Spiritually Bankrupt

If you have typed those words in as a Google search, you have my sympathy.  Here are some general thoughts for how to handle debt if your income has dropped.  Remember that this is not legal advice, but just starting points to think about your own situation, so take it with a grain of salt. If you live outside of Texas in a state less friendly to people who owe money, take it with two grains of salt.

1. If I can’t pay all of my bills, then how do I choose which ones to pay?

A hint: the creditors who put the most pressure on you are not necessarily the ones you should prioritize (see #3 below). People worry about their credit and their things, but really the first question is survival. How do you put food on the table? From that point of view, I would say you should prioritize payments in the following order: utilities, car, house, medical debt, credit cards, business debt. You don’t want to wake up one day and have your power turned off or your car repossessed.  If your utilities are unreasonably high, you could consider moving.  If your car is too expensive, then you might turn it in and buy a cheaper one or start to think about public transportation (though good access to that is rare in Texas).  House payments are third because the foreclosure process takes a long time, and it’s becoming somewhat easier to work something out with the mortgage companies.  Or once you do get a job, you could file a Chapter 13 case to stop the foreclosure and pay what you owe over 5 years.  Besides, many people devote too much of their income to their home, and should think about surrendering (see my post “To 13 or not To 13“).  Medical creditors don’t typically take aggressive collection measures, and my understanding is that emergency facilities will treat you without regard to ability to pay.  Obviously if you have a serious condition that requires ongoing treatment by a specialist, you may want to talk to the doctor about payment and see what you can negotiate.  Credit cards are discussed in #3 below; and if you have a business, you will most likely consult with a lawyer anyway.

2. How do I choose what assets to liquidate to pay debts?

To me, it is always sad when clients have spent their entire retirement savings and then taken out a home equity loan in order to pay down debt and then wind up coming to see me anyway. In that case, they have spent their retirement needlessly and will also now have higher house payments, making the house that much harder to keep. In this situation, it makes sense to file bankruptcy sooner rather than later.  These assets are called “exempt assets,” meaning you get to keep them when you file bankruptcy.  If you have non-exempt assets, you may have to delay your filing somewhat if you want to liquidate them and use them for your own needs rather than lose them entirely.  Stock and rental properties are two examples.  My next post, on Chapter 7, will address in more detail what property you are allowed to keep when you file bankruptcy.

3. But if I don’t pay, won’t I get collection calls?

You will. Credit card companies and their debt collectors will harass you if you don’t pay, but as I mentioned above, that doesn’t make them your highest priority. 1. Debt collectors will threaten you with liens and garnishment, but in Texas, they can’t place a lien against your house, and they can’t garnish your wages. Debt collectors are typically calling from out of state and don’t know Texas law. 2. In any case, federal law prevents the worst kind of harassment and misleading statements. It may turn out that you have a cause of action against a debt collector who crosses the line. 3. Often times, the collector’s main threat is that your credit will be hurt if you don’t pay. While your credit is damaged by late or missed payments, it is possible to repair, and it is not always the most important consideration. A future post will address bankruptcy and credit. 4. The collector will try to shame you into prioritizing your creditor over your own survival needs. This is ridiculous – your needs come first, especially if you have a debt with the outrageous interest rates we’re seeing nowadays. 5. The practical response that 9/10 of my clients come up with? Screen your calls. It usually doesn’t change anything if you don’t take the debt collector’s call.  Ultimately, if you do decide to file bankruptcy, the creditors won’t be allowed to contact you at all.

4. But if I don’t pay, won’t I get sued?

You will, probably.  But that is not necessarily a problem.  In fact, it can often be beneficial because rather than trying to negotiate with a front line employee with no training in or authority to negotiate, you’re (probably your attorney is – this starts to get specialized) negotiating with a lawyer who can settle the matter on often reasonable terms.  If the lawyer is suing on behalf of the original creditor, he or she may accept information about your hardship and let the debt go cheaply or for nothing.  If the lawyer has purchased the debt or suing for a debt collector, he or she may be more hard-headed, but a federal debt collection suit or a motion to compel arbitration may cause him to moderate his position.  Credit cards and business debts can often be settled pretty cheaply and in some cases, throwing up a little resistance may get the creditor to give up and dismiss the suit.

5. Should I file bankruptcy?

I am planning to write many many posts on this topic.  I have already some detailed posts on Chapter 13 debt repayment plans and on  Chapter 7.  In short, if can’t pay for your house for a while due to unemployment, Chapter 13 gives you an opportunity – once you have a regular income again – to stop a foreclosure and save your house by spreading out what you’re behind over 5 years.  It also allows you to discharge whatever unsecured debt you can’t pay.  Chapter 7 discharges all of your debt (with some limitations for fraud, child support, some taxes, etc.), and will actually put your credit on a path to quicker recovery (more on that later).

This entry was posted on Friday, May 29th, 2009 at 9:27 pm and is filed under pre-bankruptcy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.