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Beware: Bankruptcy Can Be a Powerful Tool-If Used Correctly

A Chapter 7 bankruptcy allows consumers overburdened by credit card and medical debt to discharge the debt and get a fresh start in life. In exchange for wiping out the debt the court appoints a trustee who takes certain assets you own and sells them to pay your creditors. However, the trustee cannot take certain property you need for living, e.g. a house you live in with $150,000 equity, a car with $6,000 equity, household goods, computer, retirement benefits and items that do not exceed a certain value, such as wedding rings, watches, bicycles, milk cows, poultry, and life insurance, to mention a few. However, many debtors try to use cut rate attorneys to file bankruptcy, thinking that all lawyers are the same, hoping to save a few dollars in attorney’s fees. Unfortunately, there are lawyers out there who claim to be bankruptcy lawyers who do not know what they are doing and just charge a small fee and then abandon their clients. Here are some disasters I have witnessed in my 36 years of practicing law caused by clients’ lawyers whose cheap fee seemed too good to be true:

1. The client had a car accident lawsuit pending when he filed bankruptcy. His attorney told him it was exempt from the trustee. It was not. The trustee took it over and settled it for $240,000, none of which went to the client.

2. Client lost his house with $110,000 equity. While this would have been exempt under Arizona law, because the client had not lived in Arizona for 2 years, the trustee was allowed to use North Carolina law which only allowed a $20,000 exemption. His attorney did not know this.

3. The client was an accountant who operated out of his LLC. When he filed bankruptcy, the trustee took over the LLC and sold it to an accountant from Minnesota who wanted to live in Arizona where it was warmer. Thus, he lost his business. If his attorney had him operate as a sole proprietor he could have kept his business.

4. The client had $80,000 in a mutual fund that he thought was an IRA. His lawyer never looked at the statement, which clearly said it was not an IRA fund. The trustee took the $80,000.

5. The client was disabled and received $3,400 in benefits from his private disability policy. His lawyer told him these benefits were exempt and filed bankruptcy for him. Disability benefits are only exempt if they are from an employer disability policy, not a private one. The trustee took the benefits and the client never received any more benefits for the rest of this life.

6. The clients owned 2 houses, the big house they lived in and their former residence which they rented. Along with the bankruptcy filing, they planned to downsize and move into the smaller cheaper rental house with $50,000 equity. Their big house had no equity and had payments of $3,000 per month. Their lawyer told them they could file bankruptcy and declare their intention to move into the rental house in 6 months, thereby protecting it from the trustee. Wrong. They filed their bankruptcy and the trustee took their rental house. They had to be living in it on the day the bankruptcy was filed.

Bankruptcy is an important federal right that everyone has. However, as shown above, you need a good bankruptcy attorney to guide and protect you through the bankruptcy. Make sure you do your homework and check out that the attorney you hire is experienced with a good reputation in the community.