Filing bankruptcy is something that many consumers have to consider, for several reasons, many of which are out of their control. It helps people who can no longer pay their debts get a fresh start by liquidating assets to pay their debts or by creating a repayment plan. Bankruptcy laws also protect financially troubled businesses.
There are several types of bankruptcy and many things to consider, both before and after filing. In an effort to help you better understand the ins and outs of bankruptcy, we asked several experts to provide their best financial tip when it comes to bankruptcy.
Consult with a bankruptcy attorney.
If you are considering bankruptcy, the most important thing you can do is to sit down with a bankruptcy attorney to explore and understand both your bankruptcy and non-bankruptcy options. Bankruptcy isn’t for everyone and there are different reasons why it might be best to, at least temporarily, delay filing your bankruptcy petition.
The earlier that you meet with a bankruptcy attorney, the more options you might have on the table as well. Once you are facing a wage garnishment or your house is being sold in foreclosure, your options are more limited.
As a general rule, if you owe family members or friends money, don’t pay them before you file for bankruptcy. Payments like these are called “preferential transfers” and can be avoided by a trustee that gets appointed in your case. A simplified example: You owe your brother $1,000 and you pay him back a month before you file your bankruptcy. The trustee can sue your brother to collect the $1,000 that you paid to him because he received more than your other creditors.
Finally, you shouldn’t be an ostrich if you are considering bankruptcy. Some people act like an ostrich with their head in the sand by avoiding their mail and phone calls. If you’ve been avoiding looking at mail and letting the bills and collection notices pile up, take a proactive step by opening the envelopes. Your bankruptcy attorney will need all of these names and addresses so that your creditors (and the collection agencies) can be served when your case is filed.
Understand that tax debt is dischargeable.
There is a misconception out there in the media and other places that Internal Revenue Service and state income tax debt is not dischargeable in bankruptcy. To the contrary, IRS tax debt and state tax debt is absolutely dischargeable. In order to take advantage of this, there are three elements that must be met: (1) the tax must be at least three years old, (2) you must have filed your tax returns on time or at least two years prior to filing bankruptcy and (3) the IRS or the state taxing authority must have assessed the tax (i.e. sent you a bill) at least 240 days prior to filing bankruptcy.
So, what does that mean? It means that if a debtor has tax liability he must wait the three-year period and also have met the other two elements to have the tax discharged.
Generally, people file bankruptcy because of pressure they feel from their creditors. Harassing phone calls, lawsuits, etc. The IRS normally does not put that type of pressure on people for at least two to three years; however, banks and credit card companies do.
Therefore, if a debtor is filing bankruptcy because they’re feeling pressure from a credit card company, and the debtor has tax debt, the debtor must delay filing bankruptcy until the three-year condition is met: and it is not very difficult to do so. A good bankruptcy attorney can help a client wait that time out.
One must be very careful though, the three years does not begin on January 1st, it begins on April 15th or the tax filing deadline date.
Get your budget in order.
Prepare a detailed budget based on your actual expenses. If a borrower prepares the budget, the borrower is more likely to be realistic than say a lender, loan consolidation scam, consumer credit counselor, or other third party. This process helps borrowers see whether they can afford to meet their family’s needs and goals such as health insurance, educational fund, etc.
Once people have reached the point where they have stopped paying their unsecured creditors, they can save all of their receipts and look at their weekly expenses. Many people who are considering filing bankruptcy are “robbing Peter to pay Paul” by continuing to charge normal living expenses on their credit cards while also continuing to make their minimum monthly credit card payments.
Many of these people initially believe that they would have a surplus if they did not have to pay their credit card debt because they have not accurately included the expenses that they are continuing to charge on their credit cards. Carefully examining the receipt slips, credit card statements, EFT and checking records, and ATM withdrawals, usually accounts for the family’s ongoing expenses.
Non-recurring (“spike”) expenses such as vehicle repairs, medical copays, and home repairs, may need to be estimated on a two to three-year basis and pro-rated into each month. This process helps couples stop fighting about money and eliminate any guilty feelings about filing bankruptcy.
Donald E. Petersen of Law Office of Donald E. Petersen
Don’t feel ashamed of bankruptcy.
Know that you have nothing to feel ashamed about. Shame often comes with financial difficulty, but there is life after bankruptcy – and you’re far from the only person out there that needs a bit of financial help. Take comfort in knowing that you are taking the right steps to secure a financial future. While it can be difficult to bounce back from bankruptcy, it’s not impossible.
What’s harder is dealing with endless collection calls, defaulting on loans, and not having enough money to meet your basic necessities. Filing for bankruptcy will help you get back on your feet again. It’s common for people to feel the burden of shame when facing bankruptcy, and this can often lead to depression and even suicide. It’s important that the stigma of shame be erased when it comes to bankruptcy. It’s also important to follow up that initial filing with a solid post-bankruptcy plan — both for your mental and financial future.
