12/14/2011 12:51 PM ET|
When you're too poor for bankruptcy
If you can't afford to hire a lawyer or pay the bankruptcy filing fee, consider some options so you still get creditor relief and protect yourself from property loss.
Matt and Toni used their credit cards when times were good to buy furniture and otherwise set up their new household. They assumed they would keep earning enough money to pay off their debts.
But Toni, a home health aide, had stretches of unemployment between clients, so they starting using the cards to pay their other bills. She took six months off when she had a baby, putting them further behind.
Instead of rising, the couple's income is about half of what it was a few years ago, said Matt, who works for the state of Washington. Meanwhile, their revolving debt has ballooned to $50,000. And this fall Toni had another three-week gap in employment.
"That doesn't seem like much," Matt said, "but it was enough to really push us over the edge."
Matt had been toying with the idea of bankruptcy for years, but when he visited a lawyer he learned that he didn't have enough cash on hand to even start the filing.
"I've had the initial consultation," he said, "but am not able to pay the fee to have the means test conducted, much less the rest of the fees."
It's not uncommon for people to struggle so long with impossible debts that they wind up too broke to pay a lawyer or the filing fees for bankruptcy, said Henry Sommer, a former president of the National Association of Consumer Bankruptcy Attorneys and a supervising attorney at the pro bono Consumer Bankruptcy Assistance Project in Philadelphia.
The most common type of bankruptcy, a Chapter 7 filing that erases most consumer debts, typically costs $1,500 or more. A Chapter 13 filing, which involves a repayment plan, can cost twice as much.
Costs for both types of filings rose after the 2005 bankruptcy reform act imposed a means test and other limitations on filing. As costs have risen, so have the number of people filing without a lawyer's help -- by 187%, according to the Administrative Office of the U.S. Courts.
People who file for bankruptcy without attorneys rose from 6% of Chapter 7 and Chapter 13 filings in 2007 to 8% of Chapter 7 filings and 10% of Chapter 13 filings this year.
Now, some of these folks could simply hate lawyers, but more likely they're trying to save what little money they have left.
This strategy can backfire, though, since a poorly filed bankruptcy can be dismissed -- meaning you don't get any relief from your creditors -- or you could lose some property that might have been protected if you'd gotten competent help.
Before you risk that, consider the following options:
Figure out if you're judgment-proof. If your income and property are legally protected from creditors, you can still be sued, but the creditors won't be able to collect. That's known as being judgment-proof. You may be judgment-proof if you own very little and have no income, or if all your income is from Social Security, because Social Security payments are legally protected. The list of property that's exempt from creditors' claims varies by state (check here) but often includes clothing, household items and a car worth $2,000 or less.
If you're judgment-proof, you may not need to file for bankruptcy, Sommer said. You can just send a letter to your creditors telling them to stop contacting you.
There is a hitch in being judgment-proof: If your creditors go to the trouble to sue you and get a court judgment, they may be able to collect from you if your circumstances improve in the next 10 years. A bankruptcy filing, by contrast, would legally erase the debt.
If you think you may be judgment-proof, it may be worth scraping up a couple hundred dollars to confirm that with an attorney (you can get referrals from the National Association of Consumer Bankruptcy Attorneys). Some attorneys will charge less.
Expand your thinking. Your bank account may be empty, but there still may be ways to quickly raise the money you need to file.
Canceling pay TV and other luxuries could free up some cash, assuming you aren't on a contract that imposes early-termination fees. Selling property you're likely to lose in bankruptcy, such as a second car, could bring you the cash you need.
If you're still making payments on debts you hope to erase in bankruptcy, for example, you probably should stop and save up the cash instead. Sommer said some people continue making payments on such debts right up until they file, which really makes no sense.
"It's a habit or a sense of moral obligation," Sommer said. "Some people pay a little bit to everybody, thinking 'that will keep them off my back,' but that is not a good strategy."
