Common Reasons For Filing Bankruptcy

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The first Topic that we got a lot of this week from perspective clients and that was reasons for filing a bankruptcy just right from the get go.

Probably the most common reason that we’ve seen in the last couple of years has been medical bills. It’s always been maybe over the past decades where divorces and medical were nose and nose for which one was actually causing the highest number of bankruptcy filings each year. But over the last couple of years, it seems pretty clear at least with our cross-section of clientele that medical bills have outpaced divorce quite a bit in terms of the ones responsible for most bankruptcy filings. There are actually some reasons behind it. Medical care costs have certainly increased and it doesn’t look like that trend is going to change anytime soon.

A lot of people think that if you’re insured, you’re sort of protected from these and it certainly does afford you some degree of protection but in often times, even with the best of the insurance you’re still responsible for some type of 10% to 20% co-pay. When you have a heart attack, for example, we pretty commonly see bills for heart attacks ranging in $75 to $150 thousand dollar range and 10% of that is usually more than most of us care to cut a check for or are even able to cut a check for.

So it’s not necessarily the case that somebody’s gotten injured or ill and didn’t have insurance to protect themselves. In fact, I’d say a good 25% to a third of our cases where we file a bankruptcy because of a medical bills there actually was insurance at least at some point throughout the treatment process.

Another reason medical bill tends to drive more bankruptcy filings has to do with the type of collections that they use. Different types of debts will collect on different timelines. Medical is one of the more aggressive ones. Usually if you got medical bills out there that aren’t having payments made on them, the average is a year and a half maybe two years before you really at risk of those going to the county courthouse, getting a judgment and using that judgement to come after wages or bank accounts through some type of garnishment.

Now if you compare that to credit cards, we normally see them taking at least two and a half or three years. So at least another year, year and a half before you are really at risk of some type of judgment that could turn into a garnishment and possibly jeopardize your wages or the money you have in your bank accounts.

Civil suits is an area that has really exploded over the last two or three years. There’s an interesting phenomenon, a collection world in the heart of the recession days that were necessarily in the clear with that right now. But back in 2009 or are a little bit through 2010 a lot of what we call secondary collectors simply went out of business. There’s an old joke “You can’t get blood from a stone” and then of course there’s an attorney version of that joke “but you can get that stone.” So what they were doing is they were taking credit card or medical bills and instead of having the primary creditor, the hospital or the visa or master card calling you for maybe six months to a year and then farming that out to a secondary collector for another six months to a year, it might go through two or three secondary collectors if the first one or two weren’t successful in getting payments out of the debtor.

And then eventually we go a law firm and of course we all do cheapest thing first, and cheapest thing you can do in trying to collect on those debts is to send out what’s called “donning letters” . Just a legal term all that means is a demand letter or just a letter asking for some type of payment. They are usually pretty obvious. They’ll have rather bold and impressive looking letterhead at the top. The idea is to basically capitalize on the idea that you’re now being contacted by a law firm. Somebody who has the ability to sue you and take your money as supposed to a secondary collector who can just simply try to wear you down, embarrass you, or harass you to the point that you end up making the payment or simply make those things go away.

Well, what happened in the recession is a lot of these secondary collectors simply were going out of business. They could not harass enough or embarrass enough to get payments out of people that they just simply did not have to make. And so the original collectors stopped spending so much time at this secondary collection stage and started kicking over the debts to law firms a little faster.

Seems like the law firms clued in and have the same difficulty donning letters worth as effective and so they started going to suet more often. So you have this phenomenon the last two or three years with debt collection where the collection process isn’t staying as long at the original creditor collecting or at the collector’s stage collecting. They’re kicking those debts over the last or to the law firm a little faster, the law firms are just filing suit faster.

We first started noticing this trend maybe in early 2011. Prior to that it was probably somewhere around 10 to 15% of the cases of the bankruptcy that we filed that had some type of what we would call a “garnishment action” or an “impending garnishment action” either the client already had a judgment against them in county court that could been be turned to a garnishment. Or there was already a garnishment in place maybe taking wages and we were trying to get filed as quickly as possible to stop that. Of course, once you file a bankruptcy, garnished wages have to stop.

