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Why File Bankruptcy?

The Sweeney Law Firm, P.C. Jan. 30, 2023

By the time you’re asking yourself that question, the situation has probably gotten pretty bad. If a creditor has initiated a lawsuit against you, it is the time to determine whether or not filing for bankruptcy is a good idea. In this article, we’ll discuss some of the consequences of a creditor’s judgment against a debtor and how this can impact your assets. To learn more about whether bankruptcy is right for you, contact our experienced bankruptcy attorney at The Sweeney Law Firm, P.C. today.

Reasons to File Bankruptcy

Most people who file bankruptcy are completely overwhelmed by their debts.  

You may have lost your job and the new one you found doesn’t pay nearly as well. Your family may be facing large unreimbursed medical expenses. Perhaps a divorce or business failure has devastated your finances. Or maybe you got caught up in the foreclosure crisis. 

Creditors and collectors are hounding you. Your paycheck may have been garnished and you are now unable to live on what remains. Your marriage might be buckling under the financial strain.

You might be ready to tap your IRA or 401k to pay creditors. That would put the short term before the long term, and would be a major mistake. Maybe you are thinking about paying off the unsecured debts, like medical bills and credit cards, rather than focusing on secured debts like mortgages and car loans. That would also be a mistake.

Don’t Ignore Mounting Debt

The first stage of the debt collections process is to notify the debtor that they have an outstanding bill due. This then is attached to their credit report where it does significant damage to their ability to open a line of credit. Those who are financially secure can simply pay off the debt. But what about those who are buried in what feels like an ever-increasing pile of debt?

Generally, they simply ignore the claim on their credit report and don’t answer phone calls from numbers that they don’t know. This is a bit like treating the symptoms without addressing the underlying problem. The problem is that you owe a creditor money and, because of this, they have a certain amount of power over you. Ignoring their attempts to collect a debt will only work for so long. After that, they will attempt to sue you for the balance.

At this point, ignoring the debt is no longer an option. If the creditor obtains a judgment against you, this means that they can employ more aggressive tactics. We’ll talk about some of those tactics below.

Judgment Liens

Secured debt is debt that is backed by collateral or some real property. Common examples include car loans and mortgages. Both of these are backed by the car itself or your home. Unsecured debt is debt that is not backed by real property. Medical expenses and credit card bills are examples of unsecured debt.

A judgment lien is when a creditor puts a lien on your property for an outstanding debt. It’s not something that you want to happen. Essentially, an unsecured creditor secures their debt against something that you own. They do this by putting a lien on valuable property. Essentially, the creditor now has a right to the proceeds of the sale of your property. In Tennessee, judgment liens can only be attached to real estate. However, this real estate can include your own home. There are restrictions, however, and creditors won’t be able to force the sale of your primary residence. Generally, the creditor can only place the lien on a percentage of your equity.

Wage Garnishments

In Tennessee, a creditor may garnish a debtor’s wages after they have received a judgment in their favor. Tennessee limits the amount a creditor can garnish to 25% of your income in most cases. The garnishment is sent to your employer who is then put in the awkward position of withholding a certain amount of money from your paycheck and sending it directly to your creditor. This, of course, makes the process of paying you more difficult as your employer will now be required to divide your wages between you and your creditor.

In order to garnish your wages, they must first sue you and receive a judgment in their favor. They can then petition the court for garnishment.

Bank Account Levies

In Tennessee, once a creditor has received a judgment in their favor, they can also initiate a bank account levy. Essentially, they are allowed to freeze funds in your bank account for the amount that they are owed on the debt. They can then petition the court to transfer those funds over to them.

In this case, checks that you wrote assuming that the money was there won’t clear if you don’t have enough money left over when the amount is frozen.

While most creditors will need to get a judgment against you before levying your bank account, government agencies or those acting on their behalf do not. Those who owe student loans or back taxes can have their bank account levied without a court order.

Should I File for Bankruptcy?

As explained earlier, the creditor must receive a judgment against you before pursuing any of those actions. In order to avoid more aggressive collection techniques, you will need to be proactive. They will be. In fact, they have every incentive to move as quickly as possible with this process. That is because it either forces the debtor to begin making payments on the debt or allows them to take the money by court order.

The good news? Bankruptcy can stop all creditor actions against you. The bad news? If they’ve already put a lien on your property, bankruptcy may not remove it. There are specific rules for when bankruptcy can remove a judgment lien.

In addition, if you file for bankruptcy after wage garnishments or a bank account levy have gone into effect, you will likely not be able to recover that money.

On the other hand, a judgment lien may be revoked if, by filing for bankruptcy, you can protect some equity in a property by law. The law allows debtors to protect a certain amount of equity in certain properties or a total amount of equity in all their property.

Is Filing for Bankruptcy Right for Me?

This will require a bit of cost/benefit analysis. If a creditor has initiated a lawsuit against you, you must evaluate the likelihood that lawsuit will be successful. Generally, if you have any cause to dispute the debt, then you should attempt to fight it. In the event that the judgment will most likely be entered in the creditor’s favor, you should consider bankruptcy as an option.

Obviously, if you can pay off the debt, you should. But if you can’t, then bankruptcy will help you protect the money that you do have, the property that is most important to you, and will stop the creditor from taking any actions against you.

Talk to a Memphis Bankruptcy Attorney

If you are facing any of these financial decisions and pressures, you should talk to an experienced bankruptcy attorney about whether obtaining a fresh start through bankruptcy is right for you.  

The Sweeney Law Firm, P.C. is a bankruptcy law firm in Memphis has an excellent reputation. Call us today for a free initial consultation on how to file bankruptcy in Memphis.