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Mortgage Forbearance And The Hidden Gotcha: Escrow

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Got a mortgage forbearance? Watch out for the escrowed taxes after the forbearance is up.

While the CARES Act made forbearance on federally backed mortgages available for the asking. But no one talked about the escrow portion of the skipped mortgage payments.

Federal guidance urged servicers to offer easy ways to pay the skipped payments after forbearance but seems to have skipped any discussion of a timeline for making the lender whole for taxes due during the forbearance.

So, if you need a forbearance, make a plan for the escrow shortage.

What are escrow items

If your lender or mortgage servicer collects property taxes and/or homeowner’s insurance along with your loan payment, those are escrow items.

In essence, the servicer collects monthly a slice of funds that are paid out only once or twice a year, but are required to keep the taxes paid and the home insured. The servicer pays them when due, on your behalf.

Escrowed taxes after forbearance

At the end of the forbearance period, the payments skipped remain due. But, there’s no single way that the details of the repayment will be handled. The skipped payments may simply be due at the end of the loan. The loan may be modified. The rules may change yet again.

But what seems clear, now, is that the skipped escrow payments may be due far sooner than the principal and interest accrued during the forbearance. Existing law gives the lender/servicer the right to increase the escrow portion of the future payments to recapture the missed escrow payments.

The standard period for recapturing escrow shortages is to add one/twelfth of the total escrow default to the monthly payments for a year. Fannie Mae and Freddie Mac have instructed servicers to extend the period for paying the escrow shortfall to 60 months.

Keep escrow in mind

The issues arising in the COVID-19 emergency and the multitude of different kinds of home loans make this subject complicated and not subject to a single, simple answer.

And whatever guidance we have now may well be upended by the next legislative remedy that governments and lenders propose.

The takeaway is to be mindful of the escrow portion of the payments missed in any forbearance, and to ask questions about how any deferral or modification affects escrow shortages.

Or, if your circumstances permit, set aside the escrow portion of your regular monthly payment each month of the forbearance, so you can pay that amount at the end of the forbearance.

How to tell if your mortgage is backed by Fannie or Freddie.

Fannie and Freddie have online look up tools that need only the property address and the last four digits of your Social Security Number to perform a search.

• Fannie Mae: http://www.knowyouroptions.com/loanlookup
• Freddie Mac: https://ww3.freddiemac.com/corporate

More on finances and Covid

Guide to surviving the pandemic driven economic downturn

California’s New Exemptions For Money In The Bank

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California has finally created a state law exemption for cash in the bank.

Californians filing bankruptcy no longer face loss of all the funds in their bank accounts when they choose California’s generous homestead, thanks to changes in exemption law.

Two exemption statutes , new in 2020 , provide protection for cash in the bank from levy under state law or turnover to a bankruptcy trustee.

The absence of protection for cash other than current wages was a gaping hole in California’s standard exemptions. State exemptions protected significant equity in a home, but next to nothing for the cash necessary to make the next mortgage payment.

That has changed, with the creation of Code of Civil Procedure 704.220 and 704.225, both newly effective in 2020.

Money for basic needs

CCP 704.220 creates an exemption in sum of money equal to a month’s living expenses calculated under a state welfare formula. Currently, that amount is $1788.

The statute reads:

(a) Money in the judgment debtor’s deposit account in an amount equal to or less than the minimum basic standard of adequate care for a family of four for Region 1, established by Section 11452 of the Welfare and Institutions Code and as annually adjusted by the State Department of Social Services pursuant to Section 11453 of the Welfare and Institutions Code, is exempt without making a claim. ….

The exemption has exceptions. In state law, it doesn’t apply to a levy to collect the following:

  • wages owed to another
  • child support or spousal support
  • debts to the state for taxes, unemployment, etc.

We’ll have to see how those exceptions apply in bankruptcy.

Amounts needed for support

The second of the new exemptions , CCP 704.225, appears on its face far broader.

CCP 704.225 Money in a judgment debtor’s deposit account that is not otherwise exempt under this chapter is exempt to the extent necessary for the support of the judgment debtor and the spouse and dependents of the judgment debtor.

