Thursday, August 06, 2009

Bankuptcy is an option, but...

Bankruptcy is hot in Utah right now.  Filings for the first half of 2009 were up 62% over the first half of 2008.  Given the way the economy is, this is no great shock, but what's a little more surprising is that Utah rates so high in its filing rates (e.g. 9th in Chapter 13 filings).  A pair of professors at BYU, Lars Lefgren and Frank McIntyre, seem to have figured out why: Filing rates are higher in states that have less protection for debtors, especially protection from wage garnishment.  Makes sense.  If creditors are grabbing your paycheck, you need to do something about it, and if bankruptcy is all you can do about it, that's what you do.

That doesn't mean a head-long rush to the bankruptcy court is a good idea, though.  I've seen too many cases where the debtor waited until the roof was falling in before seeking counsel and then insisted on the attorney filing the petition immediately if not sooner.  Such cases seldom end well.  For a lot of reasons.

First, if you're a consumer debtor, you can't just jump into bankruptcy.  You have to take a debt counseling class to get through the door.  Then there's also a detailed analysis of your income, expenses, assets, liabilities, and such.  These things simply take time.  If you're a business debtor, you don't have to take the class, but believe me that the extra analysis of your business affairs required more than makes up for any time gained there.

So what can happen if you rush things?  Well, if there were 100 things that could go wrong, you could think of maybe 50 of them.  And there are a lot more than 100 things that can go wrong.  And you don't need anywhere near 50 to create a disaster.  Most problems consist of numbers that don't add up and need corrected, resulting in increased expense and delay, and coming under the trustee's whithering glare that can burn a hole in battleship plate.  Sometimes the consequences get more exotic and severe.  For example, in the Mount Holly Club bankruptcy, a major creditor is moving to dismiss because it alleges the company didn't get proper, member approval to file.  Oops, did someone miss a step?  We'll see.

Just remember, in bankruptcy as in business as in life in general: Proper Planning Prevents Poor Performance.

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