Monthly Archives: August 2012

I’ve Already Been Sued — is it too late to file for Bankruptcy?

I get this question a lot, and it is one of those questions that requires a little interpretation.  I don’t think that anyone who calls and asks this question really believes that just because you have been named in a lawsuit means that you can never file for Bankruptcy, which is what the question asks.  In reality there are three questions lurking here.

The first question fleshes out this way, “I’ve been sued over a debt I did not and could not pay.  The Plaintiff has taken a judgment against me and recorded that judgment in County records.  What exactly does all of that mean, and if I file for Bankruptcy now, what can a Bankruptcy do for me with respect to that judgment?”

Like with most things the answer to that question is going to vary from State to State, and I do not presume to discuss anything here other than Oklahoma State law.  That being said, in Oklahoma a judgment gives the creditor certain rights, including the right to garnish wages, levy on bank accounts and record that judgment in County records.  Once the judgment has been recorded, it creates a lien on any real estate owned by the Debtor in that County.

That isn’t nearly as bad as it sounds.  First of all, there are some limits on wage garnishments.  Bank levies are rarer for a variety of reasons, but what most callers asking this question are really concerned about is a judgment lien attaching to their house.  Now, a judgment lien attaches to all real estate owned by the Debtor in the County, so if a Debtor owns a house that he lives in and another house — say a rental property, the lien will attach to both properties.  That is significant, because in a Bankruptcy a judgment lien can be removed from homestead property, but it cannot be removed from real estate that you own and don’t live in.  Also, a judgment lien cannot be foreclosed on homestead property (meaning the creditor can’t force a sale of the house to get its money), but it can be on property that the debtor owns but doesn’t live in.

Translated, this means that in a Bankruptcy a judgment lien can be removed from your home.  If you own other property, it probably cannot be removed and will survive the bankruptcy.

Now, just because you’ve been sued, doesn’t mean a judgement has been taken against you.   This is really the answer to the second question.  The second question fleshes out like this, “I’ve just been sued.  The lawsuit was filed a few days ago, and a process server just handed me the Petition and Summons.   Does that mean that a judgment has been taken against me?”  In a word, No.   These things take time.  A lawsuit generally ends with a judgment.  it doesn’t start with one.   However, filing a bankruptcy takes some time as well, so, calling an attorney sooner rather than later is always a good idea.
The third question is “I’ve just been sued.  I owe the money.  Can a bankruptcy filing stop the lawsuit, prevent a judgment from being entered and make sure that no wage garnishment will ultimately be served on my employer?”

The answer to that question is very simple.  Yes.  Lawsuits, wage garnishments and bank levies are all stopped by a bankruptcy filing.  They are not stopped by your making an appointment with a bankruptcy lawyer, by your filling out forms or even by your paying the lawyer money.  They are stopped when your Bankruptcy petition is uploaded to the Bankruptcy Court’s electronic filing system.

The minute that a Bankruptcy is filed an order issues automatically from the Bankruptcy Court that stays (meaning temporarily stops) all collection activity against the Debtor or property of the debtor.  That means everything stops.  The automatic stay is one of the really cool things about a bankruptcy filing.

So, is it too late?  No.  That does not mean that waiting any longer is a good idea.   Getting the bankruptcy filed will take time, so be sure that you leave yourself the time you need to prevent the creditor suing you from causing you any unnecessary pain.


What if My Bankruptcy is Denied?

I love questions like this.  My standard answer (if I am feeling obnoxious) is, “Well, I don’t know.  How would that happen?”  The standard response to that is, “Well, I don’t know.  You’re the lawyer.”

Yea, I’m the lawyer; and the fact is, it is possible to have a discharge denied — but that isn’t really the question.  The real question has nothing to do with the Bankruptcy Code and everything to do with the fear of feeling backed into a corner, surrounded and overwhelmed.  This is what I classify as a monster under the bed question, because no matter how old we get, we still have irrational fears that keep us up at night and vanish instantly when hit by the beam of a flashlight.  So, here’s my flashlight.

To be eligible to file for bankruptcy you must meet certain criteria.  The most well known of these is that to file a Chapter 7 Bankruptcy, you must pass the so-called Means Test.  You also must be insolvent; but there are three insolvency tests, and if you don’t meet at least one of them, you aren’t talking to a bankruptcy attorney.

Assuming that you are a human being (and not, say, a non-business trust) and you are not able to pay your bills as they come due, you are going to be eligible to file some chapter of Bankruptcy.  Which chapter may depend on other things, but you will talk to your attorney about those in detail — and this isn’t what people are afraid of.

For most people this really is a monster under the bed fear.  What if the Court just says “NO!  Not YOU!  Anybody else, ok; but not YOU!”  Doesn’t happen that way.  If you are eligible to file, you are eligible to file.

