How to Protect Your Credit When You Are Broke
Every so often a client will say, “I am hopelessly in debt, but I don’t want to ruin my credit score with bankruptcy. It is still very good.” This statement is just like the old joke, “I can’t be broke, I still have checks!” A credit score is supposed to be an indicator of your financial health. Unfortunately, many people assume that their financial health is indicated by the credit score. Consequently, they continue to misuse credit, in many cases borrowing from credit sources to pay monthly credit obligations. It is a vicious cycle of debt.
In today’s economy your credit score is not the only factor a lender considers when issuing credit. Financial institutions are using new sources to profile their customers. A recent article by Wall Street Journal writer Karen Blumenthal entitled New Ways Bankers Are Spying on You reports that banks are now examining rent and utility payments, bank deposits, as well as estimating your home’s value in order to gauge your financial health. Blumenthal writes that in one case a bank customer was denied a credit after the lender reviewed his home loan records, determined that the value of his California home had declined, and noticed that his mortgage principal wasn’t declining—giving away that he has an interest-only mortgage.
Financial good health is living within a budget, using credit responsibly, controlling debt and excess spending, working towards short and long-term financial goals, and contributing to savings and investments. It is difficult to manage just one of these aspects when a person is overwhelmed by debt.
Fortunately, the federal bankruptcy laws provide an answer for individuals living beyond their means and buried in debt. Bankruptcy offers a legal means to restructure or eliminate your debts while protecting your family’s assets including real estate, vehicles, or retirement accounts. During bankruptcy creditors cannot contact you directly and the vast majority of debtors do not lose any property.
If you are drowning in debt, don’t be fooled by a high credit score. Your financial house is built on sand and it is time to rebuild on solid ground. Consult with an experienced bankruptcy attorney and discover how the federal law can get you back on the path to financial health.
Rising Gas Prices Impact Debtors in Bankruptcy
Debtors in bankruptcy are required to disclose all household income and expenses. While the debtor’s income is often relatively easy to determine through pay stubs and bank records, calculating expenses can be more elusive. When completing your bankruptcy schedules it is important to be realistic. Often changes in the economy can significantly affect your budget. The recent spike in gas prices has impacted the budgets of American families, and changes calculations within your bankruptcy case.
The U.S. Energy Information Administration recently determined that the average price for a gallon of regular unleaded gas in the United States is $3.567. That is a change of almost $.78 from the same time last year. Many economists believe that the national average will climb to over $4.00 per gallon. In fact, in some states (notably California) gas is already over the $4.00 mark.
It is important to account for this increase in your family’s budget. If you drive 12,000 miles per year and your car averages 25 miles per gallon, you use 480 gallons of gas per year, or 40 gallons per month. At the national average price of $3.567 per gallon, you spend almost $143 per month on gas. That is already $31 more per month/per vehicle than a year ago. If gas prices climb to $4.00 per gallon, the additional cost to a two income, two car family will be approximately $97 per month more than last year.
Higher gas prices have also contributed to an increase in food prices. According to the U.S Department of Agriculture, food prices for a family of four with school-aged children averaged $1184.50 during the month of January. That’s $26.20 per month more than the same time last year.
While not every budget increase will necessitate a change in your bankruptcy schedules, any significant change that occurs after you sign your bankruptcy schedules should be brought to the attention of your bankruptcy attorney. While only a small percentage of cases will be affected by increases to a debtor’s expenses, it is important to keep your attorney apprised of changes in your finances during your case.
Devising A Financial Strategy After Divorce
One of the most common causes of divorce is financial difficulties. Once your divorce is over your finances may get worse before they get better. What can you do to lessen the impact?
Calculate your net worth by taking inventory of your assets and liabilities. Summarize all of your assets including the value of your home, cash, savings or checking accounts, any valuables such as jewelry, antiques or artwork and any retirement accounts. Subtract the amount that you owe on all of your debts. Be sure to include payments that are made quarterly or yearly.
Prepare a budget based on your new income level and stick to it. Look at your income and liabilities. Be sure to budget for car repairs and other unexpected expenses. If the amount you spend is more than your income, you will need to make some choices about expenses you can cut. You may need to take your lunch to work, or cut back on activities for yourself and your children.
Make certain that joint accounts with your ex-spouse are closed. You do not want to be held responsible for debt that your ex agreed to pay in your settlement. Be sure to check the mortgage, automobiles, insurance and credit cards. Take the appropriate steps to transfer titles if needed. Be sure that any joint checking or savings accounts are closed. Establish new accounts and credit if you haven’t already done so.
Update your beneficiary on your life insurance, investments and retirement plans. Remember to update your will and any trusts. If your ex-spouse covered you on their health insurance, get your own policy or make sure you are covered by COBRA benefits.
Try to keep emotions out of your financial decisions and don’t dwell on the split from your spouse. It is up to you to take care of yourself in all aspects of your life, including your money.
Chapter 13 Bankruptcy: Living Expenses – Need vs. Want
When people consider filing for relief under Chapter 13 of the Bankruptcy Code they are typically consumed with the debts they owe, creditor harassment, and just making it day to day. Because this can be overwhelming, seeking counsel from an attorney can help put things into perspective.