Instead, you should prioritize the payments that matter the most -- your rent or mortgage if you plan to stay in the home, your car payment if you need your wheels to get to work, essential medical treatments, food and utilities.
If cash is really tight, you could even skip a utility payment if that would help you scrape up the funds to talk to an attorney.
Other sources of cash can include loans from friends or family, or your retirement funds. The loans would be legally wiped out in the bankruptcy filing, but that wouldn't prevent you from repaying them later. Using retirement funds to pay your creditors isn't advisable, since that money is protected, but it may be worth paying the taxes and penalties for such a withdrawal if bankruptcy would help you get back on your feet.
Look for low-cost help. Many bankruptcy attorneys offer discounted initial sessions. This session should give you a good idea of whether bankruptcy is an appropriate option and what you need to do to file.
If your income is at or below the U.S. poverty level (currently $18,530 for a family of three), you may be able to get free help from your local legal-aid society if -- and this is a big if -- the agency does bankruptcy work. Many legal-aid societies don't do bankruptcies or do very few because of limited funds. But your legal-aid society may be able to refer you to other low-cost or free services that may help.
A few bankruptcy courts have "pro se help desks," including the courts in Chicago and Milwaukee. These services are designed to help people who are filing without an attorney ("pro se").
Document preparation services often tout themselves as cheap alternatives to hiring lawyers. But be careful. Legal-aid attorneys complain that some of these services give advice, even though they're not supposed to, and that the advice may be wrong. Given how complicated today's bankruptcy procedures are, you should at least read an updated guidebook, such as Nolo Press' "How to File for Chapter 7 Bankruptcy," currently in its 17th edition, before attempting to file on your own.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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We had massive medical bills after a car crash even though we had auto insurance and health insurance. We paid every single bill we had every month for three years but one hospital decided they wanted to be paid in full within one year. They demanded we pay them $1,000 per month. We could not afford that payment as we were also paying our living expenses, another hospital and other doctors too. They decided that even though we had made $300 per month payments to them every month for three years without fail we were "uncooperative" and refused to make a "reasonable payment". They turned us over to an extremely agressive bill collector who harrassed and sued us. Once they had a judgement they garnished our wages taking nearly 40% of our paycheck. Apparently "reasonable" means you can't pay for your kids school lunches, make your house payment or pay your other debts after they take what they want.
We filed bankruptcy. It's a pity because now instead of getting paid EVERY DIME we owed them plus interest (because we have integrity and were paying them religiously) they will not get a single penny from us.
This has everything to do with the massive cash the Debt Industry threw at our representatives through lobbyists and campaign donations so that they would vote for a law that would prevent people from declaring bankruptcy. They vilified the people who are forced to declare bankruptcy by perpetuating the myth that these are people who simply live luxurious lifestyles that they cannot afford or for which they do not want to pay. The truth is that person declaring bankruptcy is usually forced to do so through no fault of their own. It takes more time to explain that divorce, medical bills, and unforeseen emergencies or unemployment are whipping out the safety net that people built for themselves. Or that the cost of health care, insurance, and all the basics required for a family have skyrocketed while most of the new wealth created in the last 30 years has gone to the top of the richest of the rich and that most people’s real income has stagnated, not even keeping up with inflation. We now live with the results of a pay to play Washington, effectively taxation without representation for the poor and middle class. Washington bailed out banks, insurance companies, and car manufacturers with our tax dollars, then turned a deaf ear to the people evicted from their homes, left unemployed, and stood by as people who worked all their adult lives had their pension funds raided. They wonder why we’re angry and apathetic, well; they are probably glad we are, that way they can keep operating the same way!
jUST OVER A YEAR AGO i FILED CHAP.13. I was sailing right along, until my son was hurt on the job and I lost his rent which was just enough to make the mortgage and send the trustee the payment they ordered. Now I am months behind on it again and the courts have released my bankruptcy. Now the mortgage co is calling again, I can't seem to get anywhere with them on a modification and I don't know what to do!! First off, I don't understand how they can add another $617.00 per month to a budget that wasn't cutting it in the first place! My property taxes have doubled over 14yrs along with the staples of every day survival. Food, gas, oil for heat and hot water.
