Going Bankrupt: Not Just a Saying

Going Bankrupt: Not Just a Saying

   
     Bottom line up front, Bankruptcy is bad m'kay!? Seriously, this is the last thing you want to do if you are having financial troubles. You are much better off trying to use a commercial debt consolidation agency or trying to argue better loan terms with your creditors. Bankruptcy will ultimately destroy your credit and make it extremely hard to secure any future loans. But here are the basics of it...

     What happens when you have no money, not enough or zero income, and your debts and bills still need to be paid? You go bankrupt and no, that is not just an idiom. It is actually a legal matter that you file with the federal court system under the federal bankruptcy code, and for individuals specifically chapter 7 or chapter 13.
     Chapter 7 filing is the greater of the two evils that individuals can file, to be eligible for Chapter 7 you must be in this case an individual,  partnership, corporation or other business entity. Your income must not be equal to or over the median income for your state, if it is then you are subject to a test to determine if your filing is abusing the use of bankruptcy. If the test is not passed your bankruptcy will either be converted to Chapter 13 or be dismissed.
     What happens under chapter 7 bankruptcy? It includes the liquidation of all eligible assets in an effort to pay off a debtors creditors, note that there are assets that are exempt from liquidation. The exemptions include things that will help you get back on your feet such as dwellings, transportation, household goods, clothing, and retirement accounts. These exemptions usually have a cap on value for instance in Ohio they include:

• Homestead: $132,900
• Vehicle: $3,675 in one vehicle
• Household goods: $12,250 with up to $575 in one item
• IRAs (including ROTH): $1,171,150

While this may sound like a good option you are still losing assets and may potentially lose the assets that you think might be exempt because they are over the value limit for that specific exemption. 

     If you still choose to file for chapter 7 you must give a petition to the bankruptcy court that includes multiple forms that require you to know: your creditors and the amount you owe them, income (source, amount, frequency), your property, your monthly expenses, and several other financial schedules (detailed lists in well organized manner), and a tax return. It also costs you money to file for chapter 7, $245 to file the case, $75 admin fee, and a $15 trustee fee (the person that liquidates your assets). There are also a wide range of nuances in the chapter 7 filing that could eventually still allow for loss of exempt property as well.
     The lesser of the two evils is chapter 13 bankruptcy. It essentially makes a plan to pay off your creditors in three to five years, three if you make less than median monthly income of your state (or have cause for longer) and five if you make over the median monthly income of your state. Your liabilities must not exceed $383,175 in unsecured debt (debt not backed up by collateral) and $1,149,525 in secured debt. You also must have been to credit counseling in the last 180 days (this applies to chapter 7 as well). Just like Chapter 7 you must submit a petition with all the same schedules, this is important in Chapter 13 because this information is used to notify your creditors to stop or not start their collection actions during the period of bankruptcy. There are also fees, $235 to file and $75 admin fee.
     If approved the debtor must submit a payment plan to the courts with the petition or within 14 days of filing. The debtor then has 30 days to make his first payment even if the payment plan hasn't been approved of yet. The payments will be submitted by the debtor to the trustee for distribution to the creditors which usually aren't paid in full unless they are a priority creditor such as a tax collection agency.
     Chapter 13 allows the debtor to stop all collections against their assets or property by creditors. This allows the debtor to keep much needed property such as housing and transportation, however this doesn't mean the debtor can pay the smallest amount possible. Priority debts will more than likely be paid in full unless the creditor agrees otherwise. Secured debts will have the outstanding payments paid off in full during the bankruptcy period and continue to pay throughout the life of the debt (typical of home mortgages). However smaller secured debts may be reduced to the liquidation value of the collateral borrowed against. If your payment plan is violated the court may convert your case to a chapter 7 and your assets would be liquidated or it may be dropped altogether and you would no longer have collection protection.

     Now that we know bankruptcy is bad hopefully you will be more careful about going into debt in the first place. The easiest way to go into debt is to not take out any loans or arguing for better terms with whoever is trying to loan you money. What is the worst that could happen? They say no and you move on to the next bank that may or may not agree to your terms. After all they should fight to get your business since you are paying them more money than you took from them in the first place. But don't take my word for it...do your own research. 

Credit: The Middle Class's Welfare

Credit: The Middle Class's Welfare

     Credit has turned into something much different than it used to be. Credit combined with modern day consumerism has created a trap for the average citizen in which they can fall into overwhelming debt. Do not be confused by "good" interest rates, reward & cash back credit cards, or any other gimmicks to get you to own one. If people could live within their means then credit would not be such an issue for so many.
     Credit started a long time ago presumably when one person did not have enough of their product to exchange for someone else's product that both parties were interested in possessing. Thankfully the party that had enough goods, the creditor was willing to give up their goods to the party with less, or the debtor, because they believed that the other party would give the agreed amount of goods back at a later date. This was more than likely done between people that knew each other in small communities. Their knowledge of each other would give them assurance that the debtor was going to pay their part of the deal and more than likely at little to no interest.  These deals were also largely based off of buying or trading goods that were needed to stay alive.

