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Top 4 Reasons NOT to Consider Bankruptcy

 

Top 4 Reasons NOT to Consider Bankruptcy

By Attorney Ginger Kelly, December 24, 2018

It’s not unusual to borrow money and have every intention of paying it back. But for some unknown reason, you can’t pay it back. Maybe you lost your job or your hours got cut. Did your small business just crash or were sick or hospitalized. Sometimes you need to stay home with a sick child or elderly parent. Whatever the reason, it’s very human to find yourself unable to pay back loans and credit cards. When life happens, and you are stuck with debt you can’t pay, it’s OK to talk to an experienced bankruptcy attorney.

Although many people avoid the “B” word, bankruptcy, bankruptcy could be the tool you need to get back on your feet. If you can’t decide what to do, here are the top 4 reasons why you should not consider bankruptcy.

Number #1. The Hole you’ve Dug for Yourself isn’t too Deep to Get Out

Paying and paying on credit card debt without making a dent in the balances is a perfect storm for credit disaster. Another problem is paying a minimum payment on a judgment for years and years and years and the balance just doesn’t go down, it appears to go up. These are problems that may lead you to think bankruptcy is the best option. But what if you are simply annoyed at paying bills? The best plan of action to take is to do the math. Weigh your disposable income and your unsecured debt. Are you making more than your minimum payments? Are you making any progress paying down principal? Even if you can only see a slight dent in the principal, over time, but it’s taking a long time for you, evaluate whether bankruptcy is really the best idea for you right now. If you have no employment or medical issues, no change in family status, keep plugging along. Bankruptcy is probably not for you.
Dennis, a Veteran living by himself on Social Security and a small pension had problems with a judgment on a small debt. Because Dennis did not defend himself in court, so the creditor obtained a judgment against him. This was way back in the 90’s. Dennis had no choice. He started making very small minimum payments of about $30 per month out of his disposable income, which wasn’t much. In 2017, he came to me for help. Dennis paid almost $9,000 to his creditor over the years and he couldn’t see any end in sight. Since Dennis had little monthly disposable income and other medical debt, bankruptcy was a good fit for Dennis.

Tip #1: If you can’t afford to pay all your unsecured creditors in full, over the next 3 years, your current strategy isn’t working.

Number #2: You Have NOT Looted Your Retirement Account to Pay Bills

It can be very tempting to take a loan or an early withdrawal from your retirement funds, simply to keep your head above water. But if you have the means not to do this and to seek help first, even when debtors are filing law suits against you, awesome! Borrowing money against your retirement account is a very big risk, especially if you are close to retirement age. By looting your retirement, you are not getting out of debt easily. You are actually taking from old-age self and using it, hoping you will recover. Most people don’t recover. And don’t forget the consequences of early withdrawals. It’s not worth it. Alternatively, consider making plans to contact a bankruptcy attorney who can help you move forward, not backward, before you decide to loot your retirement accounts.
Steve is currently being sued by a lender for a repossessed vehicle because he suffered road bumps in his career. After several layoffs, he decided he could no longer afford his $400 a month car payment. He surrendered his car. After the lender sold his car at auction, Steve still owes about $10,000. If Steve borrows from his retirement account he can pay off this debt and not have to worry about the law suit. Sounds tempting, doesn’t it?

Steve decides to hire a lawyer and the lawyer negotiates with the lender for a payment plan. He sticks to his monthly payments and pays off this debt within 3 years. Steve still has enough money to save for retirement, repair his current vehicle, eat out every once in a while and pay his mortgage. Steve probably doesn’t need to file for bankruptcy.

Tip: Seniors who need the relief bankruptcy are often tempted to use precious retirement funds to pay off credit card debt. If you find yourself in this situation, consider this a big red flag.

Number #3: Your Family Isn’t Going to Suffer

It’s a known fact that having a child is not easy. Some say that having a child is the single greatest predictor that a single person will end up in financial collapse. When struggling with debt and weighing your options, consider who is dependent upon you. What are their ages? Do you have an “emergency fund” to care for them if something unexpected happens? The larger the number of dependents you have, the more likely you are to need an emergency fund and health insurance.

