bankruptcy blog
Bankruptcy as a Financial Planning Tool
You want to save more for retirement. You want to save for your kid’s college. You want to plan for your financial future and set financial goals. Standing in the way is your debt. You can’t seem to get ahead or make a dent on the amount of debt you have. It is the ever growing gobstopper. Each month your debt seems to mount even though you never miss a payment. You are current on everything. However, that $50,000 credit card debt is now sitting at $75,000. Everything is maxed out.
As is human nature, we have two immediate responses fight or flight. For the fighters out there, you start searching for ways to solve this problem head on. You start looking at what you have that you could turn into cash to throw at the debt. Maybe it is your retirement account or the equity you have in your house. Maybe it is your mother’s wedding ring. Whatever it is, you’re willing to part with it to deal with the debt problem that you are faced with. That may be a shortsighted response.
A much overlooked financial planning tool is a personal bankruptcy. A bankruptcy is an opportunity for a fresh start, a new financial beginning. It allows you to address your debt and move forward with setting and achieving your financial goals. You no longer feel stuck.
Example 1: John is 50 years old, married, and the guardian of his two minor grandchildren, ages two and five. He qualifies for a Chapter 7 bankruptcy. He has $50,000 in credit card debt and is current on making the payments. However, he has now maxed out all of the cards and is stuck. He and his wife have a goal to start saving something for their grandkids college, but can’t because of their debt. He has $50,000 in a retirement account that he is thinking of withdrawing to pay down his debt. If he does this, he will have $0 saved for retirement and will have to pay taxes on the amount withdrawn. Alternatively, he could file a Chapter 7 bankruptcy and be debt free in as little as 3-4 months. At the same time, he could keep his retirement account in place because it is exempt (protected). The money he was spending making minimum monthly payments on credit cards can now be used to save for his grandchildren’s college.
Example 2: John has $250,000 in his retirement account and a house with $60,000 of equity. He has $100,000 in credit card debt and does not qualify for Chapter 7 bankruptcy because his income is too high. Rather, he qualifies to file a Chapter 13 bankruptcy, which involves a five (5) year repayment plan where he will pay some or all of his debt back. The amount paid on debt depends on John’s income and the value of his assets. At the end of the plan, he will be debt free. John gets to keep all of his assets, including his retirement account and his house, which will most likely continue to accrue value.
If you or someone you know is in financial distress because of debt, bankruptcy should be considered as a viable solution. Liquidating an asset may ultimately do more harm than good. A bankruptcy may allow you to move forward with setting and achieving your financial goals.
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Back to School Budget Blues
Labor Day is behind us. Pools are closed for the season. And you are back in the swing of your school year routine. Now might be the first time you have had an opportunity to review your bank statements since your kids needed new clothes, shoes, school supplies, and sports gear. The expenses came at you fast and furious. Before you knew it, you had spent more than you would have wanted. You have a case of the back to school budget blues.
Do not fret. You can make some simple changes to cure the back to school budget blues.
- Write it down. You don’t have to keep track of your budget and expenses in your head. Start with an itemized list including a total budget. Keep track of expenses as you go so that you know where you need to make adjustments on the go.
- Be realistic. Don’t be over-conservative. I see this all the time. A client will state that an expense is much lower than in reality. The outcome is that the client blows past the budgeted amount, which impacts decisions and the ability to pay for another item.
- Try to stay under budget. You almost always come out better when you spend less than your budget. This is not always possible, but should be a goal.
- Want vs. Need. How many of us heard this growing up: do you want it or do you need it? You should answer this sage question when creating your budget. Provide yourself a category for wants because it is okay to treat yourself every once and awhile.
- Learn how to say “No”. We all do it, say “Yes” to avoid someone’s negative reaction if we were to say “No.” However, we can’t give more than we have. Math does not lie. If you have $4,400 net household income, spending more than that will mean tapping into savings or credit. Saying “No” is a powerful tool to ensure you stay under budget.
