Almost every client with whom we meet have the same question: should I (or we if a married couple) file a bankruptcy case? And implied in the question of “should I” is “is filing a bankruptcy case the “best” thing to do in light of the client’s financial situation. It’s the fundamental question that our clients are looking to answer, and at Kain & Scott it’s our job to help them answer that question.
So when that fundamental question is asked, here are the things we consider in advising clients:
Yes, there’s a provision for involuntary cases in the Bankruptcy Code. But involuntary cases are rare (in 34 years of this practice, I’ve only been involved in one involuntary case). Bankruptcy is, for all intents and purposes, a voluntary decision made by the debtor. In almost all cases, the individual who will decide to file a bankruptcy is the debtor herself, and no one else. So the very first thing clients need to understand is this will be the client’s decision.
All clients need to look at whether there is a less expensive, less intrusive and less impactful solution to their financial problems. In my experience, every potential bankruptcy client has four non-bankruptcy options: do nothing and see what happens, borrow or refinance, liquidate assets or work out voluntary settlements with creditors. All of these options have advantages compared to filing a bankruptcy case, and all of these options have disadvantages when compared to bankruptcy. It’s the client’s decision as to whether the advantages of not filing outweigh the disadvantages of not filing. Let’s take a closer look at the non-bankruptcy options.
Because Bankruptcy is a voluntary procedure, and because we (no longer) put people in jail because they can’t afford to pay their bills, every client should know that one option they have is to do nothing in light of their debt situation. Simply don’t respond to collection notices and stop making payments on the debt on which the person is obligated. While it might seem that doing nothing is not much of a solution to a problem, there are situations in which taking no action is the best way to handle a financial option.
The most common fact situation in which doing nothing makes the most sense is where a client has no assets that creditors can liquidate and they have no income that creditors can garnish. The classic example of this is an older individual whose only source of income is social security benefits, who doesn’t own the home in which he lives and who has modest assets that he owns. Creditors cannot garnish social security benefits and money that is traceable to social security benefits cannot be taken from a debtor. If the debtor does not own real estate or personal property with significant value, there’s not much to be gained by the creditor in filing a lawsuit and obtaining a judgment against a debtor with this financial profile, since the creditor will have to spend money to attempt to collect against an individual who is very unlikely to ever pay the creditor. Since the creditor can receive a tax benefit from writing off the debt, the most money the creditor can realize in a situation like this is likely going to come from the Internal Revenue Service, not the retired debtor.
The retired, social-security-only income low or no-asset debtor is not a person we see commonly. But there are other people for whom doing nothing in the face of debt problems is the best course of action. These are the people, who while they don’t have non-exempt assets, have significant income - and enough disposable income that they can afford to pay not just minimum payments on the accounts outstanding against them, but to pay extra to significantly pay down debt. We usually don’t see this individual at our office, but every now and then we do, and paying off the debt aggressively (and thus reducing the interest charged on the account) is a good non-bankruptcy option for them.
While it might work for some people to do nothing to resolve their debt issues, there are drawbacks to this approach. Let’s go back to the example of the retired, social security-only debtor. The debtor who fits this profile has very little risk of losing property or money in collection. That is the status they have due to the exemption laws that govern the collection of debt. However, simply because an individual may not lose money or property to creditors involuntarily, it does not mean that creditors will then stop trying to collect voluntary payments.
One of the changes I’ve seen since I began filing bankruptcy cases in 1983 is the rise of the debt-buying industry. Collection agencies have always been with us: companies that collect on past-due accounts for businesses that are owed money by their customers/patients/clients. Debt buyers are a little different breed: these companies buy the uncollectible debt that businesses and collection agencies have written off (and this type of debt is purchased for pennies), and the debt buyers try to get whatever they can from the uncollectible debtor. This can lead to collection techniques that are much more aggressive than the most aggressive collection agency.
So the debtor who is pretty “bullet-proof” financially might still have to endure the phone calls and letters that come with debt collection from a debt buyer. Lawsuits can be threatened and filed; judgments can be taken against the most “judgment-proof” debtors. Debt buyers, after obtaining a judgment against a debtor can levy on bank accounts - even accounts where the only source of funds in the account can be traced to Social Security benefits. This doesn’t mean that the debt buyer will be successful in collecting - but in a scenario such as this, the debtor has to file court papers and appear in court to have a judge rule that the bank account cannot be levied. In the meantime, the account is “frozen” and with that come the complication of NSF checks.
And what about the debtor with significant enough income that her debt can be paid down aggressively? For that debtor, the downside is that a significant amount of take-home pay will be dedicated to the pay-down of debt. If the debtor loses hours at work, of if her job changes, or there’s a reduction in salary, or there’s an unexpected personal expense, or sickness, or separation/divorce, the ability of the debtor to retire debt quickly will be reduced or eliminated. Then that debtor is in the uncomfortable position of potentially having wages garnished to the tune of 25% of net (take-home) pay, because of an unforeseen financial problem. I tell my clients that I tend not to represent people who are financially unlucky; the aggressive pay-down of debt is a good strategy for those who can afford it, but there are many variables - both at work and at home, that can make this strategy unworkable.
That’s one non-bankruptcy option. Next week, we’ll look at the pros and cons of other non-bankruptcy options.