People that have a solid credit-building plan in place that can be followed prior to declaring bankruptcy often have a better outlook pre-filing. Why? It helps to know that there’s a plan to fall back on. Filing for bankruptcy without a plan can feel overwhelming and doesn’t give a person much to look forward to.
Plans should include ways to rebuild credit, information and education about how to avoid overbearing debt, why some debt can be a good thing, and how to balance a debt to income ratio. This type of plan can be built on your own (through research) or with a bankruptcy attorney. Either way, a plan is important to your overall well-being when faced with bankruptcy.
So, my best advice is two-fold: you have nothing to feel ashamed about and a post-filing plan can help alleviate any feelings of depression, guilt, or shame.
Categorize and prioritize the payment of your debts.
When I counsel business owners or individuals who are considering bankruptcy, I stress the importance of categorizing and prioritizing the payment of their debts. First, it is imperative that the client understands his or her financial situation, including the assets owned and the obligations owed.
Next, it is important to resolve the debts that a bankruptcy won’t fix. In a corporate setting, that means making it a priority to pay those business debts that flow through to the individual owners, including (a) trust fund tax and sales tax obligations, (b) certain claims of employees and (c) debts that are guaranteed by the individuals.
Individuals considering bankruptcy should try to pay down as much non-dischargeable debt as possible. The most common of these are most tax debts and domestic support obligations. In addition, it is important to keep current on lease obligations, as well as obligations secured by property, such as a mortgage or an automobile loan. Doing so provides the putative debtor with the most options in the event of a bankruptcy filing.
Seek the best long-term solution.
Like all financial decisions, the decision to file bankruptcy is important. Your long term financial well-being is the paramount consideration. The critical goal is to preserve future income for you and your family. If you have too much debt, the cost of servicing that debt by making payments on credit card debt with 20%+ interest has the effect of leaving you with no cash flow to save for retirement.
Many people make their minimum monthly payment on their credit cards, but then have no cash left to purchase anything, so what do they do? They “charge it” again each month, causing their credit card balances to never go down. If they can eliminate the debt and save the 20%+ interest that savings allows the cash to cover needed purchases and creates excess cash that can be saved for retirement.
You need to eliminate the debt in the fastest and most cost-effective manner. You need a professional who knows all means to eliminate debt, by utilizing bankruptcy as well as non-bankruptcy options to analyze your situation to find the optimal solution. There are times when alternate solutions outside of bankruptcy, such as debt resolution, are more cost effective. Another example is income tax debt. Bankruptcy can often be used to eliminate income tax debt, but tax relief specialists don’t inform their clients of this avenue because they don’t provide that service and prefer to capture the client’s money rather than find them the best solution.
The bottom line is that you should to consult with an attorney that knows all methods, including bankruptcy, tax relief and solutions outside of bankruptcy, in order to obtain the best long term financial solution.
Get a clear picture of how your finances currently stand.
The best tip for those considering filing bankruptcy is to get a clear picture of what your finances look like right now. Most of the people who meet with a lawyer to get advice have not opened their credit card statements in months or even years. They’re not clear on how much they’re already paying each month toward their debt or how much they spend on daily expenses.
Most feel overwhelmed, anxious, and worried about the future. Not knowing how much debt you actually have or what your expenses actually look like are a large part of why people feel stuck. I recommend spending a few hours pulling your credit report, sitting down with all of your statements and bills, and making a list of your debts and expenses.
Once that information is gathered, look at what sources of income you have available and what kind of assets you have. This simple action will help eliminate some of the overwhelm people face and help you start looking at possible solutions. By completing this work at the beginning, it can make the process to obtain advice so much easier for people considering bankruptcy. This also makes a consultation with an attorney much more effective because it’s easier to determine what potential solutions are available when it’s clear where the individual is at with their finances right now.
Know Your Rights
The best tip for anyone considering bankruptcy can be summed up in 3 words: Know Your Rights.
Anyone considering bankruptcy needs advice to find out what rights they have. The most common phrase uttered in my office is, “I didn’t know…” The reason for that is often that they turned to the internet or to a sales person to tell them what to do without finding out all of their rights and options. Too many people take bad advice hoping to avoid talking to a bankruptcy attorney, only to turn around and have to file bankruptcy because of the hole that the bad advice resulted in.
I am obsessed with advising clients to know their rights and options before making a decision. Find out the long-term consequences, how each option will affect you next week, next month, and next year. Find out why the person on the phone from the late-night television commercial is so convincing and that you just need to pay them $1000 a month and all of your problems will be solved. Find out your rights and make the best decision for your situation.