- Save. This is easier said than done. Recent studies suggest that the almost 50% of households in the United States couldn’t come up with $400 if they needed it for an emergency. If you work more overtime than usual, save the extra income. If you receive a bonus, save that extra income. If you receive a sizable tax refund, save it.
Over the course of the year, there are several opportunities for you to review your finances. For some it is around the holidays. For others it is right before they receive their tax refund. For people with school-aged children, it is right around the time that school starts. No matter the time of year, that review could show whether or not you are in financial distress.
It’s A Family Affair: Multi-generational Financial Distress
At the bankruptcy court hearing called the First Meeting of Creditors, the Trustee, an attorney assigned to oversee your bankruptcy case, will typically ask whether you expect to receive an inheritance in the next six months. Almost every person responds with a laugh followed by a brief “no” or “I hope not.”
Most people find it incredulous or hard to believe that they’d be the recipient of any inheritance. An many hope that no one that they are close to passes away anytime soon.
In that first response there is an anecdotal message, a common story that many bankruptcy filers do not have family with any wealth to transfer upon death. We have the baby boomers that have to take care of parents who are outliving their retirement savings and children who are saddled with student loan debt. Millennials will be first generation to do financially worse than their parents. Americans do not save enough money, which will create a bit of a crisis as more baby-boomers retire. This is all happening even though unemployment is low and the economy is doing pretty well.
On several occasions, I have represented different generations of the same family who have had to file bankruptcy to resolve debt-driven financial distress when the collection funds and resources run out. When a significant life event occurs, most of us turn towards our main support system, our families. As previously stated, many Americans have little to no money in savings. What they do have can be gone in an instant helping out a son, daughter, mother, father, etc.
For example: Son and daughter-in-law fall behind on their mortgage, owing $5,000 in arrears, and face a pending foreclosure. Parents agree to use all their money in savings to bring the mortgage current and save the home from foreclosure. In the meantime, the parents turn to credit cards to pay unexpected expenses. The son and daughter-in-law fall behind on the mortgage payments again because the underlying cause of financial distress is still lingering.
It is possible that the son and daughter-in-law could have sought another alternative such as a loan modification or a Chapter 13 bankruptcy where a mortgage can be brought current through a plan that lasts 3-5 years. The parents could have then instead used the money in savings to cover the unexpected expenses or to pay the Chapter 13 bankruptcy filing fee of $310. For most of us, we want to help our family avoid disaster. However, there may be ways to provide support that you are not aware of.
The Financial Struggles of Aging
Living on a fixed income is difficult for many older Americans. Over the course of time, there has been a shift to individuals bearing a higher burden of financial risks. Gone are pensions. Health insurance is more of the burden on the insured than before. Savings are usually not sizable enough to cover an unexpected or unplanned expense. Social Security benefits, if taken early, come with a cost as the monthly benefit is permanently reduced.
As a result, the rate of individuals over the age of 65 that are filing for bankruptcy has tripled as compared to 1991. Despite a lifetime of hard work, many face the uncomfortable reality of mounting debt.
It could be that a spouse fell ill or passed away, leaving behind insurmountable medical bills and funeral costs. It could be that you had to retire early because of an injury, a child or grandchild moves in with you, or you could simply miss one car payment. Any small thing that snowballs.
Bankruptcy may be the best way to address the debt. Instead of feeling pressure to liquidate assets, a bankruptcy may allow you to achieve the end goal of being debt free and retaining all of your property.
In some situations, a bankruptcy is not necessary to protect assets but to provide peace of mind. The phone calls stop. The collection letters cease. The fear eliminated. Bankruptcy can provide many emotional and mental benefits beyond dollars and cents. After a bankruptcy, you can focus more on your well-being than on how you are going to continue to pay debt. Bankruptcy can be a liberating experience.
I have seen many clients try to outwork the debt. They attempt to find solutions because they were brought up that “you pay your debts.” However, That can be like running on a track and each step you take requires that you run another lap. A bankruptcy allows you to step off the track. There can be a fear that people will assume you have given up or avoided your responsibility to pay for your debt. Alternatively, you are showing that you are brave to take that uncomfortable step towards a fresh start. Peace of mind awaits.
