Should I File Bankruptcy?

16 Jul Should I File Bankruptcy?

If I had a nickel for every time a client told me that filing bankruptcy was the last thing they thought they’d ever do, I’d have a whole bunch of nickels. The same is true for every time a client has told me that they’ve always paid their bills, and always intended to pay. I don’t mind hearing it, though. I understand that the decision to file bankruptcy is not an easy one for anyone, and most people would rather do anything to avoid it. Many people consider and reconsider, and struggle with the decision, sometimes for years. It’s a big decision, and it should be taken seriously.

Although we may differ in the details, most experienced bankruptcy lawyers take the same basic approach. Like most of my colleagues, I do a cost/benefit analysis in advising a prospective client whether bankruptcy is the right decision, and like them I focus on a client as an individual. Although we express our ideas in different ways, the basic process is much the same.

To get a feel for whether bankruptcy is appropriate, I generally start by looking at the total debt, total income, and the household budget. Assuming that a bankruptcy will affect credit-worthiness for a period of five to ten years, I look at how long it would take the prospective client to pay off his debt (excluding mortgages) without filing bankruptcy. If the client can’t pay the existing debt in ten years, I think bankruptcy is a sound choice. If the client can pay that debt in five years or less (a very rare circumstance), bankruptcy should be used only if there are other circumstances that warrant drastic measures–for example, the client is at or past retirement age, has a stress-related health condition, or the need to resolve credit problems in order to preserve a job.

Other issues such as age, history of employment, health, family, and personality are all important considerations. The vast majority of prospective clients who consult me clearly need bankruptcy relief, and have exhausted every other conceivable option. Only rarely do I meet with someone who has even a remote chance of repaying all their debt, short of winning the lottery.

There is, however, one additional consideration. I look at whether the debtor is judgment-proof, i.e., whether there is any real possibility for creditors to collect from a client’s property. I don’t mean harassing phone calls, but whether the client has any property that a creditor could seize. If a client is judgment-proof, the major benefit of a bankruptcy filing is to stop creditor harrassment. Once reassured about what creditors can and cannot do to enforce a debt, a client can make an informed decision about whether the benefits of bankruptcy are worth the costs.

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