Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

How Does Your Household Budget Measure Up?

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stretching money

The expenses your paycheck has to cover go on and on.

Each dollar is stretched;  each expense clamors for attention.

Too often, the expenses go on long after the available money is gone.

What seem like immediate needs squeeze out those necessities that only come round occasionally but in big numbers:  car repair, medical incidents, college.

And when the “occasionals”  do come round, you’re caught short.

I generally see families to talk about bankruptcy when things have gotten so out of balance that better budgeting won’t fix the problem.

So, let’s take a tour of the cost of living so you can stay in balance, and we’ll never meet face to face in my law office.

What daily living costs

Consumer Credit Counselors  proposes a model allocation of your income among all of those categories on your household expense list.

The headings in blue are the big wedges of the pie;  below are all of the expenses to be paid from that percentage of your income.

 

MONTHLY EXPENSES

MONTHLY AMOUNT

HOUSING

 35%
Rent
First Mortgage
Second Mortgage
Association Dues
Property Taxes
Renters/Homeowners
Lot Rent
Home Maintenance
Electric/Gas/Oil/Propane
Water/Sewer/Garbage

TRANSPORTATION

 15%
Gasoline
Auto insurance
Maintenance – Oil/Lube/Tires
Auto Tags/Inspection
Bus Fares/Ride Shares/Parking

INSTALLMENT DEBT

 15%
Car Payment #1
Car Payment #2
 Student Loans
Tax installments

EVERYTHING ELSE

 25%

FOOD
Groceries
Meals Out
School Lunches
Food/Snacks at Work
Telephone/Cell Phone/Beeper
Cable TV/Internet

CLOTHING

INSURANCE
Medical
Life

HEALTHCARE
Drugs/Medication
Office Visits/Deductible
Dental
Optical

CHILDCARE
Daycare/Babysitter
Allowances/Kid’s Stuff
Diapers/Formula/Baby Supplies
Child Support
School – Tuition/Supplies
Church/Charities
Lawn/Pool Maintenance/Home Security
Personal Care – Shampoo/Toothpaste/Haircuts
Bank Service Charges/Postage
Work Tools/Clothes/Occupational Dues
Dry Cleaning/Laundry
Home Cleaning Supplies
Cigarettes/Tobacco
Hobbies/Clubs
Lottery/Casinos/Bingo
Gifts/Parties/Holidays/Cards
Vacations/Travel
Alcohol
Books/Newspapers/Magazines
Lawn/Pool Maintenance/Home Security
Movies/Sporting Events/Entertainment
Pet Care/Vet/Food/Medications

Savings/Reserve

 10%
Emergency reserves
Retirement
College

TOTAL

 

So, how do your monthly expenditures line up against this model allocation?

I was struck by how many of my standard expenditures are slated to come out of just 25% of my income.  That’s a long list.

Reshuffle the cards

Another way to look at your allocation of money comes from now-senator Elizabeth Warren’s book, All Your Worth:

  • 20% to savings;
  • 50% to must-haves; and
  • 30% allocated among your “wants”.

How does it work in your household?

 

 

Will You Have Money For A Lifetime?

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financial literacy building blocksThe financially literate manage their money for the long haul.

In a world of biweekly paychecks and monthly billing cycles, it’s easy to let your perspective shrink to 30 day increments.

  • Mortgages are paid monthly
  • Utilities bill every 30 days
  • Credit cards come due 12 times a year
  • The monthly bank statement tells you how you did that month.

But that view is incredibly short-sighted.

Your working life isn’t everything

Most of us don’t work for our entire lifetimes. Your financially productive years  may be only half of your lifespan.

There’s growing up and getting an education;  there’s a working life; then there’s old age.

And the money we manage in that middle slice of life usually determines how well we live at the end of our lives.

If you expect to inherit a fortune from short-lived relatives, you can stop reading here.

For the rest of us, let’s keep thinking.

We usually grow up and go to school on someone else’s nickel, though it may take student loans to get a post secondary education.

But unlike funding school, you can’t borrow to fund your old age.

No one lends a 70 year old money to live on.

  • You’ve either saved for retirement, or
  • You sorta  get along on Social Security,  or
  • You are supported by your family.

Your house won’t support you

Lots of equity in a home, even if paid for, doesn’t put food on the table and prescriptions on the counter at the end of a working life.

Home equity isn’t a retirement plan

Those things require cash.

Out of pocket medical costs for a couple in retirement reach $240,000

The house will need repairs.  Property taxes come due.  Appliances wear out.

It simply takes cash to maintain a comfortable life in retirement.

Sell the house, and you are paying rent or moving away from the community you live in.

It would be nifty if today’s housing payments could double as retirement savings, but that seldom really works.

Manage your money for the long haul

With life expectancy increasing, more and more people are finding that retirement is as long as their working lives.

