Last updated Dec. 15, 2017.
Curious about how bankruptcy works and if it may be right for you? Your first step is to set up a consultation with an experienced bankruptcy lawyer. The initial bankruptcy consultation is a first meeting, usually lasting between 30-60 minutes, in which your bankruptcy attorney gets a feel for the financial issues you are confronting and how best to address them.
A good bankruptcy attorney will not try to “steer” you in the direction of bankruptcy, and the meeting may very well end with your attorney recommending that you hold off filing or that you completely forego the bankruptcy process altogether. Any good consultation will focus on your assets and how best to protect them as well the dischargeability of your debts.
Every Law Office Will Have a Different Process
The process is not uniform. Some offices will provide a questionnaire and list of required paperwork prior to the consultation; others will hand it out when you arrive. In either event, be prepared for some document collection as consumer bankruptcy post-BACPA has become quite detailed in its production requirements.
I want to begin by emphasizing that the below script is not comprehensive has not been taken from a transcript of an actual bankruptcy consultation but rather represents a generalized account of a dialogue that would commonly be seen at the initial meeting between lawyer and client.
Sample Bankruptcy Lawyer-Client Interaction
LAWYER (extending hand): Welcome, glad you found us.
CLIENT (shaking lawyer’s hand): Thanks, I live in the area, so it wasn’t too bad. Never thought I ‘d find myself here but …
LAWYER: I completely understand, I hear that quite often. Hopefully our discussion here today can lift your spirits a bit. I know when we spoke over the phone, you mentioned that you were having some issues with large credit card balances and a mortgage payment that was fairly high?
CLIENT: Yeah, unfortunately, I lost my job last year. Used to work in finance, was making good money and was blindsided a bit by the cuts. Saw some friends having trouble, but didn’t think it would happen to me … that type of thing. At first, I figured we’d just wait out the market and to float my lifestyle while looking for a new gig, I ran up some pretty high balances on my credit cards.
LAWYER: How high?
CLIENT: Man … close to $40,000. I know that sounds bad. Like I said, I lost my job and …
LAWYER: Look Mr. X, I want to be clear that you don’t need to explain yourself to me. This isn’t about judging your financial issues, it’s about attempting to solve them.
LAWYER: As long as you didn’t use your credit cards with the intention of abusing the system — in other words, in contemplation of a bankruptcy filing — you should be in good shape. Have you used your cards recently?
CLIENT: No, the balances are maxed out. Last we … well my wife, she … I think she bought some groceries a few months ago, but that should be it.
LAWYER: Alright, we’ll want to see recent statements to verify, but use for necessities isn’t going to present a problem. Be aware that using your credit cards 90 days prior to filing bankruptcy for purchases of over $600 carries with it a presumption of bad faith.
CLIENT (smiling): So I can’t pay your fee with a credit card, huh?
LAWYER: Very funny. No, absolutely not. In fact, and this is a very serious point, you cannot under any circumstances use your credit cards now that you’ve met with me … unless of course you decide that you are not going to file for bankruptcy. Running up a credit card balance prior to filing bankruptcy is fraud and at this office we take it very seriously.
CLIENT: I understand.
LAWYER: The good news is that credit card debt is classified as unsecured debt, generally the easiest to wipe out in a bankruptcy filing. Credit card debt is a common problem we see here on a daily basis, and chapter 7 bankruptcy in particular can provide a nice solution.
CLIENT: You know, I’ve read that, but I’m not sure bankruptcy is the right option. It feels wrong … I mean, I’ve always paid my bills on time.
LAWYER: Sure, most people try to pay their debts and want to pay their debts. I’d be a bit disingenuous if I didn’t concede that there is a stigma associated with bankruptcy for many out there. Before we address, from a balance-sheet perspective, whether bankruptcy is a viable option, let’s talk about the interest rate you currently pay on your credit cards. May I ask what it is?
CLIENT: Well, my Visa has something like a 28% interest rate and I have an American Express that is a little better, can’t think of the balance off hand.
LAWYER: OK, let’s start with the Visa, 28% interest? What do you think of that?
CLIENT: I don’t like it but …
LAWYER: Have you been able to pay down the balance at all?
CLIENT (pausing before speaking): Well, no.
LAWYER: Right, well I guess I can’t really blame you in light of the bath you’re taking every month on your interest rate. It’s textbook usury.