The most frustrating part is that people who overspent with credit cards (of which I have NONE) can have their frivolous spending wiped out when I have done everything right by not over extending, but still can't make ends meet and I am going to lose my home. The one I physically built as a single mother of 2. It's just so wrong!!!!!
SOMEBODY PLEASE HELP ME FIND OUT HOW I CAN PROTECT MY HOME!!!!!!
That's what's happening.
We are losing the middle class as a result of them losing jobs, houses, etc.
Now what? Who's going to pay the bills?
The corporations won't. They just 'internationalize even more.
The people won't, because they have little or nothing left.
The government won't because unless it prints money and sets off an inflationary spiral, there's nothing more that it can do.
There are two classes remaining: the very rich and the poor. (soon to be very poor).
If you're not in the first group, you're in the second or at least headed that way.
Start looking for another country where you might be able to live and work. Do it now before you are too broke to manage a move.
Do we really think ANY politician is going to be able to correct this? I am under no illusions. This thing is broken and going down.
I have to say that I agree with other posters here about feeling sorry for this family. 50k in credit card debt but you can't afford a BK lawyer? I would be willing to bet that if you looked at the purchases on their credit cards you would see that they were living well above their means and fall back on the, "I thought I would be making more money every year" excuse which is hinted at in the article.
- Live below your means (unless you are at/below poverty level)
- If you don't have 6 months to a years worth of living expenses you should not buy a house.
- If you are living month to month you should wait to have kids (not always possible I know).
- If you have a smart phone and don't need it for work chances are the phone is smarter than you (if you are having economic challenges)
- Plan for the worst and hope for the best
This is what many people know as common sense but many people seem to struggle with. I understand that unemployment is high, but life rewards the most prepared. It may not be fair but it is the way of things.
What is totally amazing is that msnbc is not reporting any of the tax changes that have already gone into effect.
No college tuition deduction / no deduction for teachers who buy their own supplies. (this one is really bad - now the kids will have even less to learn with)
And there are others - when is this congress going to get their heads out of their butts and start taking care of business? This is getting totally out of control and until -"We the People" stand up and let them know that we are "Mad as Hell and not going to take it anymore" - will things start changing.
Instead of the occupiers rally against nothing....all of us need to stand up and say whoa !!!! Time for some changes and change those that will do nothing about fixing things,,,,,except only worrying about keeping their cake jobs in DC.
MSNBC needs to report what the changes have been...the other cable news networks have....the word needs to get out that we are being hosed over once again and very little is being said about it.
Yes, bad things happen to people. And in extremely rare cases, something so overwhelming and beyond anyone's ability to prepare for means they have to file.
But mostly the "unexpected" that causes trouble is due to poor life planning and poor choices. Those unexpected events are not really unexpected at all. If you spend every dime you bring in and have no savings, guess what? Any bump in the road causes a disaster, and those bumps WILL happen - that's life. Buying on credit? That means you couldn't afford it in the first place. Having children when you can barely support yourself? Incredibly irresponsible, and sentences your child to a future of poverty. Get no job skills or education? That's a choice to be stuck at minimum wage.
You can choose to be a victim in life, and blame the government, corporations, the legal system, political parties, or anybody but yourself for your troubles. Or you can make choices that allow you to thrive no matter what the rest of the world does. Hint - the second path is the one that will bring you the most happiness.
'Living Beyond Your Means' could mean you took a lower-paying job after a layoff or survived cancer. When the means are cut, sometimes there isn't any way to even keep up with all the bills coming in. Even for the emergency fund owners, the money eventually runs out..so do retirement accounts...
