A lot of people believe they don’t need to hire an attorney to file for Bankruptcy, or they believe that attorneys simply cost too much so they should go it alone. Can you address this issue?
Bankruptcy is very complicated. Making a DIY project out of your financial affairs may cause you to miss some really great remedies and a true fresh start. What is that worth?
There are very few individuals, who own nothing and earn next to nothing, that would be OK to file their petition themselves. The Bankruptcy Court website understands this need and provides DIY instructions. However, if the papers are filed incorrectly the Court will dismiss the case and repeat filings within a years’ time, do not offer the same protection as the first filing. The danger to most individuals filing a DIY petition is that the DIY instructions cannot replace the experience and training of a qualified attorney.
It is best to seek the counsel of a Bankruptcy Attorney at the first signs of financial distress to prevent a financial mistake that becomes a big dark financial hole. You see our doctor every year, hopefully, to prevent or arrest sickness early on. Have a financial checkup too. If you cannot pay your bills in full for two months, you are experiencing financial distress. Homeowners should send a Request for Information from Servicer every year to make sure the monthly mortgage is applied correctly.
Before withdrawing money from a 401K or ‘borrowing from Peter to pay Paul’ to avoid the embarrassment of filing a bankruptcy, it is best to consult with an attorney. There may be other better options available.
To illustrate the point, I share this clients’ story. During the housing crisis one couple, who were used to a high six figure income experienced the ramifications of a bad mortgage loan and reduction in wages. They borrowed from their retirement to pay their bills hoping to save their home and their credit score. Sadly, they lost their house, were unable to continue paying the unsecured credit card debt, their credit score spiraled downward and the IRS had their hand out to collect on taxes due for the retirement withdrawals. The IRS used its strong-arm collection tactics, wage garnishment, and bank levy, and took the money to pay rent, utilities, buy food, and other necessities. By the time my clients considered bankruptcy as a remedy to stop the IRS levy actions they had lost their home and assessed thousands of dollars in non-dischargable federal and state tax debt.
By this time bankruptcy could only discharge their unsecured debts. They still had to deal with their tax debt. Had they consulted with me before they decided to withdraw from their retirement account they could have saved their retirement funds as they move forward with a fresh start on reduced wages. So we did the second best things, filed a chapter 7 to take care of their unsecured debt, then a chapter 13 to create a reasonable payment plan.
Bankruptcy Attorneys should also be on the list of consultants for Business Owners, here’s why. A small corporation that is unable to pay its bills, and the owner continues to take his or her salary, even if it is reduced, can be forced to pay the Bankruptcy Trustee a year or more of his or her salary back if the corporation files bankruptcy. How is the owner to come up with the money he or she used to pay personal bills? Had they consulted with me before filing the business bankruptcy they would have understood the Bankruptcy Trustee’s powers and could have taken a different course of action or waited to file the Business Bankruptcy.
Often a Business Owner will choose to defer payment of employee taxes to ‘keep the doors open’, not realizing the Owner is personally liable for those unpaid taxes and penalties and interest. Consulting with a bankruptcy attorney may help the Business Owner realize the need to change the way they are running the business before they dig themselves into a deep financial hole.
I have seen Owners use a home as collateral for business debt. If the business fails there is a high likelihood the Owner will lose his or her source of income and place to live. Starting and building a business requires business skills and flexibility. Our society is constantly changing and businesses that are insensitive to this fact usually fail. Consulting with a bankruptcy attorney before using a home as collateral is a wise move. We educate our clients’ on the pros and cons of borrowing.
Marriage and the property acquired after marriage is considered community property in many states. A couple in financial distresses with irreconcilable differences often wonder what to file first, the bankruptcy or divorce petition. While it is difficult for warring tribes to disclose financial information and work as a team, it may be in the best financial interest of the parties to do so.
There are special rules in bankruptcy that can change unsecured credit card debt listed in a marital separation agreement into nondischargeable debts in bankruptcy. Unclear Family Law Court Orders that assign attorney fees to one spouse may be considered Child Support in Bankruptcy Court and non-dischargeable. Couples in financial distress and/or experiencing irreconcilable differences need to be informed because their decisions will affect them for many years.
