Tag Archives: Financial Planning

Bankruptcy, the Easy Way Out. Really?

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By Ginger B. Kelly, Esq. Posted: May 16, 2017

In 2013 there were over a million bankruptcy filings.  In 2014, there were slightly less than a million.  Based on these filing numbers, something like 1 out of every 200 adults in the US file for bankruptcy (uscourts.gov). That’s a lot of people turning to bankruptcy.  Based on these figures, it appears as if bankruptcy seems like an easy way out, or is it?  Let’s consider a few things before making this assumption, like the implications of a filing and how bankruptcy compares to other debt relief options.

Is Bankruptcy Really the Easy Way Out?

Basically, a typical Chapter 7 bankruptcy (total liquidation) filing involves three basic steps.

#1.  Paperwork: To begin any bankruptcy case, a series of forms outlining your debts, assets, income, expenses, and related information need to be filed.  This is not like your ordinary tax return.  There are multiple papers that need to be filed. It’s a ton of paperwork.

#2. Trustee Meeting: After the petition, the schedules and all the paperwork has been filed, a court hearing date for a 341 Trustee Meeting will be scheduled.  The Trustee Meeting (also known as the Meeting of the Creditors), the bankruptcy trustee will ask you many questions.  In Massachusetts, you will be given notice that the meeting is recorded.  Most of the questions confirm the information in your paperwork.  The Trustee may ask you about how your debts and assets will be handled. For most Chapter 7 filers, the Trustee Meeting goes rather quickly, about 15 minutes or so.

#3.  Discharge – After the Trustee Meeting, assuming nothing goes wrong, there are no issues or complications, most of your debts will be discharged.  A few debts that will not be discharged are Student Loans, some IRS Tax Debt and a few other things.  Now the person filing Chapter 7 can begin their fresh start.

But wait…

Those three steps are an over-simplification of the process.  There is a lot more to it.  Many other important legal considerations must be dealt with, in a typical Chapter 7 bankruptcy case. This is why most people consult with a lawyer before beginning or considering any Chapter 7 or Chapter 13 bankruptcy case.

Even when the case is closed, there’s a lot to consider.  Credit card debts, medical debts, payday loans and most other unsecured debts, are gone, but other debts like student loans may not ever go away.  Secured debts, like car loans and home mortgages can also go away.  But if a person whats to keep their home or car or both, they will need to reaffirm those debts and continue making those payments.  Sometimes, a reaffirmation hearing is required.

So why is Bankruptcy complicated?

Primarily, there are two big potential problems, maybe more.

#1.  Valuable property at Risk.  Because a bankruptcy trustee will evaluate both debts and assets, to determine if some debt could be repaid by liquidating (selling) your assets, a filer runs the risk of losing some important assets.

For most people, the two primary things they don’t want to lose are automobiles and real estate.  These two assets are the easiest to sell.  If the value of a filer’s home or car (or both) is much greater than the loan you used to buy it, that property could potentially be sold to repay creditors.

For more on how this works, and on the exemption laws that protect your property in bankruptcy, see this article, Should I Choose Massachusetts or Federal Bankruptcy Exemptions.

#2.  Effect on credit scores. The other issues most people worry about when it comes to filing for bankruptcy is how this affects credit scores.  Everyone knows any bankruptcy will have a serious impact on a FICO score for several years.  The degree of impact depends upon how good or bad a filer’s credit is the day they file their petition.  The better the credit the more significant the drop will be.  If a filer’s credit was shot to begin with, or on the low side, (which is true for most people who file for bankruptcy), the effect will be significant, but less than a filer with good credit.

To sum it all up, when a person files for bankruptcy, they can expect that obtaining loans right away won’t be so easy.  Often, credit cards and even car loans are available, but typically at very high rates of interest.  However, when a filer sticks to a reasonable budget, and pays their bills on time, they will be off to a fresh start and better credit over time.

Alternatives to Bankruptcy.

It’s been said that bankruptcy is sort of the “ultimate weapon” of debt relief.  But this means that bankruptcy should only be used when other options fail.  A discharge of debt via bankruptcy is only available once every seven or more years; bankruptcy is not something a person should try first.  Some people work with credit management companies to reduce debt, but I do not recommend this in most cases.  Others try asking family for help or they find another source of income, like a second job.  Adjusting one’s budget is always a good plan.  Do this before considering filing for bankruptcy.

Next Steps…

For those who have tried every option and have no realistic alternatives, then it’s time to schedule a consultation with a bankruptcy lawyer. Your first consultation should not cost a dime and it’s a good time to find out if bankruptcy will work in your situation.  When you meet with your lawyer, be sure to ask a few important questions.

  • Based on my income and job situation, do I qualify for bankruptcy?
  • Can I get rid of all my debts in bankruptcy?
  • Is property I own (bring a list of a few big items) unprotected or at risk?

A quick consultation with a good lawyer will help you understand a few things bankruptcy can do to help and what the risks would likely be or whether or not there are better options.

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The Law Office of Ginger B. Kelly is now accepting new clients.  Call and schedule your first appointment.  We are a small law office offering your first confidential consultation, absolutely free of charge.

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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 debt, finance, bankruptcy and District Court matters. 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.com, visit us at Ginger B. Kelly on Facebook or feel free to 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 cannot 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 © 2017, by Ginger B. Kelly, Esq., all rights reserved.

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Filed under Bankruptcy, Debt, Debt Collection, Filing, Massachusetts, Massachusetts law, practical stuff, Rhode Island, Student Loan Debt, Uncategorized

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

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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