START THINKING BANKRUPTCY NOW, NOT LATER, EVEN IF YOU NEVER FILE
May 8, 2020
If you’ve lost your job or struggle to pay your debts, you may need to file for bankruptcy. If that’s the case, you should ignore some common advice and start thinking defensively, and acting proactively.
The coronavirus pandemic that upended the economy is also expected to send unprecedented numbers of people and businesses to bankruptcy court. Millions are out of work, and economic disruptions could continue until a vaccine is widely available, something that may be months away.
DON’T WAIT TO TALK TO A BANKRUPTCY ATTORNEY
People are usually advised to solve their debt problems on their own, if they can, with bankruptcy as a last resort. But the people who come out of bankruptcy in the best shape tend to be the ones who got expert advice early. Even if you never file bankruptcy you need to be educated to the pros and cons and the dos and don’ts
If you even think that there’s a possibility that you’re going to be in debt trouble, or you’re not able to pay something, go have a consultation before you make any kind of financial move.
DON’T TOUCH YOUR RETIREMENT MONEY
The new coronavirus hardship withdrawals allow people to take up to $100,000 from their 401k or individual retirement accounts without penalty or mandatory withholding. The withdrawals are taxable, but people who can pay the money back within three years can amend their tax returns to get those taxes refunded.
But few people in financial crisis now will be able to pay the money back. More important, money in retirement funds is typically protected from creditors and so should not be used to pay debt that could be discharged in bankruptcy, such as credit cards and medical bills.
DON’T LET CASH PILE UP
A cash buffer is important, but money in bank accounts can be levied up to pay creditors. Your attorney will advise you about where to put extra cash. One option may be a Roth IRA. Any amount you contribute can be withdrawn tax-free at any time, and in the meantime it’s protected from creditors.
DON’T GIVE AWAY ASSETS
People are often advised to sell unneeded possessions to pay down what they owe. If there is a bankruptcy in your future, though, check with a bankruptcy attorney first since the sale may be more unnecessary or may be needed later.
Also, don’t give away assets, because a bankruptcy trustee – the person administering your bankruptcy case – could sue the recipient to get them back.
DON’T PASS UP FORBEARANCE OPTIONS
Because of the crisis, many lenders are allowing borrowers to skip some payments. The usual advice is to take advantage of such forbearance only if you really need to, since the debt will still have to be repaid. The advice is different if you may file bankruptcy.
Credit card debt and most other unsecured debt can be erased in a Chapter 7 bankruptcy, which is the type most consumers file. Secured debt, such as mortgages and car loans, usually isn’t erased, but forbearance could help you save money for other necessities, including food and utilities.
BE PROACTIVE
None of us know exactly how the virus crisis will unfold. But long experience says that being proactive about being informed is smart.
CONCLUSION
Times are tough and may get tougher. To survive you need to be proactive. Please act sooner rather than later. If help is needed, we are here to help.
Riley C. Walter