Money Rehab with Nicole Lapin - Is Bankruptcy Ever the Right Move?

Episode Date: September 30, 2023

Originally aired 5.12.21 Nicole is joined by bankruptcy lawyer Todd Turoci to take an inside look at bankruptcy from start to finish, how to get debt collectors off your back and whether filing for bankruptcy is ever a “good thing.”

One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that

I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN. Chime. Feels like progress. Banking services and debit card provided by the Bancorp Bank N.A. or Stride Bank N.A. Members FDIC. SpotMe eligibility requirements and overdraft limits apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details.

I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your

reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k?

You don't do it? No, I never do it. You think the whole world revolves around you and your money. Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand.

Nicole Lappin. The consequence of the finance world being so jargony is that there are tons of finance terms that people have heard of and could use in a sentence, but couldn't actually define. Bankruptcy is absolutely one of them. In movies and TV shows like It's a Wonderful Life or Schitt's Creek, bankruptcy is painted as financial death. But on the other hand, Chrysler had one of the most well-known bankruptcy filings in our lifetime. But I still see Chrysler's every time I go outside. So who's right? Is bankruptcy financial do-over or is it game over? I wanted to phone an expert, so today I'm bringing you confessions of a bankruptcy lawyer. Todd, thank you so much for joining us. Welcome to Money Rehab.

Well, it's good to be here. Thank you for having me. And let's start with a little introduction. Can you tell me about your career? How did you get into the world of scary bankruptcy? Well, there's nothing scary about bankruptcy, but I can explain it pretty easily. I went to law school in 1989. And by the time I graduated in 1992, I had dreams of being a business slash real estate lawyer. But in 1992, in Southern California, we're having a terrible recession and nobody could afford a business lawyer or a real estate lawyer. And what people needed was a bankruptcy lawyer. So I got into it that way. So your official title now is?

I am a bankruptcy lawyer. I am president of my law firm. I'm a certified specialist in bankruptcy, both by the California State Bar Association and the American Board of Certification. And how many people have you helped through bankruptcy? Oh, you know what? A wild guess would be about 7,000. Bankruptcy is such a scary word.

You said it wasn't scary. Convince me. Well, okay. From my perspective as a lawyer, it's a really nice area of practice because if you come into me as a client, I can be fairly certain that my prediction of what's going to happen in your case is going to come true. Whereas if you go into a family law lawyer or a personal injury lawyer or just a general civil litigation lawyer, they'd be lying to you if they told you what was going to happen. They really can't make promises. And it's disappointing a large percentage of the time. You don't get the results you wanted. You don't get custody of the kids. You don't get the dollar value on your case you thought you had. But in bankruptcy, if you come into me and you say, look, I am over my head in debt. I can't pay my credit card bills.

I can solve the debt problem. I can get you out of debt. And I can be 97% sure that that's going to work out for you in that way. And people leave much better off than they came in. So in that sense, it's not scary. It's a good thing for almost everybody that comes in. Well, let's step back. What is bankruptcy? Well, bankruptcy is a civil procedure where you ask the federal court to give you a permanent injunction against your creditors, preventing them from ever collecting those debts against you for the rest of your life.

When do you hear someone deciding to file for bankruptcy? What drives people into my office is something happened in their life that changed things. Most people are cruising along. They're making it. They're paying their bills. It might be tight, but it's not insurmountable. So what might happen is one of the spouses, if it's a married couple, might get their hours cut at work, or they might lose their job. Now, they can't afford to service the debt they were servicing. They might have two car payments. They might have $25,000 of credit card debt. They might have a second mortgage on their house. All well and good when you have two spouses that are working or even one spouse who has not incurred more debt than they can afford.