This exemption promises the possibility of protecting a sum considerably larger than the formula used to calculate CCP 704.220. But it also opens up opportunities for litigation over support for how long, and at what level of comfort.

Both protect deposit accounts

So, what’s a “deposit account”? This becomes one of the all-too-common treasure hunts through the law, each statute referring you on to another.

CCP 481.081 says “Deposit account” means “deposit account” as defined in paragraph (29) of subdivision (a) of Section 9102 of the Commercial Code.

And the Commercial Code , in subsection 29, provides:

“Deposit account” means a demand, time, savings, passbook, or similar account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument.”

You can take it to the bank

So, in creating a California cash exemption, the legislature has finally recognized, and acted on the idea, that it takes both a roof over your head and some money in the bank to have genuine protection from creditors.

More

California homestead gets a major update to reflect the real cost of housing.

Find The Right Cure for Your Debt Problems

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Get-out-of- debt advice and sales pitches abound.

Like this one.

But too few get-out-of-debt gurus tell you that you need a diagnosis of your financial ills before prescribing the cure.

Is the stomach ache indigestion or appendicitis?

Is it temporary upset or a life threatening money pit?

The answer makes a big difference in how you treat it.

No single prescription for debt

A doctor treating your illness wants to know your age, your medical history, other medical conditions along with your symptoms.

Same sort of questions arise if debt is what ails you.

  • Age
  • Dependents
  • Current income
  • Assets
  • Debt total

All of those factors interact to shape a treatment plan to get out of debt.

If you are on the cusp of retirement, you don’t have time to tackle big debt by cutting out frills in the budget.

If you are young, single, suitably employed, the prescription may be different.

So don’t take to heart every buckle-down-and-pay scheme you find on the internet.

Too little, too late

Most get-out-of-debt advice is better suited for living economically after you’ve solved the debt problem.

Fewer lattes, more eating at home, less entertainment spending.

Compare bankruptcy with payment plans

That may work to get out of debt if you have time, discipline, and modest debt to start with.

But the starting point is comparing your income to your debt, in light of your fixed expenses.

How big is the problem?  To bring it down, do you require a pellet gun or a bazooka?

How precarious are things

The final question is how risky is the treatment?

Think of the endless lists of common side effects and serious complications listed with every medicine you take.

When the ailment is debt, the risk is living with no reserves.  A recent study found 40% of Americans couldn’t pay for a $400 emergency without borrowing.

Four hundred dollars isn’t much in this economy.  Yet a $400 expense would imperil a huge swath of our citizens.

It’s easy to fool yourself into thinking that you aren’t likely to face an emergency.  Yet, look at this list of pretty mundane things that require a $500  fix.

None of those are so far fetched that they couldn’t happen to any of us.

So living without a financial safety net in order to pay of big debt is big-time risky.

Here’s a further discussion of  my diagnostic of your debt alternatives:  when to hold and when to fold.

Tax Tips & Tidbits

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Tax filing deadline approaches, so I thought we’d gather up tax tips and little known tax strategies, especially useful if you’ve filed bankruptcy.

The Tax Deduction No One Tells You Aboutfan of bills

If you are paying mortgage interest, state taxes, back support, or business debt through a Chapter 13 plan, those payments made by the trustee may be deductible to you.  Just because the trustee cuts the check, doesn’t mean you aren’t the payor.

insolvent for tax purposesEscape Tax On Settled Debt

Proving to the IRS that you are insolvent is one way out of paying taxes on the canceled debt.  But watch out, the IRS’s definition of insolvent is different from most.

5930176734_380196d14c_zTax Software Makes A Lousy Purchase, When It Can Be Free

The IRS provides free, commercial tax prep software for those with an income of $62,000 or less.  And they partner with volunteers to provide free help with returns through VITA.

credit-squeeze-transparentHow To Escape The Flat Wrong 1099

You’ve got challenges when the creditor sends you a dead wrong 1099.  The IRS got the same, erroneous info.  What to do to avoid the tax consequence of someone’s mistake.

