Have you ever heard the expression, “bad things happen to good people?” No where in the law is this more true than in the bankruptcy world. Trust me when I tell you, your clients don’t come to you with overwhelming debt dreaming that would be the position they would find themselves in one day. Nobody grows up thinking some day I would like to find myself divorced, with 3 DWI’s and sure let’s toss in overwhelming debt too.
Have you ever met a business owner who wished his/her business would fail, or a client who wished their income would fall just a little further, or I wish my kid had brain cancer, or when I grow up I hope to marry the love of my life and then divorce him/her? Or, have you every met with anyone who said they have never made a bad financial decision? And yet, these things happens every day to good people in Minnesota everyday. Why? Because it’s called life, and we are all imperfect and life is imperfect.
I received a wonderful e-mail that I wish I would have kept. The e-mail showed a picture of the ocean with the waves coming in and the caption read, “you cannot stop the waves, but you can learn how to ride them!” What a wonderful metaphor for life right?
The ocean can be fairly smooth but it can also be very wavy and utterly scary. I suppose all the contractors out there thought the market would never worsen in 2006 when making money for them seemed so easy. Ask those same contractors what it was like to try and make a dollar in 2009 and you get a very different story.
When life tosses you a big wave that takes you out and tumbles you around like a rag doll, the stress can be enormous. A 20k credit card debt that once seemed like chicken scratch a few years earlier can now seem overwhelming. Life is really humbling. I always feel the most sorry for those of you Bankruptcy Attorneys in MInnesota with clients who have made enormous sums of money but now finding themselves in the middle of losing their home and barely financially able to even keep the refrigerator stocked.
Take Penny for example. She was married and making really good money. Her and her husband lived in Roseville, Minnesota. They lived in a nice home and enjoyed an affluent lifestyle. The problem was Penny’s husband was very controlling and verbally abusive. So, in 2006, Penny sought and received a divorce from her husband. She agreed to give him 50% of the equity in the home, valued in 2006 at 350,000.00. She agreed that when their youngest child reached the age of 18, she would sell or refinance the home and pay her ex-husband his share of the equity plus interest.
Can anyone tell me what happened after 2006 to the housing market? Correct, it crashed. The problem is Penny’s agreement had no market crashing contingencies and she now owed her ex-husband more money there was in total equity in the home! What is she to do? She makes 30k a year and there is no way, now that she has lost her child support, that she can continue to make payments on the mortgage much less pay her ex-husband a large sum of money she doesn’t have. In addition to this, Penny had accrued 23k in credit card debt.
When Penny came to see me, she was in tears and had no idea what to do. Her ex-husband was now pounding the tables demanding his money now that their daughter’s vehicle was out of sight of the home they shared. So, Penny called her Kain & Scott MN Bankruptcy Lawyers. She asked to speak about her situation. I met Penny for a bankruptcy consultation in Roseville, Minnesota.
After meeting with Penny, and recording some information, we proceeded to discuss possible solutions. There are 4 possible solutions to any financial crisis.
1) dO NOTHING!
I speak from the heart. I want to know what happens if I throw my hands up and say- the hell with it, I am not going to do anything! What happens then?
We have outlawed slavery. You cannot be jailed for simply not paying a debt. For Penny, here are the worst case scenarios: A) Penny’s ex-husband brings a post decree motion in family law court asking the family law judge to order the sale of the property, according to the decree, and ordering that the proceeds get disbursed per the decree and any deficiency would be a judgment against Penny; and B) the credit card companies will obtain a judgment against Penny for the amount of the debt.
Ok, so Penny’s creditors get a judgment against her, then what can they do? They can, amongst other things, seek a garnishment of her wages and/or a levy on her bank accounts to try and collect on the debt. Most creditors can only collect about 25% of your wages (there is a strict formula for this), they cannot leave you penniless.
Occasionally, I do meet with clients who do not have a problem with this result. Sometimes, I meet with clients who are say, Vietnam vets, and they have already experienced extraordinary fear, and the thought of losing 25% of their wages working part time at Super America does not scare them much. However, I will say most of our veterans still file a bankruptcy simply because they want to be left alone.
In Penny’s case, when you make 30k a year, you cannot have your wages reduced by nearly 25% and still pay your bills. She already sustained a decrease in income when her youngest daughter left home and the child support obligation ended. If she lost an additional 25% of her income it would force her into bankruptcy for sure.
The added twist to Penny’s case was the fact that the debt owed to her ex-husband was of the kind that is not dischargeable in a chapter 7 bankruptcy under Bankruptcy Code Section 523(a)(15). So, if Penny did nothing, not only would she likely lose any equity she may have had in the property but she would owe a non-dischargeable deficiency to her ex-husband. That seemed grossly unfair.
After all, why should the risk of the market tanking fall on just Penny? I realize this is a deal she struck but the deal was struck in a market that was rosy at the time and extremely inflated. I will give you the punch line at the end of this blog and tell you what we did to resolve Penny’s problem entirely.
2) DEBT CONSOLIDATION
Traditional debt consolidation is always an option that is available to those with overwhelming debt. I don’t like traditional debt consolidation at all. Why? Because when a client does it, you are a walking billboard that you are in financial distress so your credit suffers immensely anyway. Plus, creditors are not required to participate and many don’t or won’t. So when you get the phone call from debt consolidation companies or you call the number on tv and when you speak to their “A” squad, they will make debt consolidation sound like the answer to your prayers.
