By Jeff Curl, San Francisco Bankruptcy Attorney

In reviewing the last 78 bankruptcy cases we filed, the statistics show our clients represent a wide spectrum of society. Their ages, income, education and other measurements really span across many cultural lines. Take a look at who files for bankruptcy.

By Jeff Curl, San Mateo Bankruptcy Attorney

This blog is not a compilation of statistics; this is observations of my clients’ stories. While we represent both creditors and debtors, I was thinking about the debtor-side of the equation and why people (I am excluding the business clients) find themselves in bankruptcy.

This topic has been discussed by my colleagues around the country, and reasons for filing bankruptcy vary by geography, marketing to clients and other factors. In other words, what may be true for my practice is not necessarily true for my colleagues.

How The Story is Told

When a new client makes an appointment, we have them fill out a short two-page questionnaire about family size, home ownership, debts, assets and income, among other information. They send this to us before the appointment so that we have a chance to review and consider their situation before meeting, and identify potential problems and solutions.

But before diving into the details or discussing the options, I usually set the questionnaire to the side and ask the client to tell me why they are meeting with me, and what they hope to do. And I shut my mouth and listen because everyone has a story to tell and I am interested in hearing what happened and what the client wants and hopes to accomplish.

Some stories are short, some are long. Some give great detail, some hesitate because verbalizing their debt problems is painful. But with a little prompting most are actually eager to share their plight. We’re humans, we like to talk about what happened, if not for therapeutic or legal reasons, simply for social contact.

Five Reasons I See People Filing Bankruptcy

What I have learned from my San Francisco area bankruptcy clients about how they came to find their way to my office is this:

1. Unemployment and underemployment. The job market is just really tough. And even if you are lucky enough to have a job, the Bay Area is so expensive that it may not be enough. Or I have many clients in that 50+ age group that are well educated and have a hard time finding a job in market that often worships youth.
2. Being a parent is expensive. Parents almost always want their children to succeed. I have parents that provide housing to kids into their adulthood. Parents are co-signing student loans and car loans when the kids cannot actually pay for them. They pay for private school tuition and piano lessons, going into debt trying to give their kids the best opportunities for success.
3. Life-changing events. Divorce, deaths, injuries, job loss and other unforeseen or just plain difficult situations can reap financial catastrophe upon anyone. Not only did something turbulent happen, but most people try to maintain the same lifestyle and expenses in hopes and expectations that things will return to normal. Sometimes this is just denial, sometimes it just doesn’t pan out after good faith efforts.
4. Entrepreneurial risk. Whether starting a business or flipping properties when real estate suddenly collapsed, many clients found their dreams turned to nightmares. Sure, some people did not calculate the risks carefully, and some got greedy. Most just got caught in a financial collapse or circumstances that most could not see coming. Failure is part of risk-taking, and sometimes it results in bankruptcy. But I think most of these people go on to succeed eventually.
5. Irresponsibility. While definitely a small minority, some clients will tell me with regret and embarrassment that they just screwed up. They overspent, under-saved and really had no plan or direction. Many were just financially illiterate. Replacing tires on the car which is really ordinary maintenance was suddenly a financial emergency. They rented a nicer apartment with a better view, had nice clothes and ate out too often. Now we were filing a Chapter 7 bankruptcy and they learned a very difficult lesson.

It is extremely rare to encounter the client that is hoping to “work the system” or is casual about his or predicament. Even those that appear to be aloof are usually just masking a bruised ego.

There are many reasons people file that I have not described, but these are some categories that come to my mind. The thing I like about reflecting back on this is that I appreciate how much people want to repay their debts and struggle mightily — psychologically and financially — before seeing me. It is not taken lightly by my clients and the relief they feel at the end makes my practice area particularly gratifying.

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There must be something in the air with the recent plight of family law and bankruptcy matters that have arisen. I represent both debtors and creditors in these cases. That means I have clients that are divorced and wish to get rid of some debts related to their divorces in bankruptcy. And I have clients who are the ex-spouses and want to prevent the debtor from discharging their debts in bankruptcy.

