Bankruptcy: After Christmas?

It's the time of the year where many people start buying gifts for others for the holidays. That, of course, is in addition to buying food, heat, electricity, telephone(s), gasoline, auto insurance, cigarettes (bad for health - bad for pocketbook), cable, clothes (don't forget shoes, socks, and underwear), and paying rent or mortgage and the car payment. Oh, and remember to buy the medications the Doctor prescribed.

Quite a list! How To Pay For It? Many people use CREDIT CARDS. Then comes February 1st and the bills flood the mailbox overwhelming the Letter Carrier's ability to carry all of the Visa, Mastercard, Discover, JC Penny, Sears, BestBuy, Fingerhut, QVC, Amex, Capital One, Orchard Bank, Bank of America et al BILLS.

When asked how they expect to pay, many will say "Well, I HAD to get those presents. I mean, it was Christmas (or Chanukah or whatever other holiday "requires" gift giving)". Says the lawyer at the first consultation about debt relief, "Okay, but how did you expect to pay the bills?" - the classic answer "I didn't think about that. I figured I be able to pay a little on each card, I guess." This response is typical from clients with sufficient income to pay the bill with minimum payments over the next 20 years, and from those who HAVE TO GO WITHOUT FOOD AND HEAT TO MAKE ONE PAYMENT!!

There are several problems here, actually many more than several. The biggest, in a sense, is that with debt that has accumulated over the past 3, 5, or 10 years there is no way ANY PAYMENTS are affordable. Then comes "Can I file bankruptcy?" The real question is "Can I file bankruptcy and still get rid of my bills (a discharge) even though I was foolish...?" There is no easy answer.

In order to eliminate/discharge debt, the Bankruptcy has to be filed in good faith. You cannot intentionally incur debt that you know you cannot pay. At a minimum, that debt cannot be discharged (made to go away). But wait...There's more! When the gifts were being bought and the plastic nearly melting from over-use, did the purchaser intend to repay the credit card company? The easy answer is "Yes, I always pay my bills!" But, is that the honest answer.

Many people just do not think about or know how to think about budgeting. People of all ages get caught up in the "I have to buy a gift for..." mode. So, what can be done for the honest but horrid money manager/giver?

Rule 1. Know how much you take home every month and how much must be spent on essentials, like the list above

Rule 2. If there is any extra, before deducting current credit card payments, be certain that it is truly disposable income immediately. Do not count the money you will save when you stop smoking.

Rule 3. Add up all of your credit card and other unsecured debt (debt not attached to collateral, like a car loan)

Rule 4. Multiply the amount of debt by 3% or 0.03

Rule 5. If the result after following Rule 4 is more than your "extra" (your disposable income) you should not incur more debt.

Rule 6. To figure how much unsecured debt you can support reasonably, DIVIDE your extra/disposable income by .03. So, if you have $200/month truly extra, the Most unsecured debt you can have is $6,000. And, remember that "extra" is what's left after paying all of the expenses listed in the beginning of this posting and any other NECESSARY expenses you have.

Even at the level shown, paying will be a bit of a struggle - things happen that cost money and are unexpected. Missing one month of the payment on any unsecured debt will make everything fall apart and you might never catch up.

If you have done those calculations, and after being careful you find that 6 months (I just picked a number) into the new year that you cannot pay because "Life comes at you fast!", then yes, you can file a bankruptcy with a clear conscience and peace of mind.

Author's Copyright by Richard I. Isacoff, Esq, November, 2011

rii@isacofflaw.com
http://www.isacofflaw.com

Where Do We Go From Here - Bankruptcy?

Regulatory reform is upon us. Congress and the White House have signed into law legislation that should revamp the entire structure of banking and financial institution oversight. The "watchers", auditors and guardians of the economy now have a veritable arsenal to be sure we do not have another meltdown. In the meantime, what do we do to improve the situation as it effects each of us?

There are really three primary groups of people who have to deal with the economic "Katrina" we have just gone through - at least as far as the eye of the storm: 1. Those who had nothing to lose and now have nothing to fall back on and may not even be able to get satisfactory employment; 2. The wealthy who managed not to lose everything and can rebuild without a significant change in lifestyle, except for the new Benz and 4 weeks in New Zealand this year; and 3. Everyone else - struggling to make ends meet and to plan for retirement (now put off until 70 to 75 by many).

This post will try to assist the last group - those working, maybe 2 jobs, or in a family where both spouses are employed (at least for the time being). Next time, we will deal with the 1st group

The new credit card laws (see June 11, 2009 Posting) will help keep credit costs down IN THE FUTURE, but will have little effect on current debt service (monthly payments). The result of legislation, reaction by card issuers, may also severely restrict the issuance of new cards and has already cut credit limits by as much as 75% and in some cases totally. It was never a good idea to play musical cards and hope that there never was a last card, but many of us did just that. Guess what? There is a last card and we already have it!

More startling however, is a study released June 4th, done by Harvard with some top notch doctors lawyers and economists, including Elizabeth Warren, Chair of the TARP oversight committee, that determined that from 2001 to 2007, there was a 50% increase in Bankruptcy filings due to medical expenses/emergencies. In 2007, it's reported that in 62.1% of the Bankruptcies filed, medical expenses/problems contributed significantly to the need to seek Court protection. In many of these cases credit cards were used to fund the expense - in others, hospitals' and other health care providers' bills have gone unpaid and built-up that 62.1% figure.

Surprisingly, or maybe not, 77.9%, more than 3/4 of those filing because of medical issues, had health insurance at the start of the bankrupting illness. Co-pays, deductibles, non-covered procedures, and uninsured hospital stays contributed to the result.
Most of those filing bankruptcy for these reasons where homeowners (2/3) and 60% had gone to college.

Did the bankruptcy make sense? Did it fix the problem? Did the people filing for Bankruptcy protection find relief, financial and "peace-of mind"? MAYBE.

The next posts will deal (short and sweet) with the Bankruptcy process - its good and the bad, but most of all what it is, how it is done, and what it is not. As a beginning, it must be understood that filing Bankruptcy, called filing for protection from creditors, is a right, not a privilege. The law is contained in Title 11 of the U.S. Code. The effect of the filing is Debt Relief. Interestingly, when people income file taxes, few pay the maximum amount on their gross income. Normally, deductions are taken for mortgage interest, medical expenses, child care etc, or the standard deduction is used. This is called Tax Relief. The IRS Code is Title 26 of the U.S. Code.

For some reason everyone is proud to use the Tax Code to minimize what they have to pay to the Government, yet people are still ashamed of filing for Debt Relief under the Bankruptcy laws. Tax Relief - Title 26; Debt Relief Title 11. They are both Federal law and they are both there to give guidance and assistance to taxpayers/consumers. Sure, with the IRS Code the government wants money and with the Bankruptcy Code, debtors are relieved of the obligation to pay money, including certain taxes. Look, a Federal Law is a Federal Law and Bankruptcy is not a four (4) letter word.
Author's Copyright by Richard I. Isacoff, Esq, June 2009

http://www.isacofflaw.com/
rii@isacofflaw.com