Not filing for bankruptcy can, in many cases, have more lasting consequences than filing for bankruptcy. Most of my clients ask, “What if I don’t do anything?” There are many opinions on the subject and the credit industry spends billions stigmatizing bankruptcy as a means of finding relief from a mountain of debt, foreclosures, foreclosures and harassing calls. A client came into my office, let’s call her Sally, who asked why she should consider bankruptcy and what would happen if she did nothing: would she be sued? What would happen to your belongings? Would she lose her house and her car?
Sally seemed quite stressed about her situation. She was recently divorced and had a son to take care of her. She was a few months behind on her mortgage and also about to fall behind on her car payment. She had used credit cards (50k+, 18%+ interest) to supplement her income while she was getting divorced, which had been expensive. She earned a decent income, but was unable to make ends meet with her overwhelming debt load. Sally even took money out of her retirement account to help pay her bills, but she still fell behind. We discussed several options to ease her burden, including the possibility of paying off her debts and attempting a loan modification on her mortgage that had a fairly high interest rate.
We decided that it was in Sallys best interest to file a Chapter 13 reorganization. Why? Sally had received Notice from the lis pendens bench. That’s the notice from the banks that they were about to start foreclosure. She tried to work with her creditors, without success, they called her at all hours at her house, then at her work. It turns out that Sally has a second mortgage on her house and her house, like many in Central Florida, lost so much value that the second mortgage could be stripped in bankruptcy. With the second mortgage liquidated and her unsecured debt eliminated, Sally would be in a better long-term position by filing for bankruptcy than she would try to work out a settlement, which she didn’t have the means to do.
What if Sally did nothing? Sally was about to be sued for foreclosure, and her creditors were likely to sue as well. If the house had been foreclosed, she would have been evicted, the house sold, and a deficiency judgment would have been entered against her, including fees, penalties, and interest. Judgments in Florida earn 10% annual interest and remain viable for 10 years. However, they can be renewed at that time for another 10 years. The creditor could then sixteen years and sell at auction all of her property, including cash, vehicles, and other property, except $1,000.00 worth, to satisfy her debt. If there wasn’t enough to sell, they would wait and keep repeating the process years later until the debt was paid off.
With much of her debt eliminated, Sally was able to make her bankruptcy plan payments, keep her home and car, pursue a loan modification with her bank while reorganizing her finances, and graduate from bankruptcy with a brighter financial future. much brighter. Collection calls would end. She would begin to repair her credit and after 10 years or less, the bankruptcy would be removed from her credit reports.
I never advise clients to view options as short-term relief goals, but to carefully consider which options put them in the best financial position for retirement or enjoying retirement. Bankruptcy is not the only solution to a financial crisis, but sometimes it is the best solution. A full financial analysis should be done and all options explored so someone like Sally can make informed decisions about how best to reach her long-term financial goals. If only she had come to see me sooner, I would have saved her retirement account, she is exempt!
