File Chapter 7 Bankruptcy or Do Nothing?

Written by Lex Rogerson, Lexington Bankruptcy Lawyer

Filing bankruptcy can be a lengthy process and require a good deal of effort on the part of the debtor.  For this reason, my Lexington, South Carolina clients sometimes ask why they should expend the money and effort of filing Chapter 7 bankruptcy.  “What can my creditors do if I don’t file?”

When the client is considering Chapter 7 because he finds himself unable to pay his unsecured debts–credit cards, medical bills, retail charge accounts, and so on–this is a very good question.  Because an unsecured creditor holds no lien on any collateral and therefore has nothing to repossess, its only legal remedy is to sue the debtor.  If it succeeds in the lawsuit–and it probably will if the debtor actually owes the debt–the result is a judgment.  But a judgment doesn’t necessarily produce money for the creditor or take anything from the debtor.  The debtor loses something only if the judgment creditor identifies property or possessions of the debtor that it can have the county sheriff sell.

Every state allows a debtor certain exemptions–some basic property the state legislature has decided creditors may not reach.  For example, in South Carolina, creditors can’t reach the first $50,000 or so of equity the debtor holds in his home, the first $5,000 of equity in a car, or take certain other property which is protected.  For the most part, the same property is protected against a judgment creditor as is protected against a Chapter 7 bankruptcy trustee.  In the great majority of Chapter 7 cases, the trustee is not able to locate any of the debtor’s property that is not protected by exemptions.  This means a judgment creditor could not, either–at least not right now.  So again the question arises: If I can’t protect anything more in bankruptcy than I could if I do nothing, why should I file?

In my view, there are only two reasons.  The first is a technical, legal one.  A judgment remains in force for ten years.  If the debtor acquires non-exempt equity in any asset during those ten years– if he pays off a car loan and thereby increases his equity in the car beyond $5,000, or if he pays down his mortgage and his home appreciates such that his equity exceeds $50,000–a judgment creditor may be able to reach this increased value.  The creditor could obtain an execution or levy under which the sheriff must seize and sell the asset, applying the proceeds to the judgment debt.  By comparison, in bankruptcy, creditors get a one-time snapshot of the debtor’s assets.  With narrow exceptions, bankruptcy law says that only the things the debtor owns as of the filing date are answerable for his past debts.  If he acquires property or increases his equity in property after filing bankruptcy, he benefits from that improvement in his position, not his creditors.  This is one reason bankruptcy is referred to as a fresh start.  It allows debtors to acquire property in the future that cannot be taken away for past debts.

The second reason is a practical, human one.  For many people, the pressure of aggressive creditors and debt collectors becomes a major quality of life issue.  A recent research study by two law professors concluded that most people are driven to bankruptcy not by any sudden, catastrophic event but rather by the relentless, depressing pressure of collection calls and letters.  In fact, the same study found almost 70% of people struggle with serious financial distress for a year or more before considering bankruptcy, but eventually they are worn down by the relentless drum beat of creditor harassment.  R. Mann & K. Porter, Saving Up for Bankruptcy, 8 Georgetown Law Rev. 289 (2010).  Filing bankruptcy, by contrast, means that creditors must immediately cease virtually all collection activity by force of the automatic stay set out in Section 362 of the Bankruptcy Code.  Most of my clients find this a welcome relief.

If you are relatively sure your asset picture will not improve substantially in the next ten to twelve years, and if collection pressure does not bother you, there may indeed be no reason to file Chapter 7 instead of doing nothing.  But if you want a fresh start, free of collection pressure and free of the drain of past debt, you may want to consider Chapter 7.

Not everyone’s situation fits Chapter 7.  Do not consider filing bankruptcy until you have thoroughly reviewed you entire financial situation with an experienced bankruptcy attorney.  In addition, exemption laws can be complicated.  The exemptions discussed in this post are approximations and are given for illustration purposes only.

About

Lex Rogerson is bankruptcy lawyer in Lexington, South Carolina. He is a native of Darlington, SC and attended public schools in Columbia. He graduated from Yale University and the University of South Carolina School of Law.