The Pitfalls of Micro-Spending
We are all guilty of it. You go to Target for that one pack of batteries. Next thing you know, you’re at self-checkout, the total incrementally increasing as you scan each item and place it in the bag. Before you know it, you’ve spent $30. Some days it is $15. Other days it is $50. Over the course of a month those trips to Target can really add up.
I once had a client who would go out to eat or buy a Starbucks coffee every day. I asked how much they estimated they spent daily on those items. It was around $15. To keep the math simple: 52 weeks in a year x 5 work days in a week x $15 =$3,900. My client was surprised to discover they were spending around $330 per month or about $4,000 per year on these small expenses.
In many instances, micro-expenses are often overlooked or not thought about when creating a budget. However, it is these small items that make a big impact on your budget. Most budgets I see don’t take into consideration miscellaneous monthly expenses. Including a buffer in your budget for micro-expenses will help.
The best place to start taking control of micro-expenses is by reviewing your monthly bank statements. You may not even realize how much you are spending on multiple transactions of less than $5. Another tip is to set a fixed budget for the micro-expenses. Cash is still king. Withdraw a fixed amount of cash for the week or month to be spent on certain items. Once you run out of the cash, you stop spending. If you can’t live without your Diet Coke, that is cool. Maybe it makes more sense to buy it in bulk instead of picking one up every day at the convenient store.
We could replace Starbucks or Diet Coke with new clothes for your growing child, school supplies for that class project, or cough drops for your ailing spouse and the same principles still apply. It is amazing how $5 spent here and there impacts your overall financial well-being. Living is expensive. Being mindful and aware of where your money is going will help you make those day-to-day financial decisions.
We all know the big expenses we have to pay every month like the rent or mortgage payment, insurance, car payment, etc. Make it a priority to understand the micro-expenses in your life as well. Life can change in big ways in a flash. If and when that occurs, you or someone you know may find it difficult, if not impossible, to keep up with the expenses of everyday life.
A Fresh Financial Start
With the year coming to an end, you may be delving into your finances. Your financial health and wellbeing may soon be at the top of your newly minted New Year’s Resolution list.
A bankruptcy fresh start may be the fix that you are looking for to jump start your financial wellness plan. One of the main goals of a bankruptcy is the fresh start. Think of it as wiping the slate clean. You could file a bankruptcy, eliminating all of your debt (with some exceptions) in the process. It is a fast and efficient way to put your financial woes behind you and start anew.
A common concern or fear that clients express is the negative impact a bankruptcy can have. I like to reframe that concern or fear into a positive.
Example: Bonnie has $50,000 in medical bills. The hospital sold the debt to a debt collector that has brought a lawsuit against Bonnie. She considers filing for bankruptcy, but is concerned that it will haunt her for 10 years. Eventually, Bonnie has a judgment against her for the $50,000 plus attorney’s fees. The judgement is reported on her credit report as unsatisfied. She sets up a payment plan with the debt collector for $350/month. She pays the agreed upon payment for 12 months, which costs her $4,200, but has had to stop making payments because her credit card debt has increased by $5,000 in the same time frame. She is running in place.
In that same period of time, Bonnie could have paid an experienced bankruptcy attorney to file a Chapter 7 bankruptcy. She would have already received her discharge and would have been debt free. Instead of languishing for years in a payment plan she could ill-afford, Bonnie could have filed bankruptcy and started rebuilding her credit sooner rather than later. The bankruptcy can free you from the constant cycle of robbing Peter to pay Paul. Think of the time and energy that you will no longer have to devote to shifting money around to make minimum monthly payments.
Bankruptcy is available to individuals and couples who need a fresh start. Yes, it is reported on your credit report for 10 years. However, the bankruptcy also shows that you have addressed your debt and have come out on the other side debt free. In most Chapter 7 bankruptcy cases, you wipe out all of your debts and retain all of your assets.Achieving financial stability and wellness through a bankruptcy may be exactly what you have been looking for. A New Year is an opportunity for a fresh financial start.