South Florida Paralegal Blog

Recently, in a response to a posting about credit card company practices being examined by Congress, a reader posted a comment regarding bankruptcy. While "cadillacjoe" often makes some solid, well-thought-out points, I have to disagree with a few comments he made.

I think I have a pretty good idea of the consequences of filing bankruptcy. First of all, I have typed approximately 5,000 Chapter 7 cases between 1994 and 2007. I have spoken to thousands of my clients who have called me months after their discharge, happy to report that they had new credit and even some car loans and mortgages with decent interest rates.

Secondly, I have personal experience with this issue, as I was forced into filing bankruptcy almost a decade ago after my ex-wife lost the home and vehicle I purchased for her while we were married. The fact that her ex-husband didn't pay a dime of child support for their four kids didn't help either.

Third, as a mortgage broker, I can personally attest that I have helped several post-bankruptcy clients obtain loans at decent rates (approximately 1 - 1.5% over what somebody with good credit would pay) in as little as seven months after bankruptcy.

Joe states: "I don't think the housing market in Palm Beach County really has anything to do with going bankrupt or the amount of people that are going into bankruptcy"

Joe, I have to disagree. Why? Because I am averaging 15-20 calls a week from people who are filing bankruptcy precisely due to the housing market. The stories are similar but it all boils down to a few scenarios:

1. The client purchased investment property at the point when prices were sky high, just before the market crashed. They are holding a property that is worth $50,000 to $100,000 less than they paid a year ago. They can't sell it, can't rent it. What are their choices? If they do a short sale or deed in lieu, they will be taxed on the deficiency balance, as the IRS considers this forgiven debt as income. Jonathan Alper, Esq. explains on his great Florida Asset Protection Blog.

2. The client purchased or refinanced their primary residence with some type of adjustable loan and now the payments have jumped $200 - $300 per month. Coupled with the fact their home is worth less than they owe, they don't have many options either.

Joe goes on, stating "Bankruptcy will often remain on your credit report for as long as 10 years. During this time it can be next to impossible to obtain loans or any type of credit."

Joe is right, a Chapter 7 stays on your credit for exactly ten years, but speaking from personal experience, it doesn't prohibit your ability to get credit. I had three new credit card accounts within six months after my bankruptcy discharge. In my experience and those reported by my clients, bankruptcy will generally not affect your ability to get credit, but it will affect your interest rates for approximately 18-24 months.

Unfortunately, Joe has fallen victim to the inaccurate news reporting on the changes in the bankruptcy law when he asserts "Also in 2005 a new federal bankruptcy law went into effect making it much more difficult to erase credit card debt by filing for bankruptcy."

In reality, the 2005 changes had nothing to do with one's ability to discharge credit card debts in bankruptcy. It's amazing how many people say this to me. The 2005 changes had more to do with the fact that the credit card companies bought and paid for this law. Their multi-year campaign to "reform the bankruptcy laws" was vetoed several times by President Clinton. The credit card companies (after making billions of dollars on ridiculously high interest rates and bogus fees) were whining that it was too easy to file bankruptcy and that a large number of bankruptcy filers actually had the ability to pay some of their debt.

Guess what? A recent study confirmed what I already knew; the majority of bankrupts do not have the ability to pay even a portion of their debts, after taking into account their regular living expenses. In fact, this study revealed that over 97% of people who qualified under the old rules still qualify under the reforms.

Finally, Joe states "Before you restrict yourself to bankruptcy you should explore other options. Quite often, lawyers/ paralegals are quick to suggest bankruptcy and they don't always explain how damaging bankruptcy can be. Why would they do this? The answer is simple; if you don't file for bankruptcy, they don't get paid. Another opinion would be a Debt Settlement program. However if a bankruptcy is unavoidable I would find a licensed bankruptcy attorney one who specializes in Chapter 7 and Chapter 13 cases."

I agree with Joe that bankruptcy should be a last resort and that people should explore other options first. That is why I have always encouraged people to do so, even before pre-bankruptcy credit counseling became a requirement. However, there are many "credit counseling" companies out there who don't deliver on their promises and some are downright crooks. If you are interested, I would encourage you to check out the originator of the entire credit counseling concept, Consumer Credit Counseling Services. They are a United Way agency and they don't play games.

Regarding Debt Settlement, I'm not a big fan of the concept. Here's how it works: you pay every month into an account and when you reach, say 25% of your total debt, the Debt Settlement company will supposedly negotiate with all your creditors to accept less than you owe. I'm not a big fan after seeing many of these companies in action. Many charge huge fees, up front, so if you change your mind after a few months, they keep your money, sometimes thousands of dollars. Secondly, many promise to stop collection calls, but they simply can not. There is no law that says creditors can't harass or even sue you while you are paying thousands of dollars to these companies over a 3-5 year period. Third, your credit is ruined by the time the company actually settles the debt, if you actually complete the plan. Guess what? You could have filed bankruptcy and have been completely re-established in less time.

And lastly, not all attorneys or non-attorneys are more interested in making a quick buck than doing the right thing. I have talked more people out of refinancing during the boom than I have brokered loans for. Why? Because I didn't think it was in my client's best interest. Sure, my bottom line was lower, but I'm in this for the long haul. I'm proud to say that my company has never received one complaint in 14 years of business. I'm proud to say that over 85% of my clients were referred by a previous client.

Bankruptcy should never be anyone's first resort. Those experiencing financial difficulty should always explore other options first. But if you find yourself having to file bankruptcy, at least get accurate information from people who have been through it. It will hurt you in the short term, but you will see, life goes on.