In our bankruptcy practice, we regularly hear clients express after their case has closed that they regret not having taken steps to discharge their debt sooner. Too often, potential filers wait longer than they need to before deciding they need help, or, in the process of trying to stay afloat, make avoidable financial mistakes that put them in a worse off position than they needed to be before ultimately filing for bankruptcy protection anyway While bankruptcy is not a viable option for every circumstance and some bankruptcy filings are easier on clients than others, there is no risk in contacting qualified debtor’s counsel to find out if bankruptcy is a reasonable choice for you and determine what next steps serve to get you the best outcome post-discharge. Many offices, ours included, do not charge a consultation fee for bankruptcy matters. 

Consider the following avoidable scenarios which are all too common among eventual bankruptcy filers that make decisions without being fully aware of their options.

Scenario 1 – Debt Juggling

Too often, would-be bankruptcy filers spend longer than necessary trying to juggle their debt before seeking help. It is hard to identify the line between managing debt in a difficult time and the point where debts become impossible to reasonably keep balanced, but waiting too long means paying more toward debt that will eventually be discharged and allowing potentially avoidable interest to continue to accrue, living longer under the pressures of such debts than is necessary, and perhaps making a future Chapter 13 more difficult in the process. If you find yourself juggling debt without a clear and certain end in sight, it may be worth calling to assess your situation sooner rather than waiting until the situation becomes unmanageable entirely. 

Scenario 2 – Retirement Loans

Typically, retirement assets are exempt from bankruptcy proceedings – that is, they typically cannot be liquidated to repay creditors and do not factor into a Chapter 13 plan calculation. By converting these assets to categories of assets with smaller exemption limits, you decrease the wealth you can retain when filing for bankruptcy. Further, many retirement assets come with certain tax advantages or come with penalties with used before you reach a certain age. As such, it is rarely prudent to withdraw or borrow against such assets, such as through a 401k loan, to repay other debt or cover regular living expenses, and such a decision certainly should not be made without careful consultation. It is all too common for eventual bankruptcy filers to have withdrawn from or borrowed against such accounts, leaving them with non-dischargeable IRS debts or penalties imposed against their retirement plans – all of which may have been avoidable had they considered bankruptcy sooner. 

Scenario 3 – Preferential Repayment

When you file for bankruptcy, the Court examines whether any one creditor (other than mortgage and car lenders, typically) has been repaid larger sums to the detriment of other creditors. They look particularly hard at repayments to relatives or other associated parties, also known as insiders. If the Court finds that certain creditors have been treated with preference over others, they may seek to claw back the paid funds. Sometimes, would-be-bankruptcy-filers pay creditors preferentially in an effort to help juggle their debts, or to repay their friends and family first by virtue of those relationships. If they then seek bankruptcy protection later, this can impair their ability to file at that point. Understanding who you can safely pay and in what amounts early on is key to keeping options open in the future, and is something easily assessed in consultation with bankruptcy counsel. 

Scenario 4 – Lawsuits, Garnishments, and Liens

Sometimes, people wait to consider bankruptcy even after a creditor has filed a collection lawsuit against them or even begun garnishing their wages. Once creditors begin the collection process through the Court, they begin adding the cost of their collection in legal fees and expenses to the debt owed, and once garnishment has begun it can be hard to continue balancing other debts. Worse, if a creditor prevails in a lawsuit and seeks to attach a lien to any of your property, once that lien is in place it can severely impair an eventual bankruptcy proceeding. Filing for bankruptcy can stop most lawsuits immediately, halt garnishments already in place and prevent new garnishments from taking effect and protect assets from new liens being placed upon them, but only if action is taken timely. 

Conclusions

The above are only a handful of common situations debtors find themselves in when trying to file after attempting self-help without full understanding or proper guidance. If you are struggling to manage debts, even if you do not anticipate filing or wish to file, a free consult with competent counsel can be critical to avoiding missteps that may disadvantage you down the line or leave you without the option of bankruptcy relief that may have otherwise been available.