Author: Andrew M. Thaler
The first step is to identify that there is a problem. The second step is to deal with the problem head on by getting proper and timely advice on how to solve the problem. Unfortunately many people wait too long, or never seek the advice they need in order to make good life choices. As they say, an ounce of prevention is worth a pound of cure. This is the first in a series of articles that illustrate how having pertinent knowledge can drastically affect the outcome.
Facts: Debtor, let’s call him Mike, is 55 years old:
- owes $100,000 on credit card debts.
- has no savings other than an IRA account with $100,000
- owns a house with his wife that has $200,000 in equity but no other significant assets
- makes $55,000 a year
- uses one credit card to pay another card’s minimum monthly payment
- can no longer obtain new credit cards and is now unable to make monthly minimum
- receives dunning letters and has been served with lawsuits
- has poor health insurance coverage with high deductibles and has a heart condition that while stable could flare up at any time
Mike, does not seek advice from a bankruptcy attorney. Mike panics and withdraws $50,000 from his IRA and uses the bulk of the money to pay creditors putting the most pressure on him. Shortly thereafter Mike incurs out of pocket medical costs of $15,000 due to his heart condition (which causes him to miss 4 weeks of work) thereby eliminating his ability to pay the minimum monthly amounts on the remaining $50,000 in credit card debts. More lawsuits are filed. Judgments are placed against his house, his wages are garnished 10% by a judgment creditor that also seizes his bank account with what is left of the IRA money. At this point Mike decides to talk to a bankruptcy attorney. The attorney advises Mike that the withdrawal of the IRA money has made him ineligible to file bankruptcy at this time because the additional income made him fail bankruptcy’s “Means Test”. If Mike wants to file chapter 7 bankruptcy, he will have to wait 4- 6 months to be eligible. Mike will have to spend time and money trying to avoid the entry of additional judgments being entered against him which will become liens against his house. Mike will only then be eligible to file bankruptcy. His wife is not happy about all this. Mike is miserable.
Upon realizing that he simply does not have enough money to pay back his creditors Mike talks to a bankruptcy attorney to discuss his options. The bankruptcy attorney tells Mike that his IRA is protected from the reach of the credit card companies and that he should not withdraw any of the money to pay them as he planned. Mike is also told that if he withdraws money from the IRA to pay debts, including his medical bills, it will affect his eligibility to file chapter 7 bankruptcy. (A case in the E.D.N.Y holds that IRA withdrawals are included in calculation of “current monthly income” for Means Testing purposes. Courts in other jurisdictions have not agreed.) Mike is told that his share of the $200,000 equity in the marital home is exempt from the credit card creditors and no judgment liens will be filed against the house if he acts quickly. Mike is told that he should not consider obtaining a home equity loan to pay his debts because if he files chapter 7 bankruptcy those debts will be permanently discharged. Additionally Mike is told that on the filing of bankruptcy there is an automatic stay that will stop the dunning letters, the lawsuits and the filing of judgments against the house. Mike is told bankruptcy will discharge of all of his credit card debts and that he will be able to keep all of his assets. Mike is relieved that he did not follow advice from others and use his retirement money and equity in the marital home to try and pay his debts.
The above scenarios illustrate that based on the same facts there can be two diametrically opposed outcomes. One is favorable to Mike (he saves his IRA, can file bankruptcy immediately to discharge all his debts, does not tap into the equity in his house and avoids judgments against his house) and the other is a disaster (he loses $50,000 in his IRA, cannot file bankruptcy now, has to deal with creditors who might file judgments against his house and a very unhappy spouse etc.).
In short, a failure to obtain information on debtor and creditor rights can be disastrous. I tell clients that not consulting with an attorney in these situations is like crossing a highway blindfolded late at night thinking that there is no way they will get hit by a car. You might reach the other side in one piece or you might get hit. In scenario one Mike was hit and hurt bad. In scenario two Mike had his eyes wide open and only crossed the highway after he knew the path was safe. Mike came out unscathed.
The bottom line is that when faced with debt that keeps you up at night, seek advice from a qualified bankruptcy professional. Property that might otherwise be lost can often be protected. Debts that don’t seem will ever go away might be discharged. Every case is different. Bankruptcy or other appropriate options for dealing with debt may be available. An education is essential to making an informed decision.