One of the most common misperceptions about filing bankruptcy in Michigan is that it is a last resort. It is a given, for many, that a Chapter 7 or Chapter 13 bankruptcy should be the last thing that anyone does when debt becomes unmanageable.
But is this true?
What do people mean when they say that bankruptcy should be a last resort? According to whom, or what?
This Article will discuss the truth of the notion that bankruptcy is a resort. Or its falsity.
When Do People Begin to Consider Bankruptcy?
People begin to consider filing for bankruptcy in Detroit, Livonia, Farmington, Westland, Wayne, Inkster, and elsewhere in Michigan, naturally, when things begin to get tough.
What does “tough” mean?
When debt rises, hardship rises with it. Quickly.
At first, this hardship takes the form of personal stress and anxiety. You have all of these bills to pay each month … and not quite enough income to manage it. You lose sleep over this, you sell your comic book collection on Ebay, you think about taking on a second (or third) job …
Your mood suffers. Your marriage, your relationship with your children, your friends all suffer along with it.
If extra income does not come your way, things do not improve from that point. When you inevitably fail to pay one or more of your creditors, they will take action.
That action will, first, take the form of collection letters and invoices that fill your mailbox. They will phone you at all hours.
And then they will sue. You’ll answer or ignore the summons received. Either way, if you contractually owe the money and lack any real legal defense, the Michigan state court you find yourself standing before will issue a judgment against you.
With this judgment in place for up to 20 years under Michigan law, your creditors will be able to:
- Garnish your wages;
- Garnish your bank accounts;
- Garnish your Michigan state tax refunds;
- Record judgment liens against your real estate;
- Seize your personal assets.
At any point along this depressing path, you may find yourself wondering whether a Chapter 7 or Chapter 13 bankruptcy can improve the situation.
Who wouldn’t? But is bankruptcy the last resort, after all of these things have happened?
Why Bankruptcy Is Not a Last Resort
So why should you not do everything possible to stop the bleeding of unmanageable debt before filing bankruptcy?
The answer is that bankruptcy is not a last resort because it may be inevitable for you. And you can make what should be a “simple” Chapter 7 or Chapter 13 much more complicated by engaging the wrong “anti-bankruptcy” actions prior to the bankruptcy’s filing.
What are some of those “wrong” actions?
1. Cashing Out Your Retirement Accounts
A tax-qualified retirement account such as a 401(k), 403(b), or an IRA can be completely protected in a Chapter 7 or Chapter 13 bankruptcy. Unlike other potentially high-value assets, the US Congress intended your retirement savings to be preserved through the bankruptcy process.
The bankruptcy process is aimed at offering you a “fresh start,” free from debt. The freshness of that start would be badly hampered by the loss of your retirement savings.
A knee-jerk response to overwhelming debt is to cash out your 401(k) in order to pay or, worse, only partially repay debt.
That debt is, with very few exceptions, totally dischargeable in bankruptcy. Your retirement account is safe.
Why would you not file a bankruptcy before emptying your retirement accounts?
It doesn’t make much sense, but this is a very common step for Metro Detroit bankruptcy lawyers to find that new clients have taken.
2. Transferring Valuable Assets to Other People
The discharge of your debt in bankruptcy in Michigan and anywhere else is a benefit available only to “good faith” debtors under the US Bankruptcy Code.
This means that debt incurred by way of fraud is not dischargeable. It means that a discharge of any debt is not guaranteed for those filing bankruptcy for fraudulent purposes.
And it means that assets that have been fraudulently transferred by a person prior to filing bankruptcy can be recovered from those possessing them.
You won’t do your cousin, your brother-in-law, your best buddy, or anyone else by re-titling your Camaro to that person before filing for Chapter 7 bankruptcy.
Your family member or friend will be served with a demand for turnover of the property when you do file for bankruptcy. It they refuse, they will be sued.
And they will lose. You yourself will not get that property back—and you may be in danger of losing your right to a discharge as well as your freedom if then prosecuted for the Federal felony crime of Bankruptcy Fraud.
Filing the bankruptcy with the assistance of an experienced Michigan bankruptcy attorney before taking any such “self-help” action is essential.
3. Borrowing from Friends and Family—and then Repaying Them
In addition to liquidating assets and recovering fraudulent transfers of property, a Chapter 7 Trustee can (and will) also recover what are known as “preference payments.”
The US Bankruptcy Code requires that, if any of your unsecured creditors are to receive any payment from your bankruptcy case, they should all receive an even split.
Thus, if you repay too much money to a single commercial creditor within the 90 days prior to filing, this is considered a “preference” payment. That is, you preferred to repay that creditor at the expense of your other creditors.
When that creditor is not a commercial creditor but a family member of friend to whom you have repaid a “personal loan,” this is considered an “insider preference” payment. The “look-back period” is not 90 days in this case but 1 year.
If bankruptcy is likely for you, borrowing from and repaying friends and family members is going to get them in trouble.
You’re better off just filing the bankruptcy first.
4. Earning Too Much Money
This concern sounds bass-ackward, but it is well known that Chapter 7 bankruptcy is available only to those who qualify for it on an income eligibility basis.
If you earn too much money, you must file a longer, more expensive Chapter 13 bankruptcy process instead.
In order to file for Chapter 7 bankruptcy, you must “pass” the Chapter 7 Means Test.
The Means Test is well-described in detail here. However, in short, the Means Test averages the gross income that everyone in your household earns over the 6 months prior to the month in which the bankruptcy is filed.
Scrambling to take on 32 part-time jobs, perhaps too cleverly attempting to draw wages in cash form rather than via payroll, is only going to complicate your Chapter 7 eligibility.
If the income isn’t there and part-time gigs are just going to serve as a temporary stop-gap, it is likely time to face facts.
5. Bankruptcy Can Be Filed Too Late to Help
You can always discharge unsecured debt in a Michigan bankruptcy, no matter when it is filed. However, other creditor actions that can be remedied with a bankruptcy filing must be stopped within certain timeframes.
Win particular, if your home is heading into foreclosure, the foreclosure process can be stopped and past due mortgage payments can be cured with a Chapter 13 bankruptcy.
However, the Chapter 13 must be filed before the sheriff’s sale auction of your property occurs. After the sheriff’s sale date, it is too late to save your home with bankruptcy. All you can do is discharge any remaining related “deficiency” debt.
Likewise, a vehicle or other personal property seized can also be recovered from the seizing creditor—but only before it is auctioned off.
After the property is auctioned, it is gone for good.
If bankruptcy is a last resort, it may also be a less effective solution for you.
Contact a Metro Detroit Bankruptcy Lawyer to Discuss Your Circumstances
The bottom line is that the correct timing of the filing of a Chapter 7 or Chapter 13 is best determined with the assistance and advice of an experienced Livonia, Michigan bankruptcy attorney.
The Hilla Law Firm has successfully represented hundreds of clients through Chapter 7 and Chapter 13 bankruptcy processes in Michigan.
Offering free, virtual consultations and friendly, one-on-one service from Livonia bankruptcy attorney John Hilla, we will ensure that your matter is handled properly, competently—and with kindness.