Tax Myth Saddles You WIth Tax ForeverShould You File The Return If You Can’t Pay The Tax

It’s a myth that filing a timely return without a check to pay the tax you owe makes you instantly exposed to collection.  Instead, here are four reasons to file the return whether or not you can pay right now.

?????Don’t Let The Tax Scammers Catch You

Stolen identities and stolen tax refunds are just two of the consequences of falling for the fake call from the “IRS”.  Here’s what to watch for to stay safe during tax season.

Spill the beans concept.The One Person You Must Tell That You Filed Bankruptcy

Hiding your bankruptcy discharge from your tax preparer can be an expensive mistake.  The bankruptcy discharge trumps (if we can still use the word) the tax on canceled debt.

chained businessman on white backgroundDitch The Tax Debt In Bankruptcy

You can get rid of tax debt in bankruptcy.  Walk through the rules that control when a tax is dischargeable without payment.  Also, help filing a return when you have no records.

More tax tips on Income Taxes in Bankruptcy on our sister site.

The Judgment Lien That Escaped Your Bankruptcy

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I Have Forgotten Something

What do you do when you discover old judgment liens on your home long after you filed bankruptcy?

Your bankruptcy case is closed.

You’re recovering nicely.

Then you find there’s a judgment lien on your house that you didn’t know about.

And the law says that liens survive a bankruptcy case, unless the bankruptcy court orders otherwise.

Is there anything you can do to get rid of the lien?

Most likely, yes.

Can the lien be avoided

The debtor (that’s you, the person who filed the bankruptcy) can ask the bankruptcy court to void a lien on their property if

  • The debt existed when the bankruptcy case was first filed
  • The lien is a judgment lien
  • The property to which the lien attaches was claimed exempt
  • The property had too little value to pay any senior liens, the judgment lien, and your exemption

Let’s look at each requirement for an avoidable lien, found in Bankruptcy Code 522(f).

1. Predates the bankruptcy

Bankruptcy impacts only debts that predate the filing of the case.  That doesn’t mean that there has to be a default on the debt or a lawsuit filed.

But the events that create the debt have to have happened before the bankruptcy was filed:  you used the credit card;  you were involved in an accident; or you were transported by ambulance.

Your bankruptcy case potentially effects all debts arising before you filed.  But the legal rights involved can’t have arisen since your bankruptcy was filed.

2. Lien secures a judgment

Liens that can be wiped out because they impair exemptions must be judicial liens, that is a lien created by a lawsuit.

Voluntary liens, like mortgages and home equity lines of credit can’t be eliminated because they interfere with exemptions. This section of the law deals only with involuntary liens.

You can’t eliminate statutory liens, either.  Tax liens are created by statute.  They aren’t covered by this provision of the bankruptcy code.

3. Property was claimed exempt

Because this part of the law is focused on seeing that you get the full benefits of the exemptions you claimed, the property affected by the lien must have been claimed exempt.

Some courts will avoid a lien if the property in question could have been claimed exempt.

4. Lien frustrates claim of exemption

To meet this condition for avoidance, some math is required.

As of the day the case was originally filed, the value of the property then had to have been insufficient to pay the balance of any voluntary liens on the property, the exemption, and the lien you want to avoid.

It may be that the lien at issue is avoidable only in part, if the value of the house would pay mortgages and the exemption, and something beyond.

The fact that there is no value in excess of the voluntary liens doesn’t prevent you from avoiding the lien. It’s not an all or nothing thing.

Revisiting your case

So, what do you do when old judgment liens are discovered well after your bankruptcy case is over?  Reopen the case, and ask the court to avoid the lien or liens that impair your exemption.

Your motion to reopen needs to tell the court what you want to achieve.  Usually, you attach your motion to avoid the lien to the motion to reopen the case.

Most courts will want you to pay a new filing fee, to pay for the new work the court is going to do.  You can ask that the fee be refunded, but usually, you’ll have to pay up front to get started.

