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