Monday, March 28, 2011

Stopping garnishments without bankruptcy

Debtors frequently ask if they can do anything to stop a garnishment or a lawsuit before they are ready to file a complete bankruptcy case, perhaps as a "pre-filing" measure. After all, how can they afford to pay a bankruptcy lawyer once part of their take-home pay is being garnished? I am sorry to report that there is no procedure in bankruptcy to stop debt collection before you really file bankruptcy. The process is only started with a bankruptcy petition, and for Chapter 7 cases your attorney must be paid in advance. (Bankruptcy attorneys also usually want all the documents fully prepared for the time of filing, though you can file a "skeletal" petition and then file the complete forms within 14 days. However, there are serious pros and cons.)

Debtors frequently ask if there are non-bankruptcy alternatives for stopping or adjusting garnishments. These options are usually not available or not worthwhile. You can challenge a garnishment in Georgia if there is something wrong with the judgment that is being collected (and there are a lot of default judgments out there based on faulty procedures). For instance, if you were never served with the lawsuit but the creditor thought you were served because a deputy sheriff actually served papers on the wrong person, then the judgment can be attacked as invalid. This is called a collateral attack, and there are many ways to do this if there are legal grounds for doing so. However, this will only buy you more time. If you really owe the debt and it is collectible, then the procedural defect can be cured by serving the lawsuit again or filing it in the proper court or whatever it takes, so then eventually you will be hit with a valid judgment and a valid garnishment. In many cases it is simply not worth hiring a lawyer just to buy time.

The amount of the garnishment is regulated by the federal Consumer Credit Protection Act and Georgia's statute that essentially mirrors the federal rules. These rules (found in the Federal Wage Garnishment Law Fact Sheet) allow up to 25% of your take-home pay to be garnished (though a certain amount will be protected if you work less than full time at minimum wage). These rules define what part of your income is "disposable" and is available for garnishment. Because these rules are in place, they give creditors the right to take what is allowed. Judges do not have the power to review garnishments case by case and lower the garnishment amounts based on the needs of a particular family's budget. It might be possible to negotiate with the creditor, but the fact that there was a lawsuit usually means that negotiation ended some time ago.

Despite the hardship imposed by a garnishment, there are still other considerations for whether one should file bankruptcy. For instance, sometimes the amount left to be garnished is not more than the cost of a bankruptcy case, so there may be no benefit from rushing into bankruptcy unless there are other potential garnishments waiting and money to be saved. Sometimes a debtor has enough income and assets to pay their other creditors on their own terms when a bankruptcy might force the liquidation of assets or impose a payment plan. You should review your situation just as carefully as if there were no garnishment, preferably with the help of a patient and understanding bankruptcy attorney.

Friday, March 11, 2011

When to file bankruptcy

Deciding whether bankruptcy is best for your situation is complex enough. If you have decided you need bankruptcy relief, the next question to consider is whether to file now or file later. Although filing provides immediate protection against collection efforts, there are situations in which you will be better off if you wait.

No health insurance: Bankruptcy petitions only address the debts you had on the date of filing, so you will be stuck with debts you incur later. Some debts are practically involuntary, such as medical bills for important treatment. If you have no way to pay for serious unforeseen medical bills in the near future, then you may want to wait until you are able to obtain insurance before you file bankruptcy so that your debts will stay cleared for a long time after your case.

Expected inheritance: A Chapter 7 case generally looks only at your assets on the day of filing, but what if one of your parents passes away after filing? Property that you inherit and life insurance proceeds you receive can still come into your bankruptcy estate if something happens within the six months after you file. If you have the unfortunate situation where you know someone may die and leave property to you, you need to think about how bankruptcy would affect that situation. If your inheritance is substantial, you may be able to deal with your creditors on your own terms. Even if it is small, you may prefer to not have a bankruptcy trustee disrupting the choices your siblings or other heirs want to make about selling or dividing the property.

Recent loan payments: Have you recently paid back a substantial loan to a family member? Bankruptcy trustees can avoid preferential transfers. In other words, they can sue your relative to get back much of the money you paid in order to share the money with the banks and credit card companies you owe. Trustees can look back at your payments to creditors over periods of 90 days or twelve months, with the longer period for "insiders" such as relatives or corporations in which you have a certain interest. Some debtors need to wait to file in order to let this payment history move farther back into the past.

Means test timing: Do you qualify for Chapter 7 under the means test now? Has your income gone up or down? Debtors with new, well-paying jobs may want to file sooner while they still qualify. Those who have lost good jobs may want to wait until they qualify. The means test looks back at your six months of income history.

There are a number of timing issues in bankruptcy cases. If you think bankruptcy relief can help, make sure you consult an attorney who will help you identify timing issues and not rush you into filing a petition too soon. Sometimes you need to file sooner to avoid emergencies, but sometimes you need to wait to file to avoid other hassles.