This isn’t a new bankruptcy case. You aren’t endangering the financial recovery you’ve made since your bankruptcy.  You are revisiting the old case to take care of old business.

The lawyer who helped you with the original case can handle the lien avoidance, or you can engage another bankruptcy lawyer to accomplish this task.

When time is tight

The overlooked judgment lien usually pops up when you are ready to sell your home or to refinance it.

Often that means you are working to deadlines.

A motion to reopen and to avoid a lien is likely to take 45-60 days before you have a bankruptcy court order in hand, voiding the lien.

If you find yourself short of time, consider negotiating for the escrow to hold the money that would otherwise go to the holder of the lien when the deal closes, while you go back to bankruptcy court.

If you didn’t check the public record before you filed your bankruptcy case to check for judgment liens, do it now.  Don’t wait for a time crunch.

Thankfully, bankruptcy courts are accustomed to helping with the overlooked lien.

More

Tax liens after bankruptcy

What was discharged in my bankruptcy case

Stripping off mortgage liens

Post bankruptcy check list

Image: Fotolia.com

 

Ten Debts That Follow You After Bankruptcy

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debts after bankruptcy

Some debts just follow you out of bankruptcy.

Not many but a few.

These debts continue to be collectible even after a Chapter 7 discharge.  The discharge in Chapter 13 is different and broader:  just another reason to choose Chapter 13.

1.   Family support

Regardless of what it’s called, court ordered payments for support of children or spouses

2.   Recent taxes

Income taxes for tax years  more than three years old, counting from when the return was due

3.   Taxes still assessable

The IRS ability to assess additional tax survives if the tax year was still assessable at filing

4.   Taxes for unfiled years

The clock doesn’t run on tax discharge until an honest return is filed.

5.   Payroll taxes

The trust portion of payroll taxes, federal and state:  that’s what the employer withholds from employee checks

6.   Judgments for drunk driving

Liability for death or personal injury from impaired operation of a vehicle

7.   Debts to spouse or child from divorce

Debts to your own lawyer do get wiped out

8.   Student loans

Unless you file suit in the bankruptcy and prove repayment is an undue hardship

9.   Money borrowed to pay non dischargeable tax

No paying taxes with a loan you want to discharge.

10.  Penalties to governments

This covers fines, penalties and forfeitures that are intended to punish not compensate

Non dischargeable if….

Three additional categories of debts survive bankruptcy only if the affected creditor successfully jumps through some legal hoops in the bankruptcy case.

Debts incurred by fraud; debts for conversion or breach of fiduciary duty; and debts for deliberate injury to person or property require the victim to file suit and prove the operative facts.

There’s a short period for filing a non dischargeability action and the presumptions operate in favor of the debtor.  But if the creditor can establish the bad behavior of the debtor that created the debt, public policy says we don’t want to shelter bad actors.

It’s important to understand that the debt must have been incurred by the bad behavior;  just trying to evade payment of an honestly incurred debt doesn’t make it non dischargeable, in most instances.

Liens survive unless…

How to get rid of liens through bankruptcy

While a bankruptcy discharge wipes out your personal liability for discharged debts, a lien on property you owned when you filed bankruptcy continues to be liable for the debt.  So you aren’t liable but your property can be seized to pay the debt.

Think of your home loan:  your discharge keeps the lender from suing you after bankruptcy for a money judgment, but it doesn’t keep the lender from foreclosing on your house if you don’t pay after bankruptcy..

After bankruptcy, as long as you continue to pay on a secured debt, the creditor is generally happy to take your money and leave you alone.  If you change your mind, or further financial troubles loom, you can walk away from the liened property, losing only the property.

An experienced bankruptcy lawyer can walk you through the bankruptcy discharge and the landscape after your case is over.

More

Interview questions for hiring a bankruptcy lawyer

What to do about tax liens

Reaffirming a car debt

 

How A Careless Bankruptcy Can Bite Your Family

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Your bankruptcy can affect your family even though they haven’t filed bankruptcy.

