How Do I Know When I Should File Bankruptcy?

Bankruptcy is a legal proceeding to either wipe out the debts you owe or pay the debts back at a lower rate. Filing a bankruptcy can sometimes be the best way to handle overwhelming debt but how do you know when it’s time to file bankruptcy?


Filing a bankruptcy will stop pending foreclosures, repossessions and garnishments automatically without further legal proceedings.   Furthermore, a bankruptcy filing will prevent your creditors from starting those legal proceedings against you. This is usually the best reason to file a bankruptcy. Even though you may be trying to work our payment arrangements or modifications of the original debt, your efforts generally will not stop the creditors from continuing a foreclosure, repossession or garnishment. Other than paying off the debt entirely, bankruptcy is the only way to legally stop these proceedings. Filing timely is critical, however. In the case of a foreclosure or repossession you must file before the foreclosure or repossession actually happens.


If you have lost your drivers license because you were in a car accident where you were uninsured, or have a judgment against you as a result of the accident, filing a bankruptcy will allow you to discharge the debt from the car accident and get your driver’s license restored. If the car accident was as a result of a DUI, however, you may have a hard time discharging the debt. If your job requires you to have a driver’s license, filing bankruptcy may be the best way to keep your job.


Sometimes, you have greater flexibility with your secured creditors in a bankruptcy. For instance, if you have a car loan with a high interest rate, Chapter 13 bankruptcy will allow you to lower the interest rate to a more reasonable rate and still keep the vehicle. If you have a co-signer, however, your co-signer may have to pay the difference between the old rate and the new rate.


A chapter 13 bankruptcy allows you to discharge a second mortgage if there is no equity to secure the loan. This means that if you owe more on your first mortgage than the property is worth, your bankruptcy attorney may be able to avoid the lien on the second mortgage. This will change the debt from a secured loan to an unsecured loan which could be discharged.


Federal law prevents creditors from engaging in harassment to collect the debt you owe, however, not all creditors follow the law. Some creditors will contact your friends and family members to collect your debt or call you relentlessly. Sometimes the only way to stop the aggressive creditors is to seek legal protection.

Governor Signs Bill to Protect Houses and Cars from Creditors

At the end of a contentious legislative session, the Governor signed into law an important piece of legislation strengthening Alabamians’ ability to protect their house and car from being seized by creditors.  The bill (SB 327), sponsored by Sen. Cam Ward (R-Alabaster), Rep. Jim Hill (R-Moody) and passed unanimously by legislative members, was due in large part to tireless consumer advocates like Alabama Appleseed, who recognize the importance of protecting the very assets Alabamians working poor are struggling so hard to maintain.


Before the law was changed, a creditor could seize your car, bank accounts, and household goods if the creditor said you were delinquent.  You would only be able to keep these items if the total value of this personal property was less than $3,000.  In practice, this amount may have been sufficient to protect some items from being seized, however, because cars typically are worth much more than $3,000, it rarely protected vehicles from being seized by creditors.  The result left many working poor without a way to work.  If you can’t get to work you can’t pay your debts.


Even more oppressive was a creditor’s ability to seize your house if it had more than $5,000 in equity.  Building equity in a home has traditionally been considered a stable investment for the future, providing favorable tax benefits (and one that has been encouraged by generous government backed mortgages) in addition to contributing to a stable and productive environment for the family.   Yet, under the prior law, if you couldn’t pay a medical bill or private school tuition debt, the equity you had built in your home could be the very thing that would allow a creditor to seize and sell it.


If you were forced to file bankruptcy to manage your debt, the old law would often force people who could not afford to pay creditors into a sometimes impossible repayment plan just to protect their property.  In my practice, I had to constantly correct the notion that “they gotta leave me with one house and one car, right?” Wrong.  That would have been correct in the age when a house cost less than $5,000 and vehicles cost less than $3,000, however, in today’s world it would be impossible.


