Overcoming the Guilt or Shame of Bankruptcy & Chapter 13 as an Option

“I was taught growing up that if you incur a debt, you’re responsible for paying it.”
“I always pay my bills.  I never wanted to have to file for bankruptcy.”
“I could have avoided this if only my credit card company would drop my interest rate.”
Despite all of the jokes and political rhetoric about people who welch on their debts, deadbeats, welfare recipients, the “moocher class”, etc., the fact of the matter is – the stigma associated with bankruptcy and not paying one’s bills is extremely prevalent.  These are ethical principles that are ingrained into our minds at an early age, and difficult to overcome.
Unfortunately, some people get so bogged down by these dogmas, that they delay doing anything about their finances until it’s too late – and they are faced with imminent invasive collection actions such as wage garnishments, bank levies, utility shut-offs, lawsuits, repossessions, and foreclosures.
Instead of getting the fresh start they needed, they dragged their heels until their debts spiraled out of control.
For those of you that believe that bankruptcy is morally repugnant, I urge you to consider Chapter 13 Bankruptcy.
Some debtors are required to file for Chapter 13 instead of Chapter 7 because they are ineligible to file Chapter 7 due to a prior bankruptcy or their income disqualifies them.  Others file Chapter 13 to obtain extra protections for assets or to avoid foreclosure.
As your bankruptcy attorney, I owe you a fiduciary duty.  In the past, I’ve discouraged people from filing Chapter 13 unless they absolutely had to.  Let’s be honest – Chapter 13 is longer, more difficult, and requires adherence to a disciplined budget.  But if someone insists on filing Chapter 13 strictly for moral reasons, I would rather they do that than not do anything at all, which would only make financial matters worse in the long run.
What is Chapter 13?  Generally-speaking, it is a 3 to 5 year debt consolidation and repayment program.  We take all of your debts, pool them together, and break them up into different categories.  Based on the types of debts you have and the circumstances of your case, certain types of debts must be paid in full while most of your debts are paid pennies on the dollar.  That percentage is based primarily on income, but sometimes other non-income factors come into play.  The unpaid percentage is usually discharged (with the exceptions of certain non-dischargeable debts, such as student loans) just like in Chapter 7 Bankruptcy.
Debts that are not dischargeable in Chapter 7 Bankruptcy – such as domestic support obligations, taxes, and student loans – can be rolled into and paid in a Chapter 13 Bankruptcy.  Virtually everyone qualifies for Chapter 13 Bankruptcy (there are debt limitations that few people ever come close to breaching – $383,175 unsecured debt and $1,149,525 secured debt, as of the date of this post).
And if you absolutely, positively are unwilling to do bankruptcy at all, consider alternative debt relief options, such as Chapter 128 or our Budget Counseling Services.

April is Financial Literacy Month

Did you know that only three states in the U.S. mandate that kids receive a semester of instruction in personal finance education?  18 states have it folded into another class, leaving 29 states with no requirements whatsoever.
I have always believed that strength comes from knowledge.  Knowing what to look out for in sales contracts and marketing gimmicks can help you be a better consumer.  Understanding how much impact an interest rate or a loan term has on debt can help you make wise financial decisions.
Consider our new budget counseling services to help you arm yourself with the information you need to be wiser and stronger.

Hoping to avoid bankruptcy? We can help with that, too!

At Holbus Law Office, we pride ourselves on guiding people down the road toward financial recovery via Chapter 7 and Chapter 13 Bankruptcy.  However, we also want to help guide people toward financial recovery without bankruptcy when possible.
That’s where our new budget counseling services come in.  For one low fee, you get a one hour counseling session plus three free follow-up sessions to help keep you on track.  The initial session includes a personalized review of your household budget, personalized recommendations to lessen your expenses, plus general advice on savings, credit scores, finance terms, and marketing gimmicks.
If bankruptcy ends up being unavoidable for you – your fee may be credited toward your bankruptcy costs, so you won’t have to pay for both services.
Call us today to find out how we can help get you on track toward a fresh start.  And remember – you don’t have to take time off of work to meet with us with our regular late evening hours.

