How can I improve my budget to avoid bankruptcy again in the future?

Some people file for bankruptcy under the delusion that doing so will solve underlying budget problems. These people often return as repeat bankruptcy filers. Are you at risk of falling into the cycle? Here’s one very simple question you can ask yourself:

Do I find myself struggling financially, despite not having to pay credit card debts, loan debts, medical bills, etc. anymore?

If the answer is “yes”, you are going to find yourself filing for bankruptcy again unless you act now to fix the problem. As much as we love your business, nothing personal, but we really don’t want to see you back in our office as a repeat filer if we can help you prevent it.
Step 1 – Prioritize
Some things are more critical for survival than others. Have a well-grounded sense of what qualifies as a “need” and what qualifies as a “want”. Food, clothing, shelter, health care, and transportation – those are needs. Learn how to discipline yourself and cut excess baggage when you are struggling to make ends meet. If you cannot afford to feed your family, it’s time to ditch your satellite television service.
It’s okay to indulge in some luxuries, but not at the cost of being able to provide for the well-being of you and your family. Do not rely on credit to make ends meet just so you can enjoy creature comforts – you’ll wind up back in the same hole you just dug yourself out of.
In most cases, you will find you can afford all of your basic needs and at least some of your wants. How many luxuries you can afford depends on your income. Which ones you can afford depends on your priorities.
Even within the realm of basic needs there might be room for savings. Instead of dining out at restaurants, cook your own meals at home. Buy store-brand products rather than name-brands. If you’re living in a $200,000 house, perhaps your family will fit comfortably in a $100,000 house. Carpool to save money on fuel. Skip on designer clothing – your kid does not need to go to Abercrombie and Fitch for back-to-school shopping.
One of my pet peeves that I frequently encounter when budget-planning with my clients is charitable contributions. I mean no disrespect to people’s religions and their tithe requirements, but let’s be responsible. If you are struggling to pay your legal obligations, charity should not be in your budget. You can’t help others when you can’t help yourself.
Step 2 – Prepare for a Rainy Day
For many of you, the catalyst that ultimately caused you to file for bankruptcy was a string of unfortunate events. You might have been laid-off from work, perhaps incurred massive medical debts from an illness or injury, or perhaps your car decided to kick the bucket.
These tragedies happen to everybody. It may seem that it happens to some people more often than it does others, but nobody is immune from bad luck. It’s foolish to go through life, paycheck to paycheck, believing that no disaster will ever throw a curveball at you. It happens to the best of us. The question is: will you be prepared for it?
The vast majority of you with a savings account keep only the minimum balance in it. You have a savings account – use it! If you are paid bi-weekly, you can save up over $1,000 per year just by setting aside $38.50 from each paycheck. Keep this account as an emergency source for funds, to be used only for major medical or vehicle expenses, or as a temporary back-up source of income if you lose your job. Avoid tapping into it except as a last resort, and always attempt to repay yourself when you can afford it. The greatest thing about lending yourself money – no late fees, penalties, or interest!
Step 3 – Prepare a Budget & Balance Your Accounts
Examine your income. Look closely at your gross income. If it often includes overtime, figure out what your base wages are, and how much of that overtime, if any, is reliable. Do not bank on money that you cannot rely on. Examine your deductions. Do you often get a large tax refund each year? While it might be a nice nest-egg to have, consider consulting a tax professional and adjusting your withholding if you’re struggling to make ends meet. You will also want to look at some of your optional deductions, like life insurance and 401(k) contributions. Both of these things might be good to have, but you may need to temporary suspend these contributions so you can afford to live.
Map out your expenses. They can be split into three categories. The first is “fixed amount expenses”. These are expenses that occur on a predictable and routine basis and cost the same each and every time. Examples include rent/mortgage, auto payments, insurance premiums, student loans, child support, subscriptions, and certain utilities.
