Bankruptcy — Is It A Powerful Tool Or A Dangerous Tool? Yes….
Bankruptcy is a powerful tool to use if you are having financial difficulties, but if bankruptcy is not used correctly, then it can be a dangerous tool.
Here is a quick overview of bankruptcy and then we’ll talk about when it should not be used and when you should consider using bankruptcy.
Quick Overview of Bankruptcy
The basic idea of a bankruptcy in Alabama is either restructure your debts (a Chapter 13 — which we do not normally recommend) or a Chapter 7 bankruptcy which is where all of your debts are discharged or wiped out.
The goal is to give you a fresh start. This has its basis in the Bible related to the release of debts (and thus bankruptcy is hardly the sin many make it out to be) and in our own culture.
We see big companies routinely “file for protection under bankruptcy” and consumers are allowed, under the law, to do the same.
When you file for bankruptcy, the court automatically enters what is known as the “automatic stay” which tells all creditors and collectors to stop collecting against you. The idea is to let the court sort out your assets, debts, and ability to pay, so the court can decide which creditors, if any, will get paid.
This automatic stay normally will stop, or “stay,” lawsuits, foreclosures, garnishments, etc.
Then you will have a hearing, in a Chapter seven (7) bankruptcy, where creditors can object to your debts being discharged. Then, at about the 90 day mark from filing in Birmingham, the court will enter a discharge order and the case will be over.
You may be able to (and may want to) “re-affirm” some or all of your secured debts. Items such as your house and car. This allows you to agree again to the terms of the loan. This can be a complicated area but know this is a potential option.
Finally, after bankruptcy, we see some creditors and debt collectors collecting against you for the debts you no longer owe. This is illegal and we enjoy suing these guys for doing this…. Whether it is false credit reporting, calling you, writing you, etc. Any type of collection activity is normally illegal.
When You Should Probably Not Use Bankruptcy
It is sad when we see people who file for bankruptcy because of identity theft. If it is truly identity theft, you do not normally owe the debt. So why bankrupt against it? If the companies won’t stop collecting against you, and won’t get the false information off of your credit reports, then sue them.
We also see people file bankruptcy simply to stop harassing debt collectors. They can eventually pay their debts but what they cannot tolerate is debt collectors calling neighbors, calling them at work constantly, making threats, illegally calling their cell phones, etc.
Understand that debt collectors have a right to collect debts. If . . . they follow the law.
They often don’t follow the law.
So if that is the driving motivation, then explore your options to sue the collectors for breaking the law, rather than filing for bankruptcy.
Finally, when Alabama consumers are about to lose their homes to foreclosure, they may consider bankruptcy — normally Chapter thirteen (13). This can be an option but if there is wrongdoing by the mortgage company — and we see plenty of that by Bank of America, Chase, LPP, Ocwen, Wells Fargo, etc. — then look into suing your mortgage company rather than filing for bankruptcy.
Of course you need to have a competent lawyer help you evaluate your decision but we hope you will consider all of the options, including filing bankruptcy as we will discuss next.
When You Should Consider Bankruptcy
Bankruptcy is very powerful for when you simply cannot get out of debt and your creditors will not work with you.
Chapter seven (7) should be considered when you qualify (under what is known as the “means test”) and when you don’t have a reasonable way to pay off the debt. For example, I met with a gentleman who had around $75,000 in credit card debt and he made $30,000 a year.
As you would imagine, this person had a great job and credit but then lost his job.
He tried to work with the creditors but they would not work with him and instead they sued him. He was facing multiple judgments (which trash your credit) and the garnishment issues that result from judgments. Garnishment of wages and bank accounts.
There was no real prospect for resolving this debt. Judgments would have ensured that this man never got out of debt as judgments make 12% interest a year.
Chapter seven (7) bankruptcy was the best option for him. And this is the exact type of situation that bankruptcy is designed to help — to give someone a fresh start.
An example of a Chapter thirteen (13), although rare in our judgment, is when you have a lot of equity in your house and you can now pay your debts, you just need to stop a foreclosure. When there is no fraud by the mortgage company.
Again. That’s a rare event in Alabama foreclosures.
We should be thankful we have the option to consider bankruptcy. It is a powerful tool. And sometimes it is the only tool that can help us.
But, normally, there are other options and all the tools you have should be considered.
Educate yourself. Talk to a bankruptcy and a consumer lawyer. Then take the right action for your situation.
We wish you the best and if you live in Alabama and want to chat with us, please pick up the phone and call us at 205-879-2447 or fill out our contact form.