Written by Lexington/Columbia Bankruptcy Lawyer, Lex A. Rogerson, Jr.
Avoiding bankruptcy. There can be a number of potential reasons why someone with debt problems decides not to file bankruptcy. Fairly often we’ll advise our Columbia area clients not to file – at least, not yet.
Sometimes it’s a matter of delaying for tactical reasons, and sometimes it’s just not a good idea flr that client. But there are a few things someone in that position should do, and probably more things they should not do, whether or not they eventually decide to file.
- Don’t run up unnecessary debt. Sometimes paying off debts can seem so hopeless that a client says, “What the heck? I’ll never get out of debt, so I might as well enjoy myself.” This is dangerous thinking and can lead folks to incur debt they have no intention of repaying. That’s not only dishonest, it can lead to the new debt being declared non-dischargeable if they do eventually decide to file bankruptcy.
- Pay mortgages and car loans first. When creditors are hounding you, it can be tempting to pay the ones that are making life unpleasant now instead of the ones that can cause the biggest problems in the long run. Unsecured debts such as credit cards, retail charge accounts, and finance company loans are usually dischargeable in bankruptcy, and it usually makes little difference whether they have been paid down after the debtor begins feeling financial distress. By contrast, a mortgage company’s lien on a debtor’s home, or an auto lender’s lien on his car, is are usually affected relatively little by bankruptcy. And keeping payments on these debts current can keep open some beneficial options if the debtor does decide to file. So secured debts like these should almost always be the first priority.
- Pay non-dischargeable debts next. Special debts like taxes, student loans, and family court obligations usually survive bankruptcy. So if a client eventually decides to file, he’ll be glad if he has used whatever funds he had available to pay these kinds of debts rather than his dischargeable Visa card or Macy’s charge account.
- Don’t take out a second mortgage or home equity line to pay off debt. The exemption laws allow all of us to protect a certain amount of the value of our homes – in South Carolina, the amount is a little over $53,000 per person. So for most people, whose home has less than this amount of equity (or, if the home is jointly owned, twice this amount), unsecured creditors like the ones we were just discussing have no way to collect their debts out of the home. But exemptions don’t apply against mortgages. So if a debtor draws on the equity in his home by taking out a second mortgage or home equity line of credit (HELOC) in order to pay off debt, he is giving his creditors value out of his home that they could not otherwise reach – usually a very bad tactical decision.
- Don’t give away or hide property. When debt becomes a problem, some people decide they’ll simply put things they own into someone else’s name, wrongly believing this will protect the property. This is dishonest, and it rarely works. State laws allow creditors to recapture fraudulently transferred property from the recipient, and bankruptcy law allows a trustee to recover transferred property whenever the debtor does not get “reasonably equivalent value” in return. What’s worse, once the trustee recovers the property, the debtor can’t claim an exemption in it, making the situation worse than before. And to top it all off, this tactic can even prevent the debtor from receiving a discharge of any of his debts if he files bankruptcy. So the cute trick of “selling” property to one’s brother-in-law for $50 can backfire big time.
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