Informal Bankruptcy Protections

When a bankruptcy case is filed with the court, an “automatic stay” kicks in which protects you from most debt collection efforts.  The automatic stay is temporary and applies while the bankruptcy case is pending.  In most cases, the automatic stay protections are them replaced by the permanent protections offered by the bankruptcy discharge.
But even before you file your bankruptcy case, just knowing that you intend to file for bankruptcy is often enough to deter most creditors from attempting to collect against you for your debts.  Although technically and legally most are allowed to continue to make collection efforts, most will stop once they can confirm that you have indeed hired an attorney to file for bankruptcy – as a pragmatic matter.
Why would your creditor stop pursuing you for a debt if they are legally entitled to pursue you?
Let’s say I’m a collection agent for Acme Collections, LLC.  I’ve been attempting to collect a $500 debt from you for the past 6 months to no avail.  Seeing no other recourse, I’m thinking about filing a lawsuit against you in small claims court to recover the $500.  Yes, it will cost my company money to file the lawsuit – my company will have to pay court filing fees, pay for an attorney to file the paperwork, and other costs incidental to the lawsuit – but most (if not all) of those costs can be added to the bill I’m trying to collect.  So what may have started out as a $500 debt will become a $1300 debt if my company is successful in obtaining a judgment against you.
But what if you tell me that you’ve retained an attorney to file for bankruptcy?  I call your attorney and confirm that yes, you did in fact hire that attorney.  The bankruptcy case isn’t filed yet, so technically, my company can still file a lawsuit against you.  But should we?
Well, probably not.  My company is already short the $500 you owe it.  If it invests the time and money into filing a lawsuit – even if my company prevails and gets a judgment against you – that judgment can be discharged in the bankruptcy case.  My company’s only hope is to rush through the lawsuit, garnish as much of your wages as it can before you file for bankruptcy, and hope that it doesn’t have to turn over the money as a recoverable preference.  Not at all likely.
So without even filing for bankruptcy, just the fact that you have hired an attorney to begin the process of filing for bankruptcy is enough to deter my company from filing a lawsuit against you.  In all likelihood, my company will sit back and wait for its notice that the bankruptcy case has been filed.
So what’s the lesson to be learned here?  If you’re planning to file for bankruptcy and you’ve hired an attorney – make sure your creditors know it – particularly the ones who haven’t yet invested the time or money to file a lawsuit against you.  Don’t ignore phone calls.  Make sure that you always refer your creditors to your bankruptcy attorney.

If I’m bankrupt, how can I afford to hire an attorney for bankruptcy?

Filing for bankruptcy protection without an attorney is a treacherous venture into a legal minefield.  Neither the trustee nor the court can provide you legal advice or counsel, and essentially there is no one involved in the process who can look out for your rights and best interests.
Although most of the bankruptcy forms are relatively self-explanatory, there are any number of places where you could land yourself into trouble by inadvertent omission or error.  Schedule C (your property exemptions) and the Form 122 (the means test) are nearly impossible to do without legal training and access to the resources you need to know the relevant and applicable numbers.  Furthermore, the forms cannot fully convey the myriad of information concerning deadlines, documents, what to look out for (issue spotting), or even ensuring that you’ve asked yourself all of the questions you need to ask yourself.  There are limits in how much information and strategies you can glean from the forms, and the forms don’t provide you access to the bankruptcy statutes nor all of the case law that may be relevant to your case.  There are many tricks and strategies attorneys develop over their entire careers to address all of the various issues that can crop up, and if you choose to file without an attorney, you’re denying yourself access to that wealth of information.
But attorneys do not come cheap, particularly to someone who is struggling to pay their bills.  Here are the top three tricks that most people use to pay for their bankruptcy case.
1. STOP PAYING YOUR UNSECURED CREDITORS
There are exceptions to every rule, but in virtually every bankruptcy case, you will be advised by your attorney – as a matter of course – to stop making payments on your unsecured debts in anticipation of your bankruptcy filing.  This advice is not given because the attorney wants these funds, but because there are actual legal impacts to a bankruptcy case if you continue to pay your unsecured creditors – referred to as “preference payments”.  To say nothing of the fact that you’re throwing away money on debts that will ultimately be discharged in your bankruptcy filing.  Now, most people will need to continue paying on some debts – notably secured debts like mortgages and car loans that you intend to keep – and each case is different, so defer to your attorney’s advice on this matter.  But in general, you will be advised to stop making payments on your credit card bills, medical bills, payday loans, and more.  Side bonus: it frees up some money to pay for your bankruptcy case.
2. INSTALLMENTS AND TAX REFUNDS
Most attorneys offer some sort of payment plan.  Every attorney is different in setting their own internal policies, and some are more flexible than others.  I consider myself fairly flexible – my clients can make any sort of payment with no minimum requirement and no specific due dates – provided that something is paid once a month.
Taking advantage of payment plans to retain an attorney provides you with limited formal protections under the FDCPA, but also some informal protections against creditors seeking to file lawsuits against you.  In my practice, many of my clients make smaller payments until they receive their tax refunds in the spring and use those to pay off whatever their remaining balance is – usually with plenty leftover to spare – depending on the size of their refund.
3. BORROWING FROM FRIENDS OR FAMILY
Admittedly not an option for everyone.  Even those who have access to this source may be too embarrassed to ask for the help.  But some people go this route, and there’s nothing wrong or illegal about it.  However, if you do choose to borrow money from a friend or family member, make sure that you wait to pay them back until after you receive your discharge.  Payments made before your bankruptcy case is filed could be considered an “insider preference”, and without getting into a lengthy discussion about that topic – suffice to say – this is not something you want to have to disclose to the trustee.  The statutes are fairly silent about money paid to insiders after a case is filed but before the discharge (the 3-4 months that a Chapter 7 case is typically pending).  To play it safe, I advise waiting until after the discharge, because the statutes expressly permit voluntary repayment of any debt.