By Ryan C. Wood
One of the most common remarks we here from clients is, “I never thought I would file for bankruptcy protection.” Our response is usually, “No one ever does.” They probably never thought the bad thing that happened to them or, their family, that led to having to file for bankruptcy protection would happen either. Bad things happen every day that are not in our control. So unfortunately for some there is no avoiding the necessity of filing for bankruptcy. For example: being laid off from a job, medical debts, debts resulting from car accidents or a natural disaster. While these circumstances are not traditionally in our control there are plenty of other pieces of the financial puzzle that are within our control.
Credit Cards/Payday Loans/Cash Advances/Vehicle or Title Loans
These four types of debts are primarily the types of debts that can have incredibly high interest rates. If you have never heard of usury laws you are not alone. Each state has or had usury laws to limit the amount of interest a lender could charge a borrower. The laws are designed to protect all of us from unfair or unconscionable interest rates. These laws have been weakened over and over again in the name of greed and corporate profits. For more detailed information please read “How Can Credit Card Companies Charge Such High Interest Rates?” http://www.westcoastbk.com/blog/2012/07/how-can-credit-card-companies-charge-such-high-interest-rates/ So the law now allows for the ridiculous and unconscionable interest rate as high as 29% on some credit cards. If you do not pay off the credit card each month that has a high interest rate the underlying debt will balloon quickly. Spread that problem around four or five different credit cards are you are heading in the direction of a bankruptcy lawyers office unfortunately. So do your best to limit the use of creditor cards and especially the use of your highest interest rate credit cards. Payday loans and cash advances are even worse. The highest interest rate I have ever seen on an actual loan documents was over 1,000%. Somehow this is legal. Standard vehicle loans can have generous interest rates. Title loans are when your vehicle is paid in full, but you take loan and use the vehicle as collateral. The loan company will take your pick slip/title until the loan is paid in full. Title loans are traditionally horrible for the borrower. Again, very high interest rates and title loan companies rarely keep very accurate records regarding payments and accrued interest.
Do not buy too much house. Other than banks handing out questionable loans and fraudulent appraisals artificially increasing the value of homes, the next largest factor as to why so many people lost their homes in my opinion was because they bought too much house. That means they purchased a house that was too large and too expensive given their income and expenses. The cause of this was mostly interest only mortgages and adjustable rate mortgages. So do not buy too much house. If you income is reduced 20% will you still be able to afford your mortgage payment each month? How long can you pay your mortgage if you are laid off? We all hope that these unfortunate events do not happen to us, but they happen to everyone without discrimination.
The thing with taxes is you have to pay them, period. So just let the government have the money upfront so you do not have an issue when it comes time to file your taxes each year. In California the Franchise Tax Board is does aggressively collect unpaid taxes. The FTB will garnish your wages and attached a tax lien to your home if you own real property. If you have changed your deductions on your paycheck to artificially increase your net income each month you are creating a tax debt each paycheck. Will you have the money to pay the taxes at the end of the year? No, you will not because you changed your deductions to increase your net income because you are currently having trouble paying your bills. Do not change your deductions to artificially increase your net income. It is a recipe for disaster. If you take an early distribution from a retirement account pay the penalty/taxes at the time you have the money taken out. Do not defer the penalty/taxes to when you have to file your return. Again, this is a recipe for disaster. Every bankruptcy attorney will tell you that ERISA and other qualified retirement accounts (Tax Deferred) are 100% protectable when filing bankruptcy under almost all circumstances. So another reason to not raid a retirement accounts because you can keep the retirement money and still discharge your debts.
If you are having difficulty paying your bills each month bankruptcy might be the best option to get back on track financially.