Common Mistakes People Make Before Filing A Bankruptcy Case

I am often reminded of vast amount of misinformation people get, or invent, regarding bankruptcy law.  This is merely one of many, many stories experienced bankruptcy attorneys hear every week and serves as a stern reminder of why it is critical to have a bankruptcy attorney examine your situation, advise and represent you if you file a bankruptcy case.

I Already Know I “Qualify” For Bankruptcy (Or, I Know Just Enough About Bankruptcy to Be Dangerous)

I met with a potential client the other day regarding filing a Chapter 7 bankruptcy case for him.  The client insisted that he qualified for a Chapter 7 case.  According to him, he had no assets, and his only income was unemployment and I shouldn’t need any more information than that.

When I told him I still needed to have a consultation with him to go over all the relevant information, he insisted that he just wanted to file and get this over with and was ready to pay.   Fortunately I finally got him to schedule an appointment because no competent attorney is going to file a bankruptcy case for someone without getting all the necessary information and having a detailed consultation.

So, I’m going over the information with him.  He holds strong to his “no assets and only unemployment income”  mantra.

By asking my standard questions I learn that he has significant tax debt.

I tell him the tax debt is probably not dischargeable in his Chapter 7 case (although taxes are sometimes dischargeable in bankruptcy).    But then he says that’s no problem, he’s been on a payment plan with the IRS for $1,000 per month.    I then say, “Wait a minute.  The budget you provided me shows you running a negative not counting any IRS payments.  Where are you getting the money to pay for the taxes?”

As the bells continue to go off in my head, here’s where it got interesting.

Income Can Also Be An Asset In Bankruptcy

That’s when he tells me:  “oh by the way….I sold my business last year to my ex-partner for $200,000 and he has been paying me $5,000 per month on that”.   “Uh huh…” I say. “and how much does he still owe you?”   To which he replies,  “about $100,000”.

That’s when I explained to him that not only is it income to him (which he somehow omitted from his original “solely unemployment income” disclosure), but that income likely disqualifies him from being able to file a Chapter 7 case (because it creates a surplus in his budget and he likely would not pass the means test).

Moreover,  the money owed from his former partner  is also property that he owns (i.e.  an asset).  The right to receive a payment is clearly an asset which would be “lost” in a Chapter 7 case unless exempted, and he did not have sufficient exemptions under applicable laws available to protect that amount.

On top of all that, the transfer (sale) to his former partner might very well be deemed a fraudulent transfer because they took no steps to ascertain the value of the business before deciding on a “buyout” price.

This client had considered precisely NONE of this.

All of a sudden, this simply Chapter 7 case he wanted to file was neither simple, nor what he wanted to do.   At least he was smart enough to have decided to follow through with the consultation and provide the necessary information for me to make the above determinations.

A Risk Of Not Hiring A Bankruptcy Attorney

If my potential client had gone to see a paralegal or non-bankruptcy attorney and insisted on filing Chapter 7 without having the benefit of a consultation and representation by a bankruptcy attorney, the case would have likely been filed and he would have been at risk of losing his discharge AND losing the future stream of payments he was expecting from the sale of his business (and his former partner possibly sued for the business transfer).

Not a good result, but it happens all the time.

I get many sad phone calls from people who represented themselves in a bankruptcy case and now want me to fix it for them.   It can’t always be done.

So, the moral of this story is:  There is a reason why competent bankruptcy attorneys require certain information and procedures before undertaking to represent you in a bankruptcy case.

The oft asked vague question “can I or should I file for bankruptcy” can only be answered after a comprehensive consultation with a bankruptcy attorney who can, after analyzing all the relevant information and asking you important and relevant questions specific to your situation, advise you on your options and the costs and benefits for pursuing them.


Image Courtesy of greencolander