Assuming you hope to enjoy a long life, change the measure of your financial thinking from months to decades.

What you save now funds those decades after the end of your working life.

The easiest way to do that is to pay yourself first from every new dollar in the door.  Whether you draw a salary or live in the creative or gigster economy, some part of what you earn today has to support you in retirement.

I like to think of setting aside something this week for a nice night out when I’m 75.

If you don’t pay yourself first, and think you will save what’s left over at the end of the month, you set yourself up for failure.  It’s too easy to have nothing left at the end of the month.

Save first, and your challenge is to make what’s left work to cover your expenses, the necessary and the indulgent.

When that gets tough, hum a few chords of “When I’m 64“, and imagine what you want your life to be at 64.  At 74.  At 84.

The rest of your life is a long time.

More

The real threat to your retirement savings

Update your  money management thinking

Where is your money really going

Which comes first: debts or saving

 

 

 

 

Get Annual Credit Report For Free

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free credit report bandWhen is FREE not FREE?

In a world seemingly driven in all matters by credit reports, getting that report for nothing ought to be a good thing,

But the commercial entities beat the federal government to the web address freecreditreport.com.

And they also got a better ad agency that wrote catchy tunes promoting their product, under the guise of free credit report.

But freecreditreport.com provides you a free credit report only if you surrender personal information, wait for it to come by snail-mail  and sign up for a monthly service billed to your credit card.

They bank on you not cancelling that subscription.

Cha ching!

It’s not really free.

Free credit report

The three big credit reporting agencies do provide a no-strings attached credit report  free to everyone, once a year.

Unfortunately, the URL doesn’t mention free, and doesn’t come with a catchy, banjo driven jingle;

Annualcreditreport.com

But it does provide simple, and free, access to your credit file.

The right to know

Federal law enacted in 2003 gives everyone the right to request a free credit report each year from each of the three national credit reporting agencies:  Experian, Equifax, and Transunion.

For nothing (that is: free) you can examine your credit report once every four months, if you request your free report sequentially from the CRA’s.

Repeat after me:  annualcreditreport.com.

What to do if you find errors

The Federal Trade Commission website walks you through how to challenge inaccurate information on your credit report.  They’ve even included a sample dispute letter.

ConsumerHelpCentral.com  sorts out your remedies if the CRA doesn’t correct the information.

Sing the chorus

Here’s the game plan:

  • Click on www.annualcreditreport.com
  • Order a copy of your report from one agency
  • Look for errors and inaccuracies
  • Challenge bad information
  • Mark your calendar for 4 months to order a report from one of the other national CRA’s

Then, how about I offer a free subscription to BankruptcySoapbox to the best jingle submitted for ANNUALCREDITREPORT.COM. 

I talk about credit after bankruptcy at Bankruptcy in Brief and what your credit report should show after bankruptcy discharge.

Financial Lessons From Furloughed Federal Workers

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out of work

The plight of workers going without pay because of the government shut down looms over our news.

If our incomes haven’t been affected, it’s easy to see this as someone else’s problem.

But are the rest of us really immune to the same financial straight?

Over and over again, we hear that most U.S. families couldn’t pay an unexpected $400 bill without borrowing money.

The current problem is a lot bigger than $400.

Effectively out of work, federal workers face weeks with nothing coming in, and too little set aside.  It’s notable now because there are so many families affected.

But ending up with no income isn’t unique to the governmental workforce.

To paraphrase the credit card ad, what’s in your savings account?

Image courtesy of DavityDave and Flickr under a CC license.

 

Stop Making Quarterly Tax Deposits

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tax+forms+and+billsWe never make tax deposits for our small business because we don’t know what we’ll owe.

We just wait til the return is prepared and try to pay then, he explained.

But, again this year, he couldn’t write a tax check for a year’s worth of income.

So the client sitting across the table from me had an $8,000 tax bill for last year, and in mid October, had made no deposits toward this year’s taxes.

Waiting for certainty about what he’d owe, he racked up penalties for not making advance deposits, penalties for not paying when the return was filed, and interest on the unpaid tax.

And he was positioned to do it again this year.

Ouch!

Quarterly tax deposit trap

I’m sure the provision that the self employed make quarterly deposits, rather than more frequently, was thought to be a convenience for small business.

Instead, in my opinion, it is a trap.

It calls on entrepreneurs to estimate what they’ll owe, set money aside as it comes in, and, every three months, have enough money on hand to cover the check for the taxes.

That’s often a tall order for the self employed, who wear lots of hats and juggle lots of responsibilities in their business.

And it’s costly and uncomfortable when you don’t manage to do it.

Replace the quarterly tax deposit

Discard the quarterly tax deposit.  Instead, make a monthly tax deposit.

Treat income taxes as one more regular, monthly expense of being in business.