Karen got slammed with a judgment from one of her credit card creditors. It was from a debt she acquired back in 2006. She was very upset. Karen is a single working mom, supporting two school-aged kids. Their father pays hardly any child support. If Karen’s creditor garnished her wages, or she lost her job, how would she pay her rent, feed her children and buy gas to get to work? With this in mind, Karen worked out a payment plan with her creditor and is now making minimum payments. Karen is also saving for emergencies and has enough disposable income to pay for things like school pictures and activities, clothes, food and gas. If this wasn’t the case, Karen would probably benefit greatly by talking to an experienced bankruptcy attorney. But since her family is doing fine, and she’s paying her unsecured debt and her bills, bankruptcy may not be a good option just yet.

Tip: If you have dependents, be sure to stash some cash into an emergency fund.

Number # 4 You’ve Got Equity on Your Home AND you can Catch up on your Past Due Mortgage Arrears

It’s been estimated the over 7 million Americans are underwater on their mortgages. But there are many ways of finding relief, like negotiating a loan modification and talking to your lender. If you file for bankruptcy these are the 5 things you may be able to do, as a last resort of course.
1. Catch up on past due mortgage payments or negotiate a loan modification so you can stay in your home;
2. Eliminate a second mortgage or home equity loan through bankruptcy;
3. Erase debt that could be due if the lender foreclosed and sold your home for less than you owed;
4. Free up money that you were paying on other debts so you can afford your home loan; and/or
5. Avoid a big tax bill from “cancellation of debt income” that could happen if your home goes into foreclosure or if you negotiate a short sale.

Where to Get Help

A consumer bankruptcy attorney can help you understand how filing may help you. Many offer low-cost or free consultations. Every bankruptcy attorney should tell you of your options and alternatives to bankruptcy before you make those very important decisions.
If you have other legal questions, especially if you are contemplating bankruptcy or dealing with collections or debt collection law suits, Attorney Ginger Kelly is now accepting clients in the Dudley, Webster, Sturbridge, Fiskdale, Southbridge, Saundersdale, Oxford, North Oxford, Charlton, Charlton Depot, Auburn, Leicester, Rochdale, Spencer, Brookfield, East Brookfield, West Brookfield, North Brookfield, Warren, Brimfield, Wales, Palmer and Holland. We can explore whether or not bankruptcy is the easy way out for you. Our office is a quiet and comfortable place to talk, and a free pot of coffee will be waiting for you when you arrive.

The Law Offices of Ginger B. Kelly

167 Carpenter Hill Road

Charlton, MA 01507

(508) 784-1444

AttorneyGingerKelly@gmail.com

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I stole this title from Andy Prescott: “Think Twice Before Taking out a 401(k) Loan”

I stole this title from Andy Prescott: “Think Twice Before Taking out a 401(k) Loan”.

Comments Off on I stole this title from Andy Prescott: “Think Twice Before Taking out a 401(k) Loan”

Filed under 401(k), Bankruptcy, Financial, Legal, Retirement Savings

I stole this title from Andy Prescott: “Think Twice Before Taking out a 401(k) Loan”

401K_dead_ground_hog

Image by Mike Luckovich, editorial cartoonist and The Atlanta Journal-Constitution’s Pulitzer Prize winner

Using a 401(k) loan to pay for things may be OK in some instances. However it’s not always a good idea, as stated in an article entitled, “Think Twice Before Taking Out a 401(k) Loan,” written by one of my favorite bloggers Andy Prescott. Andy is a CPA who writes about saving money at artofbeingcheap.com and is also a staff contributor for HowardClark.com. I enjoyed Andy’s article and, as usual, he brought up a few good points from a CPA perspective.

Then I thought about this.  Since I’m a bankruptcy attorney, why not explain how this works based on my experience and training?  Helping debtors make good choices when faced with financial problems is my business.

For quite some time now, as a general word of advice in most circumstances, I advise most clients that taking out a 401(k) retirement account loan to pay off pressing debt is probably not your best option.  Of course this depends.  Everyone’s situation is different.  Even so, especially when a person is considering bankruptcy, taking a 401(k) loan to pay off debt just complicates the whole idea of using this viable option for relief.  Not only does this complicate good decision making, it also complicates a bankruptcy discharge, trustee decisions and more.

