and information you provide, and to advise you accordingly. If you drop a case in your attorney’s lap and expect him to drop everything and file a case for you in 24 hours – you can expect the quality to suffer, and you can expect problems. In fact, I would urge you to avoid any attorney willing to file a case that quickly.
Furthermore, you are going to have certain obligations and responsibilities in bankruptcy. You’re going to want time to digest these, and make sure that you’re making the right decision before you commit to filing your bankruptcy petition.
Okay, I want to file bankruptcy. Here’s some information. Get it done for me.
Bankruptcy is a privilege, not an absolute right. And it’s a privilege that usually confers a tremendous financial benefit. In exchange for that benefit, the bankruptcy court is going to have some expectations of you. They expect a full disclosure of your income, assets, and debts – to determine what, if anything, you can reasonably be expected to pay on your debts. They also expect you to conduct yourself in a manner that doesn’t unfairly and unjustly impact your creditors (meaning not racking up a bunch of debt right before you file your case, not paying certain creditors at the expense of others, and not selling or giving away valuable assets).
Your attorney’s job – my job – is to help guide you through this intensely bureaucratic process; to advise you to avoid legal pitfalls; and to make sure that you follow the laws and procedures properly. But that doesn’t mean you can sit back and not take an active and serious role in your own case. If you cannot bring yourself to disclose information or to follow explicit instructions and advice from your attorney, then you may want to seek some other form of debt relief with less rigid expectations.