debt

Walking away from debt vs. filing bankruptcy

Justin HarelikQuestionDear Bankruptcy Adviser,
I have more than $200,000 in credit card debts; I don't think I will make it. What will happen if I don't file for bankruptcy and just stop paying? I don't have any assets and my business went bad. What do you think?
-- In Debt and Deseperate

AnswerDear Deseperate,
Thanks for sharing your situation. I'm sure a lot of readers are wondering what they would do in your situation: unable to pay the bills and not wanting to file bankruptcy.

While many would not agree, filing bankruptcy after trying to start your own business is perfectly reasonable. Many notable Americans have faced the same troubles. Walt Disney and P.T. Barnum, both entertainment pioneers, filed bankruptcy. Milton Hershey, owner of the Hershey's chocolate empire, filed bankruptcy four times! Before you decide to walk away or ignore the debt, you should consider whether you want to try again.

Even though you describe yourself as having no assets and a defunct business, I'm going to assume that you have some assets and that your business continues in some way. I hope you won't take offense; my experience is that when people say that they have nothing, they usually have something. My purpose is to give you an answer that will be helpful in describing what is likely to happen whether you have assets or not.

First, each creditor will contact you by phone, cell phone, letters, e-mail -- any way they can. They will make demands and threaten you with lawsuits. If that doesn't work, they will hire a collection attorney in your area to sue you on their behalf or sell your debt to a collection agency that will probably sue you immediately.

The creditors (or collection agencies) will sue and may possibly get a judgment against you. If you own a home, a lien could be filed against it. If your bank accounts can be located, a levy can be filed against any money in the account, and that money can be given to the judgment creditor. If your business continues to function in any way, a sheriff or "receiver" will be sent into your business office. This person will look at all mail that comes into your office and open it, looking for checks. Any checks made out to you or your business may be taken by the receiver.

Receivers take a certain percentage of the money for their fees; the remaining balance will be paid to the creditor. The money ultimately paid to the judgment creditor will be credited against the total amount of the judgment against you. This type of action can continue until all amounts due under the judgment, and all costs incurred in collecting the amount due, are paid in full to the judgment creditor.

The judgment creditor can also have you served with a subpoena or order requiring you to come to court and be questioned under oath. You would be required to answer questions about all your assets and explain why you are refusing to pay the amount due under the judgment. By doing so, it is hoped that enough pressure would be put on you to pay something, at least a partial payment.

Failing that, a group of judgment creditors may try to force you into an involuntary bankruptcy. Usually, this is only done when the creditor knows you have valuable assets and wants to have them sold. For example, if you had a home with a large amount of equity and you personally guaranteed the credit card debt that the creditor or collection agency is attempting to enforce, it will want to have that property liquidated. The net proceeds (after the bankruptcy trustee takes a percentage) would be distributed to your creditors. This process will also enable the creditor to gain the tax benefit of writing off the debt you owe.

If you have a car, especially one that is paid in full, the creditor's attorney might try to make you surrender the vehicle. I know of an attorney who was trying to collect a debt for his client. He called the debtor into court and asked him whether he had a car. The debtor said, "yes." The attorney asked him to go to the car and get documentation to show he owned the car. While the debtor was going to the car, the attorney asked the judge to execute a "turnover order." The judge granted the attorney's request and when the debtor came back to court, the judge demanded that he turn over the keys to his car. The car was then taken into possession by the sheriff, sold at auction and the net proceeds were then credited against the amount of the outstanding judgment. The debtor was left on the curb to find his own way home!

In other words, if you have any assets, any at all, they are at risk. If at any point in this process you have no assets, then your risk decreases. Basically, creditors can't do anything to you if there's nothing for them to take.

Here's what you can do: You can make them wait. Most creditors will sue and get judgments that they can't enforce at that moment because you have nothing to give them. However, these judgments last 10 years and can be renewed twice for a total of 30 years. Now, judgments can fade away over time, that is to say, collection agencies and creditors have higher priority things than trying to collect from someone who doesn't have anything. But if you do accumulate some assets or rehabilitate your business, you may find some very happy creditors knocking on your door with enforceable judgments.

So if you plan to re-establish your credit during the next 10 years for any reason, such as getting financing to start a new business, you're going to need to either make arrangements with your creditors to pay the outstanding debts or you may need to file for protection in bankruptcy. If you don't need credit, then it's not a necessity.

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