Business or Home in Trouble?
Four Not-So-Scary Alternatives Your Bankruptcy Lawyer Might Not Tell You
by Samantha Dammer, Esq
Special to the Florida SBDC at USF
Last month, I met with at least four prospective clients who should not have called my office. The reason that they consulted with me is because each one of them was led into a Chapter 13 or Chapter 11 bankruptcy and their case was either completely screwed up, or it was unnecessarily filed in the first place. Having to “undo” what’s already been done in order to improve a client’s legal situation is harder and more costly than it is to provide the client with the best solution for his problem at the beginning.
Most bankruptcy attorneys are very knowledgeable in a variety of other types of law, such as civil litigation, real estate, debt settlement and tax law. However, it is unfortunate when a client chooses to hire a “bankruptcy mill” type of law firm that simply rushes the case through the system for the lowest attorney fee. A lot of times, a Chapter 7 “fresh start” bankruptcy, or a reorganization of debt is the logical game plan. However, by taking a more holistic approach to an individual client’s situation, oftentimes the bankruptcy itself can be avoided by looking at four other options.
- Real estate loss mitigation options.
If the only problem is real estate related, such as being “upside down,” in default, or in the foreclosure process, there are a variety of loss mitigation solutions available through most lenders. Many banks would rather work with you to effectuate a short sale, deed in lieu of foreclosure or loan modification than to go through the foreclosure process. This is true for commercial properties and investment homes as well as for a primary residence. Having an attorney involved in the process can be a stress reducer, as well as a good way to avoid getting in worse trouble by signing a legal document that may not be in your best interests. If you are facing foreclosure, you are well advised to contact an attorney who handles civil litigation defense as well as bankruptcy so that you can explore all of your options.
- Debt settlement and/or Offer in Compromise
If you only have one or two creditors, it might make sense to negotiate a debt settlement instead of filing for a bankruptcy. This is especially true if your main creditor is the IRS, in which case an Offer In Compromise might be a better deal than a Chapter 13. Keep in mind that although there are certainly exceptions, most of the time your IRS debt is not dischargeable in a Chapter 7 bankruptcy. If you have major debts that you simply cannot pay or negotiate, and you do not qualify for a Chapter 7 because of the means test or because you have assets, you might need to file a Chapter 13. However, the decision to file a Chapter 13 should not be taken lightly, as there are significant attorney fees and court costs involved. In addition, many times you could end up paying more through a Chapter 13 than you would if your wages were garnished or if you settled the debt some other way.
It is sad when I receive a frantic call from a prospective client who just received a scary call from a debt collector bully. These types of bullies make threatening calls, which are often illegal, stating that they will immediately start garnishing wages or some other drastic action when a formal lawsuit has not even been filed. These folks that call me in a panic are often sophisticated business owners who have simply never been in any prior financial distress and therefore don’t know their legal rights or what to expect. It is important to understand that we still have due process in this country, which means that a creditor needs to have a judge determine that a debt is owed before a judgment can be entered and enforced against a debtor’s assets or income. The process to obtain this judgment begins with the filing of a civil lawsuit complaint. If you are served with a complaint, you have a certain amount of time to respond. Sometimes the best alternative to bankruptcy is to fight the lawsuit on the merits, especially if the lawsuit is the main financial problem. An experienced civil litigation attorney can not only preserve your legal rights through the legal process but can also provide skills and leverage in negotiating a settlement to avoid bankruptcy.
- Wait it out.
As I indicated earlier, a creditor must go through the entire legal due process system before it can actually do anything to you as far as wage or bank account garnishments or other seizures of assets. If your situation is that you owe on a whole bunch of credit cards, medical bills or other such debts are small individually but total a lot of money, you may not need to rush into a bankruptcy. Of course if you cannot pay these bills and you qualify for a Chapter 7 bankruptcy, that probably is your best solution as you may get a fresh start and can begin the process of credit restoration. But if you don’t qualify for Chapter 7 or if you have non-exempt assets, rushing into a Chapter 13 to reorganize the debt is not necessarily your best option.
Under the Statute of Limitations, creditors only have a certain amount of time to sue you for the unpaid debt, and many creditors won’t bother, especially if it’s a small amount. The older the debt is, the less likely that it will be collected. When you file a Chapter 13 bankruptcy, you are taking a proactive step to pay back creditors through a plan, but if those creditors are never going to come after you this might not make sense to file because you can end up paying more than you would if you did nothing. Unless your credit is important to you, waiting it out to see what, if anything, your creditors will do can be a viable alternative to a Chapter 13.
Filing a bankruptcy is a serious matter and should not be taken lightly. Do not be afraid to ask your attorney about alternatives to bankruptcy, regardless of your type of debt and individual situation.
Samantha L. Dammer is a Florida attorney concentrating her practice in the areas of business and personal bankruptcy, civil litigation, foreclosure defense and general business law. She is a member of the Tampa Bay Bankruptcy Bar Association and the Hillsborough County Bar Association and she has practiced law since 1998 (admitted to Florida Bar 2007). This article is not intended to substitute for the advice of an attorney, especially an attorney licensed in your jurisdiction.