Transfer assets or repay debts , and you can expose family to attack by the bankruptcy trustee.

Even if not fatal, the trustee’s bite can  leave scars.

How family gets sucked in

I sat waiting for my turn at a bankruptcy hearing last week and watched a series of other cases that left blood in the water.

The trustee’s feeding frenzy in at least three cases centered on payments or transfers the debtor  made to family before they filed their bankruptcy case.

In some cases, the debtor was repaying money lent by family.  In others, it appeared the debtor had simply made a gift to family.

In the worst case, it looked like the debtor had transferred a car to keep it out of the bankruptcy.

All of those transfers spelled trouble.

In each case I watched, the Chapter 7 trustee continued the hearing for the production of documents, the amendment of schedules, or further questioning.

In several, she wanted the debtor to agree to give her a longer period to challenge their very right to a bankruptcy discharge.

None of this bodes well for the debtor.

Here’s why.

The long arm of bankruptcy law

Bankruptcy law gives the trustee legal rights to recover, for the benefit of creditors, property or money the debtor has transferred.  Collectively, those are the avoiding powers.

Payments on existing debts to ordinary creditors can be recovered from the creditor where the payment was within 90 days of the bankruptcy filing.

If the  payment  was to a family member.  the look back period is  four times as long:  a full year.

So, if you paid on that loan from your sibling or your parent in the year before you file a Chapter 7, the trustee can sue your family member to get the money back.

Why preferences matter

Most people find it hard to understand why payments on genuine debts can trigger trustee lawsuits to retrieve the money.  The debt is real, they say.

It’s not wrong to have paid a real debt.  The idea is fairness among creditors, looking out for the creditors who didn’t get paid back before filing.

It’s also to take the profit, if you wish, out of aggressive collection tactics by some creditors:  no point in levying the debtor’s account if it triggers a bankruptcy filing and a lawsuit to get the money back.

Gifts are worse

In legal speak, a gift is a fraudulent transfer.  The person making the gift didn’t get anything in exchange.

The gift leaves him poorer than he was before.

That’s fine if you have enough remaining to pay your creditors, but not so if the gift damages your creditors.

When the debtor starts giving significant stuff away to family, his later bankruptcy sets those family members up for a lawsuit.

Now, I’ve never seen a bankruptcy trustee try to unwind ordinary birthday gifts or the like.

But start giving away cars, businesses, or houses and things change.  And in California, the look back period for recovering those gifts is four years.

We take care of family

Our desire to take care of those close to us is natural and admirable.

When you’re considering bankruptcy, however,  you need to stifle those caring impulses til after the bankruptcy.

After the bankruptcy, you are free to repay any creditor you wish to.  You can take care of those who took care of you when you needed it without any negative consequences.

Assuming the discharge wiped out all your debts, you can give anything you have away, since no creditor is harmed.

Tell the whole story

As I sat there, I wondered whether each of those debtors in the hot seat had told the whole story to their attorney.

Did the bankruptcy papers they filed reveal these transfers, or had the trustee found out some other way?

The problem even a good bankruptcy lawyer can’t fix

If the debtors didn’t take full disclosure seriously, they brought trouble on themselves.  Even if the trustee doesn’t sue their family, they may not get a discharge because they concealed the transfer.

The bankruptcy papers you file to start a case ask all the pertinent questions about transfers and payments.  If it was debtor carelessness or deceit that kept the truth out of the record, then I have little sympathy for the debtors.

If, however, the problem was created by lousy lawyering, then I watched  innocent debtors pay the price.

Lousy lawyering takes several forms,

  • failure to counsel the client fully about the need to be transparent
  • failure to insist on full answers to questions
  • failure to recognize avoidable transfers
  • failure to consider Chapter 13 where family isn’t exposed to suit

This day in court was unusual:  most 341 meetings are dull as dishwater.

But anyone watching this collection of troubled cases was reminded about the benefits of good representation and the importance of telling the whole story.