Budget Errors – What “Weekly” and “Bi-Weekly” Really Mean

“I do not make $2,600/mo.  I’m only paid $1,200 every two weeks!”
“I spend $100/week in fuel, so $400/mo.”
“I’m getting paid three times this month, therefore, the trustee is getting too much money!”
“I didn’t miss any payments.  I made two each month.”
I hear erroneous comments like this (or get similar questions) from clients all the time.  I’ve been flooded with them recently, so while this isn’t necessarily a bankruptcy-specific topic, I think it’s worth taking a minute today to discuss it.  It would certainly go a long way to helping people better manage their finances if they understand what “weekly” and “bi-weekly” really mean.
Somehow, this pervasive idea got stuck in people’s minds that there are only four weeks in a month.  It’s true – every month has at least 4 weeks.  February – the shortest month of the year – has 28 days (except in leap years, obviously), which is exactly 4 7-day weeks.
But every other month has 30 or 31 days (3-4 days beyond 4 weeks).  What this means is that if you are paid weekly, every three months, you get 5 paychecks instead of 4.  If you are paid bi-weekly, every six months, you get 3 paychecks instead of 2.
So, when your attorney prepares budget schedules that show you making $2,600/mo when you’re paid $1,200 every two weeks, it’s because he is properly taking into account that third paycheck you get every six months.  Instead of 1200 * 2, the equation is 1200 * 26 (two week periods in calendar year) / 12 (months per year), which yields $2,600.
If you are filling up the gas tank every week, and spending $100 each time you do, you actually spend about $435 per month, not $400.
Payroll orders for Chapter 13 plan payments are pro-rated.  So, if your plan payment is $500/mo, but it’s coming out of your bi-weekly paycheck, the deduction won’t be $250, but instead, it will be $230.77.  For five months, you will be paying in less than $500/mo, but the third paycheck in the sixth month catches you back up.
And if you are making payments every two weeks, then you have to make a payment every two weeks.  If you only want to make two payments a month, then you have to increase what you’re paying to the monthly amount divided by two.
Common time definitions:

  • Weekly = once per week.  There are an average of 4-1/3 weeks per month.
  • Bi-Weekly = once every two weeks.  There are an average of 2-1/6 of these per month.
  • Semi-Monthly = twice a month.
  • Monthly = once a month.
  • Bi-monthly = once every two months.
  • Quarterly = once every three months.
  • Semi-Annual = twice per year or once every six months.
  • Annual = once a year.
  • Bi-Annual = once every two years.

New Budget Counseling Service

Bankruptcy is not always avoidable.  Unexpected auto repairs and massive medical bills can cripple even the most frugal… the most disciplined… and the best prepared individuals.
However, to the extent that bankruptcy is avoidable, we at Holbus Law Office have prided ourselves on giving our clients valuable information regarding budgets and personal financial management, in the hopes that they would never need our services more than once.
But what about the people who are trying to avoid bankruptcy altogether?  People who are struggling financially, but are not yet to the point where bankruptcy is necessary.  People who, with a little guidance, can get back on track without resorting to bankruptcy.
Today, we take our motto a step further.  I am pleased to announce that beginning tomorrow, August 15, we will begin offering personalized budget counseling services.  For a small and very reasonable fee, you get one 60 minute session plus three free 30 minute “check-up” sessions (1 month, 6 months, and 12 months after the initial meeting).
Let my years of experience – helping Chapter 13 debtors manage a budget that allows them to complete their plan successfully and helping Chapter 7 debtors prepare reasonable budgets that help them to afford reaffirmations on home and auto loans – help you hopefully avoid bankruptcy entirely.
We will review your personal budget, give advice and tips about spending habits, tips for effectively using savings accounts, review common marketing gimmicks, help you understand the real impact of interest rates and loan terms, and more.

Why reaffirm?

I have blogged in the past about why it is critical to disclose all of your debts on your bankruptcy schedules, even ones you don’t want to include or “file against”.  The two main things to take away from that article are:

  • Listing a debt is NOT the same thing as “filing against” or discharging a debt.
  • You have an obligation to disclose all creditors – dischargeable or non-dischargeable, secured or unsecured – as a matter of due process.

So, with that in mind, let’s move on to the topic of reaffirmation agreements.  Again, there are two main points to make in order to understand why a reaffirmation agreement may be necessary.

  • Bankruptcy wipes out debts, but it does not remove liens (with some exceptions).
  • Secured debts are generally dischargeable debts.

