The decision to file bankruptcy is usually driven by threats from creditors to take something from you, now.
Do nothing and your creditor can levy your bank account or garnish your wages.
It’s all too human to put off a difficult step like filing bankruptcy until those threats seem real and immediate.
But even if your creditors can’t harm you today, what about the long view?
Is bankruptcy the right choice, now?
My quick test for the decision to file bankruptcy asks whether a creditor with a judgment could take anything from you.
If the answer is no, the quick conclusion is you may not need bankruptcy.
Existing law and your current circumstances keep your creditor from reaching your wages or your assets.
In the past then, I’ve told clients that they did not need bankruptcy protection, now, if
- they were unemployed (no wages);
- in possession of assets with little value or only exempt value; or
- had an income protected by exemptions (Social Security or retirement).
(The advent of the means test has made me reconsider the unemployment issue.)
But the elderly woman I saw this week reminded me that more than the short term is involved in deciding to file bankruptcy.
Take the long view
My client has nothing today that is vulnerable to the credit card company who has a judgment against her.
Each of her sources of income is exempt under California or federal law. Social Security cannot be taken by judgment creditors under 42 U.S.C. 407. Retirement income is exempt under California law in Code of Civil Procedure 704.115.
Down the road, however, she stands to inherit a fully paid-for house at the passing of an even more elderly relative. A house anywhere in the Bay Area has to represent hundreds of thousands of dollars.
Without bankruptcy, she would end up sharing that inheritance with her creditors. (In my head, I imagine American Express moving into the house with her…)
If she files bankruptcy and her relative survives the filing by six months ( 11 USC 541) , the inheritance will come to her free of any claims of the creditors who now hound her.
Don’t mess with stress
There’s another, non economic issue: stress.
Even the collection proof worry.
While my lady is objectively safe today from her creditors today, because her income is fully exempt, she’s still stressed by the situation. She’s fighting chronic illness and as well as worrying about the next demand or lawsuit that comes in the mail.
She needs the peace that bankruptcy will bring so she can devote her energies to fighting disease.
While I’ve said repeatedly that bankruptcy is a snapshot of what you own and what you owe on the day you file, the decision to file should really look down the road a bit.
File now, and enjoy a better future.
Image courtesy of JonRawlinson.