Minimizing or Eliminating “Collateral Damage” From a Bankruptcy Filing

Minimizing or Eliminating “Collateral Damage” From a Bankruptcy Filing

While your financial circumstances may make a bankruptcy filing inevitable, there are still issues to consider beyond the relief that the bankruptcy court can provide. While the main focus of a bankruptcy consultation with Leiden and Leiden is to assess your financial problems and discuss the available bankruptcy options, another goal is to address any potential “side effects” of a bankruptcy filing for the consumer, their assets, and any other affected parties. This article will highlight some of the most common collateral issues, and how they can be handled. As we always like to remind potential clients during the consultation, “if it is not important, we wouldn’t ask.

Are you expecting educational expenses for yourself or a dependent?  Whether someone is on their way to their own graduate or postgraduate degree or expects to have to finance/cosign the education of a dependent who will be going off to college in the next few years, you and your attorney should discuss your educational timeline.  Under a Chapter 13 bankruptcy, a debtor cannot obtain credit during the lifetime of the case (usually 3 – 5 years) without trustee or court permission. There is no guarantee that the Chapter 13 trustee or bankruptcy court may be willing to approve the financing of higher education, especially if there will be no financial benefit to the debtor. On the other hand, there are no borrowing restrictions in a Chapter 7  case, which will usually last for no more than 6 months. Unless you are prepared to finance the remainder of your education or your dependent’s education out of your own pocket, be aware of the consequences based on the bankruptcy option which you select.

Do you have deposit accounts with a bank or credit union that will also be a creditor in your bankruptcy case?  Bankruptcy law requires you to notify the court of everyone that you owe money to, which in some instances may be a bank or credit union that also keeps your income deposits.  If you have a credit card or unsecured loan with a credit union, and also deposit your paycheck with that same credit union, they will have the right to freeze your account immediately upon receipt of notice of your bankruptcy filing. In some instances, your bank or credit union may be able to take the funds that are on deposit and apply them towards the balance of the debt that is owed. In addition to losing the money that is on deposit, you run the risk of cancellation of any contracts, utilities, and/or insurance policies which you have set up for monthly auto draft. You also need to verify that you are not on accounts with any family members, even if just for emergency purposes, as your ability to access their accounts can also allow the bank or credit union to freeze those accounts. If you have any questions about how your deposit accounts, or the deposit accounts of your family members will be affected, discuss this with the attorney during the bankruptcy consultation.

Are you a cosigner or authorized user on any debts with family members or friends? Just as someone may be listed on a bank account for emergency purposes, it is also not uncommon for a debtor to be an “authorized user” on a family member’s credit card in the event of an emergency. If you are an authorized user on another family member’s credit card account and you file a bankruptcy case, the credit card company may suspend their charging privileges. Because many institutional creditors subscribe to different sources of information which will notify them of the bankruptcy filing (even if they are not listed as a creditor) a credit card account may be suspended even if you are not aware of the debt or your account status at the time you file your bankruptcy case.  Your attorney will explain your options, which may be to have yourself removed from the account, or at least make the cosigner aware so that they can protect their rights.

By discussing these issues in advance of a bankruptcy filing, your bankruptcy attorney can advise you on the best bankruptcy option which will eliminate, or at least minimize, the effects yourself, your money, and your family members.  Don’t be afraid to ask questions and discuss your financial goals beyond the bankruptcy, so that you will receive the best possible relief from your bankruptcy filing.