After admission to the bar in 1978, Lex worked for the state department of labor, trying occupational safety cases. He then realized a dream of living in the Rocky Mountains, moving to Missoula, Montana, where he worked with a small civil law firm. In 1981, he returned to South Carolina to work as a public defender.

Lex began private practice in Lexington in 1984 and has been representing consumers in bankruptcy cases since. He has always concentrated on representing ordinary individuals and throughout his career has assisted clients in criminal defense, police misconduct, personal injury, small estates, and appeals. For the last 10 to 15 years, bankruptcy has been his primary area of practice.

Bankruptcy attorneys and other lawyers frequently ask Lex to speak at seminars. He has led presentations on bankruptcy law the general practitioner needs to know, ethical issues in bankruptcy practice, and current developments in consumer bankruptcy. In 2008, a bankruptcy judge asked his collaboration in a seminar on trial evidence in bankruptcy court.

For three years, Lex taught legal writing as an adjunct at the USC School of Law. He understands that explaining the law clearly, not in jargon, is as important when discussing options with a client as when writing for a court. As someone told a group of lawyers many years ago: like it or not, when you entered law school, you became a professional communicator.

Understanding a lawyer’s obligation to serve the public and the justice system, Lex has been president of the Lexington County Bar Association and serves on its advisory committee. He is circuit and regional chair of the Resolution of Fee Disputes Board and a member of the SC Bar Pro Bono Committee. In 2001, he was named Pro Bono Attorney of the Year. The SC Supreme Court awarded him a certificate of appreciation for public service in 2002, and in 2006, he received the Billy Robinson Public Service Award from the SC Bankruptcy Law Association.

Lex has been lead attorney on published decisions in the South Carolina Court of Appeals and Supreme Court and in the federal Fourth Circuit Court of Appeals. He maintains an “AV” rating in Martindale-Hubbell Law Directory, the highest category for both legal ability and ethical standards.

Lex and his wife Shirley have been married for 27 years. They have two daughters, ages 19 and 22. While away from the office, Lex enjoys backpacking and hunting. He plays catcher in the SBL, a senior men’s baseball league. Though an unimpressive hitter, his teammates nevertheless say he plays hustling defense, calls a good game, and is fearless on plays at the plate.

Contact Information:

Lex A. Rogerson, Jr.
P.O. Box 365
111 E. Main Street, Ste. C
Lexington, SC 29072
(803) 359-5520
(803) 359-5555 (facsimile)
lexlaw@windstream.net

**CV, BV, and AV are registered certification marks of Reed Elsevier Properties Inc., used in accordance with the Martindale-Hubbell certification procedure standards and policies.

Lex Rogerson, Columbia Area Bankruptcy Lawyer


Comments

  1. Cullen says:

    Not sure I understand you right. You say “If you are relatively sure your asset picture will not improve substantially in the next ten to twelve years, and if collection pressure does not bother you, there may indeed be no reason to file Chapter 7 instead of doing nothing.”How is this so when creditors can sue you?

  2. Russell DeMott says:

    Just because they can sue you does not mean they can collect from you.

  3. Lex Rogerson Lex Rogerson says:

    When a creditor sues on a debt, ordinarily the best it can hope for is a judgment — a declaration by the court that the defendant owes it a certain sum of money. But if the defendant does not own any assets beyond those that are protected from creditors by the exemption laws, the creditor has no way to collect, at least in those few states like South Carolina that do not permit garnishment of wages.

  4. Stevan says:

    Hey,
    Thanks! Great post you have written on “File Chapter 7 Bankruptcy or Do Nothing?”. Really I can say that your post is very informative, I’ll come across your blog again when you will update it with new.

    Stevan
    http://www.jrlaw.org/

  5. Camille says:

    I wish to return to school and have reached the max in stafford and Perkins loans. I’m going have to rely on PLUS loans for my Phd or law school if I decide to return. Will filing bankruptcy hinder me from receiving loans particularly PLUS loans in the future?

  6. Camille says:

    I wish to return to school and have reached the max in stafford and Perkins loans. I’m going have to rely on PLUS loans for my Phd or law school if I decide to return. Will filing bankruptcy hinder me from receiving loans particularly PLUS loans in the future?

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