Saturday, October 1, 2011

Get out of jail free card = Bankruptcy

Did you know that if the credit card company obtains a judgment against you for not paying the credit card charges, and you fail to pay the judgment, you can go to jail?  The reason for this is "contempt".  So, although technically you cannot be jailed for not paying a debt, the court can put you in jail for "contempt of court" for failing to obey a court order to pay the judgment or failing to make periodic payments on the judgment to reduce it.  That's why the court (usually the State District Court in New Hampshire where I practice)  has "review" hearings to determine if you have the financial ability to pay the judgment or make periodic payments to reduce the judgment.

A client was hit with a judgment for $9000 on one of her credit cards.  She never responded to the credit card issuer's law suit and did not want to pay a lawyer to do so because she owed the money and had no defenses.  She thought the credit card company would just get a judgment against her, and leave her alone because she did not have the financial ability to pay the judgment.  Wrong.

When she originally made the charges on her credit card, she meant to pay them back, but then she was hit with a divorce and suddenly did not have the financial ability on her own to pay all of her bills. She received a notice from the local District Court that she must appear for a "review hearing" regarding the $9000 judgment against her for the credit card debt.  At a review hearing, you appear before the court and fill out a financial affidavit as to all of your income and expenses so the judge can decide what you can afford to pay on the judgment against you - in this case, it was a $9000 judgment for credit card debt.  And, as with all judgments, interest continues to accrue on the unpaid portion of the judgment, so the debt just keeps growing.

Although attending a review hearing should not be a terrifying experience, my client did not want to attend alone so I accompanied her. With the completed financial affidavit, we showed the judge that my client's regular monthly bills were greater than her regular monthly income and she had nothing left over at the end of the month to pay anyone.  Her problem was that she lived in a condominium that was too expensive to live in now that she was divorced.  But, because the condo was only worth $140,000 in this terrible real estate market, and she had a combined total of $200,000 in mortgages on it, she could not sell the condo and she could not refinance it. She thought she was stuck with this debt forever until she explored what options bankruptcy could provide to her.

Back to the District Court . . . .if you fail to obey a court order to pay a judgment, or fail to make court ordered periodic payments, you can be held in contempt of court by the judge and jailed - which is why the court considers your financial ability to pay.

When I also explained to the District Judge that my client would be filing for bankruptcy soon, the District Judge understood that the judgment against my client could be discharged in a bankruptcy case and she would not be required to pay the judgment or to make any periodic payments on the judgment. He told my client to advise the court of the bankruptcy filing date so that the District Court case would be "stayed".

What does "stayed" mean?  When you file a bankruptcy petition, the bankruptcy code "stays" or stops just about ALL creditor action of any kind against you.  This is called the "automatic stay", meaning the minute you file your bankruptcy petition, creditor action against you must automatically stop.  So, for example, if you are required to make $50 a month periodic payments because of a judgment against you for credit card debt - that automatically stops.  And, if you receive your discharge in the bankruptcy case, the entire credit card debt against you will be discharged and the credit card company may never pursue you on that debt - no review hearings, no periodic payments, no contempt charges for failing to make periodic payments, no phone calls from debt collection agencies - it all goes away with a bankruptcy discharge of debt.

While bankruptcy may not be the answer for everyone, it is something worth exploring to learn about your options if you are facing a judgment or making periodic payments on a judgment against you.

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