Is Bankruptcy the Right Option?
Q: We are in quite a tight spot financially. We have extensive medical bills because of poor health insurance and high deductibles, along with past-due credit card bills, past-due taxes and a judgment that a creditor recently won against me in court. This creditor just placed a levy on our checking account, which of course is now overdrawn. There is no possible way for us to get caught up. We have four children and no assets. Is filing for bankruptcy protection an option?
A: Bankruptcy might be the best of bad options, but you’ll want to make up your mind fairly soon. The bankruptcy overhaul legislation that Congress passed this year takes effect Oct. 17, and some people will find it much harder to have their debts erased.
Your situation is not at all unusual. A recent Harvard University study found that half of all consumer bankruptcies were triggered by medical problems. Interestingly enough, about three-quarters of the people who filed medical-related bankruptcies had insurance when they became ill or disabled. They often lost their insurance after losing a job or, like you, had inadequate coverage and high deductibles that left them exposed to catastrophic bills.
Another way you’re in the mainstream of bankruptcy filers: You have kids. Harvard bankruptcy researcher Elizabeth Warren, coauthor of “The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke,” found that having children is one of the leading predictors that a household will file for bankruptcy.
Ideally, everyone would have adequate insurance and savings to confront the inevitable setbacks life offers. When that’s not the case — and it often isn’t — you should look for alternatives, such as working a second job, trimming your budget and selling assets to pay your debts. If that won’t cover what you owe, a bankruptcy filing might be a better course than struggling forever with impossible debts.
An experienced bankruptcy attorney can apprise you of your options, and many offer free consultations. Good luck.
How can I deal with mounting debts after a divorce?
Dear Liz: After 25 years as a homemaker and mother, I was divorced. I had to find work, create an income and begin life over. I am now 65 and in very good health, with loving children and a small business. But I am in debt and have no savings for the future. I awake each day to find I have more debt. It’s not healthy debt that I could handle, but over-the-top debt that I will never be able to repay. I acknowledge that I have a Cinderella princess mentality, thinking a prince will come along to rescue me, and that I’ve lived an upper-middle-class lifestyle that’s beyond my means. I have done my emotional work in overcoming the idea that I’m a victim and thus not responsible for my situation. But I still can’t act. My children do not know of my immediate disaster nor do my clients. I feel frozen and unable to reconcile myself to the inevitable, disrupting their lives and their image of me. What now?
Answer: You act.
Emotional work is all fine and good, but it’s pretty useless if you’re not using your insights to change the way you behave.
And, as you intimated, you’re behaving like a child. Children can believe in fairy tales and last-minute rescues, but grown-ups take charge of their own lives.
This won’t be fun. If you truly can’t repay this debt, you may end up filing bankruptcy or negotiating settlements with your creditors. You may have to move and live a more basic lifestyle.
But every day you delay, you’re adding to the pile of debt you owe. And you already have two things–good health and loving kids–that many rich people would trade their fortunes to achieve. Keep that in mind in the coming difficult days.
When is someone “judgment proof”?
Dear Liz: I am 75, in poor health and live only on Social Security (I get $1,046 per month). I’ve been told that if I want, I can stop making payments on two credit cards that I owe on and will never be able to pay off. Is that true? I can’t afford to file for bankruptcy.
Answer: Normally, when someone stops paying a debt, the creditor will start collection attempts and may file a lawsuit. If the suit is successful, the creditor gets a judgment and can take further actions, such as garnishing wages or taking property.
If your only source of income is government benefits, though, and you have no home or other assets that can be legally taken to satisfy your debts, then generally you’re considered “judgment proof.” That means a creditor is unlikely to get any immediate payment if it sues you in court.
That doesn’t mean lawsuits won’t be filed, however. A creditor may get a judgment against you hoping to get something out of your estate when you die. Even if no suit is filed, you may have to deal with collection calls and letters that can continue for years, even decades.
If you really can’t pay these debts, then you might want to consult with an experienced bankruptcy attorney about your options. Many offer free initial consultations, and they may be able to help you find an affordable way to file your case if that seems like the best course.
Can Collectors Go After My Social Security?
Dear Liz: I am 75, in poor health and live only on Social Security (I get $1,046 per month). I’ve been told that if I want, I can stop making payments on two credit cards that I owe on and will never be able to pay off. Is that true? I can’t afford to file for bankruptcy.
A: Normally, when someone stops paying a debt, the creditor will start collection attempts and may file a lawsuit. If the suit is successful, the creditor gets a judgment and can take further actions, such as garnishing wages or taking property.
If your only source of income is government benefits, though, and you have no home or other assets that can be legally taken to satisfy your debts, then generally you’re considered ‘judgment proof.’Â That means a creditor is unlikely to get any immediate payment if it sues you in court.
That doesn’t mean lawsuits won’t be filed, however. A creditor may get a judgment against you hoping to get something out of your estate when you die. Even if no suit is filed, you may have to deal with collection calls and letters that can continue for years, even decades.
If you really can’t pay these debts, then you might want to consult with an experienced bankruptcy attorney about your options. Many offer free initial consultations, and they may be able to help you find an affordable way to file your case if that seems like the best course.
How are marital debts treated in the new bankruptcy law?
Dear Liz: My husband was married and owned a home with his first wife. In the divorce, she got the house with the stipulation that he would receive one half of the $25,000 down payment when it was sold. She defaulted on the mortgage, however. The lender sold the house at auction and then came after my husband for the amount that was still owed. The divorce papers had stated he would not be liable for such a debt. My husband attempted to sue her for the $9,000 he paid the lender plus the $12,500 he was promised but she filed for bankruptcy and his claim was one of the debts that was discharged. I’ve done research on the Internet and it seems like his debt shouldn’t have been erased. Do you think we have a case?
Answer: It depends.
If your husband’s ex filed her bankruptcy case before Oct. 17, 2006, when the new bankruptcy reform law took place, then her debt to him could legally be erased, said Leon Bayer, a Los Angeles bankruptcy attorney.
The new law, by contrast, says that a debt created by a divorce agreement isn’t dischargeable in Chapter 7 bankruptcy liquidation, although it may be erased in a Chapter 13 repayment plan.
If the debt was incorrectly discharged, your husband would be able to pursue his former spouse for the $12,500, Bayer said. In addition, he could sue her for the $9,000 he paid to the lender if the divorce court required the ex-wife to hold him harmless from that debt, as your letter seems to indicate.
By the way, there is a chance that the lender shouldn’t have been able to dun your husband for the $9,000 debt. Several states, including California, have “anti-deficiency” laws that prevent mortgage lenders from trying to collect such debts if the loan in question was a “purchase money mortgage”–in other words, if the loan was used to buy the property. If the loan was subsequently refinanced, though, anti-deficiency laws typically don’t apply.
If you still think your husband might have a case, Bayer recommends contacting a local attorney for help.
