A very nice Orlando couple who were convinced they needed to file a chapter 7 bankruptcy came to my office today for a consultation. Initially, it seemed that they had good reason to believe that filing a chapter 7 bankruptcy would be a good idea.
Their home had been in foreclosure for sometime. A judgment of foreclosure had been entered, and in just a few weeks, it was to be sold. Like so many Orlando homeowners, the house was substantially underwater, meaning that they owed more on the mortgage debt than the house was worth.
They understood they would have a deficiency judgment entered against them for that unpaid debt. However, after talking with them, it appeared to me that it would probably not be best to file a chapter 7 bankruptcy – at least right now. First, this was an older couple whose sole source of income was social security retirement and disability benefits.
This income is exempt from collection by creditors, so even if the bank obtained a deficiency judgment, their benefits could not be taken away from them. This couple had modest assets, which would also be exempt from collection. This couple did not expect to need credit for the purchase of another home or car in the near future (they had just purchased a new car!). They had very little unsecured, credit card debt. We also discussed the fact that the bank has up to five years after the foreclosure to request a deficiency judgment. It remains an open question how many of these deficiencies will be obtained and pursued by the banks.
After discussing their situation, we agreed that they probably didn’t really need to file for chapter 7 bankruptcy, at least right now. They had nothing that a creditor could take from them, and they were experiencing no real financial distress. Sometimes this is called being “judgment proof.” However, had they insisted upon it, I probably would have filed a chapter 7 bankruptcy for them.
Other persons in this same situation may not have wanted to live with the anxiety of knowing that a creditor could attempt to collect against them, even if those efforts may not succeed. The uncertainty of a deficiency judgment may not be tolerable for some, particularly younger families and individuals who have a distant horizon for financial planning.
One of the greatest benefits of bankruptcy relief is knowing that creditors can no longer take action against you. Some will seek bankruptcy relief just to have that peace of mind. Others may be comfortable knowing that the law will protect them without having to file a bankruptcy. Seeking protection under the bankruptcy laws is often a complex decision based on many factors. It is a very personal decision that will be guided by a persons goals and life situation. It is best to make that decision after seeking consultation and advice from an experienced bankruptcy lawyer.