His Divorce Lawyer suggested he call me about a bankruptcy to deal with $125,000 in credit card debt. It sounded like a good idea, but there were hidden risks that nobody else had noticed. 

Although he was a half owner of the former marital residence, and would have been entitled to a homestead exemption (recently increased to $165,500), against his half of the equity, see: what  can you keep if you file for bankruptcy? he was no longer entitled to that exemption after his divorce was finalized. In fact, even before the divorce was finalized, once he moved out of the house, it would be tricky to claim the homestead exemption. Thus, filing a chapter 7 bankruptcy case at this time would result in the house being sold! 

An alternative would be to file a chapter 13 payment plan, stretching out his credit card payments over 5 years with no interest.  It is sometimes possible to pay the credit cards less than 100%, if you have no equity in the house, or if you have a homestead exemption to offset your equity.   In this case, however, because he had no homestead exemption, I determined that the monthly payment to a chapter 13 bankruptcy trustee would be higher than he could afford. 

That left him with two choices: (a) continue with the “debt settlement” company, or (b) stop paying and let the creditors get judgments, because his only current income due to an accident at work, was fully exempt from creditors. 

We then developed  long-term plan that better met his personal objectives.

Had he come to me right after he moved out of the house, and before he filed for divorce, we might have been able to qualify him for a chapter 7 bankruptcy. 

The lesson here is to always consider bankruptcy as a tool at the time you are thinking about a divorce, rather than waiting years later. Call us to develop personalized strategy to help you manage your debt.