But then their job gets cut and they can't afford it. And so what do they do? And even then, they will hesitate to come in to see me until some creditor pushes them. For example, a mortgage lender might start a foreclosure action or a credit card company might bring a lawsuit. And that's usually what drives them into my office is that kind of legal proceeding that they don't know what to do about. I see. And then what happens next? Can you explain the process of filing for bankruptcy? Oh, absolutely. Looking back over the years, I would say my average client has about $25,000 in credit card debt, has a second mortgage on their house, has at least one car payment, possibly two. And what I ask them to do is give me a list of those

debts and a list of their assets. Most people don't have any assets, at least no assets that a bankruptcy trustee would be interested in selling. And the reason you give me that list is because we have to disclose that to the court and to the other creditors, and the court will review it and say, look, you've got this car that's paid for, and you don't have any exemption allowed for it. So we're going to take your car, and we're going to sell your car. We're going to use it to pay back some of your debt. And that's why I get that list of assets. But as I said, most people don't have a car that's not exempt. And most people don't have any other assets that aren't exempt. They just have a lot

of debt. For 97% of the cases, I would say, they file bankruptcy, they get a discharge of their debt, and they keep everything. Now, if you have been saving all your life and you've got $100,000 in the bank, or you have a lot of equity in your house, you're not a good candidate for bankruptcy because you'll lose those assets. You can't give your stuff away before you file, and you can't hide your assets. You have to put everything on the table. If you've got something to lose, then you're not a good candidate for chapter seven.

You might, in that case, consider chapter 13. What's the difference? Good question. In a chapter 13, you pledge your future income to pay back your debt. In a chapter seven, you pledge your current assets to get out of debt. Now, as I said, most people in Chapter 7 don't have any assets that can be sold. But if you qualify for Chapter 13, you do have future income. And in a situation like that, let's just say you made enough money to pay back some of your debt but not all of it. Let's say you could afford a $300 or $400 a month payment, but that's not enough to get you out of debt in the short term. So the bankruptcy court will say, let's do a Chapter 13. You pledge $300 a month for five years, which comes to $18,000. At the end of five years, after you've paid that $18,000,

we're going to wipe out the rest of your debt. And you might do that if, let's say, you did have a car that had $18,000 of equity, and you don't want to lose your car because you need it to get to work. So you file Chapter 13 and say, instead of giving up my car, which is worth $18,000, I'm going to do a Chapter 13 instead. And I'm going to pay $18,000 over the next five years into a plan. The creditors get the same amount of money and I get to keep the car. So Chapter 13 is better? Well, it's different and it's worse, I would say, most of the time because it sucks being in a chapter 13. You're in a bankruptcy for five years, which is chapter seven.

You can be in and out in three or four months. In a chapter 13, you're living under a budget that's very strict. months. And a Chapter 13, you're living under a budget that's very strict. No going after dinner, no Christmas presents, no vacations for five years, because all of your excess income is going to pay your creditors. And for most people, that is not a preferred way to live. So I recommend a Chapter 7 if you can qualify and if you don't have any other assets to lose. But for a significant portion of the creditors or debtors, I mean, they have to do with 13 because they would lose assets if they file a 7

or they make too much money to file a 7. Okay, so I never advocate funny business in general or anything illegal, obviously. So I should underscore that doing this fraudulently and trying to get a get-out jail free pass by filing bankruptcy and suffering for a few months or a few years is no bueno. Yes. Children, don't try this at home. I think that's really important because somebody listening saying, oh, yeah, this sounds really rad. This sounds awesome.

I can just get everything cleared and, you know, suffer for, this sounds really rad. This sounds awesome. I can just get everything cleared and suffer for a little bit of time, but that's awesome. So I don't have to actually do the hard money rehab work to get out from under debt. And speaking of that, the negative is you're going to have a bankruptcy on your credit report for 10 years. So if you are at your rope's end, you probably have pretty bad credit. And bankruptcy is not necessarily going to hurt your credit. If you come in and see me, you have a 540 credit score, bankruptcy is going to help your credit. Now, if you come in and you have a 760 credit score, and we file bankruptcy for you, your credit is going to get hurt. And you're not going to find good credit easily attainable in the near future.