The second category is “variable amount expenses”. These are expenses that occur on a predictable and routine basis, but the cost varies based on consumption. However, past experience will guide you on approximately how much money you will need to budget (always round up when budgeting your expenses, to give yourself a cushion). Examples include groceries, clothing, most utilities, fuel, entertainment, personal grooming, household supplies, and prescription medication.
The third category is “unexpected expenses”. You know they’re going to pop-up, but you don’t know when, nor how much they will cost. The two primary examples: medical and vehicle expenses. These are expenses for which a rainy day savings account comes in handy.
After you set-up your budget, keep a very detailed transaction log of your bank accounts. Track what you spend your money on and when you spend it. After each of the first four to six months, compare your transaction log and your budget. You might be spending more money than you realize or budgeted for, and you may need to make some adjustments when that reality sets in.
The cold, hard truth is that there will be certain things you cannot afford. Indulging in luxuries is okay, even healthy. But your expectations need to be realistic. If you have the attitude that you’re going to buy whatever you want whenever you want it, regardless of your financial ability to pay for it – that’s just downright irresponsible. Your disdain for credit card companies and lending practices does not excuse you from paying your debt, and you will garner little sympathy for having such an attitude.
Step 4 – Use Common Sense
If something sounds too good to be true, it is. You’re in a capitalist market where everybody is out to make a buck. There are no free lunches, and so you need to be aware of the underlying goals behind every sales tactic. A smooth-talking salesman with an easy smile is no excuse for getting yourself into a bad transaction. Blaming someone else for your fiscal misfortune will not help you become a smart and responsible consumer. Here are some tips you can use to empower yourself:
Beware of hidden fees and charges. When something is advertised as being $39.99 per month, you need to know what the base services are that the $39.99 just bought you. Frills will cost more.
Be cognizant of taxes, shipping, and handling. Batteries are often not included.
If you miss a payment, do not be astonished that your interest rate spiked! Your low interest rate is a reward for having good credit.
Your 0% interest for 12 months is only good for 12 months. Care to guess what happens on the 13th month?
Warranties are a good indicator of how long the product is expected to last.
If you need a $5,000 loan, do not take out a loan for $10,000 just because you are approved for it.
Consider your debt to income ratio. If your monthly payment on the loan represents more than 15% of your monthly income after taxes, then exercise great caution and only incur the debt if absolutely necessary.
Avoid impulse shopping. Wait two weeks. If you still have to have it, then buy it.
Shop around. Vendors sell the same items for different prices. Some offer better financing options.
Learn the lost art of bargaining. Be willing to walk away empty-handed if the salesman is unwilling to work with you on your terms.
Be aware of the interest rate and term of the loan. A loan for $10,000 at 5% interest will cost you $11,322.60 over 5 years. The same 5 year loan at 20% interest will cost you $15,896.40. The same 5% interest loan will cost you $19,324.80 over 30 years.
Avoid cash advance or payday loans. Among all types of credit, these tend to have the highest interest rates – many of them are nearly 2000% interest (that is NOT a typo!).
Beware of adjustable rates on loan deals that sound like they’re too good for your credit score. As many sub-prime mortgage borrowers discovered, those interest rates do not stay low.
Coupons only save you money if you planned to buy the product before you found the coupon.
Package deals may cause you to buy more product than you actually intended to buy.
Avoid free gifts, sale prices, and other marketing gimmicks that require you to first buy something that you had not intended to buy originally. These are gimmicks to lure you into a store and purchase other things that are not on sale.
Outsmart the commercial. Try to figure out what they’re not telling you. It’s a fun game and a good source for laughs.

