By Kitty J. Lin
When it comes to bankruptcy, many of our clients wait until the very last minute before making the decision to schedule a bankruptcy consultation to find out if bankruptcy can help them. It has been ingrained in their heads that bankruptcy should be the very last option after all other options have been exhausted. This type of reasoning could potentially cost them lots of time, money, and sometimes even their homes. Bankruptcy is normally the last option, but seeking the counsel of an experienced bankruptcy lawyer when financial problems start is the best course of action. Here are some scenarios that come up most often during our consultations:
Our clients often feel guilty about even considering bankruptcy because society has made it seem like they are bad people if they do not repay their debts. So they try to find other options to repay their debts. You hear about debt consolidation companies or debt settlement companies all the time on television or on the radio. “We can help you settle your debts for pennies on the dollar and you don’t have to file for bankruptcy!” That is one of the claims I have heard previously. This seems like the miracle cure and therefore people flock to these companies to try to save their credit and get them out of debt. Let me tell you a horror story from one of our previous clients: our client went to a debt settlement company. This company told her that if she paid them $1,000 per month for 36 months her debts would all be paid off. She had over $60,000 worth of debt, so this seemed like a great idea. She faithfully paid her debts for 2.5 years. She thought she was almost done (only 6 more months to go) and requested the company to provide her with a statement that shows what her remaining balance is. To her shock, the balance was higher than when she first started. That is when she came to see us for a free consultation. We realize that not all situations are the same and these debt consolidation or debt settlement companies may be able to help some people. It always depends on the situation, but most seem to be scams. One thing you need to do is make sure the debt consolidation/settlement company you speak to is a reputable company. You should always try to consult with a non-profit organization to help with debt consolidation/settlement. Our client could have saved herself $30,000 had she spoken with us first before going to a debt consolidation company.
Some of our clients have already had their paychecks decrease significantly due to the wage garnishments levied against their paychecks. Filing for bankruptcy prevents wages from ever being garnished and stops all wage garnishments that have already started. Of course, whether you choose to file bankruptcy depends upon a number of factors. If your debts are burdensome and you cannot afford to pay your debts back you will save significant money when your wages stop being garnished when you file for bankruptcy sooner rather than later.
A lot of homeowners do not consult with a bankruptcy lawyer while they are attempting to obtain a loan modification. The problem is that most of the clients that speak with us indicate that the lender tells them that they do not qualify for a loan modification days before their home is about to be sold in a trustee sale. I have had clients call me panicking because their house is going to be sold the next day. When I ask why they didn’t call me earlier, the answer is often “I’ve been trying to do a loan modification and only heard back from the lender today that I have been denied.” If the trustee sale goes through before you file for bankruptcy it is too late to save your home unless you have other defenses. It is a good idea to seek the advice of a bankruptcy attorney once you receive a notice of default to find out what your options are. Filing for bankruptcy does not bar you from proceeding with a loan modification.
Paying Credit Cards
Many clients continue to pay their credit cards even though they cannot afford to do so. They do that mainly by borrowing the money from other sources to pay their debts. They may do balance transfers or obtain payday loans to pay for their expenses. Some people have even taken money out of their retirement account to pay their debt. The retirement accounts are set up for a reason: to ensure you have money when you retire. If you take money out of the retirement account, that money will not be there when you retire. Even worse you will be hit with early withdrawal penalties and now you owe taxes. Borrowing money to pay credit cards usually only gets you in more debt. If you are in over your head with debts you need to seek the advice of a bankruptcy lawyer so that you do not incur even more debt.
This article is not saying that you should go out and file for bankruptcy at the first sign of financial trouble. You need to take a smarter approach and be realistic when you look at your finances. Will you be able to pay your debts back in a reasonable manner with realistic cutbacks on your expenses? If so, then you may not need to file for bankruptcy. If you are living from paycheck to paycheck and you have no spare money to pay back your creditors without having to borrow money from Peter to pay Paul, you should consult with a bankruptcy attorney to see what your options are sooner before later.