LAWYER: An excessive rate of interest, prohibited in the Bible as well as most other major religions. I’ll venture to guess that you’ve paid close to the entire principal balance of your loan in interest payments, but that’s how your credit card company makes money — they soak you with fees and interest. Your concern was paying back your debts. Well, what if you already had?
CLIENT: Interesting point.
LAWYER: Look, I’m not here to tell anyone how to live their life and bankruptcy isn’t without its warts, it will stay on your credit for the next 10 years. But when you are losing sleep at night thinking about how to pay off a company that is systemically and intentionally ripping you off, there is an issue. You mentioned that you have trouble with the mortgage lately. If you could wipe the credit card payments off the books, could you make the mortgage payments?
CLIENT: Quite possible, yes. We just have so many bills, it seems like money is never coming in, always going out. I’ve found a new job but the salary is nowhere near what it used to be. I mean, I hope it will bounce back. I just never thought I’d be here. Plus there’s the kids, my wife and I — well we don’t want to have to move them out of their school. Hell, we don’t want to have to move them at all.
LAWYER: I get it, many people have an emotional connection to their home. I’m no exception. However, we need to take a step back and see whether you can truly afford it. It is possible to have your judgment clouded by this type of thing. I want to make sure your decisions are as dispassionate as possible and that you do the right thing for your family. First, how much equity if any is the property?
CLIENT: I think we’re a little underwater. The house appraised for $375,000 last year but we owe $350,000. With prices falling like they are, I’m guessing it’s a wash or we owe a little more than what it’s worth.
LAWYER: The amount of equity that you have in your home is important for a couple reasons. First, many think bankruptcy is all about debt, but it’s really about assets. Subject to your asset picture and exposure in that regard, from what you’ve told me, your debts will likely be dischargeable. However, keep in mind, if we file for you, a bankruptcy trustee will be appointed to your case. The trustee’s job is essentially to hunt for equity you have in property to determine whether there is anything to sell off to satisfy some of your creditors’ claims. Only what is called non-exempt equity is subject to sale.
CLIENT: I remember our discussion about the exemption laws over the phone. The trustee can only come after the value in certain assets that peaks out over state-prescribed minimums, correct?
LAWYER: Correct, but remember, the number-one rule of bankruptcy is full disclosure. As long as you lay all your cards on the table, you should have no issues. If you attempt to hide assets, the trustee can really rain down a storm on you that has potential criminal implications. If you decide to file, you will be signing your bankruptcy schedules under penalty of perjury. Bottom line is I need to know about everything that you own.
CLIENT (nods): I understand, I just want to do the right thing.
LAWYER: The second reason we want to discuss home equity is to see whether the home is worth keeping. If you’re hopelessly underwater, this may be the time to surrender the property. Bankruptcy provides the unique opportunity to walk away from a home with no continuing obligation under the loan.
CLIENT: What exactly does that mean? Will I be able to stop a foreclosure?
LAWYER: Well, yes and no. Filing for bankruptcy does immediately trigger injunctive relief called the automatic stay. The instant the case is filed, your creditors are prohibited from taking collection action against you … even a foreclosure is frozen. Temporarily. However, bankruptcy does not relieve you of the obligation to pay secured debts, such as mortgages and car loans, if you intend to keep the property. In other words, we’re considering chapter 7 bankruptcy for you. While filing such a case will for a short time stop foreclosure, you’ll still have to pay your mortgage including past-due amounts, if you wish to keep the home. You do have the option of a chapter 13 bankruptcy as well. A chapter 13 case involves restructuring your debt based on what you can afford to pay. All of the your disposable income must be committed to the repayment plan we create for you. Since you have very little disposable income, it is possible to pay back creditors at pennies on the dollar. In addition, those who file for chapter 13 bankruptcy do have the option of catching up on past-due mortgage or car payments, allowing property that would be subject to foreclosure and repossession to be retained. Unlike chapter 7, chapter 13 bankruptcy also allows debtors to keep non-exempt assets that would otherwise be subject to liquidation. In both cases, you would be able to surrender a home that you can no longer afford. Based on what you’ve told me about your recent income, I think chapter 7 is likely the best option.
CLIENT: OK, I agree. At this point if I qualify for a chapter 7, I’d like to go in that direction. I don’t want to be stuck in a payment plan for a number of years. As far as the home is concerned, you’re saying I can just walk away? I mean if we decided that it might be a good idea? Obviously I’d have to talk it over with my wife.
