Dennis C. Hogan
Neither First Nor Last Resort - Bankruptcy
With the sudden unemployment of millions of people because of the Covid-19 shutdown, there are many people whose financial situation suddenly deteriorated. Many of those people wonder whether bankruptcy is the right option for them to get them through this lean time. Of course, each person has a unique situation and a unique answer. So I can only speak in general terms about what bankruptcy might do to help a person’s financial situation.
Bankruptcy is neither the first action to take nor the last if your financial situation changes for the worse. It is important in good times to spend and save in a way that allows you to weather the inevitable financial storm. If you have stayed out of debt and saved some money, then a negative situation is simply a time for you to execute the plan you already have in place to have no additional savings while using your savings until your income situation improves.
You might wonder why a bankruptcy attorney is writing about a method of personal finance that keeps people from needing a bankruptcy attorney. I like to think of bankruptcy as just the first step in a personal financial plan. The goal of personal bankruptcy is to put an individual or married couple on the financial path without debt and with personal savings. In that way, clients will never have another bankruptcy.
It is a pleasure to deal with bankruptcy clients because the person who is a good candidate for bankruptcy tends to be optimistic. In good times they go into debt because they have a good job that is paying for what they need. They are optimistic about how long that job will last. They buy things on credit because they planned to pay them off with their future income. Then things change. It may be part of a large economic problem like today’s Corvid-19 shutdown or it may be due to a problem unique to themselves. Either way, the income stops or is drastically reduced and the bills and installment payments keep coming due. Without income, those installment payments go unpaid. The late fees add more to the amount owed and eventually, debt collectors start calling to be paid before the other debt collectors.
Bankruptcy should also not be the last thing you do. One thing that bankruptcy should come before is taking from your 401k or IRA. I have been heartbroken to know people dipped into their 401K or IRA. That money is intended by Congress to help you in your old age. Therefore, there is a penalty for taking it early. Very importantly you can usually keep those funds even when you go through bankruptcy. It’s a crying shame to know people who think their only hope is to buy time with money that would otherwise increase for their retirement years.
Bankruptcy is basically the debtor giving assets to a bankruptcy trustee so the trustee can sell (liquidate) the assets to pay creditors. From that basic idea, there are exceptions as to what assets the trustee takes from the debtor and rules as to who is the first creditor in line. If your property (minus those exceptions) is equal to or more than your debts than you really have no reason to enter bankruptcy. After all, you could sell your property yourself and pay off the creditors.
In most cases, your 401K is not counted by the trustee as property to be liquidated so you should not touch it to make installment payments. Your retire money will be gone and in a month the debt will still be there waiting for another installment payment. In signing up for your 401K you are helping with a Congressional plan to eliminate poverty among senior citizens. Keep that 401K money where it belongs - in your name to be used when you are too old to work.
If your income has become too small to pay down your debts, it’s time to talk to a bankruptcy attorney.