Well so 10% or 15% maybe 2 ½ or 3 years ago was about the percentage of cases that were In that position where we had to do what we call “rush filing”, trying to get filed as quickly as possible to avoid losing one more dime to the creditors. Once the trend in collections changed, those debts starting going to law firm faster, the law firm’s started going to civil suits faster. These days, it’s up more around 90% from 10% to 15% to maybe 85% to 90% of the bankruptcy that we file have some type of a judgment or a garnishment action on them that requires them to be filed as soon as humanly as possible and as soon as you can correctly file the documents to either get rid of the risk of some type of a garnishment or to get rid of the garnishment itself.

It’s just a trend that’s gone on. I think, maybe in the last few months, we’ve seen it slow down a little bit, as secondary collections have become more successful and they’ve been able to get more payments from folks. But it’s still increasing an incredible high compared to the last decade where we were pretty used to a 10% or 15% of those cases. It also greatly redefined how law firms have had to approach bankruptcy, petition drafting, document collections, how we facilitate cases. Something that we may have taken a months to plan out in the past often times now has to be done between Monday and a Friday in order to avoid losing some type of property or money that can be avoided.

Another real common reason that we got contacted for this week was foreclosures. The roughest week I can recall in this area was probably the week or 10 days before Christmas this year. It was just a strange time period for foreclosures in Denver County and its immediate surrounding counties where I believe in that 7 day period, 7 work days, before Christmas we had 5 clients come in. Many of these were people we’d never met before at least 4 out of 5 we weren’t previously hired by. Folks who came in with foreclosure sales within 24 to 48 hours the time we’ve met them.

Now when you file a bankruptcy, you’re at the minimum filing a bankruptcy petition which is going to range depending on the few things like the number of creditors but it can be anywhere from 55 to 75 pages long. It’s really like a little book that we end up drafting about your finances, what you’ve done with money, property, what your income looks like and so on. That’s a little daunting to have to write that within 24 hours.

Also most of these cases were filing Chapter 13 to save the homes so there’s an additional Chapter 13 plan that needs to be drafted as well. But week or so that 7 working days prior to Christmas this year we had at least 5 people come in, they had a foreclosure coming up within 24 to 48 hours. Thankfully, the clients were able to produce what documents we needed in time and were able to save all of those homes.

There is a thing you can do if you’re in that spot called “skeletal filing” where essentially you’re just filing the bare minimum of documents needed to get to the court to generate a case number to put a stay order in place. A stay order is the order that stops collection activities, everything from collector phone calls to civil suits or in these case is stopping foreclosures.

We go to phases with what is causing them most. Clearly that week it was foreclosures. Foreclosures were probably the primary driving force behind most bankruptcy a few years ago when we were right in the heart of the foreclosure crisis. These days we’re kind of getting back to the more traditional causes of bankruptcy. Medical debt that just simply can’t be paid back and credit card debt that can’t be paid back.

Another thing that’s kind of creeping on the scene in magnitude that we hadn’t seen before are the payday loans. These are the places, I’m sure you’ve seen the places. It’s hard not to if you drive down to any block in Denver there’s going to be a giant neon signs announcing their presence. These are the folks that give you short term loans on pretty much loan shark type terms and then of course they’re extremely aggressive when those payments, which are fairly impossible anyway, extremely aggressive when those payments aren’t made.

Someone told me this years ago and I had done it and actually found out it was true, if you go stand at a payday loan place and turn around, the odds are very good you will see another one. And the reason they do that way is because they’re aware of how hard those loans are to pay back. They know that most likely at some point if you get in to the habit of using these loans even as a stop gap measure you’ll have to take out a second one to pay back the first one. And so typically when they decide locations on where to put those types of establishments it’s always within a line of sight of another one, that way they know that can hook someone in who’s already in trouble with the first one and get the balance to spiral from there.

In years past when we would see payday loans on a bankruptcies it was usually a balance of maybe $500 to $1,500 but here on the last maybe 6 months, we’ve seen a trend to spike upwards quite a bit. We’re seeing now a lot more people coming in where they gotten themselves into a 5 and 6 and 7 thousand dollar balance range on payday loans. There’s usually other debt associated with it because the payday loans are not anyone’s first option of where they go. In fact, that’s usually the very last option of where they go.

Those are the primary reasons we’re seeing the folks to come in these days when they’re at least coming in to consultation to see if a bankruptcy is something they should be looking at. It’s usually either medical bills, credit card debt, civil suits, they’re trying to stop foreclosure or maybe going down the payday loans spiral.

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  1. Common Reasons For Filing Bankruptcy
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