More

Questions to ask a bankruptcy lawyer before you sign up

Rules for testifying when you go to bankruptcy court

Bankruptcy not a do-it-yourself project

When bankruptcy blesses your family

California Gets New Homestead

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California homestead

The California Legislature enacted a dramatic increase to the state’s homestead law at the very end of the legislative session in August. It became effective September 18, 2020.

The dollar amount of the homestead increased to a minimum of $300,000 and a maximum of $600,000. Gone is the link between marital status or dependents. Every homeowner is entitled to the homestead amount.

Recognizing that home values vary widely in the state, the new law establishes a homestead greater than $300,000 where the median price of a home in the county exceeds that floor. Regardless of the median price of homes, no one gets a homestead in excess of $600,000.

Finally, the dollar amount of the homestead will be adjusted by inflation, going forward.

Here’s the text of the bill itself, showing the language it replaces.

Homestead unknowns

At this writing, we don’t know whether the new homestead becomes effective when the governor signs the bill, which was the intent of the drafters, or whether it’s effective January 1, 2021.

The uncertainty is the product of last minute procedural manoeuvres that pulled this provision out of a larger emergency bill to be stand alone legislation.

The other unknown is what data base will serve as the reference point for the median price of a home in each county.

Homestead certainties

What we know about the new homestead is that it protects family homes from forced sale in and out of bankruptcy.

In state courts, the homestead acts as a check on the ability of a creditor to force the sale of a home to collect a judgment. That works by requiring that any forced sale pay the homeowner the homestead amount before taking any sales proceeds for himself.

In bankruptcy, the homeowner can claim the homestead and the same restrictions on sale apply to a Chapter 7 trustee. So now, a far larger swathe of homes are protected from sale by the larger homestead floor.

The homestead also plays a part in Chapter 13. While there are no forced sales of homes in 13, the amount of non exempt equity often determines how large the monthly Chapter 13 payments must be. That’s because one of the “rules” in Chapter 13 is that if the debtor gets to keep his assets, creditors must get as much as they would have if the debtor had filed Chapter 7. We’ve nicknamed the “best interests of creditors” test for plan confirmation.

I’ve often seen homeowners who can’t get relief in bankruptcy without putting their home at risk of forced sale or at risk of a Chapter 13 plan payment that is simply too large to manage.

Homestead updated

The original purpose of the homestead was to protect an amount of money that is required to keep a roof over a family’s head.

Prior to this change, the increase in the cost of homes left the homestead outdated. The homestead before this bill only protected about 15% of the value of the typical California home.

We’re now far closer to achieving that goal and preserving home ownership for everyone.

More on homesteads

How the homestead works

Which chapter is best for me

Why I love Chapter 13

Doing The Means Test Yourself

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Posts on internet bankruptcy boards feature individuals who have “filled out the means test” and then proceed to announce their conclusions.

Given the uncertainties in the legal community about how to apply the means test, I can’t imagine a non lawyer learning anything reliable from trying to do this themselves.  As a certified bankruptcy specialist, I end up thinking, and rethinking, treatment of income and expenses on the means test. I teach this stuff to other bankruptcy lawyers, and still it’s a challenge.

Yet the results of the means test determine whether you get to choose which chapter of bankruptcy you want to file, or how much you have to pay if you file Chapter 13.

Means test rat’s nests

The tricky issues include how to deal with income from non filing spouses; from roommates or extended family members; shared custody situations; changing income issues, and how to handle business expenses for the self employed.

One bankruptcy appellate panel recently decided that the judges who drew up the form did it wrong!  That really helps.

You have to parse out income “received” but not “derived” during the look-back period and figure out how to report children where custody is shared.

Then there is the dispute on the deduction side about ownership allowances for paid-for cars; operating allowances for older cars; debts associated with property you’re surrendering, and just what part of your telecommunication expenses go on the form.

And how do you treat the costs of delayed health care needed in the future?  Do you divide that cost over the life of a Chapter 13 plan, or over 12 months, or….?

Can you swear to that?

I cringe when I ask a client to sign this form, as they cannot possibly validate all of the entries on the form, given the complexities of the law.

