Top Five Myths About Bankruptcy

I get questions all the time about bankruptcy that still surprise me. What I've learned is that there is a lot of misinformation out there.

Here are my top five bankruptcy myths (in descending order):

MYTH #5: YOU CAN'T FILE IF YOU HAVE A JOB

"Means testing" was added to the bankruptcy laws in 2005 to ensure that people who could afford to pay their bills paid something. The idea behind means testing made sense. But in reality, your income has to be very high before the Courts will reject a Chapter 7 filing. Even if your income is over the means test, there are many factors that play into deciding whether you pass or not, too many for this post (call me and I'll tell you more). 

MYTH #4: YOU WILL LOSE MOST OF WHAT YOU OWN IF YOU FILE

The vast majority of bankruptcy filings are "no asset" cases. The fact is that most of your assets -- home, vehicles, retirement savings, modest bank savings, and all of the items folks typically own (clothing, furniture, electronic devices, etc.) -- are 100% protected. In Minnesota, if you own your home you can even have a significant amount of equity in your residence and protect all of it.

MYTH #3: YOU CANNOT ELIMINATE TAX DEBTS

There are strict rules about discharging income tax debts but the fact is that you can completely eliminate older tax obligations to the IRS and to the State by filing bankruptcy. The rules are a bit too lengthy to review here, but one rule is that the taxes have to have been first due at least three years ago. If need be, you can hire a bankruptcy lawyer to assist you while you organize your affairs and wait for the right time to file. And then say goodbye to the old tax debts.

MYTH #2: BANKRUPTCY DESTROYS YOUR CREDIT

For better or worse, we live in a society where credit is relatively cheap and easy to get, even after a bankruptcy filing. Chapter 7 filers frequently get credit card and car loan offers the month after they file. Chapter 13 filers can qualify for new loans during their case. Normally, credit scores can rebound significantly within 12 to 24 months after the filing date. I frequently hear back from clients who are buying homes or refinancing home loans three years after they hired me and they are getting competitive interest rate offers (not the absolute best rates but rates that are surprisingly good).

MYTH #1: BANKRUPTCY IS A PERSONAL FAILURE

Nearly all personal bankruptcy filings are caused by job loss, medical issues, divorce, or other factors that are largely things outside of our control. Bankruptcy is not welfare or a government handout. It is an economic safety valve to save people from being stuck with debts they can never repay.

If you are struggling with bills, talk with an experienced bankruptcy lawyer to learn more and to go over your options. When you call our office, there is no obligation and your first consultation is free.

About the author: Dan Cooke

Image credit: premier101

Do I Really Need to File For Bankruptcy Protection?

How do you know for sure whether bankruptcy is right for you? Can you avoid bankruptcy altogether? Depending on your situation, it might be possible. To decide, you first need to understand your options.

IT ALL STARTS WITH A BUDGET

First, you need to create a realistic monthly budget. Income is usually easy to calculate. If you get paid once every two weeks, just multiply your net pay from a typical paycheck by 26 and divide that by 12 (if your paycheck is weekly, multiply by 52 and divide by 12). This will give you a rough estimate of what you have to spend each month. To figure your monthly expenses, start with necessities and regular payments — like mortgage, rent or car payments — but leave out all other long-term debts (such as credit cards, bank loans, etc.). How much money is left over each month? With that amount, could you pay off your debts at current interest rates in three years? What about five years?

If you need help with the budget, you could speak with a non-profit credit counseling agency. There are also online tools that can help you calculate how long it will take to pay your debts with the money you can set aside each month for payments.

SELLING ASSETS, BUT NOT RETIREMENT SAVINGS

If you cannot find a way to pay off the debts over three to five years by budgeting, what about selling things that you own to pay off the debts? If you have valuable assets that you do not need to live — a boat or an antique of significant value, for instance — you might want to consider selling the items to pay your bills. But in most situations you NEVER want to sell any part of your retirement savings. Retirement savings are generally protected from collection by your creditors. Plus, cashing in retirement savings can create new debts in the form of income taxes and penalties for early withdrawal. You just end up trading one debt for another. But if you have other assets you might be able to sell, speak with a financial counselor or get a free consultation with a bankruptcy lawyer to go over the pros and cons of this option, ideally before you sell anything.

GETTING OUTSIDE HELP

If budgeting and selling off assets aren’t going to work, you can contact a trustworthy non-profit credit counseling service for assistance. In most areas, you can call the United Way’s 2-1-1 service to get a list of agencies you can trust (we also keep this information in our office). To be honest, there often isn’t much these agencies can do to reduce the debt amounts. But they can review your budget again and help you prioritize your payments if you have more than one debt. Sometimes that can be a good intermediate step before you commit to bankruptcy, just to get an outside opinion.

