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Finding a free bankruptcy lawyer for business, consumer debt

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Your Business Credit
Your
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.

Ask Elaine a question or read her prior answers in the 'Your Business Credit' archive.

Question for the CreditCards.com expert Dear Your Business Credit,
I had a business that is now closed and I have a lot of credit card debt for the business and personal debt, to the point that I have to file bankruptcy. However, I cannot get a free lawyer because of the business. I do not have the money to pay a lawyer. What do I do? I live in New York. --  Pamela

Answer for the CreditCards.com expert Dear Pamela,
I am sorry to hear about your business. Many entrepreneurs don't realize how much risk they are assuming when they borrow money on credit cards for a small business. Even if you take out small business credit cards in the name of an LLC, you typically must sign a personal guarantee. This means that you are obligating yourself to pay off the bills even if the business fails. The same holds true for small business loans for which you've signed a personal guarantee.

I asked Michael Gunderson, a bankruptcy attorney at Gunderson & Tharpe in Chicago, how you can get free legal help in a situation like this. He suggests calling the state bar association in your area, which in your case is the New York State Bar Association. "Most bar associations strongly encourage lawyers to commit a portion of their practice to pro bono work," says Gunderson.

It is not clear why you think your business ownership would prevent you from getting help. "There is no rule or law that would suggest that just because someone has a business that they are not eligible for pro bono work," he said. The exception might be if you have valuable business assets, such as equipment, that you could sell to pay the bills. However, he said if you run a professional services business, it probably does not contain many tangible assets. "In reality, the asset is themselves," he says.

Lawyers all have their own requirements for deciding if someone qualifies for pro bono help, Gunderson says. If one attorney turned you down, try another.

If your case is routine, Gunderson says you may be able to file the paperwork on your own. Go to the federal court clerk in the district where you live and ask what resources it can provide, he suggests.

You're facing a very stressful situation, but before you file for bankruptcy, I would dig deep to see if you can come up with any creative solutions for paying down your debts. Is it possible to work with a credit counselor to come up with a repayment plan? The U.S. Department of Justice maintains a list of credit counseling agencies it has screened to help consumers avoid disreputable firms that have plagued the industry. Talking with a pro may help you find strategies you haven't considered to lower your overhead or generate more income to pay your debts.

Many people turn to bankruptcy because they get worn down by calls from creditors and want to move on -- but bankruptcy can, in some cases, make it a lot harder to get life back to normal. According to the credit bureau Equifax, a Chapter 13 business bankruptcy filing that gets discharged (typically because you've paid your debts under a court-approved payment plan) will stay on your credit report for seven years. A Chapter 13 filing that doesn't get discharged, or a Chapter 7 or Chapter 11 business reorganization filing, will stay on your credit report for 10 years.  These days, many employers check out job applicants' credit reports. By filing, it's possible you could hurt your chances of being considered for a job.

Let's say you've considered all of this and still want to go ahead and file. You'll want to ask your attorney about a couple of options.

One is Chapter 7 bankruptcy, which will let you discharge unsecured debts such as credit card debts, medical bills and personal loans. A bankruptcy trustee may opt to sell your nonexempt assets, including property you own, to repay your creditors. Depending on your situation, it is possible that you may be able to keep your home.  There are state and federal laws that cover what property is exempt.

Not everyone qualifies for this type of bankruptcy. If your current monthly income is more than the median for a family of your size in your state, you must pass a means test, in which your monthly expenses are compared to your income.  High expenses -- for instance, a large mortgage payment -- may help you qualify for Chapter 7 even if your income is higher than the median.

Another option is Chapter 13 bankruptcy, also known as the "wage earner's plan." If you earn a salary that is above the state median, you must work out a court-approved plan to pay your debt within five years. If your salary is below that benchmark, you must make a plan to pay the debts within three years. Creditors can't start or continue collecting from you during this time.

A Chapter 13 filing can allow you to protect a home from foreclosure, as long as you pay your mortgage during your set repayment period, and will allow you some extra time to pay your unsecured debts. You can qualify for Chapter 13 if your unsecured debts are, as of 2013, less than $360,475, and secured debts are less than $1,081,400. Unsecured debts are those that aren't tied to collateral, such as credit card debt.

Many small business owners have bounced back from a business failure and gone on to succeed in a new career or venture. The decisions you make now will play a big role in what your future is like, so consider each move you make carefully.

See related: How to pick a bankruptcy attorney, When bankruptcy makes sense, Debt management plans vs. Chapter 13 bankruptcy

Meet CreditCards.com's reader Q&A experts
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Published: June 10, 2013


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