When you should seriously consider an alternative to filing
In Part 1 of this article, I offered some compelling rationale for filing bankruptcy – even for those who are current with all their debt payments. Here, in Part 2, I will do the opposite: argue against filing bankruptcy. Why would I do that? Because bankruptcy is not for everyone.
Bankruptcy is for the honest debtor
If you have something to hide, it’s best not to file bankruptcy. It could be a car you transferred out of your name to avoid creditor attachment; the rental income you’re hiding in cash; or the personal injury suit you plan to file right after discharging all your debts. All of these scenarios are big, fat no-no’s. Let me be abundantly clear: bankruptcy fraud is a serious crime, and it is regularly prosecuted in all districts. Don’t take a chance.
Expectancies belong to the trustee and creditors
You’ve probably heard that all non-exempt assets you possess on the date of filing are part of the bankruptcy estate. Simple enough. But consider this: Some assets you may not even have yet may still have to be distributed to your bankruptcy creditors. How can that be? Expectancies. If you anticipate receiving a tax refund in April, but it’s only January and you haven’t even filed your tax returns yet, that expectancy is still an asset. Bankruptcy trustees often intercept tax refunds directly from the IRS if they weren’t listed and exempted on the schedules. Another example: You were promised a signing bonus from that new job, but you filed bankruptcy before you received it. That bonus which you don’t even have yet is still an expectancy, and thus, an asset. When and if you do receive it, it may have to be turned over to the trustee for payment to your creditors. The same rules apply to realtors who file bankruptcy with homes under contract. The deals may not have officially closed by the time the bankruptcy is filed, but when and if they do close, the funds are considered property of the bankruptcy estate.
In a similar vein, there are those who are expecting an inheritance, and worry that their creditors may get to those funds. So they come up with the idea of filing bankruptcy, discharging their debts, and keeping the inheritance for themselves. Nice idea, but not foolproof by any means. According to section 541 (a)(5) of the Bankruptcy Code, if a debtor becomes entitled to receive an inheritance within 180 days of a Chapter 7 filing, the inheritance is part of the bankruptcy estate. Note that the debtor doesn’t need to have received the money within the 180 days; just the entitlement to receive the inheritance (which usually occurs when the person leaving you the inheritance passes away).
Judgment-proof debtors need not apply (but may want to anyway)
When you stop paying your creditors, they can sue you to obtain a judgment. They can then use the judgment to garnish wages, freeze and garnish bank accounts, and potentially seize assets like cars and real estate. But what if you don’t have wages to garnish or assets to seize? You may well be “judgment proof”. This simply means that while the creditor is free to seek and obtain a judgment, they may not be able to collect on it. And if they can’t collect, you’re in the clear, right? Yes and no. For one, being judgment proof may well be a temporary situation. Yet judgments may be collectible for decades (20 years in Florida if renewed). So if you think you may have income or assets in the future, you may want to file bankruptcy now – even if you’re currently judgment proof.
Your income is not the whole story
I’ve had many consultations with people who were unemployed or underemployed, and clearly concerned about how to handle their debts in such a situation. However, income is only part of the equation. What about assets? Bankruptcy looks at the debtor’s whole financial picture, not just their income. Does the debtor have substantial non-exempt savings (outside of a federally designated retirement account)? Does the debtor own real estate that is not protected as homestead property? Does the debtor own expensive jewelry, cars, boats, motorcycles? If you can liquidate your assets to pay your creditors, you’re generally expected to do so. And if you file a Chapter 7 in such a situation, the bankruptcy trustee will liquidate them for you. It’s a simple rule: If you can afford to pay back your creditors, either through income or selling your stuff, you should probably do so.
As I always caution at the end of my blog articles, this is certainly not meant to be an exhaustive list of reasons not to file bankruptcy. There are far more pros and cons to filing than what this brief two-part article has suggested. That’s why the initial consultation with your attorney is so vitally important. Just make sure that you reveal all pertinent facts, and that the attorney you are meeting with gives you a thorough consultation. If you feel like you’re being rushed, find someone else.