I have seen too often a financially irresponsible (FIR) ex-spouse file a chapter 7 bankruptcy shortly after the family law court issues the final decree that divides the community property. The property of the financially responsible (FR) non filing ex-spouse is sucked into the filing FIR ex-spouses’ bankruptcy. How? The Bankruptcy Trustee has the power to undo the property divisions during what we call the Trustee’s ‘claw back’ period.
One particularly ugly case where the FIR filed a chapter 7 bankruptcy shortly after the Family Law Property Division and the Chapter 7 Trustee determined the assets were unfairly divided by the Family Law Property Division and declared the FR separate property community property because it was acquired during marriage. The Property Division did not specify why the property was unevenly divided so the Chapter 7 Trustee was allowed to ignore the Family Law Property Division and the (FR) ex-spouse turned over the ‘community property’. My office negotiated a settlement amount so the FR ex-spouse kept her home, but it put a large dent in her savings. The Trustee wasn’t being a bad guy. He has a duty to the unsecured creditors to seize and sell non-exempt assets, and failure renders the Trustee personally liable to the unsecured creditors.
The couple in the this particularly ugly case had ‘stayed together for the sake of the children’, treated their property as separate amongst themselves, but did not move into separate residences because the FIR could not afford to. California Case law, at the time of this case, did not consider living in separate bedrooms under the same roof as a ‘separation’, the divorce decree did not spell out why the property was unevenly divided, and the bankruptcy was filed to soon, so the FR ex-spouse after years of trying to work things out for the best for her family lost more of her hard earned assets.
The California Case Law on what is required to prove ‘separation’ has since changed but the lesson from this case is clear. Seek bankruptcy counsel when there are assets and irreconcilable differences. Although the FR was blindsided by the FIR’s bankruptcy, had she known the result of the FIR’s bankruptcy they could have discussed the matter and saved assets for their children instead of the FIR’s unsecured creditors.
Another reason to seek the counsel of a bankruptcy attorney is to apply the maximum amount of exemptions so you experience the best fresh start possible. An exemption is a deduction allowed by law to exclude your assets from the bankruptcy estate. A bankruptcy estate is created when a bankruptcy petition is filed. California has two sets of exemptions, 703 and 704, to protect assets. I have witnessed elderly couples lose their home because they either hired a paralegal to fill out their petition or their Bankruptcy was a DIY project. What a hardship, after years of hard work and sacrifice, they made the mistake of using their own credit to ‘help’ their children and grandchildren. They were unable to pay the debt and their children and grandchildren could not/did not pay the debt. The elderly couple filed bankruptcy and lost their most important assets. They received the dollar amount of their homestead exemption when the Trustee sold their home but had to use the money in six months to buy a new home or give the money back to the Trustee; a hard, bitter lesson. Had they consulted with a bankruptcy attorney who looked to find the best remedy, they never would have filed a Chapter 7 Bankruptcy.
As far as finding the money to afford an attorney it has been my experience money will appear when someone decides to file bankruptcy. Some find the money when they stop paying their credit cards. Some have family members or friends that loans them the money. Others use their tax refund or sell something. It is amazing how, at the lowest point for some, money is found to pay the attorney and court fees and they are off to a fresh start.
How do you find a qualified attorney?
The California State Bar Website lists all attorneys licensed in the state and includes information as to whether the attorney is active or inactive and any record of discipline. You will also find the attorneys certified by the State Bar as a Specialist in Bankruptcy Law. A Certified Specialist is someone who takes the time to study for and pass another bar exam on Bankruptcy Law and has completed the required number of bankruptcy cases and continuing education courses in Bankruptcy Law. There are Commercial websites, such as AVVO, that potential clients post questions answered by contributing attorneys. Former clients also post reviews of the contributing attorneys. Many attorneys have websites they post information about their law office. Finally, most attorneys offer consultations so you can meet them face to face and ask questions.
One of the most important tips on finding a good attorney is to retain an attorney that you can work with and trust. Take advantage of a consultation before you need a bankruptcy. This one simple act may help you avoid financial mistakes and ensure you find an attorney you trust will represent you and find the best remedies for your situation.