Why People File for Bankruptcy?
This is another transcription of The Crushing Debt Podcast, Episode number 144, “Why do our clients file bankruptcy?” I’ve done many podcast episodes, written blogs, and wrote a book on how to eliminate debt, and it occurred to me that I haven’t often discussed why my clients file for bankruptcy, or why my clients feel they need to file for bankruptcy protection. There are all kinds of different reasons. I remember back in 2008 – 2010 when we were going through the mortgage meltdown and people kept saying, “We need to stop foreclosures!” and my comment always was, “We can’t really stop foreclosures unless we stop the things that lead to foreclosure.” I think bankruptcy is very much the same; a lot of the things that lead to a foreclosure will also lead to a bankruptcy.
Divorce is one of the reasons that a lot of my clients must file for bankruptcy. Divorce attorneys are very good referrals for me because they often run into conflicts of interest; they cannot represent both husband and wife, unless in a collaborative divorce where the divorce attorney is simply drawing up documents. I don’t have those same types of conflicts of interest that a divorce attorney would have, so divorce attorneys are great referrals for me because I can represent both the husband and the wife if the divorce is amicable enough. I can file the bankruptcy to eliminate the debts of both spouses and then once the divorce is final, they literally start with a fresh slate not only from each other but also from all their debts (individually and joint). Unfortunately, if they can’t stand being in the same room together then obviously, I can only represent one spouse. If their debts are joint and only one spouse files, then the other spouse would still be liable for all those joint debts. Therefore, divorces are situations where often there is no conflict of interest for me to represent the soon-to-be-ex couple, get them their fresh start, and then they can finish the divorce and truly start with a clean break and a fresh slate.
Another reason my clients come to me for bankruptcy is death of a spouse. When someone passes, leaving a surviving spouse, there are many questions. “Am I going to be responsible for my deceased spouse’s debt?” or “my deceased family member’s debt?” Fortunately, the answer typically is, “No, you’re not going to be responsible for the debt unless you co-signed for it.” If you co-signed on a student loan for your child for example and your child were to pass away, you would theoretically be responsible. While I am also going to talk about student loans as an issue that causes my clients to file bankruptcy, for purposes of this part of the analysis, a lot of times people will file for bankruptcy because the other spouse-breadwinner has died. Again, however, in a scenario where the husband died, the wife is only going to be responsible for her debts or joint debts of the couple. Another way death affects bankruptcy is the loss of the decedent’s income. For example, a household with two working parents that relies on two working parents to make ends meet, may need to consider bankruptcy if one of those spouses passes away because the other one might want to eliminate those joint debts or debts in the deceased spouse’s name alone that are in excess of life insurance, medical bills and funeral bills.
I have a lot of clients that have overwhelming medical bills. Regardless of what your political leanings are, and regardless of what you believe, we are getting more expensive medical bills, deductibles, and prescription drugs. Medical bills are “easy” to negotiate, although you do have to put forth some effort to reduce or pay off those bills. You do have to engage with the medical billing company, but most medical billing companies will provide you with some type of payment plan that will allow you to pay back your medical bills. While medical bills are a
reason that people file for bankruptcy, they’re not one of the leading reasons. Typically medical bills can be negotiated away but if the medical bills are high enough, combined with the emergency room visits and the ambulance (or airlifted) rides, you may want to consider filing bankruptcy to eliminate those bills.
If you are involved in an accident, while you’re waiting for that fantastic settlement to come in, the creditors don’t stop calling. Many times, I have clients that are involved in a car accident or a slip and fall accident or something like that and they can’t pay their bills because they can’t work because of the injury. That’s another reason where bankruptcy may be an appropriate solution. We must be really careful because in a bankruptcy, all assets of the debtor become property the bankruptcy estate, so theoretically that personal injury lawsuit becomes an asset of the bankruptcy estate and it’s something that we have to account for within the bankruptcy case. But it’s not the accident so much as the loss of income that causes our clients to file Chapter 7 or Chapter 13 bankruptcy after getting hurt by someone else’s negligence.
I think the number one reason the clients file with my office is credit card debts or similar unsecured debts (a debt that is not secured by an asset). Some debts become unsecured because of a repossession, where the amount owed on the loan that is greater than the value of the asset being repossessed. However, I think credit card debt is probably the number one reason people file for bankruptcy. During the initial consult, I’ll ask the potential client how much they have in credit card debt. I can tell that they’re embarrassed to tell me the amount although I’ve heard everything from $10,000 all the way up to $10 million, and everything in between! I’ve said many times that all you need is have more debt than you can afford to repay to qualify for bankruptcy. So if you’ve got $10,000 in debt and you make $40,000 in a year in income, that’s 25% of your income and may be a situation where bankruptcy will be an attractive option. However, if you’ve got $10,000 in debt and you make $200,000 a year then I’m probably going to advise you not to file a bankruptcy and to simply pay it off in a lump sum or over time.
Another reason that my clients file for bankruptcy is because of IRS debt. Interestingly, some IRS debt is non-dischargeable, meaning the bankruptcy will not eliminate the IRS debt. Therefore, we may need to file a Chapter 13 reorganization plan. Although there are situations where the IRS would be dischargeable and I can help you with that determination. Even if the IRS debt is non-dischargeable, we still may want to file bankruptcy to get rid of the other debt to assist with paying off the IRS faster.
