No, You Probably Don't Need To File For Bankruptcy
No, You Probably Don’t Need To File For Bankruptcy
By: Jason L. Van Dyke, Esq.
My last article addressed why “debt settlement” is a scam that tends to cause more problems than it solves for those who have fallen on hard times (typically by overusing their credit cards). Since most debt settlement companies advertise their services as an alternative to bankruptcy, the next question that most people naturally ask me is whether bankruptcy is the best solution to their financial problems. I have a great deal of respect for bankruptcy attorneys and know that, for some people, bankruptcy is the best of many bad options. However, an attorney that only practices bankruptcy law is a hammer. When you’re a hammer, every problem looks like a nail. The truth is that most bankruptcy filings are made by people who don’t really need to file for bankruptcy.
There are certainly a few people that do need to file for bankruptcy. The most common of these situations is: (1) An individual with a complicated tax situation where the bankruptcy is part of the tax settlement plan; (2) A person that is using a strategic bankruptcy as part of their plan to save a very valuable asset (typically, their home); and (3) A person that is filing for bankruptcy to protect other assets following a divorce. For these individuals, the bankruptcy is typically one step that they are taking as part of litany of other steps in solving a severe and complicated legal problem. I do not practice in those areas of law and will leave discussions of such situations to those who do. The purpose of this article it to educate my readers concerning one simple truth: Most financial situations can be dealt with outside of bankruptcy.
Although the power to pass bankruptcy laws was originally provided for in the Constitution, the bankruptcy system as we know it in the United States today is only about 120 years old. It was established under the Bankruptcy Act of 1898 (more commonly known as the Nelson Act). The most drastic changes to the bankruptcy code came with the Bankruptcy Reform Act of 1978, which established the U.S. Bankruptcy Code and numerous special federal bankruptcy courts with original jurisdiction over bankruptcy cases. The stated purpose of the bankruptcy code is to provide the honest debtor a fresh start. Unfortunately, continuing reforms and lobbying by banks and creditors against bankruptcy (many of which manifested themselves in the 2005 Bankruptcy Reform Act) have severely perverted the bankruptcy code from its stated legislative purpose.
When a person files for bankruptcy, they are looking for a federal court judgment that is referred to as a “discharge”. A discharge literally means that the debtor(s) are discharged from the responsibility of paying the debts that were part of the bankruptcy. Creditors that continue attempting to collect discharged debts can be subject to severe legal penalties (including contempt of court). But bankruptcy is nota free gift or a handoutfrom the federal government. Discharges today are conditioned on mandatory debtor education and, regardless of whether a discharge is granted, the bankruptcy filing will remain on the debtor’s credit report for ten years. It will also remain a matter of public record forever, which may affect the debtor’s ability to obtain certain professional licenses or a security clearance. Although it is typically unlawful for an employer to fire a person because they filed for bankruptcy, many employersview a bankruptcy as the equivalent of a theft or felony conviction and may refuse to hire you on that basis.
Additional barriers for “honest debtors”include the types of debts that cannot be discharged in a bankruptcy. The most typical debts non-dischargeable debts aretaxes, criminal fines, child support, spousal support (such as alimony), and student loans. Allow us to consider the hypothetical cases of three completely hypothetical people named Donald, George, and Barack. All three of them borrowed $100,000.00. Donald spent the $100,000.00 to open up a casino that went bankrupt. George spent the $100,000.00 on tuition at Yale, but couldn’t get a real job after he graduated. Barack spent the $100,000.00 on vacations, golf clubs, clothes, booze, and some cocaine. All three file for bankruptcy. Donald gets a discharge because his debts are primarily business debts, and the bankruptcy code is one of the few places where Congress still venerates the entrepreneur. Barack also gets a discharge, because even though he blew all of his money on crap he didn’t really need, that’s still a behavior that the bankruptcy code tacitly encourages. George, on the other hand, gets fucked. Why? Because Congress has made all student loan debt non-dischargeable in bankruptcy. If he is like most college graduates these days, he will still be paying for college when he reaches retirement age. The example of Donald, George, and Barack shows is a perfect illustration of what happens when we elect people to Congress that don’t understand economics.