How can I repair my credit after bankruptcy?

When it comes to credit after bankruptcy, my clients seem to fall into two categories. The first is the “I’ll never own another credit card so long as I live” person. It’s a poignant cliché, to be sure, but this is the wrong attitude to have. It presumes that the credit card itself is the problem. The problem is that most people do not realize that there is a right way and a wrong way to use credit. Credit can be a useful tool for a variety of reasons (and bear in mind that in today’s world, you need good credit to do much more than just incur debt). Therefore, rebuilding your credit is important. The key to using credit is to use it wisely and responsibly.
If you use a credit card as a temporary substitute for cash, and you have the ability and intent to repay that debt soon after you incur it, then it’s okay to use the credit card. But if you cannot make ends meet from paycheck to paycheck, and you’re relying on payday loans on a weekly basis to put food on the table, then you’re in some real trouble! Do not buy now and worry about paying for it later. Worry about paying for it now. If you do not have a solid game plan before you purchase, you are setting yourself up for failure.
The second category of clients is concerned that their bankruptcy will prevent them from ever getting a new loan. They fear their hopes and dreams of buying a new home are squashed. For these people, arming yourself with knowledge is important. Yes, your credit score will tank immediately after your bankruptcy case is filed. But it will eventually rebound if you go about it the right way.
A common misconception is that your credit score is affected solely based on your repayment history. This isn’t even close to being true. Lenders reviewing your credit application concern themselves with a variety of other criteria, namely your income, your current indebtedness, and the ratio between those two numbers.
In many respects, a bankruptcy can improve your credit-worthiness. You’ve just had thousands of dollars of unsecured debt discharged. With that monkey off your back, you are presumed to have an easier time repaying new debt. If you filed under Chapter 7, you cannot receive a second Chapter 7 discharge for another eight years, giving your creditors plenty of time to collect on your new debts, one way or another.
Be aware of the markets. We are in the midst of a major recession and miserable housing market. People cannot sell their homes for a nickel, it seems. Equally, buyers looking to take advantage of low prices are frustrated because mortgage lenders, experiencing the backlash of the sub-prime market, are extremely reluctant to finance people with even the best credit scores. Your inability to get new credit may have more to do with the markets than it does your bankruptcy.
Many of you will have debts that survive your bankruptcy. You might have student loans, or perhaps you reaffirmed on your mortgage or car loan. These are fantastic because you don’t need approval for the loan – it already exists! These surviving loans will help rebuild your credit rapidly. Utility bills and maintaining a savings account can help too, but they work much slower.The longer you wait after you file bankruptcy before you attempt to get new credit, the easier it will be to find a friendly lender and lower interest rates. It will be tough, though not impossible, when you first emerge out of bankruptcy.
If you don’t have any debts that survive your bankruptcy, I personally recommend small furniture and appliance loans. Most lenders have deals where you pay 0% interest for the first “x” number of months. These deals give you an opportunity to establish a positive credit history without paying for it in interest (presuming you pay the debt off before the 0% interest ends). From there, you can work your way up to bigger and better things.
Building your credit is a process that started when you first became an adult. Filing for bankruptcy was like pressing a giant reset button on your financial life. Don’t expect things to just be handed to you. Rebuilding your credit will require hard work on your part. Have some patience and perseverance, and you will eventually find yourself in a better financial situation.

I own a business. How does that factor into bankruptcy?

Most people asking this question are concerned about whether they can continue to operate their business, and so we need to analyze two aspects: business assets and business debts. Before we can do that, we need to determine the legal status of the business entity. As always, bear in mind that the types of business entities and their nature will vary among jurisdictions, so it is important to speak to a competent attorney in your state who can analyze the specific facts of your case.
There are several types of business entities out there. Some examples include corporations, limited liability companies, partnerships, and a sole proprietorship. I’m going to over-simplify things just a bit here – for our limited purposes, all of these entities are identical except the sole proprietorship. The corporation, LLC, and partnerships are separate legal entities that exist separately from the individual(s) who formed it. The sole-proprietorship is not a separate entity – in other words, the individual is engaged in business and operates as the individual.
In the sole proprietorship, all of the assets of the business are the assets of the individual, because there is no separate legal entity. The business assets are listed on bankruptcy schedules along with the debtors’ other personal property and taken as exempt to the extent possible.
If the debtor is an owner of a separate business entity, then the debtor has a membership/stock/shareholder interest in the business. In that case, the business assets are totaled up, the business debts are deducted, and what remains is the net value of the business. The debtor will own that value or a percentage thereof, and that would be listed on schedules and taken as exempt to the extent possible.
As for business debts – again, because a sole-proprietorship business is not a separate legal entity, the debts incurred in the course of business are the debtor’s personal debts. To the extent they are dischargeable, they are included in the debtor’s bankruptcy. The business can continue to operate, because there never was any sort of entity to be shut down.
In the case of separate legal entitites, the business debts are the responsibility of the business, and are not included in a debtor’s personal bankruptcy. Business debts are still usually listed on schedules in case the debtor has made any personal guarantees – the personal bankruptcy relieves the debtor of any personal responsibility for the business debt, but the business remains liable. Again, business operations are largely unaffected in this case.
In order for a business to discharge its debts, it can either fold and/or file under Chapter 7. Filing a Chapter 7 will trigger liquidation and the cessation of business operations. Business entities are not eligible debtors in Chapter 13. If a business wishes to reorganize without stopping operations, it must file under Chapter 11.

