Bankruptcy horror stories (Part 1): Bankruptcy can be a disaster if…

We have previously talked about bankruptcy success stories. But can the outcome of filing bankruptcy be disastrous? Yes, it can be – and usually the culprit is bad legal advice, or lack of advice.

* Just yesterday, “Kim” attended her 341 Meeting of Creditors. Kim, an elderly woman whose only income was Social Security benefits, was not represented by an attorney although the bankruptcy trustee remarked that it looked like her bankruptcy petition was prepared by a person with some legal background and bankruptcy knowledge.  Problem was, homestead exemption was claimed in the wrong amount and it turned out that Kim’s equity in her home was not protected. The trustee made plans to send an appraiser and realtor to Kim’s home, sell it, and distribute most of the proceeds to creditors.  Kim stands to be left without her home and without her familiar surroundings in her elder years. If Kim had consulted with an experienced bankruptcy attorney, she probably would have filed Chapter 13 bankruptcy to protect her home, or possibly would not have filed bankruptcy at all, considering especially that creditors do not have a right to go after the person’s Social Security benefits.

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* “Phil” knew ahead of time that his home had considerable equity and that the home would be sold in the bankruptcy case, and he was content with the idea. After all, Phil also knew that he would receive a $75,000 check from the bankruptcy trustee as compensation for his homestead exemption. Phil was planning to save these funds and use them for his living expenses. What Phil did not know – and what his attorney apparently did not know either – was that the court expected him to reinvest the $75,000 check into another homestead within 6 months. When the bankruptcy trustee followed up in 6 months and found out that the funds were not reinvested in the new homestead, she notified the court and Phil was ordered to turn over all funds to the trustee.

* “Lynn” was running a child care business from her home, with a small number of children and modest earnings. When she filed Chapter 7 bankruptcy, the bankruptcy trustee ordered her to stop operating her business until further notice. Lynn lost not only her earnings that month and the following month, but also her clients who went elsewhere to seek child care when Lynn was not available. This problem could have been avoided if Lynn had either filed Chapter 13 case to protect her business, or obtained a court order at the outset of her case allowing her to operate her business without interruption.

* “David” had a dental practice. He had some friends and acquaintances whose debts were quickly cleared through bankruptcy so after his gross earnings decreased, and costs and debts snowballed, David felt that Chapter 7 was a safe way to clear debts. Not so: although David had low income, no home, and modest personal belongings, his dental equipment and dental accounts receivables turned out to be valuable. Chapter 7 trustee decided to sell David’s dental equipment and collect his accounts receivables, unless David somehow came up with a way to buy them out from the trustee. Without all his equipment, or the means to buy it, David stands to lose his practice, which is his only source of income and which he has been painstakingly building for years. David had hired an experienced, well-established attorney with a glitzy office and hefty fees – however, it turned out that the attorney’s experience was not in bankruptcy law but rather other fields. David’s predicament could have been prevented by either setting up a different type of bankruptcy, where his business assets would not be at risk of being liquidated, or possibly settlement with creditors.

* “Mike” had serious health issues and high medical bills. There was one large medical bill that Mike thought would eventually be covered by insurance, so Mike did not include it in his bankruptcy filing. It turned out later – too late – that insurance did not pay for this bill, and since the hospital had not been notified of Mike’s bankruptcy case in a timely way, Mike remained liable for this bill. If Mike and his attorney had spent more time reviewing Mike’s potential liabilities, instead of rushing to file the case, Mike likely would have discussed his health issues and medical debts and this bill would not have ended up being left out.

* “Jon” and “Gail” were diligently making payments into their Chapter 13 plan, and had paid over $20,000 over two years. However, apparently the proposed Chapter 13 plan was never confirmed by the court. When the case was closed, the debts were not discharged by the bankruptcy court. Some of the funds were returned back to Jon and Gail, but a sizable portion of the Chapter 13 funds they sent was gone; and the creditors started pursuing Jon and Gail again, and threatening them with lawsuits. Jon and Gail mistakenly thought that if they did everything required on their part – such as making Chapter 13 plan payments and being ready to answer court’s inquiries – that their case was guaranteed to be a success. They did not realize that it was a problem that their case had been pending for months, unconfirmed by the judge – essentially accomplishing nothing but consuming their time and resources. Jon’s and Gail’s attorney was not local, was hard to reach and did not update Jon and Gail regarding the status of their case.

Unfortunately the list goes on . Ultimately, if you hire a good bankruptcy attorney who is familiar with local rules, knows what your assigned trustee and judge typically want, you will dramatically raise the chances that your debts will be discharged with minimal costs and losses.Lawyer Victoria Maydanik

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