I recently received an urgent and tearful call from a client with whom I had been conferring for about six months regarding her financial position. She had just received a summons in a case filed by a credit card company and was terrified that her wages would be garnished and her bank account emptied. Her call raised the important question of "when is it too late for file a bankruptcy?"

The client was recently divorced and we had been discussing ways to manage the large credit card debt which her ex-husband had run up. She was resistant to the idea of filing for bankruptcy protection since she felt that, even though her ex had run up bills without her knowledge, she should be responsible for paying the debts. Unfortunately, although she had a good job which allowed her to continue making payments on her home while providing for her children, she did not have the additional funds required to pay down the credit card debt.

I often speak to distraught clients who are under the impression that, once they have missed a payment, a creditor has the right to garnish wages, attach bank accounts, or worse, sell their homes. Fortunately, this is not true. Although creditors may eventually be entitled to take these actions, they can not do anything until they have obtained a judgment in court.

There are many steps involved in obtaining a judgment. Assuming the case in not in small claims court (which moves faster but still takes weeks) the creditor first must file a complaint and serve the complaint, along with a summons on the defendant. Once the summons and complaint have been served, the defendant has 30 days within which to file an answer. If an answer is filed, it could be up to a year before the case is heard. If no answer is filed, the creditor can ask the court to enter a default judgment in favor of the creditor. Even then, the creditor can not take any action to collect until he has obtained an "abstract" of the judgment - a formal document issued by the court.

With the abstract in hand, the creditor can ask the defendant's employer to garnish wages, ask the marshal to obtain funds from a bank account, or record a lien on the defendant's property.

Even when a garnishment notice is served, the employer does not begin garnishing wages for 15 days.

When is it the right time to file for bankruptcy protection then? Partially, the answer depends on the constitution of the debtor. Some clients come to me complaining that they have not slept in two weeks because they missed their last credit card payment. I encourage such clients to preserve their sanity and file quickly. Other clients do not experience as much anxiety and, for those with strong stomachs, it may be perfectly logical to hold off on filing until a lawsuit has actually been filed. The 30 day answer period allows plenty of time for preparing the bankruptcy petition and, once the bankruptcy is filed, the court case, in most instances, will be dismissed.

Waiting until a judgment is obtained is pushing the envelope. Wages might be garnished, money might be taken from bank accounts, and property might be liened. While it is often possible to reverse all these actions in bankruptcy court, the extra work is costly and unnecessary and the actions are not successful in all cases.

The bottom line: do not panic if you are served with a complaint from a creditor who has lost patience with you, but do not ignore the lawsuit. Seek bankruptcy protection before the creditor can obtain a judgment against you.

August 1999.
Reprinted with permission of the The Orange County Register.