Mortgage Cram-Down Provision Defeated… AGAIN.

The U.S. House of Representatives passed their version of the Wall Street Reform and Consumer Protection Act today. I was interested in this legislation because rumor had it that the mortgage cram-down provision would be re-introduced for consideration. For those of you not familiar, this would have given bankruptcy judges the ability to modify the terms of mortgages secured by a debtor’s principal residence – an ability that we have in Chapter 13 Bankruptcy for EVERY OTHER TYPE OF SECURED DEBT, in order to help reduce the number of mortgages going into foreclosure. Similar bills have failed over the past couple of years – most recently this past spring in the Senate (Helping Families Save Their Homes Act). Well, the provision failed once again in the House today, by a vote of 241-188. You can read more about the legislation and its status in the Senate here.

How does my spouse factor into bankruptcy?

Wisconsin is a community property state – one of nine, along with Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington. Generally-speaking, spouses in a community property state have an equal undivided interest in property and an equal undivided liability for debt. (The simplest way to understand this concept is to think of the married couple as a single unit instead of two individual people.) Many people are unaware of this and erroneously believe that because a bill comes in the name of one spouse only, that only that spouse is liable for the debt.
The existence of community property in bankruptcy lends itself to a phenomenon in bankruptcy that we call a phantom discharge, or a community discharge. This means that one spouse can file without the other spouse, and the non-filing spouse’s community property is protected against collection from community debts. In other words, the non-filing spouse benefits from the filing spouse’s discharge.
In my experience, debtors’ attorneys have mixed feelings about the value and reliability of a phantom discharge. My position is that I have little faith in them. There are exceptions to community property. There are several ways that spouses in a community property state can create non-community assets and debts, and frankly, some of the analyses to determine community status are incredibly subjective. I find it prudent and far less risky to have both spouses file joint, so that each named debtor receives a genuine discharge.
The two most common scenarios I encounter where I find it to be okay to have a non-filing spouse are (a) when the couple is recently married and has not incurred any post-marital, community debt, and the non-filing spouse has little or no pre-marital debt, and (b) when the non-filing spouse filed an individual bankruptcy very recently – again, usually in cases where the couple is recently married – and so there is a very small window between discharges where debts could have been incurred that the debtors need to worry about. More often, I see one spouse want to file without the other spouse out of guilt and a desire to save the other spouse the embarrassment of bankruptcy. I don’t recommend allowing pride and shame guide your decision-making. If you’ve reached the point where you think you need to file for bankruptcy, you need to focus on your finances and doing what needs to be done so you don’t find yourself back in the same position.
Even if you decide that relying on the phantom discharge is a risk worth taking, there are other practical reasons to have both spouses file a joint petition. As I stated earlier, community property means that each spouse owns the property of the other spouse. But for the exceptions to community property, you must list and take exempt the assets of both spouses. Generally, a married couple will have more assets than a non-married person. For this reason, many of the exemptions that we use to protect your assets from liquidation from the Trustee can be doubled for a married couple, but only if they file a joint petition. I have found that often times where you have a non-filing spouse, you also have un-exempt property that could have been exempt if the other spouse had filed jointly.
On that same vein – regardless of whether you file joint or have a non-filing spouse, you must list the income and assets of both spouses. As another practical matter, having both spouses joint makes the entire process run smoother.