All right, so let’s put ourselves in an alternate reality where there is no such thing as a reaffirmation agreement, but all other bankruptcy laws are the same.  You file for bankruptcy and receive a discharge.  The discharge is good against the world.  Therefore, your mortgage and car loan are discharged.  This means that you have no obligation to pay the mortgage company and vehicle lender, and they have no legal right to pursue you for payment.
However, bankruptcy did not wipe out the security interest that existed.  In the absence of payment, the vehicle lender repossesses your car and your mortgage company forecloses on your home.
Enter the reaffirmation agreement.  A reaffirmation is a post-petition affirmation of a debt.  In a way, it converts an existing, pre-petition debt into a post-petition debt, and makes it non-dischargeable under the old bankruptcy.  (It can be discharged in a future bankruptcy, provided that enough years lapse such that you are eligible for a discharge.)
Reaffirmation agreements are voluntary and must be entered into by both parties – the creditor and the debtor.  A debtor who wishes to reaffirm cannot force an unwilling creditor to enter into a reaffirmation agreement.  A creditor who wishes to reaffirm cannot force an unwilling debtor to enter into a reaffirmation agreement.
So, what are some of the advantages and disadvantages to reaffirming?
First, reaffirming a secured debt allows you to keep the collateral so long as you continue to make payments on the loan.  A failure to reaffirm does not necessarily mean that you lose the collateral (you can make payments without a reaffirmation, which we refer to as a “ride through”), but there are some creditors who consider a failure to reaffirm as a default, and sufficient cause to foreclose or repossess.
Second, reaffirming a secured debt is an excellent way to rebuild credit after bankruptcy, because you don’t have to apply for a new loan – it already exists, and the payments you make on it after your case is filed will help boost your credit score.  In the absence of a reaffirmation agreement, however, creditors are not obligated to report your payments to the credit bureaus.
Third, if you file a reaffirmation agreement, but then default on the loan later, the creditor is not only able to repossess or foreclose, but the creditor can also sue you for full payment of the deficiency balance afterward.  Your bankruptcy discharge won’t protect you.  Whereas, if you do not file a reaffirmation agreement, but later default on the loan, you still face the foreclosure or repossession, but won’t be liable for the deficiency.
Here are a few other things to consider when making an informed decision to reaffirm a debt or not…
Creditors are generally under no obligation to repossess or foreclose a property if they do not want to.  Although this is uncommon with real estate and vehicles, if this does happen, you could remain liable for things like property taxes, liability insurance, winterization and heating costs, parking violations, and so forth.  If you cannot get a creditor to physically take the keys to real estate or a vehicle, you probably should not abandon the collateral until they actually come for it.  And don’t just sell the collateral, either.  The lender could come back later for the collateral, and if it isn’t available for collection, you could be assessed criminal penalties.  Property that has a lien on it should never be sold without the lender’s express consent and – ideally – a lien release.
For smaller secured loans (like furniture loans, appliance loans, and jewelry loans), although the creditors have the right to repossess if you default or do not sign the reaffirmation agreement, it is highly unlikely that they actually will.  The costs of repossession almost always outweigh the price the lender will realize at auction.
Creditors who claim to have security in stuff you buy might not necessarily have a valid purchase money security interest (PMSI).  Best Buy is notorious for having very vague security agreements which list as security “all of the debtor’s assets” or “all the debtor’s personal property” or “all items purchased”.  Under Wisconsin law, 409.108(3) of Wisconsin statutes indicates that generic descriptions are okay for finance agreements, but not sufficient for security agreements.  There needs to be some reasonable detail of the collateral.
If you do want to reaffirm, the agreement must be filed with the Bankruptcy Court within 60 days of the date of your 341 hearing (which is when you are scheduled to receive your discharge).  Your case cannot be reopened to get a late-filed reaffirmation approved.  (You can file a motion to delay discharge to allow more time to complete a reaffirmation agreement.  You can also reopen a case to file a reaffirmation agreement after discharge, but the court will not approve it, and at the expense of a $260 filing fee.)
Notwithstanding considerations of positive credit reporting and eliminating the risk of foreclosure and repossession, there are other things you should consider before filing a reaffirmation agreement.  Most notably – can you afford it?  Often overlooked is the budget, but what good is a fresh start in bankruptcy if you’re just going to dig yourself into a new hole with something you cannot afford.  Consider the following factors:
  • What is the monthly payment?  Can I afford to pay it?
  • What is the interest rate?  Could I get a new loan for this sort of collateral at a better rate?  How much of my payment is actually going to the principal balance?
  • What is the term of the loan?  Do I have to make this payment for 6 months or 30 years?
  • How much is the collateral worth?  Does it make sense to pay $20,000 for a car that is worth $6,000?  Might it be cheaper to finance a new car?
  • Is the collateral necessary?  Sure, I love my 72″ plasma television, but is paying $200 a month for it really worth it when I have a wife and two kids to feed?

Budget Counseling

In 2009, we had offered some free seminars in the topics of budget management, managing credit, and good consumer habits – under the program name “Stop the Bleeding Project”,  At the time, our law firm was new and we didn’t have much media exposure, so we had trouble getting enough people interested to justify renting room space.Now that we have our footing in the community, in 2013, Holbus Law Office intends to rejuvenate its budget counseling services.

  1. Our complimentary CD-ROMs that we provide to each of our bankruptcy clients will contain new tools to help manage (a) bank checking and savings accounts and loan / credit card accounts and (b) prepare a budget.  I hope to have the CD-ROMs updated before the end of the year.
  2. We are considering either reintroducing the free STBP seminars or, alternatively, offer individual consultations to offer budget counseling advice to improve finances and / or avoid bankruptcy.  Once that decision is made, an announcement will be posted.

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.