And then, 6 months down the road, when one of the creditors initiates a lawsuit against you and you call the debt consolidation company, you are going to hear the words from the “B” squad you don’t want to hear, “if you are being sued there is not much we can do for you.” What? Are you joking me? Your “A” squad made this seem like it was the answers to all my prayers and now you toss me out like a wet napkin?
Trust me when I tell you, our clients do not find this funny at all. It’s a waste of time. I completely understand why people consider it- because they want to try and avoid the “b” word. Of course, don’t think that these debt consolidation companies (some who are owned by credit card companies!) don’t know this, they do, and they feed on it too.
I always feel bad for my clients who have toughed out a debt consolidation program only to see it fail.
A lot of MN Bankruptcy Lawyers ask me if debt consolidation work for Penny? I say, hardly- for one thing her ex-husband would laugh at the idea of being paid over 10-15 years and two, she doesn’t have the ability to make a payment after paying her reasonable and necessary expenses.
3) CHAPTER 7 BANKRUPTCY
Sometimes, pushing the reset button on your life and starting fresh is the answer. Who among us, in some facet of our lives, has not said at some point, I need to just reset the button and start fresh?
Do you think Penny ever dreamed about getting a divorce, having the housing market crash, and owing more money to her ex-husband that what he should get, and living on 75% of her 30k year wages? Hardly!
The problem for Penny is that the money she owes her ex-husband is not dischargeable in a chapter 7 bankruptcy. She can get rid her liability on her credit card debt but not her obligation she owes to her ex-husband. That sucks! Not only did she lose her 50% equity in the home but she owes her ex-husband more than the equity in the house is worth! OUCH! What about going back to divorce court and arguing for a more equitable distribution? As you family law & MN Bankruptcy Lawyers know, family law judges view the divorce decrees as final with very few exceptions- ie like fraud.
Penny’s husband did not commit fraud and any attempt to change the divorce decree now would come at a high legal cost especially given her ex-husband’s propensity to be very controlling. One could argue, a deal is a deal, no matter how cruel the result.
4) CHAPTER 13 BANKRUPTCY
A chapter 13 bankruptcy is a government sponsored debt consolidation plan. The benefit, over traditional debt consolidation is, the creditors must comply with the plan and they may not collect from the debtor while the debtor is in bankruptcy.
The chapter 13 plan can be a 3-5 year plan. It cannot go longer than 3 years and it cannot be shorter than 3 years. Assuming the debtor pays what the debtor can afford to pay during the life of the plan, whatever debt that does not get paid off at the end of the plan, the balance gets wiped out, forever, tax free!
For Penny, the debt she owes her ex-husband is dischargeable in a chapter 13 bankruptcy. However, her ex-husband could object to her plan based on a lack of good faith (ie you never really tried to pay me- you knew you would file a bankruptcy all along etc.).
While Penny could propose a plan to pay her creditors $200.00 per month for 36 months for a total of $7,200.00, and the rest would get wiped out tax free, the prospect of her ex-husband objecting to her plan plus she really could not afford to pay $200.00 a month did not make a chapter 13 seem like the solution for Penny.
While it is not the solution for Penny, for many Minnesotans, a chapter 13 bankruptcy is the answer!
CONCLUSION
So, what is the rest of the story for Penny? How did it end? How did we solve Penny’s overwhelming debt problem once and for all? The answer is leverage. Penny was living in the home and her ex-husband knew there was zero chance of her being able to refinance the house to pay him off.
The first thing I counseled Penny to do was to stop making the mortgage payment right now. I know, she would be in violation of the decree, but with her reduction in income what is she to do? Plus, it would put some fire under the ex-spouse to come to the table and make a deal with Penny. For the ex-husband, his fear was that we would file a chapter 13 bankruptcy, the debt owed to him would be dischargeable and she would live in the house as long as she possibly could, without making payments, thereby reducing the equity in the home in which ex-husband’s debt would get satisfied from, increasing the likelihood that ex-husband’s share would dwindle the longer this dragged on. Plus, ex-husband would have to hire a bankruptcy attorney to litigate in the bankruptcy case, costing him even more money.
I wanted Penny to be able to file a chapter 7 bankruptcy not a chapter 13 bankruptcy. She needed to move on from this ugly divorce and regain financial control over her life once again. So, we offered to sell the home immediately as long as Penny was paid 18k from the sale of the home, husband would get the balance, and agree to release his lien in full and not pursue a deficiency judgment against Penny- freeing her to file a chapter 7 bankruptcy in Roseville, Minnesota.
After some haggling, Penny agreed to accept 15k from the sale of the home, her ex-husband received far less than what he was owed in full satisfaction of the debt plus ex-husband released his lien to the home.
Penny then filed a chapter 7 bankruptcy on the rest of her credit card debt and started life out fresh with 15k in cash she used to purchase some furnishings and pay her bankruptcy counsel! A perfect result? Nothing is perfect but for Penny it changed her life! She loves her new home and she no longer has any debt hanging over her debt. Penny’s mood is dramatically different than the first time I met her!
Are you a MN Bankruptcy Lawyer questioning a case? Contact me directly by calling or stopping in and meeting with me at my Roseville MN Bankruptcy Law firm located at:
