While on occasion, a client will come to see us in a proactive measure before they have even missed a credit card or car payment to educate themselves on what may happen down the road and how to best proceed in planning their financial future, this is far more the exception than the rule. Quite often, the more typical client we have is someone coming to see us in a panic, after either their bank account has been levied on or their house is about to go to a foreclosure sale.
The vast majority of our clients however fall somewhere in between those two extremes, which is the position that you may most likely find yourself in. While the best position to be in is the first person I referred to, who is proactive about her pending financial downturn, in the following pages, I will address the common causes of procrastination and then try to help you to prevent a worst-case scenario from happening to you.
Quite often, due to no fault of their own, the first reaction of people facing financial troubles is to assume that things will get better and that they just have to ride out this short-term storm. Unfortunately, none of us could have foreseen the type of storm the economy has gone through since 2006, and how long it would last. As of the writing of this book, we are now into 2014, and the nation, especially here in southwest Florida, is still suffering from some of the devastating economic effects of the downturn, even though I am happy to say that we have started to see some positive economic indicators.
Nevertheless, many of the clients that we see may have had some savings to live off of or, more significantly, a large retirement account or 401(k) plan. Unfortunately, what we have seen are individuals who will exhaust all of these funds before coming to see us. While the usual reason they gave was that they thought things would turn around, or basically that they wanted to pay their debts, from their financial best interests, to use up all of their retirement accounts to pay off creditors and then leave themselves with nothing was a huge financial blunder.
While someone in their 30s can recover from this type of loss, someone who is already retired and has spent all of their retirement accounts at the age of 72 to try to avoid bankruptcy cannot recover from this devastating financial mistake. Generally speaking, properly set-up 401(k) accounts and IRAs are exempt from your creditors. Therefore, even if you have $100,000 in your 401(k) and owe $50,000 to your credit card companies, those companies cannot get at those funds whether or not you file for bankruptcy.
For these reasons, someone facing severe financial problems, and who is proactive and consults with a bankruptcy attorney prior to expending those funds, is in a much better position than someone who waits to seek bankruptcy counsel after these protected funds are expended. This is a message that I try to get out as often as possible. Remember, most bankruptcy attorneys, as well as myself, offer free consultations. Whether it’s myself, or another bankruptcy attorney, I urge you to take advantage of the services that the bankruptcy bar provides to you as a consumer.
There is no reason to make such a large financial error for your future, especially for many of the senior citizens that I see here in southwest Florida.
Another reason people delay seeking bankruptcy assistance is because they attempt to fix things themselves. This is akin to not calling a plumber to fix a leaking pipe, using duct tape to try to fix it, and the “repair” resulting in a flood in your home and further expensive damages (which may not be covered by insurance since you knew of the leak and didn’t properly address it).
The same types of mistakes we see people make over and over are people trying to fix their financial situation without professional help. It’s sort of like, if you didn’t need the professional, you would not have gotten into the financial trouble that you are in in the first place.
In trying to use a “duct-tape approach” to fixing the leaky financial problem, we often see clients think that if they reduce their monthly payments, they can make ends meet. Often they will pay off a car loan by using exempt funds from an IRA or 401(k), which, as explained, are exempt. Other times, they may take money out of their home by way of a second mortgage or, even worse, use up savings to pay off a credit card. Ultimately, the savings would be better used, if needed, to pay for a mortgage, food or medicine for their family.
Suffice it to say, these are, again, huge mistakes to make and may only delay the inevitable. If you’re looking to pay off the only credit card that you have, and this avoids filing for bankruptcy, then it may be a good financial decision. However, if you have multiple credit cards (more than three) and are not taking a universal approach to resolve all of the accounts, we often find that ultimately the clients wind up in our office and have to file bankruptcy.
Unfortunately, this is often after having wasted much of their retirement funds, savings or equity in their homes, trying to pay off credit cards, that could have been much better used to assist them in getting a new and fresh financial start.
Additionally, for reasons explained in Chapter 6 regarding Chapter 13 Plan Payments, you’re actually better off having a car payment and no equity in your vehicle than having a fully paid off vehicle, if ultimately you file for Chapter 13. Therefore, by paying off the car, it could actually cost you more money that you pay to your creditors in the end when filing for bankruptcy.
Another big motivator for people to come see us for bankruptcy is after their bank account has been frozen due to a judgment creditor levying on their account. Unfortunately, despite what a debt collector may tell you, they cannot simply seize your funds in a bank account, or what’s even worse, threaten to put you in jail. There is a whole legal process that must be followed beforehand.
While each state is different, as far as the timeframes are concerned, generally the process involves you being served with a Complaint. You then have an opportunity to file an answer (or response) to the Complaint. If you do not file an Answer, then a default will be entered against you. The next step in the process is for the creditor to file a Summary Judgment Motion, in which they seek to have a Final Judgment entered against you.
Once a judgment is entered against you, then the creditor can proceed to collect on that judgment. Generally, here in Florida, even under a best-case scenario, that whole process will take a minimum of 90 days, and often closer to six months, if the case involves an amount more than $5,000. If it is less than $5,000, then it is considered a small-claims matter, and the process can be completed as quickly as 60 days.
What often happens is that an individual will receive a collection Complaint on a credit card and ignore it, figuring that they don’t have the money to pay it anyway. They may not receive any other court notices if they don’t file some kind of response. Eventually, a Judgment is entered. However, since the attorneys for the creditor are so overwhelmed, they may not do anything on that Judgment for years. I have seen judgments enforced seven, eight and nine years after a Judgment has been entered. Again, here in Florida, once a Judgment is entered, it is good for 10 years and can be extended for another 10 years. Therefore, it can be hanging around out there for 20 years!
Meanwhile, the person who owes the money is lulled into a FALSE sense of security that the claim and the creditor have disappeared. Inevitably, a levy appears on their bank account at the worst possible moment, generally after their paycheck has hit their account, and they have cut checks to pay all of their monthly bills, such as their mortgage, electric bill, phone bill and car payment. They then call us in a frantic state, not knowing what to do. By being proactive, this whole scenario can be avoided.
Even after it happens, a bankruptcy filing can stop the creditor from pursuing you further. Upon the filing of the bankruptcy case, the most POWERFUL EVENT HAPPENS under the Bankruptcy Code: the imposition of the Automatic Stay. This STOPS the creditor from pursuing the judgment any further. This process will be explained more in Chapter 3. If you are proactive, and you have not procrastinated and set up a good plan with your bankruptcy attorney, you can avoid this from happening to you.
Similar to the bank-account seizure, a wage execution is also usually the tipping point to make someone reach out and call us for a consultation, if they have been ignoring the reality of their financial situation. Generally, the same pattern for how the bank-account seizure played out is true for a wage execution. A credit card collection complaint was filed against a person, and once they were served, they ignored it.
The creditor eventually obtained a judgment and either shortly thereafter, or even months or years later, then obtained a writ of garnishment, and served it on your employer, thereby subjecting you to a wage execution. Unlike the bank account seizure, the wage execution carries with it the embarrassment of your employer, and possibly your fellow employees, knowing of your situation. Just like when you ignore that toothache and don’t want to go to the dentist, so eventually the pain only gets worse. The same is true with ignoring a lawsuit filed against you. Procrastination and the passage of time can only make it worse.
Even if the creditor does not pursue the judgment immediately, the judgment continues to grow since the creditor is entitled to post-judgment interest.
There is one point I would like to raise at this time, and that concerns threats made by creditors and collection agencies about having you sent to jail for failure to pay a credit card. For much more than 100 years now, you cannot go to jail for failure to pay a credit card or any other debt. However, that does not mean that there is no possibility of you ever being arrested and seeing the inside of a jail cell for your failure to address a credit card issue. While you can’t go to jail for nonpayment of the credit card, you can go to jail if you ignore a judge’s order directing you to do something, most commonly to answer questions and provide documents to the creditor, such as bank account statements and tax returns.
What most people fail to realize is that after a judgment is entered, the creditor has rights to pursue that judgment, including serving the defendant with questions to determine where they work, where they bank, and what assets they have. More often than not, someone who has ignored the case continues to ignores this request for information, and it ends up in a circular file. Ultimately, the creditor will file a motion to compel the turnover of this information. The Judge will then enter an order requiring the defendant to provide the requested information usually within 30 to 45 days.
If the defendant continues to ignore the order, an order of contempt of court will be entered, as well as a warrant for the defendant’s arrest. While most overwhelmed municipalities will not immediately send the police out to take you in to appear before a judge, what usually happens is you’ll be pulled over for a traffic violation and with the modern technology in all police vehicles, the warrant for your arrest will come up, and you will brought to jail for a hearing before the judge.
You would then have to explain to the judge why you decided to ignore his order. Judges don’t like to be ignored! While the judge can fine you, the good news is that this is considered a “civil contempt,” which means that you hold the keys to the jail cell. The “keys” to let you go is providing the requested information to the creditor. Once you provide the information, you are released from jail.
Nevertheless, imagine the embarrassment of being arrested and going through the booking process. While that process may not be that traumatic if you’re in a sleepy little fishing village like Punta Gorda, where I live, if you happen to be traveling in Miami or Tampa, and get pulled over, I imagine the booking process and holding cell may not be as pleasant. You could be hanging out with drug dealers, murderers and gang members. Again, procrastination only makes the matter worse.
Don’t put yourself in this position. Seek bankruptcy counsel if you have been served with a collection complaint by a credit card company or other creditor.
Another situation I often see is a client calling my office on the eve of their house being sold in connection with a foreclosure. Again, because people do not want to address the issue at hand, or may not be able to address it and feel paralyzed, they delay and delay until they get to a point in time where something that could have been easily and reasonably addressed had they acted timely is now an emergency situation.
Most times it is too late in the game to do anything. While in Florida, we could file a bankruptcy petition to take advantage of the automatic stay and stop the sale from happening, or even after the sale, stop the certificate of title from being issued; it is really only a short delay of possibly 30 to 60 days and does not allow us any real opportunity to try and save the home in a Chapter 7 filing. While there are multiple possible avenues to pursue, that will be discussed in the chapter on Chapter 13 bankruptcies, again, waiting until this late in the foreclosure process basically strips an attorney from using his most powerful tools in addressing a foreclosure.
Had this person gone to see an attorney, whether it’s a bankruptcy attorney or a foreclosure-defense attorney, when they were initially served with the complaint, there would have been many more options available that may have even avoided bankruptcy, such as a short sale or deed in lieu of foreclosure, with waivers of a deficiency. These options could have prevented an emergency and a stressful situation.
It is especially upsetting for me to receive these phone calls when the parties have children who may have to be abruptly moved, instead of having an orderly process occur, in which the children need not be traumatized, but merely told that their parents decided to move. While fear can be paralyzing while making a decision, no decision can only lead to a worsening of the outcome.
Other options include working out a modification of the mortgage payments either before or after filing. However, when I am faced with an emergency situation with only hours sometimes to plan and strategize, it makes things extremely difficult. It’s like the difference between a football coach having a full week to prepare for a game versus having to tell the quarterback what play to call on the last play of the game and not having seen any of the game or even know who the opponent is! The lesson is simple. Don’t handicap yourself and your attorney by procrastinating and creating an emergency situation.
The other situation that we often see that forces someone to us at the last minute is after a foreclosure action with a lender pursuing a deficiency judgment. Generally speaking, a deficiency judgment is when the bank seeks to obtain a judgment when the property was worth less than what was owed on the mortgage. For example, if your first mortgage was $150,000, and the house, at the time of the public sale, was only worth $100,000, the bank could pursue you for $50,000.
Often, clients wait to come to see us until the eve before a judgment is entered for the deficiency. The delay in addressing this will again put them in a worse position possibly than had they consulted with an attorney. One of the unique things about a judgment is that it can convert an unsecured claim into a secured claim. Specifically, for example, a credit card (unless it’s with a credit union) is generally considered an unsecured debt, meaning the credit card company does not have a lien on any of your personal property.
However, once a judgment is entered for that credit card, now depending on the state law, that judgment creditor does have a lien on your property. While in Florida, that judgment cannot be enforced against your homestead based on the provisions of the Florida Constitution, that same protection is not provided in other states. Therefore, it is imperative that you take action, and consult with an attorney, before a judgment is entered. As I have stated over and over in this chapter, the more you procrastinate, the worse of a position you place yourself.