Deal with current year taxes each month so you don’t have to save up the money to cover the tax bill.

How much to pay

Start with your tax liability for last year.  Deposit 1/12 of that amount each month toward your current year taxes.

Write on the check your tax ID number, and a notation that the check represents estimated [current year] tax liability.

As the year goes on, you can estimate how this year’s income compares to last year and adjust that monthly check up or down as the facts suggest.

Breaking the tax delinquency cycle

For the man in my office, I had this suggestion:  rather than  paying $1000 for last year, when you’ve paid in nothing for this year, split up the money available for taxes.

Make a smaller payment toward the already delinquent taxes, say $250;  pay $750 toward the current years taxes.

It’s already October, so he probably can’t pay in enough to avoid all penalties for being underwithheld for this year, but it’s a start on changing his ways and paying less in tax penalties in the future.

More on taxes

When taxes are dischargeable in bankruptcy

Tax question round up

If you haven’t filed returns

Image courtesy of Flickr and 401(k) 2013  

Pay Down Debt Or Save? Which Should Come First

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debate

Pay off debt first or start saving now?

It’s a debate almost as convoluted as which came first, the chicken or the egg?

Experts heatedly take opposite sides.

You get rid of debt faster if you put all available cash into paying off balances.

BUT

You have no reserves for the unexpected if you spend everything that comes in.

After much thought, and triggered by new research, I’ve got my answer.

Start saving now.

I am convinced habits are more powerful than arithmetic.

Pay debts first is cheaper

In a world where your savings earn 1 or 2% annual interest, while credit cards cost 15-25%, it’s clear your net worth benefits from paying debt first.

The biggest bang for your buck, dollars and sense wise, comes from paying off debt.

Unless, of course, you have an unexpected expense and find yourself without funds to pay.  Then, short term borrowing is usually on even worse terms than credit cards.

But, hang arithmetic, I say.

Your balance sheet isn’t everything.

Habits drive the bus

Get the savings habit.  Even when you’re in debt.

Put a bit of your income aside every paycheck.

Dictionary.com says a habit is an acquired behavior pattern regularly followed until it has become almost involuntary:

Habits control as much as 40% of our daily activities.

Most of us have a bad habit on the subject of savings:  we label saving as something we can put off til later.

Later

  • When there are fewer demands on our money.
  • When our income has increased.
  • When the kids are grown
  • When the house paid off.

Whatever it it, we’ve created a habit of thinking that savings can wait til later.  That saving will be easy at some future time, whereas it’s hard now.

Only for most of us, no matter what life benchmark we’ve passed, savings never looks easy.  Or immediately rewarding.

So, it’s not easy.  It’s just essential.

Essential for a stable financial life.

Start small building savings habit

You don’t have to jump head first into the gold standard “set-aside of 10-20% of your income.”

If you’ve got debts from your past, it’s probably not really feasible.

Start small.  Save $30 bucks a month this month.

Save $35 next month. And so on.

Pay down your debts, but cultivate that saving habit.

Don’t allow yourself to think that saving is discretionary.  That’s a nasty habit.

Yes, saving while you’re paying interest on old debts slows your climb out of debt.

But the savings habit gets stronger.

As your debt shrinks, your rate of savings can increase.

Along with your peace of mind.

That’s where I come down on which comes first: paying off debt or savings.

It’s not one or the other.

More

Smoke, mirrors, and budgets

Update your money software

The most powerful debt management tool: not what you think

The Worst Reason To Settle Debts Rather Than File Bankruptcy

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settle or file bankruptcyThe guy with an old debt asked if bankruptcy or debt settlement would cause greater damage to his “credit”.

The money advice columnist gave the right answer to the wrong question.

She got it backwards. So did the man with the question.

She advised that bankruptcy was more damaging given that the nagging debts were already three years old and would drop off his credit report in four years, whereas bankruptcy would show for seven to ten years from the bankruptcy filing.

Right, assuming that your credit history is the important issue.

But your credit record is a sideshow in life.

Dealing with old debt

I would challenge the question the way the guy phrased the question in the first place.

When you look at the alternatives to debts you can’t pay, I think the first concern should be for your balance sheet.

Which of the alternatives makes you better off NOW, not when you want to incur more debt in the future.

For the man writing in about settling a $13,000 debt for $5,000, I would have a series of questions that didn’t center on his ability to get new credit.

  • How old are you?
  • Do you support others?
  • Do you have any emergency savings?
  • How are you doing on retirement savings?
  • Got health insurance?

If he is young, single, and employed with a bit of money in the bank, perhaps paying $5,000 to make eliminate a $13,000 debt is a good deal.

If he’s middle aged, supporting children or aged parents, and living paycheck to paycheck, I would be inclined to suggest there are better uses for $5000.  At the most basic level, put it in an IRA, and your creditors can’t take it.