Sometimes it’s child support, an equalization payment, community reimbursement, attorney’s fees from the divorce or other similar debts. The interesting thing is that in some ways I should not be needed because either the debt is dischargeable or it is not as matter of law.

The law, however, evolves as it is amended and interpreted. This sometimes makes it necessary to get it before the court for a determination of dischargeability, and sometimes the court struggles with finding the right answer itself.

The bankruptcy code provides two provisions that make certain family debts non-dischargeable in certain circumstances (meaning even if the debtor files, the debtor will still owe that particular debt after the bankruptcy process is completed).

First, “domestic support obligations (DSO)” are not dischargeable, i.e., child support and alimony. While that is fairly straightforward, things can get tricky. For example, when the family law court orders debts divided in a certain manner, and one spouse responsible, sometimes the order for the spouse responsible for paying the debt is in the nature of support, sometimes not. A DSO is not dischargeable in either Chapter 7 or Chapter 13.

Second, debts “incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record” are not dischargeable. Taken together with DSO, not a lot is dischargeable. Note, however, that a non-DSO debt arising in the course of a divorce or separation is dischargeable in Chapter 13 (it’s sometime referred to the Chapter 13 super discharge). So a debtor can get rid of some family law obligations in Chapter 13, just not DSO.

This second one involving separation and divorce can get tricky quickly. What about a debt to a third party such as an attorney that represented the debtor in a family law proceeding? What if the case was converted from a 7 to a 13? What if the divorce pre-dates the 2005 amendments to the Bankruptcy Code? It gets sticky quickly, and there is not always a straightforward answer.

If you are a creditor or debtor dealing with these kinds of debts, seek advice of counsel. Some things that may appear crystal clear, may cause you problems in the long run.

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By Jeff Curl, San Mateo Bankruptcy Attorney

Waiting too long.

This is close to, if not my number one enemy in bankruptcy practice. If you have a toothache you may take Aspirin to make it go away. If it still hurts the next day, it’s a probably a good idea to make an appointment with the dentist. If you wait and start getting the throbbing pain and headaches, you’re in trouble. If you wait until there is a nice abscess, you can actually die from that initial toothache. Was it better to get the cavity examined and filled at the outset, or better to wait until the end when you needed full surgery? Which cost more, and which one was more traumatic?

You’re smart, and you can see where I am going with this. People in financial distress don’t typically visit a bankruptcy attorney the first time they miss a payment or realize something is wrong with the money situation. But as things get progressively worse, they often still won’t reach out for help because of a feeling of paralysis, fear or good old fashioned denial. You’re not alone in just hoping that things will get better. But if you are unemployed or chronically underemployed - or your wages are being garnished or some other invasive action has been taken against you, stop the suffering.

I don’t have a way to accurately reconstruct the exact amount of assets my clients unnecessarily lost by waiting too long to decide to file. But I am confident that it is in the millions, if not tens of millions. Between losing homes to foreclosure and draining retirement accounts they could have kept, the amount of lost assets that could have been preserved is staggering. To be frank, it’s a little sad as well. And the suffering that people endure in the form of lost sleep, health and well being, family stress and other indicators is quite alarming.

This is not to say that you should call the doctor, dentist or, in my case, the bankruptcy lawyer every time you feel a scratch in your throat, a sensation in your tooth, or you lost your job. Maybe an Aspirin is the right response, and maybe you will find a job soon and scrape by just fine. But you should have some awareness of your situation and get the courage to respond accordingly. If you do find yourself fearing the phone because of creditor calls, or there is an unspoken but understood anger between you and your significant other over the money situation, things like this need to be addressed.

It may not even be that bankruptcy is the correct route at the end of the day. We’ll help you find a resource if we’re not the right solution. But I cannot emphasize enough how many times our clients have said after our first meeting, and at the end of the bankruptcy process, that they wished they had done it sooner, and that they now feel better.

Image Credit: chrisinplymouth