     In the 1920's the U.S. citizen had access to all numerous manufactured goods but no way to pay for them in whole. This is where today's definition of credit begins. Modern day credit was born when a diner patron couldn't pay for his meal because he forgot his wallet and created credit cards to avoid embarassment again, eventually called The Dinners Club Card.
     Flash forward almost a seven decades and it is 2015 a midst the height (every year is the height that's how it works) of consumerism. Credit has morphed into something extraordinary, very profitable for a few, and potentially suffocating for others. There are many types of credit now, but we will focus on one, consumer credit. Consumer credit materializes itself in many forms, the most popular being credit cards (you can buy almost anything on this), auto loans, and mortgages. Consumer Credit paired with modern day consumerism has allowed millions of families and individuals to buy things that they really need (definition of needed things has changed over centuries) such as adequate housing, transportation, and household appliances. In contrast it has also allowed millions of families and individuals the opportunity to buy things that they really don't "need" at quite a cost.
     Credit is now a very one sided deal what once started as an agreement between friends or family members has shifted into an agreement between corporations and individuals with very little human interaction. Creditors make money off of consumers by loaning out money in a lump sum that will purchase a need or want of a consumer and eventually be paid back in more than full based on the interest rate the creditor will give you.  While many Americans will be able to pay back their debts in full many (surprisingly a lot) also will not be able to, an article published in U.S.A. Today outlined this. One third of all Americans have debt that is negligent meaning they are not paying their bills on time. Those debts have been moved to collection agencies that will take a debtors assets in order to pay off the debts, meaning you would lose the goods (or other assets) you took a loan out for and not get back any money you have already paid toward the debt. However the majority of people that are negligent aren't negligent on mortgage debt, which is generally regarded as good debt.


Taken from myFICO.com

      Credit has been so ingrained into our society that it is almost impossible to live life without ever taking out a loan or owning a credit card. This has led to a way to evaluate someone's ability to repay credit, behold the almighty Credit Score. It allows corporations to evaluate you as a customer, the higher the score the less risk you are of not repaying your debt/credit. You get better credit by paying all your bills on time credit, loan, rent, utilities, etc.      Should I take out loans or own a credit card even though they are "bad"? The short answer is Yes, but the longer more painful answer is no. Most people don't have the funds or the patience to pay for everything with cash which is why loans and credit are so popular today. It is also extremely hard to buy a house without a good credit score or any credit score at all, almost forcing you to build credit through loans or a credit card in order to have a score to get a mortgage. If you are unwilling to go against the norm you have to make the most out of this horrible situation. First thing is first, stop buying things you don't need, luxury is good for personnel morale but don't make it a habit. Never, I repeat NEVER carry a balance (money left unpaid on your credit card month to month) on your credit card. If you carry a balance on your credit card you will soon figure out why 1/3 of Americans can't pay their bills because of the ungodly interest rates that they hold, usually around 15%. Build up a savings of about 3-6 months of your monthly expenses in order to pay for emergency bills like car repairs or even worse, income if you lose your job.
     If you want to go the rebellious route you must be an extremely financial savvy person to buy everything in cash. This requires you to build a huge savings for surprise purchases like housing or vehicle repair or for planned things like appliances, cars, and houses. To prevent yourself from waiting till you die to buy anything, living within your means will help as well. Just ask yourself if that dryer that folds your clothes, car the drives itself, or house that has one too many bedrooms is worth it. It might be perceived as a harder life but you will own your house, car, appliance outright the moment you buy it. There is nothing better than not having a monthly debt to pay off and you can brag that you paid for your possessions in cash, most people can't do that. But don't worry with a spot on budget and patience you can accomplish all of these things.


From creditcards.com

     The concept of buying things on credit has morphed from a gesture of good will to an opportunity to make money off of someone. Reallistically it is unlikely that you will be able to live your life to a standard you deem liveable without taking on any debt, most people that own credit cards have multiple ones. The best course of action is to live without it until you truly need it to buy a house or car, pay for school, or pay any emergency bills (that your savings can't cover). And lastly live within your means and try your best to not take out a loan for frivolous things like self driving cars. Trust me, accomplishing the "American Dream" will feel much better if you do it without the "middle class welfare" that we all know too well.