While I won’t say “don’t try this at home”, I am certain you should draw no conclusions about the means test and your eligibility for Chapter 7 based on your efforts to take the test.

Get an experienced bankruptcy lawyer involved.

Read more

Means Test Misunderstood

Means Test Is Paper Tiger Here

Means Test In Chapter 13

Image courtesy of Pixabay.

Bankruptcy Is Not Your Last Resort

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Facing financial trouble, there are three circumstances when it makes sense to file bankruptcy.

None of them is labeled “last resort”.

Yet financial-advice gurus keep saying, bankruptcy should be your last resort.

That kind of thinking keeps people suffering too long.  The delay wastes money when recovery outside bankruptcy is a lost cause.  The resulting stress imperils health.

Putting emotions to the side, let’s walk through those three situations when filing bankruptcy is the right choice, not your “last resort”.

1.  You have a crisis

Foreclosure, repossession, or wage garnishment threaten the foundation of your finances.  Without a house, a car, and a paycheck, not much about day-to-day life is manageable.

Bankruptcy is may allow you to keep something that you would otherwise lose to creditors without bankruptcy.

Bankruptcy provides the “time-out” that stops all collection action.

The automatic stay triggered by filing bankruptcy has the force of law to make everyone stop in their tracks and move the action to bankruptcy court.

Sometimes, just getting served with a collection lawsuit seems like a crisis.

10 things to know about judgments

A lawsuit, after all,  is the precursor to a judgment that leads to garnishment, liens, or levies on your assets.

Being served isn’t really a crisis, but it’s a wake-up call that trouble looms ahead.

Usually, actually getting sued is often just a symptom of a much larger problem:  it’s not just the creditor who filed this suit, but the bunch of  other creditors who aren’t getting paid either.

Bankruptcy gets you a moment to consider the big picture, and provides the legal forgiveness of most unsecured debts.  It’s the long term effect of the discharge that is precious.

2.  You see the big picture

It doesn’t require a crisis to look at your balance sheet and realize you can’t dig your way out of a financial hole.

A lifetime of minimum payments on suffocating debt is no life.  Keep making minimum payments and the debt doesn’t even die of old age, because payments extend the statute of limitations.

Healthy finances include a reserve for emergencies and serious savings for your old age.  Keep feeding VISA and AMEX and you’ll be eating cat food at 70.

Bankruptcy exists because lawmakers understood that the economy is better off when people aren’t driven into the economic underground, and when families have the chance to be self sufficient.

It doesn’t matter how got you into debt: most bankruptcies result from events the individual didn’t control, like job loss, illness, or divorce. And now, add pandemic.

Whether you’re in financial trouble because of bad luck or bad judgment, a fresh financial start is energizing.

3.  You’re worrying yourself sick

How we feel about owing money has a huge impact on physical and mental health.

It’s unfortunate in a way that our societal tendency to lionize those who doggedly pay off their debts:  the heroic story of slaying debts blinds us to the fact that stress kills.

True story of retired couple who made wrong choices about who to pay

And stress makes us stupid:  actually, measurably less likely to make good decisions going forward.  Collection pressures force too many folks make foolish choices about which creditor to pay.

So, when money worries interfere with sleep, digestion, work or relationships, it’s worth considering whether a bankruptcy discharge would improve the situation.

Even elders and the disabled, who are often legally protected from collection by non bankruptcy laws, decide to discharge debts so the bills are gone legally, for all time. And they enjoy peace at home.

Reasons for bankruptcy overlap

These three reasons for filing bankruptcy aren’t mutually exclusive:  you can have a crisis and see the big picture.

But the idea that bankruptcy is only a last resort, when you’ve exhausted all other avenues, is just flat wrong.

Bankruptcy should not be taken lightly, but neither should it be the last option.

The sooner you look at the big picture provided by bankruptcy, the less likely you are to waste money trying to pay impossible debts or make catastrophic decisions like invading retirement or borrowing against your house to pay dischargeable debts.

More

Does debt settlement work?

The real causes of bankruptcy

Why bankruptcy seems scary

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