LAWYER: Yes, of course. Consulting your wife will make good sense for a host of different reasons (CLIENT AND LAWYER share a laugh). The flip side to the secured-debt coin is the circumstance in which the debtor doesn’t want anything to do with the home any longer. A surrender usually occurs when the home is no longer affordable … or when the home has plummeted in value. Florida and Nevada homeowners are walking away in record numbers because they figure, why keep paying on a home that is worth half of what I OWE on it?
CLIENT: Right, unfortunately I don’t see the market coming back anytime soon.
LAWYER: Exactly, neither do I. So the analysis for you and your wife over the next few days will be: a) can we afford the home? and b) is the home worth keeping? If you do elect to walk away, there are advantages to doing so in bankruptcy. For example, were you to walk away outside of bankruptcy, your lender would proceed with the foreclosure process. The banks are backlogged, but eventually your house would be sold at auction. The difference between the sale price and the amount of your note would establish the deficiency judgment amount that you would owe in your individual capacity since it is likely that you personally guaranteed your loan.
CLIENT: How would I know if I had?
LAWYER: I’ll take a look at your loan docs for you, but the odds are you have personally guaranteed the mortgage. Fairly standard these days. Who is your lender?
CLIENT: Bank of America.
LAWYER: Yeah, I’m nearly certain. Well, in contrast to the deficiency judgment scenario in a traditional foreclosure, bankruptcy will relieve your personal obligation to pay most debts. Think of it as erasing your personal guarantee from the note.
LAWYER: Yes, when you surrender the home, the lender obviously takes back its collateral … but it can’t come after you for the difference. The bank will still foreclose on your property to clear title out of your name so that a third party can purchase the home, but no deficiency judgment will arise. Furthermore, debts forgiven in bankruptcy are not taxable events so you won’t receive a 1099 for the amount of forgiven debt.
CLIENT: How will the foreclosure affect my credit score?
LAWYER: The foreclosure as well as the bankruptcy will not have a positive effect on your credit score. Keep in mind, however, that since you are already behind on the mortgage and credit card bills, it is likely that your credit score has already taken a dive. With damaged credit already a reality, the reasons not to file bankruptcy begin to diminish. In fact, bankruptcy can be the start of a new day for your credit score as your debt-to-income ratio is one of the biggest factors lenders look at to gauge your creditworthiness. Since you can only file bankruptcy every eight years, creditors will take a risk on you knowing you have eliminated all of your debt and have nowhere to turn for awhile if you get in trouble again.
CLIENT: So, I will be able to get a credit card even after filing bankruptcy?
LAWYER: Likely, yes.
CLIENT: OK, well this is a lot of information to digest. Can I go home and discuss all of this with my wife?
LAWYER: Of course. The next step is to take home the paperwork my assistant provided you when you arrived. Once it is complete, I will want you and your wife to come back for an additional appointment to discuss all of your assets in detail and determine how they would be affected by a bankruptcy. From what you’ve mentioned here and over the phone, it appears as though you don’t have any property that would be subject to sale by the trustee, but we’ll want to confirm.
CLIENT: We don’t own much at this point, normal household stuff, a few TVs. I know you mentioned 401(k)s are exempt, correct?
LAWYER: Yes, as long as they are ERISA-qualified. We will review the summary plan description for you to ensure that yours qualifies before we file. You contributed to your 401(k) through your former employer, correct?
LAWYER: OK, it is likely ERISA-qualified, but we’ll want to double check before we file.
CLIENT: Great, well we’ll try to get all this stuff together and get in touch in the next few weeks.
LAWYER: Please do. If you have any questions between now and then, give me a call.
Set up Your Own Free Bankruptcy Consultation
As you can see from the above conversation, an initial bankruptcy consultation is pretty painless. It can be difficult making that first step and getting yourself over to a lawyer’s office, but once you do, you’ll feel a lot better about filing for bankruptcy. Your lawyer also will help determine the appropriate chapter to file, gather all the necessary documents, and attend your meeting of creditors with you — so you won’t be doing anything alone. Debtors who file bankruptcy with the help of an attorney also generally have their debts discharged; those who choose to file pro se have a much more difficult time, and little mistakes can be costly.
Looking for a bankruptcy attorney near you? Contact National Bankruptcy Forum today and we’ll set you up with a free debt evaluation so you can get started on a new financial path.