The snag with answering this question is that it is possible to file a bankruptcy successfully and have your discharge denied at the end.  Those are truly extraordinary cases (and not in a good way).  In my 22 years of practicing law, I have never had a client had his discharge denied.  It is a great big, bad thing that doesn’t happen easily.

So, what does that mean?  First of all, it is fairly common for certain debts to be excepted from the discharge.  This is not the same as a denial of discharge.  Most people know that recent taxes, child support and student loans aren’t going away just because they filed for bankruptcy — and they are generally right.  However, if you incur a debt with the expectation of discharging it in bankruptcy (that is called fraud), and the creditor complains about it to the Bankruptcy Court (by filing something called an Adversary Proceeding) and wins; then, that particular debt will be excepted from the discharge, and the Debtor will still have to pay it.

I can hear the chorus now, “But, I’m a good person.  I didn’t plan this.  This debt is all years old, and if I hadn’t lost my job/gotten divorced/ or gotten sick I wouldn’t be here.  Well, then you shouldn’t have to worry about this.  Again, the real fear is that the world won’t see you for who you really are; but only through this stigma of bankruptcy.

Still, this isn’t really what my clients are afraid of.  They aren’t afraid of having to pay their child support or that one credit card that they used right before they filed (knowing good and well they were filing and that they would still have to pay it).

No, my clients are afraid of filing the Bankruptcy and just being told NO.  Go away.  You aren’t good enough, and that doesn’t happen — well, not exactly.

What can happen is a Debtor can get caught hiding assets, not telling the truth, concealing income, not disclosing things he doesn’t want the Trustee to know about.  BOOM!  Thou shalt NOT lie, cheat or steal in connection with a bankruptcy.  Don’t even go there.  That means if you have a nonexempt asset you don’t want the Trustee to administer, well, talk to your lawyer about your legal options.  Just deciding not to disclose it (i.e., Oh, I don’t want to list that) is not a valid response to your lawyer.  Not only will that cost you far more than honesty up front, it can cost you your discharge.  It can also cost you a criminal prosecution and an all-expense paid vacation to a Federal minimum security “camp”.  Don’t go there, because I promise you, your lawyer has no intention of sharing your jail cell.

So, be the person you know yourself to be — honest, above board and cooperative.  A Debtor has a duty to disclose all assets, expenses, debts, liabilities and financial transactions.  Keep your records.  Produce anything requested of you.  If the Trustee wants to see something, hand it over WITH A SMILE.

The name of the Bankruptcy game is disclosure.  It is the ultimate flashlight, and the world is a lot less scary in the light.


How to Get Ahead in Bankruptcy

One of my favorite tools in the Bankruptcy Code is the right of redemption.  Redemption, or to redeem property, is the ability to pay the lesser of the value of the property at the time the Bankruptcy is filed or the amount owed on it.   So, when you paid $2,500 for a computer two years ago that is now worth $400 but you still owe over $2,000 for it; redemption can be a great deal.   I’ve redeemed Palm Pilots ($50), dining room furniture, televisions, cars, mobile homes, travel trailers, all kinds of stuff in Bankruptcy.

Now, obviously there must be a lien on the property or you don’t need to redeem it, you just file the Bankruptcy.  If there isn’t a lien on property, then any debt owed is basic unsecured debt; and a bankruptcy filing eliminates that automatically anyway.  However, a bankruptcy discharge does not normally affect liens attached to property.

Redemption works best with property that isn’t worth very much.  Funding can be a real problem, because you have to pay off the original lender in a lump sum.  So, those used Palm Pilots in the ’90’s were easy.  Clients paid hundreds for them, racked up huge interest charges; and they could all come up with $50 to never make a payment on the Palm Pilot again.

Bigger ticket items present a different set of problems.  So, if you have a mobile home that you paid $70,000 for (I didn’t say my clients were all terribly bright), it flooded recently and has earthquake and hail damage — hey, its been a rough year weather wise; it might be worth considering what it is actually worth NOW in the condition it is in and whether you can come up with a source of funding to pay that amount off.   I’ve got a mobile home working now.  Granted, the amount owed is down to about $28,000 (in large part due to a seriously spotty payment history).  However, the mobile home is worth less than $12,000 — and the client has managed to come up with the $12,000 from a relative.

So, we file the motion, hire an appraiser and get ready to argue value in front of a Judge.

Cars are a little easier, because there are a couple of lenders who will finance the redemption of vehicles.  Their interest rates are astronomical, but it can still make a huge difference in the total amount being paid for a vehicle.  I think my record on a vehicle was a Chevy pickup worth $12,000 and with a payoff balance of more than $35,000.  My clients redeemed it with redemption financing at 28% interest.  Their payment went down and their payoff term went down.  GMAC was not happy.  Oh, well.  You can’t please all the people all the time, and GMAC  just never seemed to make it onto my list for the day.

Speaking of redemptions, I’ve got a motion to file.