Breaking the Bank

Filing bankruptcy can feel like an abrupt end of a journey. But it doesn’t have to be. 

“The most common thing people say when they come to see me is, ‘I can’t believe I’m sitting here,’” says Paul M. Hollender of Corash & Hollender, a Staten Island-based bankruptcy lawyer. “But I tell them I am like a tow truck and they’ve just slid off the road. I pull people out of the mud so they can drive on down the road again.”

More than one million non-business bankruptcy filings occurred in the U.S. in 2013, according to the Administrative Office of the U.S. Courts.

“It’s usually a byproduct of some larger malady: a divorce, a criminal problem, a business collapse,” says Manhattan-based solo practitioner Gabriel Del Virginia. “Most of the time, it’s an honest but unfortunate person who deserves a fresh start.”

Critical mistakes are often made during the last few months of a downward spiral, he adds, when people spend their last few dollars from retirement funds paying off debts that could be discharged in bankruptcy.  

Other common missteps include using a home equity loan to pay bills (up to $150,000 of a home’s value can be excluded from bankruptcy filings in most of New York, says Del Virginia); borrowing money from relatives or friends, and then using a lump payment like a tax refund check to repay them; and running a business at a loss while racking up unpaid sales taxes and payroll taxes. 

“They will be personally liable for that,” says Gregory Messer, a Brooklyn-based solo practitioner. “I tell them to think really seriously about continuing the business and digging a deeper hole.”

Bankruptcy filings spiked in 2005, until new rules kicked in that made it harder for some to file. Filings climbed steadily during the global financial meltdown but are now dropping quickly. During the first quarter of 2014, filings were down 20 percent in New York and 11 percent nationwide, according to Messer.

“Higher interest rates are playing a role in that too,” says Messer. “When rates are low, people can refinance their way out of financial problems.” 

Del Virginia says the cases he sees today are often more complex than 30 years ago. 

“What I’m seeing is a lot more higher-level, complicated cases, situations involving professionals—like doctors and lawyers—and situations that have a lot more moving parts,” he says. Del Virginia says complex cases can cost $15,000 in legal fees. Simpler cases cost $2,500 to $3,000, plus a $306 filing fee.

But it’s not the end of the world. It’s a new beginning, Hollender says. People who file bankruptcy can get secured credit cards within a few months, and get back on the road to building up their credit again. Many former clients have been able to get a mortgage and buy a home again within a few years.

“I let people know I’ve seen many other people in the same neighborhood, usually on the same street, and their jaws often drop. That makes them feel better,” he says.