Why NOT File for Bankruptcy? The Reason May Be Different Than You Think

April 21, 2012 by  Filed under: Bankruptcy 

As an attorney, I have a duty to look out for the best interests of my clients. I even have a duty to look out for the best interests of potential clients, people who come to me for help but don’t actually wind up hiring me. That duty sometimes includes advising people NOT to file a bankruptcy case.

What’s the usual reason why I turn clients away? It’s not because they need to try harder to pay their debts. It’s not because I think they’re being dishonest. The most common reason why I advise people not to file for bankruptcy is because they have nothing to protect.

That’s sometimes hard for people to get their heads around. Bankruptcy law doesn’t exist to protect people who have nothing; Bankruptcy law exists to protect people who still have assets. It enables people to save those assets, and avoid losing everything.

I frequently see a potential client with the following situation: She is being harassed by debt collectors. Her only source of income is social security, or maybe employment income in a very small amount. She doesn’t own a home and doesn’t have much money in the bank. Her only debt is medical debt, credit cards, and maybe some payday loans. She incurred those debts honestly, but she is never going to be able to repay them.

Believe it or not, this person should not file for bankruptcy.

First, she doesn’t need to file for bankruptcy to stop the phone calls: Under federal law (and, for those in California and certain other states, under state law), if she informs her creditors of her inability to pay, they must stop contacting her. If they don’t stop, she has a potential lawsuit against them.

What’s more, even if the debt collectors sue her (which they could still do), and even if they get court judgments against her, how are they ever going to be able to collect? They can’t garnish her wages: Social Security isn’t garnishable and her employment income is below the garnishable amount (which varies from state to state). She doesn’t have any money in the bank to levy. She doesn’t have a house for them to put a lien against. They can’t get blood from a stone. She is judgment-proof.

On the other hand, if she files a bankruptcy case, she will have to pay a lawyer. She may have to pay Court filing fees. Perhaps more important, she won’t be able to file again for another 8 years. What if she has a medical emergency next year and incurs more medical debt?

If her circumstances change, then my recommendation changes. Let’s say she regains full employment. Let’s say a relative passes away and leaves her a partial interest in a piece of real estate. Now she has assets to protect. Now she has a reason to file bankruptcy. She needs to be able to keep those assets in order to enjoy a true fresh start.

You might be in a similar situation. Maybe you lost your job, and then after the unemployment insurance ran out, you started using your credit cards to buy groceries and pay bills. Your car was repossessed, and the lender says you still owe them money. Now you finally found work again, but you’re sill saddled with those debts. You thought that filing for bankruptcy was for people at the bottom, not people on the way back up. That’s not quite right; the bankruptcy laws exist to help people just like you.

Eric M. Boeing is a bankruptcy lawyer representing people in Chapter 7 and Chapter 13 cases in San Francisco, Oakland, and the greater Bay Area. Find him online at http://www.boeinglaw.com. Initial consultations are always free.

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