by Justin Hayford
AIDS Legal Council of Chicago

The bills have been piling up for years — hospital stays, lab tests, credit cards — even that stupid gym membership you can’t use anymore. When your health took a turn for the worse two years ago, you had to quit work, and now you’re living off of $700 a month in Social Security benefits. The minimum monthly payments on all your bills totals about $300, and there’s practically nothing left for your rent and groceries, never mind vitamins and nutritional supplements.

With more and more creditors calling you at all hours of the day, your stress level is churning up your stomach worse than Novir ever did. There is only one way out, you think: declare bankruptcy.

Well, before you blow the few remaining gaskets you’ve got left, take a deep breath while I tell you something that may sound crazy: for you, bankruptcy is a big fat waste of time and money.

All right, time for the beginning of a long, boring legal explanation. The point of personal bankruptcy is not just to wipe out old debts, but to protect your assets from the creditors trying to collect those debts. For example, if you had $10,000 in a savings account, a creditor could sue you for that money. If you owned a house, a creditor could put a lien on it. If you had a job, your wages could be garnished. Bankruptcy can prevent these things from happening.

But you don’t have a savings account, or a house, or a job. In fact, you don’t have anything that a creditor could take from you, even if that creditor sued you in court. In legal talk, you are “judgment-proof.” The law already protects you from your creditors. If you did file bankruptcy, you’d spend about $200 just in court costs (in addition to whatever an attorney might charge you) and end up in essentially the same position you started.

How do you know if you’re judgment-proof? Of course, it’s best to check with an attorney. But first and foremost, creditors cannot take any of your Social Security benefits or your private disability benefits. Those monies are protected by law. They can’t take the clothes off your back or the furniture out of your house (assuming, of course, you don’t have something worth a lot of money, like an expensive grand piano or valuable art). Generally speaking, so long as you own less than $2,000 worth of stuff, and your only income is disability benefits, you’re judgment-proof.

Sometimes you can have a job and still remain judgment-proof. That’s because your wages cannot be garnished unless you make more than a certain minimum amount. According to Illinois law, your wages can only be garnished if, in a week, you make more than 45 times federal minimum wage. Currently minimum wage is $5.15. So if your gross pay is less than $23l.75 a week, then no creditor can garnish your wages.

Of course, if any of the debts you owe are “secured loans,” then being judgment-proof won’t help you with them. A typical secured loan is an automobile loan; your debt is “secured” by the car itself, and if you don’t make your car payments, the car dealer can simply take the car back from you. Even bankruptcy won’t protect you against repossession.

But otherwise, your creditors can’t get anything out of you, so why spend the money and the time filing bankruptcy in court? Even if your creditors take you to court and get a judgment against you, they can’t collect it.

Many people who are judgment-proof want to file bankruptcy to get rid of their student loans. If you’re on Social Security, there is a much easier way to get rid of those loans. You can simply write to the loan company and explain that you are permanently disabled. The company will send papers for you and your doctor to fill out. Often those forms are enough to get your loans cancelled.

Still, many people who are judgment-proof feel a strong desire to file bankruptcy anyway, just to wipe out the old debts. They feel so much stress knowing they owe so much money, and creditors call them all day long. I’ve even had clients whose therapists told them they should file bankruptcy just to relieve personal stress.

Now, I’m all in favor of reducing stress, but if you’re judgment-proof, filing bankruptcy now might put you in a worse situation down the road. As you probably know, you usually can file bankruptcy only once every seven years. So let’s imagine you file now. Your debts are wiped out. But then a few months later you go back to work, then you’re hospitalized and left with a $10,000 bill. Now you’re really stuck; you can’t file bankruptcy for another seven years, and you’ve got an income which the hospital collectors can garnish.

A better way to reduce stress is to explain your predicament to your creditors — or better yet, have a legal advocate intervene on your behalf. If you have a legal representative, then the creditors have to correspond with that representative. In other words, they’ll call and hassle your attorney instead of you.

For many people bankruptcy is, of course, an important part of regaining financial stability. But it isn’t for everyone, and it can leave some people worse off than they were before they filed. No matter what your therapist says, check with an attorney before you get in over your head.

Reprinted from tpanNOW, June/July 2000

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)