The same is true for a foreclosure deficiency judgment. Once the property is sold, there is no longer a lien to enforce against your property since you are no longer the owner. However, if there is a shortfall between the value of the property and what you owe, once the lender gets a deficiency judgment, that judgment will attach to your personal property and any other real estate that you own.
Once they have a judgment, they are in a much better position with a secured judgment, if you want to reach a settlement. Also, you have allowed them to convert their claim to a secured claim and improve their bankruptcy position as well, since you may have to pay back the claim in full (depending on the value of your non-exempt assets). Therefore, the entry of a judgment, depending on your situation, can be a tremendous mistake, if that judgment is entered merely due to your fear of addressing the issue at hand.
The next motivating factor for a potential client to come to see us is when there is fear that their car will be repossessed. I’ve had clients come to me stating that either a sheriff’s officer or a repo man was at their house when they were fortunately not home. They were then able to hide the car at a friend’s garage. However, they fear that, at some point, they will lose the vehicle.
At this late stage, it becomes difficult to assist the client in a meaningful way before rushing into a bankruptcy filing to get the automatic stay. Of course, once you file your bankruptcy petition, it stops all creditors from pursuing any collection efforts, including the repossession of the car. However, it’s been my experience that unless you have your Notice of Creditors’ Meeting (a/k/a 341 Meeting) showing that you’ve filed your bankruptcy case and can present that to the repo man, they are going to take your car.
I had one case where a client came to see me, where we know they were pursuing the car. We had met with the client and were in the process of preparing their petition. They had taken the required credit-counseling course but had not yet come to see us to do the final signing. We then received a frantic call from the client’s wife stating, that the repo man was outside and hooking up their car to a tow truck. We immediately emailed the clients the documents they needed to sign, to at least get them filed electronically and obtain a case number so that the automatic stay would apply and stop the repo man from taking the car.
Once I had the case number in hand, I spoke to the repo man on the phone and advised him that he would be in violation of the automatic stay and could be held in contempt of court if he took my client’s car. His response was to hand the phone back to my client and drive off with her car! While we eventually were able to get the car back, it was not a pleasant experience for my client and their children. This is just another example of how procrastination can put you in a worse position. The good news is that if you don’t procrastinate, and want to keep your car and you can afford the payment, you can keep the car in a Chapter 7 or 13 bankruptcy.
Many clients I meet with first attempted to resolve their credit issues by going to a debt-consolidation company. I’m sure you have seen these advertised on TV or the internet, and many times it sounds like a great solution to avoid bankruptcy. While I’m sure there are some individuals who are helped by these companies, most of the clients that have come to me after trying them have not been meaningfully helped, have only thrown away thousands of dollars in the process, and merely delayed their opportunity to get a discharge of their debts in bankruptcy.
If you are inclined to investigate the hiring of a debt-consolidation company, I have provided you with 10 QUESTIONS THAT YOU MUST ASK THEM in Exhibit A on Page __ so that you can go into the business transaction with a full knowledge of the terms of their services and an open mind. Generally, the ones that I have seen my clients work with require that their fee be paid up front before they even attempt to do anything to help you with your creditors. I have seen fees from 10 percent of what you owe or even as high as 15 percent of what you owe. So, for example, if you owe $50,000 in credit card debt, your fee to them may be anywhere from $5,000 to $7,500. They generally set you up in a payment plan, but all those payments go to their fee first. If you are paying them $400 a month and your fee is $5,000, it will take you more than a year to pay them before you even have any money to go toward your creditors. How does that help you?
Additionally, they generally do not negotiate with your creditors until you have built up a bank of funds so that they can offer a lump-sum settlement to resolve your debts. Using this process, obviously they can only deal with one creditor at a time. If it takes you two years to deal with one credit card company, what do you think happens with the other five credit cards that you have not made payment to in a year or longer? Ultimately, these clients wind up in my office after spending literally thousands of dollars and not getting the result they desired: avoiding bankruptcy.