Sometimes, bankruptcy is the only solution. It is there to protect you. It’s also intended to protect less aggressive creditors from more aggressive ones, so everyone can get their fair share. Don’t be afraid to use this valuable tool if necessary.
The question is, how do you find a good bankruptcy lawyer? First, determine if Chapter 7, Chapter 11 or Chapter 13 seems to be the right type of bankruptcy for you. Each has its own risks, benefits, requirements and costs. Only a lawyer can advise you regarding the right Chapter, but you should have some initial idea which types of lawyers you want to look for. Generally, the same lawyers do Chapter 7 and Chapter 13, but a different lawyer handles Chapter 11 cases.
Chapter 7 is a liquidation. If you don’t have valuable assets (with equity) that you want to keep, you might want to just let the court sell whatever non-exempt assets you have, let each creditor have their pro-rata share, and you can get on with your life free of that debt. Chapter 7 will temporarily stop a foreclosure, but the creditor will probably be able to gain court approval to proceed with it afterwards unless you can negotiate some deal with the lender.
If you make too much money, you won’t be allowed to stay in Chapter 7. In prior times, many high income people would buy a house that was mortgaged to the hilt, lease their cars, and run up hundreds of thousands of dollars in unsecured debt. Then they would file for Chapter 7, keep the house (because it had no equity and they were able to make the monthly payments), keep the cars (because they were leased) and wipe out all their unsecured creditors. That wasn’t fair, because those high earners were ABLE to pay their unsecured creditors via monthly payments, they just chose NOT to pay them. So, the law was changed. Whether you make too much or not is called the “means test.” Here is a link where you can take a “guestimate” means test to see if you might qualify or not: http://www.legalconsumer.com/bankruptcy/means-test/
Chapter 13 is for people with regular income. It can be wages or salary, social security check, or people who work on straight commission. It doesn’t matter where your income comes from, so long as you can predict amounts and frequency well enough to prepare a budget and make monthly payments to the bankruptcy court. You can keep your assets in a Chapter 13, but you must make equal monthly payments over the course of 3 or 5 years in order to pay off a certain percentage of your unsecured debts. This includes past-due payments on secured debts like mortgages. BUT, you will have to stay current on your other regular monthly payments like mortgages, car notes, etc. Unless you had a temporary problem that got you in financial trouble, or problems with the demands of unsecured creditors, Chapter 13 might not help you. If you didn’t have the money to pay your mortgage on time, how are you going to pay your mortgage AND the court payments in the future?
In Chapter 13, one co-debtor can file for bankruptcy and the creditors are not allowed to go after the other co-debtor (usually this is a husband and wife, but it’s not limited to them) who did not file for bankruptcy. The rules are complicated, so don’t make decisions based on this “rule” until after you talk to an attorney. This is called “the co-debtor stay.” It is not available in Chapter 7 or Chapter 11 unless you have a REALLY good reason, AND you ask the judge for an order granting it, AND the judge agrees to do that. It doesn’t happen very often.
There are limits on who can file for Chapter 13. If your debts are too large, you will have to file Chapter 11, which is a lot more expensive. Chapter 13 is fairly inexpensive.
Chapter 11 was traditionally for businesses to reorganize, but it is also available for individuals who make too much for Chapter 13 or who have complicated financial lives that prevent them from making commitments regarding regular monthly payments. Perhaps they need a more flexible payment plan. Chapter 11 is complicated and expensive. Lawyers typically require a large retainer.
Some debts cannot be bankrupted. You will still owe them, even after bankruptcy.
Previously, people could force a “renegotiation” of their secured debts in bankruptcy. We’ve all heard of people who had a house worth $150,000 and a mortgage of $200,000 and a killer 10% interest rate. They would ask the bankruptcy court to reduce the interest rate to 5%, reduce the mortgage balance to $150,000, and throw the other $50,000 into the “pot” with the unsecured creditors. In that case, the debtor would make monthly payments based on a $150,000 principal balance, and the bank would get pennies on the dollar for their other $50,000. This process was called “cram down.” Mortgage lenders didn’t like it very much. Now, it is much harder to get, so don’t be lulled into a false sense of security after a little Internet research that reveals old law from “the good old days.”
Bankruptcy is about as technical and filled with landmines as tax law. You DO NOT want to save money, do some Internet research, and attempt this yourself. Would you perform your own brain surgery?
So, how do you find a good bankruptcy lawyer?
- Do some Internet research about the different chapters, and their advantages and disadvantages. Form a preliminary opinion about what is right for your situation.
- Write down a list of questions you have about bankrutpcy.
- Write down a list of all your creditors, what collateral they have, if any, and how much you owe each of them.
- If you find a lawyer from some type of advertising or a referral, follow steps 5-3 through 10 below. (That’s step 5, substep 3. I can’t figure out how to make my list say 5a, 5b and 5c) You can’t assume someone is a good lawyer just because they have the largest Yellow Pages ad, or because your plumber or your golf buddy recommended them.
- If you don’t have a clue about bankruptcy lawyers, go to the nearest federal courthouse that has a bankruptcy clerk’s office.
- Ask the clerk the following question: “I’m not asking for a recommendation. I just want to know what 3 or 4 lawyers seem to file the most Chapter 11, and Chapter 7, and Chapter 13 petitions.”
- If the clerk won’t answer that question, ask for the docket sheet for an upcoming hearing date for Chapter 11 cases, Chapter 13 cases, and the 341 meeting for Chapter 7 cases. The 341 meeting is the First Meeting of the Creditors. This is when creditors can ask the debtor questions in an informal sort of manner. See which lawyers names appear most often.
- Ask the clerk for the dates and times for the regular Chapter 13 docket, the regular Chapter 11 docket, and the regular 341 meetings. If you are able, attend several. Arrive 30 minutes early. Often, the clients will be seated in the courtroom, out in the spectator’s seats. When the Judge is not on the bench, chat with the other debtors. Ask them what they think about their lawyer. When court starts, observe the lawyers. Which ones seem to know their stuff? Which ones seem to fumble around? Which ones get chastised by the court for simple mistakes? Which ones seem to have clients with situations similar to yours?
- Once you pick out three or four names, call the State Bar Association to see if those lawyers have a history of any disciplinary action. If so, does that change your opinion at all?
- Make an appointment with two or three lawyers. Give them your list of creditors and the amounts of your debts. Give them the results of your online “means test” or be prepared to answer questions about your income. If you are delinquent on filing your tax returns, share that information, also. If a creditor has threatened to foreclose on property or repossess property, or if you have a garnishment in existence or coming soon, share that information. Ask the questions on your written list that you prepared earlier.
- In the meeting, ask the lawyer which Chapter they recommend, and why. Ask them specifically why another Chapter would not be the best choice for you. Ask about the lawyer’s fees, court expenses, and what are the most common “bad things” people experience in the Chapter the lawyer recommends.
- Don’t hire the first lawyer you interview. Another lawyer might give you advice that contradicts the first lawyer, or that provides a different “slant.” As my mother always said, “Denise, you don’t marry the first boy you date.”
- Don’t wait until shortly before a holiday weekend to hire a lawyer if you have an emergency coming up. Usually, the entire month of December is going to be difficult, too. If you need to file for bankruptcy in December, you might need 6 or 7 names before you find someone who is even willing to take on a new client in December. August is usually another bad month, because of the number of people on vacation.