Another instance where I see a lot of non-filing spouses are when the couple is in the process of divorce. Many debtors ask me whether they are better off filing joint before their divorce is final or filing alone after it is final. Generally, I recommend filing joint before, because we get a discharge for both debtors and because divorce decrees can limit dischargeability (which I will discuss momentarily). But the answer is rarely that simple. Part of it depends on how far along the couple is in the divorce process. Many confuse the act of filing for divorce with being divorced. But there is actually a several-month period in this state between when the divorce is filed and when it is finalized. Spouses who wish to file joint must file their bankruptcy before their divorce is finalized. Conversely, if one spouse files bankruptcy alone and the divorce is not yet final, then the non-filing spouse’s income and assets must be disclosed. So, another factor is whether the spouses are still on speaking terms. In other words, is obtaining the other spouse’s income and asset information going to be an issue? Finally, if the other spouse intends to file their own individual bankruptcy, then I am more inclined to allow the other spouse to file individual. Of course, it is far cheaper for both parties to file joint.
Let’s talk about divorce decrees. If you’ve been divorced, you might remember that part of the paperwork addressed the division and assignment of marital debts amongst both spouses. These debts might not be dischargeable if the divorce decree contains a “shall hold harmless” clause. Let’s take an example: John Doe and Jane Doe file for divorce. They only have two credit cards, one through Chase Bank and the other through Associated Bank. Both credit cards have a balance of roughly $10,000 each, and so the judge assigns the Chase debt to John and the Associated debt to Jane. If Jane files for bankruptcy and receives a discharge on her debt to Associated, and Associated attempts to collect the debt from John, then John can take Jane to court on the grounds that Jane was to hold John harmless for the Associated debt. If all of this happens, a non-dischargeable obligation could be created from Jane to John. Admittedly, this result does not seem to occur too often, but it does happen.
Finally, I want to discuss families and households. Determining the size of a household and who constitutes the household will impact your bankruptcy in several ways. Most notably, it will determine the median income level you are subject to on the Means Test and it will determine whose income is to be considered in the budget and on the Means Test. I’m not going to discuss any absolute truths for the simple reason that family structures can be complex, resulting in countless arrangements. It’s pretty simple when you have one person, or a husband and wife, or perhaps a couple of kids. But suppose you have extended family (grandparents, uncles, aunts, cousins, nephews, nieces, etc.) living with you. Or perhaps other adult dependents – college-aged kids still living at home. Suppose you’re in the process of divorce, or are engaged, or are domestic partners rather than spouses. Suppose you have joint custody with a former spouse over a child. The combinations are practically limitless, and these are all circumstances that you should discuss with your bankruptcy attorney (and possibly a tax attorney) to determine how these household arrangements will impact your bankruptcy, if at all.

Summary of the new Wisconsin exemptions.

Below is a list of the state exemptions that have been affected by 2009 Senate Bill 259 (Act 80), as well as their current federal counterparts.

  1. Homestead (primary residence of the debtor)
    1. was $40,000 total
    2. now $75,000 per person
    3. Federal: $20,200 per person
  2. Motor Vehicles
    1. was $1,200 per car
    2. now $4,000 per car
    3. Federal: $3,225 per car
  3. Depository Accounts (personal savings and checking accounts)
    1. was $1,000 per person
    2. now $5,000 per person
    3. No analogous federal exemption – use wildcard.
  4. Consumer Goods (furniture, appliances, etc.)
    1. was $5,000 per person
    2. now $12,000 per person
    3. Federal: $10,775 per person
  5. Business Tools / Inventory / etc.
    1. was $7,500
    2. now $15,000
    3. Federal: $2,025
  6. Personal Injury Claims
    1. was $25,000
    2. now $50,000
    3. Federal: $20,200