Some people do not think in terms of needs and wants when it comes to considering bankruptcy or even spending and living on a budget. However, this is a major part of what Chapter 13 bankruptcy helps to accomplish. In the bankruptcy world, a person’s expenses are looked at in two categories – necessary and non-necessary for reorganization purposes. A necessary expense would be defined as food, clothing, and shelter. Non-necessary expenses would be things such as cable, internet, gym memberships, etc. People must begin to put their expenses in perspective and make tough decisions like whether to keep their home or surrender it or whether they can afford to keep their children in a private school which clearly is a non-necessary expense.
For illustration purposes, let’s look at expenses for food, clothing and other items based on the IRS National Standards for Allowable Living Expenses in bankruptcy cases filed on or after March 15, 2009. Per month, a household of two people can spend $537.00 for food, $66.00 for housekeeping supplies, $162.00 for clothing and services, $59.00 for personal care products & services and $197.00 for miscellaneous expenses. These items become budgeted expenses in the sense that you are now limited to what you are allowed to spend on certain things. Reality sets in quickly and it sometimes stirs up anger or bitterness in Chapter 13 cases when someone must be told that they have to remove their children from private school or give up the RV used for vacation or the boat used for recreation. Remember, usually these issues only come up when someone files a Chapter 13 seeking to pay unsecured creditors less than 100%.
Anyone who files a bankruptcy is subject to these expense limits and must follow the confines of the law and the applicable rules if they want the benefits that bankruptcy offers. In other words, you have to take the good with the bad. Because we must follow the IRS expense guidelines, a person can be forced to give up property in bankruptcy and/or reduce their spending in they want the benefits of a Chapter 13 reorganization. So keep this in mind when you elect to file a Chapter 13 and attempt to pay your unsecured creditors less than 100%.
Question: What Should I Do If I Can’t Afford To Pay An Increased Credit Card Payment? Should I Contact A Debt Consolidation Company Or Consider Filing A Chapter 13 Reorganization Bankruptcy?
Before you take any affirmative steps to reorganize your debt with a debt management company or file for bankruptcy, you should sit down and work up a detailed financial budget for you and your family so you know how much disposable income you have each month to apply towards your credit card debt.
When you have completed your budget, contact your credit card companies directly and see if you can get them to agree on changing the terms of the repayment of the debt. Unfortunately, most credit card companies will not change the repayment terms unless you fall at least three months behind. Of course, if you stop making your payments, your credit score will drop significantly.
If you are unable to negotiate directly with your creditors, then consult with an attorney to consider all of your options including hiring a debt management company or filing bankruptcy.
A common question we receive in our offices is “what’s the difference between private debt consolidation and filing Chapter 13 and which is better?” Though the concept is nearly the same, there are many important differences. If you’re interested in maintaining a good credit rating and you don’t want your debt problems to become public record, then private debt consolidation may meet your needs. Private debt consolidation, however, can’t give you guaranteed court protection from your creditors. Creditors can still proceed with legal action against you to collect their debts. On the other hand, Chapter 13 offers significantly more protection to you and your family, allowing you to pay your creditors a percentage of the debt owed (often as low as ten percent) and discharges the remaining balance. And perhaps best of all, creditors cannot repossess or foreclose on your property.
What’s best for you will naturally depend on your specific debts, personal priorities and income status.
Chapter 13 Debtors Need To Be Able To Live On A Tight Budget If They Are Paying Their Creditors Less Than A 70% Dividend In The Western District Of Kentucky.
Typically, a Chapter 13 is filed by an individual or couple because their income exceeds the amount necessary to be able to qualify for total relief under Chapter 7. Chapter 13 can also provide debt relief but it requires the debtor to pay creditors some dividend back based on the disposable income left over after paying normal household bills. In the Western District of Kentucky, the courts are taking a careful eye to the debtor’s budget for the purpose of making sure that no money is spent unwisely in order to maximize disposable income that gets paid to unsecured creditors. According to the courts, attorneys now have the duty to advise their clients to reject expensive service contracts in order to switch insurance plans, internet and cable services, child care, cell and home phone service if a better deal exists. If your clients are retired, the courts feel that a cell phone is not a necessary expense and may disallow it from the budget. What dollar amount can you allow for food in the budget? According to the IRS guidelines which the courts are supposed to follow, you can spend $752.00 for food for a family of 4. However, in the Western District of Kentucky, for Chapter 13 budget purposes, you may be limited to spending $600.00 a month for food for four people which is $5 a day per person. Not hardly a lot if you are having to pay $2.32 for your kids school lunches through the Public School System.
This type of budget scrutiny by the court begs the question of whether it is worth it to have both adults in a household working outside the home creating a higher income that disqualifies them for Chapter 7 immediate relief. Rather, these hardworking couples can either deal with their creditors on their own or file a Chapter 13 plan to repay their debts. Unfortunately, if the couple elects to file a Chapter 13 and actually pay their creditors something, they may be subjected to the budget constraints set by the court for five years. It seems that the families who are trying to do the right thing by having both adults work are being punished unfairly by having to submit to a bare-bones budget in order to pay back more of their debt in a Chapter 13. I wonder if the family who chooses to create less income and have one parent stay home with the kids got it right – the opportunity to be a more involved parent, the opportunity to live with whatever budget they can afford, and the opportunity to pay no debt back through Chapter 7 relief.