With this in mind, how does one go about avoiding bankruptcy? Since bankruptcy is a paperwork-intensive pain in the ass, the first question I typically ask a client is why they want to file for bankruptcy. The most common answer I receive from a client is that they are up to their eyeballs in credit card or medical debt and they’re sick of getting calls from debt collectors. My response to such individuals is whether they have ever considered simply ignoring the debts and hiring me instead to make the collection calls stop. This is the point in the conversation where they look at me as though a massive gaping vagina just sprouted in the center of my forehead and there must be something wrong with me. I am actually quite serious. First of all, stopping collection calls is one of the easiest things that a person can hire me to do. Second, I haven’t looked at their finances yet and some of these calls might very well be concerning debts that they have no obligation to repay at all. In one case, the people calling a bankruptcy client weren’t creditors at all: they were Nigerian scammers threatening my client with arrest over an old loan he “must have forgotten about.” That particular client got amazing value for his money. He got to sit in my office with complimentary iced tea and laugh as I verbally berated the scam artist for a good half hour before my number was blocked.
Naturally, the second thing I do for a client is review their entire situation and make a determination as to whether they even need to repay some of these debts. This is where it’s important for the client to know that they aren’t only paying me for my legal ability; they are paying me for my experience. An experienced lawyer knows what creditors are more likely than not to file lawsuits, and which will simply continue with annoying and easily-stopped telephone calls until the statute of limitations runs out. He will also know which debt collection agencies have collectors that work entirely on commission (and what their commission structure is). This knowledge is essential when the decision is made to settle a debt rather than to wait and see whether the creditor will pursue it in court. Some unethical lawyers have actually encouraged their clients to file for bankruptcy on debts that still show up on a credit report but which are outside the applicable statute of limitations. There are two words for such lawyers: “Lazy” and “Dishonest”.
Hiring a lawyer that is able to properly analyze your financial situation is absolutely critical. I once had an elderly client who wanted to file bankruptcy over a $150,000.00 medical debt that was well over three years old. She had never made a single payment because she was a retired school teacher living on a fixed income. She was under the impression that, if she didn’t pay the bill, the hospital could take her house and her pension. An unethical lawyer would put her in bankruptcy. I got a massive hug I got when I explained to this sweet and very frightened lady not only that the hospital couldn’t touch her home or her pension, but that the statute of limitations on the debt would run out in less than a year as long as she followed a few very simple rules that I laid out for her. I stopped the collection calls, she followed my advice, and the hospital gave up a few months later.
That is my third job: Managing client fears and expectations. My typical client fears that, if they don’t pay that credit card or medical bill, they will get sued and lose everything. They hear dishonest advertisements on talk radio (mostly from companies selling sham corporations that don’t help anybody) about how people that lose lawsuits end up living in a cardboard box under a bridge somewhere. Good news: Your home (as long as you pay your taxes and your mortgage), at least one of your cars, and your retirement is exempt from seizure to satisfy the claims of unsecured creditors like hospitals, payday lenders, and credit card companies. In fact, they can’t even garnish your wages for failure to pay a civil judgment in Texas! Naturally, any debt that has been reduced to a civil judgment is something that your lawyer absolutely needs to know about. A creditor may not be able to garnish your wages, but once that money ends up in a bank account, it becomes fair game for garnishment. There is no one strategy that works for everybody, which is why the money you spend on an attorney is well spent.
This article concludes with a word of caution: It is not my job - or the job of any other lawyer - to help you steal from a creditor. My job is to help someone that has found themselves in a hole to stop digging and start climbing out of that hole. Although I may be able to help someone that has made some mistakes in their life (as I have), I cannot help a person unwilling to live within their means. Much like a physically healthy lifestyle, a financially healthy lifestyle can only be maintained through practice and discipline. With that in mind, my third and final article in this series will deal with how those with past problems can rebuild their credit and financial series. Until then, Uhuru!
Jason L. Van Dyke is licensed to practice law in Texas, Colorado, Georgia and Washington D.C. He has been practicing in the areas of real estate, creditor/debtor law, and real estate for over ten years. He is a member of the Texas chapter of The Proud Boys and lives in Crossroads, Texas. The views expressed in this article are general in nature and should not be used or construed as legal advice for any specific situation.