How Do You Determine If Bankruptcy Is Right For A Client?
We look at their income and expenses, as well as their assets and liabilities, and then we look at what they have been up to financially for the last couple of years and where they felt they might be in a couple of years. We place all of that into consideration and come up with potential solutions.
What Are Some Main Reasons People End Up Filing For Bankruptcy?
United States Senator Elizabeth Warren, who was previously a Harvard Law professor, studied bankruptcy filings statistically and published a couple of bestselling books on the matter. She found that people usually filed for bankruptcy for three reasons; medical bills, divorce or the loss of a job. People usually cannot predict these kinds of things, although they can lessen their likelihood.
I make the analogy that it’s like driving a car; if you drive too fast, you accept the greater risk of an accident, and if you buy a lot of stuff on credit, you accept a lot of financial risk you have a greater chance of getting into an accident or needing to file for bankruptcy. Of course, just as a lot of slow drivers who get into accidents, many people who are very conservative financially still need to file bankruptcy.
What Are Some Alternative Ways to Handle Debts Other Than Bankruptcy?
One way would be to refinance the debt, which means borrowing new funds to pay off the old at more favorable terms or a better interest rate. Another way is to sell assets to pay debts. A third way is to negotiate debts down, although someone can do a combo of the second and third way, by selling assets and using that money to negotiate debts.
People should be careful when negotiating debts because there could be tax implications. According to the government, if someone owed $8,000 and they settled it for $5,000, they received $3,000 in benefit, which is called “forgiveness of indebtedness” and the creditor will have to send that person a 1099C for that $3,000, which they will have to include on their tax return.
Sometimes the person won’t have to pay tax on it, especially if they’re insolvent, because there are ways for an accountant to can minimize the effect on the tax return. Anyone with any concerns about this issue should take with their accountant.
Do You Recommend Clients Receive Some Form Of Credit Counseling Before Filing Bankruptcy?
The bankruptcy law currently requires that a debtor go through a consumer credit counseling session and get a certificate before their bankruptcy will be accepted at the courthouse. Normally, by the time someone sees an attorney, their problems are so severe that the credit counseling session won’t actually do them any good. This is why, in my opinion, credit counseling rarely has any real value.
Current bankruptcy law also requires that before someone comes out of bankruptcy, they have to take a financial management class, which is similar to a traffic school. I think this has great value for people, just as going to traffic school has great value to people, because even if they know most of it already, they would usually walk away feeling like they actually learned a couple of things.