Here’s why:

Say the bills are mounting. You are having trouble paying them. Maybe you lost your job, or had an unexpected death in the family, an unusual medical issue or recently became unemployed. Whatever the reason, bankruptcy may seem like an awesome option. Bankruptcy is a useful legal tool.  Bankruptcy is intended to help debtors in need get a fresh start. A fresh start sounds like a really good thing, right?  Well, it depends.

Often, a truly fresh start depends on the decisions a debtor makes pre-bankruptcy filing, like using a 401(k) or other retirement account loan to pay down debt.  Under current federal and local bankruptcy rules, in a Chapter 7 or Chapter 13 bankruptcy case, an ERISA qualified retirement account is a protected asset. This includes a 401(k) savings plan and most ERISA qualified retirement accounts, like IRAs, including Roth IRAs. These types of accounts are exempt from creditors claims. Great! This is the good news! A 401(k) is a protected exemption.

Now for the bad news. Suppose a debtor gets into financial trouble. The debtor is stressed and needs fast easy cash to payoff bills, maybe some medical bills or old IRS debt, maybe even the mortgage payments.  To a debtor under stress, borrowing against a 401(k) and using those funds to pay down debt seems to make sense.  It’s easy.  No credit checks required, no questions asked and there is very little paperwork. Ask and ye shall receive, the bills can be paid.  But wait!

Little did our friend the debtor realize, that if bankruptcy was ever a good option, they may have spoiled a new beginning. Borrowing against a 401(k) retirement account to pay down debt, prior to filing, will seriously jeopardize their fresh start. After all, when faced with serious financial struggles, bankruptcy should be a viable option. It’s the new alternative to the old debtor’s prison. Anyway, depending upon the circumstances bankruptcy is useful, but not if the option is compromised by poor planning and decision-making.

As a general rule, a 401(k) retirement account loan can’t be discharged under Bankruptcy. If you borrow against it, then file for bankruptcy, you have to pay the loan back according to your 401(k) retirement account plan rules. What’s done is done. There’s no going back.

On the other hand, say a debtor facing big financial trouble decides not to pay down bills by borrowing against a 401(k) or other ERISA qualified retirement account, then they find a good attorney and decide that bankruptcy is the best option, they have a great opportunity for a brand new fresh start.

If all goes well, a debtor may decide to file for bankruptcy under this set of circumstances.  The debtor will get to discharge most, if not all, insurmountable bills (most debts are forgiven under chapter 7) or pay for a short time with a reasonable payment plan and then get a full discharge (under a chapter 13).  Additionally, the debtor gets to keep all their 401(k) retirement savings!  Like magic, they get a fresh start.  Presto-chango!

Like I said before, bankruptcy is often a useful tool for those who need it.  Making wise decisions about 401(k) retirement savings accounts and other qualified ERISA retirement accounts is important.  These kinds of accounts are often overlooked valuable exempt (protected) assets under state and federal bankruptcy law.

This is one reason why it’s a good idea to think of your finances like a critically important lifetime project. “Measure twice and cut once.”  Think twice, in other words, before making big financial decisions or taking out 401(k) retirement account loans to pay debt.

Speak to your trusted attorney. Get all the facts. Plan your best course of action so your action doesn’t plan you.

Got it? Got it. Good!

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ABOUT ME:  Attorney Kelly is an attorney in good standing, licensed to practice in both the Federal District and State Courts of Massachusetts and Rhode Island.  Her law practice is focused on consumer finance and bankruptcy.  However, Attorney Kelly is experienced in both criminal and civil trial work.  On a personal note, Attorney Kelly enjoys writing and other things, like conservation and agriculture.  To find out more visit, www.attorneykelly.squarespace.com or http://www.attorneykelly.wordpress.com, or call us at (508) 784-1444.

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NOTICE:  Attorney Kelly does NOT provide legal advice to anyone via social media or anywhere over the Internet.  Any and all electronic posts and writings, by Attorney Kelly, does NOT establish any type of attorney-client relationship, whatsoever, neither perceived, actual, material, implied or other.  We can not stress enough, if you need personal legal advice, always see your attorney.  Do not rely upon Attorney Kelly’s posts, writings or any Internet information on websites or social media for your own personal legal advice.  Seek legal advice and representation from your own personal attorney.

Copyright © 2015 by Ginger B. Kelly, Esq., all rights reserved.

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Filed under 401(k), Bankruptcy, Financial, Legal, Retirement Savings