WHAT ABOUT DEBT SETTLEMENT?

When you are struggling with debt, it is hard to avoid all the ads for debt settlement schemes. Most of these agencies work for profit and promise to help you deal with all of your creditors if you just send them a regular monthly payment. These services almost never work. They might be able to settle a few smaller bills but they’ll take a hefty fee to do this. Meanwhile, the other bills just keep growing and you are often left with an even bigger problem months later.

SO WHEN DOES BANKRUPTCY MAKE SENSE?

There is no simple formula to calculate the bankruptcy decision, but if you cannot realistically pay off your debts within three to five years, you should at least get a free bankruptcy consultation. In general, the older you are, the more dependents you have, and the larger your debts, the more likely it will be that bankruptcy will significantly improve your financial situation and help you move forward towards a more comfortable and stress-free life.

About the author: Dan Cooke

Image credit: Chris Potter

Five Crucial Steps to Quickly Paying off Debt

Many of my clients with large and small debts who are making payments on their bills wonder, "how can I most effectively pay off my debt?"

When trying to pay down debts, there's a right way and a wrong way to do it. One size does not fit all. A consultation can help create a payment plan that specifically fits your needs and get you out of debt much faster. But let these general rules guide you in your quest for financial freedom:

1. Create a List. Write down your debts on a piece of paper or a computer spreadsheet. Next to each debt, write down the interest rate and the type of debt - credit card, medical bills, etc. If you don't know these numbers, check your credit report. You may not see all of your debts on the report but it's a good starting place. Setting aside secured loans - such as mortgage or car payments - and taxes, student loans, and other government debts, the rule of thumb will be to prioritize the loans with the higher interest rates. There's a temptation to pay the loans with the lower balances off first because there's some satisfaction in seeing a balance go to zero. But you'll get to the debt-free finish line faster if you focus on the higher interest rate loans first. Note that if you have significant tax or student loan debts, you will likely want to consult with a professional because there are more complex strategies that will go into how to handle the payment of those debts. You also should consult with an expert if any of your creditors have sued you or have a judgment against you.

2. Create a Budget. If you've never created a budget, it is much easier than in sounds. A budget is just a list of your total income and expenses over a given time period. Because many bills are paid on a monthly basis, most people use a sample month's worth of income for their budget. The income side is usually easier to figure out. Expenses can take a little longer. You don't have to add up every trip to the drive-through when estimating your food expenses so just do your best to estimate monthly food costs. But don't forget to write down things you might otherwise forget: such as occasional car and home repairs, clothing purchases, out-of-pocket medical expenses, haircuts, and recreational activities. Spend a sample month jotting things down and use that to test your estimates. Then look at how much you really have over each month for paying down debts. If this amount isn't enough to pay off unsecured debts within five years, think about ways to increase the income (part-time job?) or reduce the expenses. If this won't do the trick, it's a good time to talk to a professional.

3. Pay More than the Minimum. Credit card bills have a "minimum" payment amount to keep you current. This amount is often ridiculously low. Most of us know that if you only pay the minimum it may take a lifetime to pay the bill in full. Only pay the minimums if you are doing so to put more money into paying off other loans with much higher interest rates. Note that this tip also works with secured loans -- you can often reduce a 30-year mortgage to 20 years or less by making a surprisingly small additional principal payment each month.

4. Don't Borrow Trouble. If you can't pay off your bills in a given month, you're going to be tempted to take out an additional loan to make things work. Heck, your lenders will probably even send you a letter offering you a short-term loan to help out. This is almost always a bad idea and can add years to your repayment plan. So shred those checks the banks send you. And NEVER take out a payday loan. The interest rates on payday loans tend to be outrageous.

5. Don't Borrow from Yourself. You may be tempted to sell one of your most valuable assets: retirement savings. If you're lucky enough to have retirement savings, withdrawing it is arguably a worse move than taking out a payday loan because in this case the lender is you! Selling other unneeded assets is fine but your retirement savings is special, and is treated specially under the law. Depending on how you handle the withdrawal, you may have to pay significant taxes and penalties on the amount you borrow from yourself.

If you need help, I strongly recommend you call either a qualified debt-relief attorney or a non-profit credit counseling agency. NON-PROFIT is the key. There are many "debt settlement" agencies out there that will charge you an arm and a leg to get the same help you can get for much less money from a non-profit credit counseling service.