If he’s approaching retirement and looking at a future of reduced income and with  little need for future credit, chances are that there are crying needs for that $5000 other than dealing with an old debt.

It’s not about the credit score

As you can see,settlement versus  bankruptcy is not just a matter of which impacts your credit record more negatively.

The decision needs to take in your ability to spend money on old debts when faced with current and future demands on your assets.

It’s all backwards to think that protecting your credit record is the central issue..

More

Credit heals

Better to keep paying or file bankruptcy

Shore up your defenses against debt collectors

Image courtesy of Flickr and Luke Montague. 

 

 

 

Asset Protection For Free

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Savings protection, close up of female hands covering stack of gEnjoy your money without worry about your creditors taking it from you.

That describes asset protection.

A substantial industry run by expensive professionals will scatter your money between interlocking partnerships and off-shore corporations to keep it away from those who might sue you.

And, of course, a bunch of your money lands in their pockets. 

When asset protection doesn’t work

All to keep your assets safe from unexpected, catastrophic lawsuits.

For most of us, we don’t need to go there:  Uncle Sam lays out the first step in asset protection.

Retirement plans safe from creditors

Federal law puts pensions, 401(k) plans, and employee benefit plans beyond the reach of even a creditor with a judgment.

The power of a legal judgment

Any plan qualified under ERISA has an anti alienation clause that forbids transfer of plan benefits, except to the beneficiary.

It takes no special set up, no high-priced lawyers,  no costly maintenance, just regular savings in an appropriate plan to put your retirement assets beyond the reach of a financial catastrophe.

If you file bankruptcy, ERISA qualified accounts don’t even come into the bankruptcy estate.

It takes a plan

To get the protection of law for retirement savings, they have to be in a plan.

It doesn’t work to merely label an asset or an account as your “retirement plan”.  It needs to be part of a federally recognized plan for tax advantaged retirement savings.

I can’t tell you how many of my bankruptcy clients tell me that their small business or their expensive home  is their retirement plan.

That’s not a plan, it’s a pipe dream.

And any non exempt equity they have in either of those assets is available for creditors. Worse, a creditor with a judgment can force the sale of non exempt assets, and leave you with the tax bill for capital gains, etc.

Employer match swells account

Employers seldom just hand you cash to save for retirement, but they do frequently match your contributions to a 401(k) plan.  That match represents an immediate 50-100% return on your money.

Again, all tucked away where no taxes are due on its growth and beyond the reach of creditors.

Until you’ve maxed out your ERISA qualified retirement savings, don’t fret about finding other forms of asset protection.

Uncle Sam, in this regard anyway, has your back.

More

The real threat to your retirement savings

The only three times bankruptcy makes sense

Your home is a lousy retirement “plan”

What Goldilocks Knew About Tax Season

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goldilocks-flickr_optIt’s so easy to get a tax filing extension and put off the unpleasant work til fall.

Procrastination is easy, and even sanctioned by the simplicity of an extension.

But doing it now is important to your financial wellbeing

From a purely selfish point of view, you need to know where you and Uncle Sam stand.

Really it’s all about next year.  What did Goldilocks know about taxes?

Getting withholding just right

Your withholding for next year’s tax bill needs to be just right, not too large, not too small, but right close to what you’ll owe.

Just like Goldilocks and her porridge.

And a good estimate of what you’ll owe for this year is what you owe for last year, the return we’re preparing this spring.

Unless your finances are wildly variable, last year may not be a surefire template for this year, but it’s usually close.

But you don’t know what you owed for last year til you do the math.  (I know, math, but it can’t be helped).

Scared to know?

Fear keeps many from figuring out what they owe on their taxes.  Fear that it’s a number bigger than they can pay.  Fear of drawing attention to themselves.

So, let’s look at the downside of putting it off til October.

For starters, it costs you to be underwithheld.  There’s a penalty for not prepaying enough of this years taxes during the year. [Read more…]

Stay At Home Doesn’t Mean Get Left Behind At Retirement

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couple-sunset_opt

Just because you don’t work outside the home doesn’t mean you can live on nothing in your old age.

If you are married and your spouse has qualifying income, you can contribute to a spousal IRA.

And you should.

The IRA rules for a nonworking spouse are essentially like the rules for an employed person:

  • have a spouse with earned income
  • contributions capped at $5500 or  $6500 if you are over 50
  • age less than 70 1/2
  • choose between traditional IRA and Roth IRA

The Motley Fool has a fuller yet readable treatment of rules and options for spousal IRA’s.

So, even if paycheck comes with your spouse’s name on it, you can save for retirement in your own name.

Or plan to die young

I know that’s harsh, but it gets attention.

The alternative to taking responsibility for your retirement is, of course, to plan to die young. [Read more…]

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Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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