I was in a situation several years ago, too poor to file bankruptcy. I relocated to another area and was working for my son-in-law. That started my money problems when I had trouble being paid for the jobs I did for them. I had to put my place up for sale on short notice. Loss of income for me was the end.
There was someone that saw what was happening to me, and they lent me some money to get started with the chapter 7 filing. I got a decent little place to stay, found some steady work, and made payments to the attorneys office. It was a nightmare for several years, not knowing if I would be taken to court and sued by my creditors. Anyway I got it done, that was 2 years ago, and things have been coming slowly back together for me. I no longer own anything, but I have no debt on me, and I subsist off of a small pension. Anything can happen to anybody, believe it!
I will probably have to file for BK. Being from the old school of trying to pay your debts, we used savings, retirement, insurance, and eBay. I was out of work for a year and now work 4 hours from home and under-employed. My wife was laid off. Her ex quit paying child support and isn't paying his half of son's college expenses. Probably should have filed when I initially got laid off and saved my retirement and insurance money.
BK is a tool for a fresh start but it should not be abused. I think too many people use it as a way out of paying debt. I know of one couple who have gone through Chapter 7 five times. Talk about abuse.
It is call stealing on a grand scale. It was just a few years ago that every company was giving out credit cards. Washington Mutual put people into homes with zero down into a new 3,000 sq foot homes (800 grand to million dollars) and made a lot of money off of it. Once these people had homes they got mail boxes of credit cards. Car dealers with there credit cards, furniture stores with there credit cards, clothing stores, every little mom and pop wanted to get some of that easy interest money. I would think that furniture stores would be the first ones to suffer and closed. Electronic stores were next. Mom and pop were in there somewhere. The snowballing effect of easy anything quickly went away. The cheap mortgage did not raise that much by the banks, what killed these people was that tax bill by the county. You like living like those rich folks then you can pay taxes like those rich folks. I wonder what the taxes are on a 800 thousand 3,000 sq foot house is every six months?
Do you not find it interesting to see how many homeless have cell phones. They can not afford to feed the kids, but they need cable. At the local food bank there is not any cars in the parking lot older than 5 years.
Being poor is nice for all the things I'm not temped to have. I wonder if these people every heard of Section 8, free food stamps, free cell phones, government handouts on everything.
An illegal coming into America seems to very well off when it comes getting free everything.
I have no problem with people filing bankruptcy if they have tried to protect themselves against it by not living beyond their means, not buying too much house, and making sure they have adequate savings to carry them when 'life happens'. But sometimes adequate savings turns out to be inadequate when there's a true disaster. In those cases, I am all for giving them mounds of help. Unfortunately, the people I know that file for bankruptcy do not fall into that category. They're in trouble because they made poor choices, and the rest of us end up paying for it in the form of higher prices. Quite frankly, I think that giving them help just takes away the help for the people who truly need it. The couple in this story could have avoided their financial troubles with some planning and forethought. I wish the author had chosen a better example couple.
And to Southernbelle who said her realtor or mortgage broker told her that her income would continue to rise (and presumably that was the argument for buying more house), how they heck would he/she be able to predict their future income? They obviously believed it and bought a big house because she says that thankfully their income did rise. Our realtor told us that we could afford more house, too, but we were firm with her on our budget. We didn't just say, "oh, ok then, we'll spend more because you want a bigger commission." Come on! You have a brain -- use it!
If you are really poor you can file for a fee waiver and do it yourself completely free. I did it ,it was pretty easy and I didn't make any mistakes all my debts were wiped out and it didn't cost anything. Check the court website for the income requirements all the paperwork you need is online and easy to use. 2 years later and I haven't had any problems a few hundred thousand of debt was wiped out for free. You will have to go to the courthouse a few times and there is work involved figure maybe 40 hours total spread out over a few months. That was for a single person filing chapter 7 with a house in foreclosure and hundreds of thousand in debt with no assets.
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