Now, that's not to say you can't incur debt in the future. It's not to say you're not going to get credit cards. But they're going to be secured cards, or they're going to have a very high interest rate. And it's generally not a good idea to file bankruptcy. I'm not advocating it. But if you have more debt than you can repay, it's there for that purpose. Nobody should have to live that way. Nobody should be enslaved to their credit cards, to their credit companies. 200 and something years ago, when our country

was started, there used to be such things as debtor's prisons. And when they started our country, they decided to go the other direction and make the credit system much more favorable for the borrower versus the creditor. And that's what we're living with today. The idea is we want to promote people to take risks. We want to promote people to start businesses. We want to promote people to borrow money, employ other people, build an economy, and consume, for that matter. We like people borrowing money to buy cars. We like people borrowing money to buy houses. And if you risked going to jail because you couldn't make your mortgage payment, you would find a lot less people buying houses. So it would be bad for the economy to make borrowing money or the consequences of borrowing

money and not being able to pay it back too harsh. Well, I would argue that we do still have a debtor's prison, just of a different sort with super ridiculously low minimum wage, all of these other things. But that's for another episode. Hold on to your wallets, boys and girls. Money rehab will be right back. One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a time checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit.

Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN. Chime. Feels like progress. Banking services and debit card provided by the Bank Corp. Bank N.A. or Stride Bank N.A. Members FDIC.

SpotMe eligibility requirements and overdraft limits apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details. I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated

if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels

like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host, so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. Now, back to business. So what advice would you give a listener who's considering filing bankruptcy? Well, it always frustrates me when people come into me after they filed and didn't

talk to a bankruptcy attorney first, because we're free. Wait, wait, wait, what? You're free? You have a nice car and a golden doodle that I see. That did not fall from the sky, sir. You obviously are getting paid. Who's paying you? I am getting paid. And that's a great question, but I'll get to that. I don't know any bankruptcy lawyers that don't offer free consultations. And everything I've just told you is all available for free from in-person for any bankruptcy lawyer. So there's no excuse to make those kinds of mistakes before you file. Number one, that's my first advice.

Talk to a bankruptcy lawyer before you do anything. It's free. Second, how do we get paid? Everyone asks me that because allegedly our clients are broke, right? In California, the average price of bankruptcy is between $1,500 to $2,000 plus filing fee. And filing fee is $327. So you're

looking at almost $2,000, maybe $2,500 to file bankruptcy. And it sounds like a lot of money if you're broke. On the other hand, my average client, like I said, has a couple of car payments, about $25,000 credit card payments, a house payment. So the way they pay their bankruptcy lawyers, they stop paying those creditors. Because the first thing I tell you to do, stop paying your credit cards. We're going to discharge you on bankruptcy. Now you have $300 or $400 extra a month that you can pay me. I typically take $500 down, $500 a month until it's paid off and I file. And in the meantime, you don't have to worry about the creditors suing you because usually, if you tell them that you have a bankruptcy lawyer and that you've already spoken to somebody,

you give them my phone number, they're not going to see you. They're just going to call me to confirm that I've been retained. So that's the most common mistake people make when thinking about bankruptcy. What's the most common mistake people make when dealing with debt collectors? Well, here's one. This is a secret that's worth every dime your listeners are paying to listen to this. There's a statute of limitations. And that statute of limitations is revived if you make a payment. So a lot of times, creditors will call you on our old debt and say, well, you just make

a small payment to keep the account in good standing. Don't do that, because that ruins your statute of limitations defense. If the debt is three years and six months old, you're six months away from their never being able to collect from you. It's four years, the statute? Yeah. Yes. So if you make a payment, now it's another four years that they have the statute of limitations on their side. So it restarts the clock. Yeah.