About the author: Dan Cooke

Image credit: Tax Credits

Why Bankruptcy Doesn't Ruin Your Credit

I've heard it time and again: "I can't file bankruptcy because it will ruin my credit! Won't it?"

No. Life goes on after bankruptcy and you will almost certainly be able to borrow and finance consumer purchases or even business investments afterwards. Most folks receive credit card and car loan offers shortly after filing. It is not unusual to qualify for a home mortgage loan - or a refinanced home loan - within two to three years of filing. And the repayment terms on these post-bankruptcy loans can be solid if you can wait a couple of years before borrowing again, using that time to re-establish your creditworthiness.

Bankruptcy does not ruin your credit. Plain and simple, what hurts a credit score more than anything is not paying bills. And the remarkable thing about bankruptcy is that it makes the dischargeable bills go away. You cannot be late on a bill that has a zero balance. There are credit consequences to filing bankruptcy. But for people who need help with overdue or unpaid bills, bankruptcy normally ends up helping their credit scores in the long run.

Think about it this way. The banks that lend money have one primary concern. They want to know if you will pay them back. If you ask for a loan while you already have tens of thousands of dollars in debts the bank knows that any loan they give to you will be only one of many that you have. The bank does not want to stand in line with everyone else that you owe. If, on the other hand, you just filed for bankruptcy the bank knows that any of your prior discharged debts are no longer due, making it much more likely that your new loan will be paid. Plus, the bank knows that you cannot file bankruptcy again anytime soon, making it very unlikely that the new loan will ever be discharged in bankruptcy. This makes you a better credit risk AFTER you file than you were before you filed.

The record of your bankruptcy filing will be on your credit report for some time (current laws require a Chapter 7 to be removed from a credit report after ten years). But the report will also show how long ago the bankruptcy was filed. Lenders place less importance on an older bankruptcy IF you have been good about paying bills on time after your bankruptcy was filed.

With some careful post-filing credit repair steps, a FICO score in the high 600s or low 700s is achievable within 18 months to two years of a bankruptcy filing. Lenders differ on how they use FICO scores but many treat a score like this as a high or "A-level" rating. 

How do you repair your credit after bankruptcy? Simple. Pay your bills on time. As time passes you'll build up better creditworthiness. We work with our clients to give them guidance tailored to their situation to help them repair their credit after filing.

There are, of course, other factors that will play into the decision to file. But when making the decision it is important to know that a bankruptcy will not ruin your credit. Over time it can actually help.

About the author: Dan Cooke

Image credit: 401(K) 2013

Don't Fear the Mailbox

When people file for bankruptcy relief, one of the most dramatic changes is what happens to their mail. On the one hand, pulling mail out of the box is a lot less stressful because the bills and collection notices for past-due debts are no longer there. This can take a few weeks to a month after the date of filing. It takes a week or so for your creditors to receive the official, mailed notice of filing. And there may be collection agencies out there that also need to be notified. But your lawyer can help you with any creditors or bill collectors who may have fallen through the cracks.

The good news is that the collection letters and bills will stop. And most folks assume this means their mail will go back to "normal". Not true.

Bankruptcy is a matter of public record. No one will know that you filed unless they check the public records, assuming they even know how to access them. Unless you owed them money, it's very unlikely that any friends, family, employers or associates will ever know that you filed. But there are companies that check the bankruptcy filing records regularly because they see recent filers as a source of business.

What kind of business? Lending, mostly. That's right, some lenders believe folks who recently filed are a great lending risk. This is partly because they know you don't have much (if any) older debt hanging over your head anymore. They also know you cannot file for bankruptcy relief again, at least not for many years (and hopefully never).

This is mostly fine. We live in a free-market economy after all and most of us are used to receiving junk mail and solicitations, even if we don't have unpaid debts. The problem is that some of these lenders send confusing letters that can look like official bankruptcy notices from a Court or a judicial office of some kind. I have seen letters sent directly to my clients from for-profit companies that tell them they need to sign up for "official bankruptcy notices" in their case, suggesting that they need to pay for this service (you don't). Receiving a letter like this can be very stressful and, worse, can draw you into signing up for something you don't need and don't really want.

I try to warn all of my clients about this and encourage them to contact me if they ever receive a letter they do not understand, even if they receive it months after their case was commenced. The good news is that even though some unusual mail may arrive after filing, none of it should have anything at all to do with paying older, discharged debts. And you really can start to breath easier when you reach for your mail.

About the author: Dan Cooke

Image credit: Wikimedia Commons (Steevven1)