When someone closes their business they may need to file bankruptcy because: (1) when they close their business they don’t have any other means to make money and (2) they need to eliminate debt tied to the failing business. That brings up questions of who or what is filing, the individual owner or the business entity itself, or both. There are some quirks when a business files bankruptcy but what you need to be careful of are guarantees. If the individual owner guaranteed the debts of the business, then the business filing will have no impact on the individual liability to the owner / guarantor. All the creditors are going to do is attempt to collect from the owner under the guarantee rather than the business. Therefore, maybe we don’t file for the business at all; instead we file for the owner individually to eliminate the guarantees and then we let the creditors come and pick at the bones of a dead business.
No analysis of bankruptcy would be complete without foreclosure! When I first started my practice, foreclosure was the number one reason that people filed for bankruptcy and we would either use a chapter 13 to try to catch up the mortgage arrears or we would use a
chapter 7 to eliminate the note debt and get rid of the house altogether. I’ve done a ton of podcasts and blogs and have a bunch of information about foreclosure, bankruptcy and the intersection of those two things. Today, we can also use mortgage modifications within a chapter 13.
In fact just to divert for a second I have a client who is trying to modify her loan within a chapter 13 case and we got a letter back from the mortgage company that said, “We are declining your request for a loan modification because …” whatever nonsense reason, but then they asked if we still wanted to have a mediation?! My thought was, “why would we have a mediation to discuss why you said no to the loan modification? The mediation is not going to convince you to give my client the loan modification and you’re not going in there with an open mind to try to resolve this situation. All you’re going to do is tell us why the loan modification was denied, which you’ve already told us.” That then led me down the path to ask why there is no bad faith by the lender in this scenario. A couple of episodes ago I went on a rant about the mortgage modification process in Florida, both in state court and in federal court and how the system is flawed, and how mortgage modifications are bogus. This example just feeds into that analogy – the bank says the mortgage modification is denied but let’s have a mediation to discuss it?
I think the last thing that I’m going to discuss here is that a lot of my clients may want to file bankruptcy because of student loans. I’ve done a lot of research on the issue of student loans and I will say that there are other attorneys and other organizations out there that know a ton more than I do about student loans, but I don’t think I’m necessarily a slouch in the area. In fact I’ve had a couple of guests on my show about student loans and how to get rid of student loans both within bankruptcy and outside of a bankruptcy. Interestingly student loans are not dischargeable, but what the Bankruptcy Code says is that student loans are an unsecured debt so they need to be treated like other unsecured debts. Therefore, if you have a payment plan chapter 13 bankruptcy where you’re paying back your debt at 20% of what is owed, and you have $50,000 in student loan debt – that means that through the bankruptcy your student loans are going get $10,000 and when the bankruptcy is over you’re still going to owe the remaining $40,000 to the student loan companies. Student loans are not dischargeable but they are treated the same as other unsecured creditors in a bankruptcy. However this is a basic analysis and there have been many developments in the student loan area – there are income driven repayment plans (IDR), consolidation loans, other types of repayment plans, we can discharge a student loan if we can prove that it was not for an educational benefit (think unaccredited foreign schools for example), and there are situations where we can threaten to discharge student loans and call the bluff of the student loan company. In those cases, student loans can be dischargeable. There may also be an opportunity to get a hardship discharge of a student loan now, although that is very difficult. Again, I’ve done podcasts and blogs on all of the different types of tests to discharge student loans. Here in Tampa we use the Brunner test – basically we have to prove that the debtor will never ever in their life be able to earn enough money to even come close to paying off the student loan. Many times our bankruptcy judges like to also see that they’ve cut other expenses, like cable, going out to eat, etc. However, we can use bankruptcy to get rid of student loans or like the analogy of what I said with an IRS debt, if we can get rid of other debt that will free up income that can then be used to pay the student loans. The bankruptcy won’t get rid of the student loans, but the bankruptcy will get rid of other debts that can be used to then funnel money to the student loans to more quickly pay off the student loans.
Those are the main reasons why many of my clients tend to file for bankruptcy – divorce, loss of a spouse or a lost source of income, loss of a job, medical issues, personal injury issues or injuries, credit card debts, repossessions, IRS debt, closed business, foreclosure, or student loans. Again another plug for my book on Amazon. A lot of these things are chapters in the Crushing Debt Book.
If you find yourself on the brink of bankruptcy, or know someone who is, please contact us to schedule a free initial consultation to discuss your options at 813-774-5737 or email me directly at firstname.lastname@example.org. You can also order Crushing Debt: 9 Strategies to Eliminate Financial Bullies on Amazon.com. Please also subscribe to the Crushing Debt Podcast, on Apple Podcasts, Spotify, and other podcast players, including Amazon Echo (“Alexa”) for more free information about these topics.
Shawn M. Yesner, Esq., is the host of the Crushing Debt Podcast and founder of Yesner Law, P.L., a Tampa-based boutique real estate and consumer law firm that helps clients eliminate the financial bullies in their lives. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Clearwater, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay Area.