As an example, suppose you owe $130,000 on your home and you live in a county where the county tax assessor has valued your home at $136,000, meaning you have $6,000 equity in your home on paper and more than the legal limit of $5,000.  If you are sued for an unpaid medical bill, the creditor would be able to sell your home to pay for your debt, even if the debt is more than the equity you have in your home.


The old protections (exemptions) were the lowest in the country, making Alabama, already burdened with some of the highest poverty rates, one of the most creditor friendly states as well.


The new law signed by Governor Bentley on Thursdayof last week went into effect immediately and increased the protection for personal property (the “personal property exemption”) to $7,500 and increased the protection for residential property (the “homestead exemption”) to $15,000.   These amounts will be adjusted every three years in order to keep pace with the cost of living.  Every state has their own version of exemption laws designed to prevent a creditor from forcing people into financial destitution.  Most states recognize that exemption laws are necessary to allow a person the ability to work productively to support their family.


This new law will provide substantial protections to consumers who are constantly being threatened by predatory lenders, medical bills which are not covered by insurance and the rising cost of everyday expenses such as childcare, student loans and utilities.  As a person who sees the devastating effect a creditor friendly environment can have on the working poor, I applaud the efforts of Alabama Appleseed, Senator Ward, Representative Hill and Governor Bentley in moving Alabama out of the dark ages of debtor servitude.

Payday Loan Scam Alert

If you have ever applied for an online payday loan you may be targeted as a victim in a malicious phone and email scam.

The scammers will either call you on the phone or email you pretending to be from a law firm or “investigative unit”.  They will tell you that you owe an outstanding payday loan and they need payment immediately or else they will turn the matter over to local law enforcement to press criminal charges against you.  The scammers are betting that you have more than one payday loan and that you don’t remember the names of the companies you legitimately owe.  Don’t be fooled!  Here are some tips to identify the scam and what to do to protect yourself.


1.  They claim to be representing a creditor you don’t recognize or a law firm you don’t recognize.  Don’t assume that they are telling the truth when they say they are calling from a law firm.  Try Googling the lawfirm to see if it even exists.

2.  They demand payment over the phone immediately and refuse to send you a bill in the mail.  No legitimate creditor will demand payment over the phone.

3.  They use official sounding words in emails that are otherwise just gobble-de-gook.  Oftentimes, these are foreign based scam artists who have no English language knowledge so their emails end up full of grammatical and spelling errors.  Take this sentence as an example:  “As we were trying to reach you since a couple of days regarding a very serious matter about a lawsuit filed on your name stating that you are doing some fraud and Civil litigations.”   Look for words like “investigative”, “government”, “fraud” or “criminal”.

4.  Beware of local numbers on your caller ID from a caller identifying themselves as from a law firm.  Scammers often buy local numbers to trick you into answering the phone.  Just recently, one of my clients got a phone call from a “law firm” and the number on the caller ID was from a local town that maybe had one stoplight  – but, certainly no law firms.

5.  They will lie to you!  Here are some good ones:  “We are sending a Sheriff to your home”, “You won’t be able to see your kids again”, “We are filing criminal charges against you”.  You can’t go to jail for a bad debt. Furthermore, these guys don’t even operate in the United States so they don’t have any jurisdiction over you.


1.  Demand a bill in writing.  A legitimate creditor should be able to provide you with a written statement.

2.  Don’t ever give anyone your debit card or bank information over the phone.  Period.  Don’t be bullied into thinking that you will go to jail if you don’t pay – NO MATTER HOW NASTY THE CALL OR EMAIL IS.  Remember, you can’t go to jail for a payday loan debt.


SCOTUS Decision Proves States Have Power Over Payday Lenders Claiming Tribal Affiliation


While a U.S. Supreme Court decision yesterday in the case of a Michigan Native American tribe’s allegedly illegal casino appears to have nothing to do with payday lending, experts say it’s a game c…

SCOTUS Decision Proves States Have Power Over Payday Lenders Claiming Tribal Affiliation


While a U.S. Supreme Court decision yesterday in the case of a Michigan Native American tribe’s allegedly illegal casino appears to have nothing to do with payday lending, experts say it’s a game c…

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