Bankruptcy lawyers sometimes forget: not everyone worried about debt actually needs to file bankruptcy. The anxiety that brings someone to your office may not be grounded in a real understanding of the rights of their creditors.
I recently saw a woman drawing disability pay and looking at very substantial retirement income. It seemed unlikely that she would work again. Her income, under the means test, would have triggered an obligation to unsecured creditors.
But, under California state law, her sources of income were fully exempt. A creditor who got a judgment could not reach those funds, either at the source or once they were in her possession. Doing nothing was a far better deal for her.
My friend Kansas bankruptcy lawyer Jill Michaux sent me a case where a lawyer put a woman whose income was solely from Social Security in bankruptcy, forgetting that as a newcomer to the state, she couldn’t use the unlimited Kansas homestead to protect the $200,000 in equity in her newly purchased house.
Under state law, creditors couldn’t reach the house. Under bankruptcy law, she lost the house to the trustee.
The moral of these stories is clear: make sure you assess whether the client is really vulnerable to creditors under non bankruptcy law. If they have exposure to creditors, weigh that against the probable bankruptcy outcome for filing their case.