Don't make a small payment to a creditor because they're going to ask you. And people are nice. People don't want to not pay their bills. Contrary to popular belief, most people really want to pay their bills. So you get a sweet old lady on the phone that says, well, I can't afford to pay my debts. I'm living on Social Security. And the debt collector says, well, can you make a $10 payment today just to keep the account in good standing?

Well, she'll do it. She'll make a $10 payment. And now she's screwed for another four years. So don't do that. What advice do you give clients who are getting calls from debt collectors? There is the Fair Debt Collection Practices Act. It's a law that's in place to protect debtors from creditors. They can't call you during certain hours. They can't harass you. They can't threaten you. And once you notify them that you have an attorney, say Todd Taurosi, you give him his number, and they can't call you directly anymore. That ends your phone calls. You don't have to worry about it. Now, they might say, well, we'll put you on a payment plan. We'll lower your interest rate, blah, blah, blah. We don't

want any of that. You want them to accept a settlement amount. If you owe $15,000, you tell them, look, I can get $1,000. Will you take $1,000 to settle the debt in full? If you could do that with your creditors, you could avoid bankruptcy. So that's another strategy. I don't know if you call it a secret, but that's something I would do in dealing with creditors. And then you need that in writing, obviously. Correct. So send a communication, letter, email, fax, saying we agree to accept $1,000 in full settlement of this account. Once you get that, go ahead and send them $1,000 if you don't have that debt. Now, be careful if you do that, don't do it with just one creditor if you have seven creditors,

because now you've spent $1,000, you're going to end up finding bankruptcy anyway, and you wish you had that $1,000 to pay me. So if you can work a deal with all the creditors that are beneficial, that's beneficial and allows you to avoid bankruptcy, do it. If you can't, then look at bankruptcy. It's an easy reset, but the downside is you're going to have a bankruptcy on your credit report for 10 years. And for some people, it doesn't matter. So after four years though, if you don't pay your bills, then that debt goes away? It does unless they sue you. They have four years to sue you. I see. So what they'll do is they get up to the statute of limitations and they file the lawsuit and then

get a judgment. Can we do a little role playing? Yes, of course. And here's a tip for Katie. You can take straight to the bank. You going to be Todd, a dude who's in a lot of different kinds of debts. Okay. You have a mortgage that you're not paying. You have credit cards that you're not paying. You have all sorts of stuff.

So you are Todd, not a bankruptcy lawyer, but a normal dude. All right. And I am a scary, scary creditor. Okay? You look scary. I'm so scary. Ring, ring, ring. Oh, what do you want?

Todd, this is a scary creditor. I have been retained to get your money to pay off this mortgage that you haven't been paying at all. You need to pay this right away, today, or you're going to be in big trouble, mister. I'm so tired of you guys calling me all the time. You bother me day and night. I want you to stop calling me. But you haven't paid your debt. You haven't paid your bills. You need to do that. You know, it's none of your business, but I lost my job. My dog died. My car won't start. I can't pay you anything.

I'm sorry to hear that, but you signed up for a mortgage and that is what happens when you sign a contract. You are responsible for that money. So we will need to collect that money. We'll have to garnish your wages. Well, you do what you got to do. I'm going to get a lawyer. You're going to get a lawyer. Fine. So, okay. What's your lawyer's name? My lawyer's name is Todd Taurosi. His phone number is 888-DEBTDOC. Please don't call me anymore. Yes. If they call back, you get a thousand dollars for every time they bother you. Once they've been notified, you have a lawyer. Really? Oh, that's good. Yes. So you need to log that. You need to keep very close check of every letter you get,

every phone call you get from every creditor that you've notified that you have a lawyer. Okay. And then let's do like a different choose your own adventure thing where instead of telling them you have a lawyer, how would you negotiate pennies on the dollar for that debt? What would you say to get them to do that? So if I'm saying, I'm back to the scary creditor person, you have $50,000 of debt. You need to pay that ASAP or you are going to be in big trouble. Okay. Assuming that the debt is about five months old, I would tell you, I don't have $50,000. I might be able to borrow some money from my brother who might be willing to help me out. Could I speak to your supervisor and perhaps offer a settlement of $2,500 to settle the whole debt?

Well, Todd, I am the supervisor. I am the boss of this entire collections agency, and that is just not going to happen. There is no way you can get a $50,000 debt for $2,500 measly dollars. I could potentially lower it to $45,000. How about that? Listen, I've been diagnosed with terminal cancer. I don't know if I'm going to live three more years. Please talk to your supervisor. See if we can do something that's reasonable. I know I could borrow $2,500. I can't borrow any more than that. And if you push me too hard, I'm just going to file bankruptcy.

Wait, can I break character for a second? Do they really have feelings? Do they care about all of this? They care whether or not they're going to get paid. If I really have terminal cancer, I can't pay them. I see. So no, they don't care. But the story is, if it's legit, they may say, can you send me some documentation regarding your condition? And

I will take it to my supervisor or I will find out from the creditor. Remember, you're a collection agency. You're working for a creditor. Right. So you'll go back to the creditor and you'll say, look, this guy's legit. He's probably not going to be able to pay anything. I think we'd be lucky to get the $2,500. Okay. So back to the scene. So Todd, I'm very sorry to hear that. My thoughts and my prayers are with you and your family. I will need to take this up the chain and see what the best we can do is and come back to you with our final offer for a settlement. I appreciate that. And God bless you. I really just want to do the right thing. Okay. And scene. Is that essentially how it goes down? Sure. It could. Absolutely. Absolutely. You know, there's a lot of sympathetic situations out there.

One of the cases that I had, the woman was very old and her husband had racked up woman was very old. And her husband had racked up at least $75,000 in credit card debt before he died. And she didn't know. It was without her knowledge. And then he went in the hospital, and there was another $50,000 to $100,000 in hospital bills. Now, there was some life insurance when he died. So she came to me, and rather than use the life insurance that she was going to have to live on to pay these creditors, we filed bankruptcy. And the reason I bring that up is because it was a very sympathetic situation. It wasn't her fault. And there's lots of very sympathetic situations out there. And creditors aren't necessarily going to be sympathetic, but they are going to be practical.

Okay, this has been very helpful, slightly overwhelming, but also very eye-opening. Here's a tip from Todd you can take straight to the bank. Get out of debt by filing bankruptcy if necessary. Once you're out of debt, don't ever get in debt again. Listen to Money Rehab. There you go. Absolutely. So for bankruptcy, your tip is essentially to cut once, measure twice. You can't file twice.

Oh, sure you can. Absolutely. Absolutely. But you shouldn't. So while it's initially appealing because it feels like a golden ticket out of a shitty situation, it's not. It's an easy, fresh start, but you don't want to live that way the rest of your life. You don't want, I have clients, I have filed someone's fifth

bankruptcy for them. Oh my God. So use bankruptcy as the tool is designed to be used for. Get out of debt. It's your free get out of debt card. Don't blow it by getting back into that enslavement. Again, it's not uncommon. People that have not developed good money management skills tend to be repeat customers. And that's unfortunate because, I mean, it's a wonderful thing that you can push the reset button and get out of debt. That's a wonderful thing. Well, I really look at being in debt as being enslaved to the banks. I have been on a jihad to get people out of this bondage for 30 years. I love getting people out of debt. It makes me excited to get up in the morning. You and me both. Because I've been out of

debt and it's a wonderful way to be. I agree. I've been out of debt and it's a wonderful way to be. I agree. Money Rehab is a production of iHeartMedia. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Catherine Law. Money Rehab is edited and engineered by Brandon Dickert with help from Josh Fisher. Executive producers are Mangesh Hatikader and Will Pearson. Huge thanks to the OG Money Rehab supervising producer, Michelle Lanz, for her pre-production and development work. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all. Bye.