Tuesday, May 22, 2007

Steps to Recovery: Bankruptcy -- a Primer

"Steps to Recovery" is an occasional series covering steps people recovering from cultic involvement can take to get their lives back on track. We hope to present on topics such as finances, recovering family ties, health, friendships, community, love relationships, law, spirituality, recreation, physical well-being, and mental well-being.

As I wrote in Part 1 and Part 2 of this series, one of the most pressing problems facing current and former TMers I have counseled is financial wreckage -- remaining even long after leaving the Transcendental Meditation Movement.

This article is intended to be a primer on retiring debt. I am neither a lawyer nor a financial consultant. So nothing contained herein is meant to be advice on whether or how to obtain a bankruptcy. But I hope to offer you an introduction to some of the questions people facing bankruptcy ask themselves -- and provide resources where you can find answers for yourself.

Finding oneself considering bankruptcy can be one of the most shameful events in one's life. It needn't be. Our government wisely understands that the fastest and surest way to return financially strapped individuals to the ranks of productive society members is by allowing them a fresh start. That's why there are specific rules and procedures spelled out in federal and state law for individuals to seek bankruptcy relief. And that's why businesses in the U.S. recognize that a relatively constant number of their customers will be seeking a bankruptcy. They've already planned for the costs in their business models. They simply consider it a cost of doing business.

Bottom line, bankruptcy is hardly rare. The American Bankruptcy Institute reported there were over 1.5 million personal bankruptcy filings in 2004.

Note: Bankruptcy doesn't work on some kinds of debts. It can eliminate credit card debt, medical bills, and unsecured loans. But there are many types of debts, including child support, college loans, most tax debts, and spousal support obligations that can't be forgiven in bankruptcy.

Signs You Might Consider Bankruptcy
Here are some questions that can help you figure out whether you should seek a bankruptcy or other form of debt relief:

  • Are you unable to pay your bills on time and starting to receive collection calls?

  • Are you living paycheck to paycheck? Do you have little or no money put aside in a savings account? (Many financial advisors suggest you should have 6 months of income available in liquid assets in case of loss of employment or heath emergencies.)

  • Are you spending more than 15% of your monthly income to pay debt? This is termed your debt-to-earnings ratio. To determine it, simply add up all your debt payments -- exclusive of your mortgage or other secured loans -- and divide by your net monthly income.

  • Are you able to save at least 5% of your monthly income?

  • Are you using credit cards or borrowed money to pay for items you used to use cash for?

  • Can you only afford to make the minimum monthly payment on your credit cards? Or are you skipping some payments in order to make other payments on time? (Paying the minimum amount may mean that you take over 30 years to pay off your balance -- paying many times the original purchase price of the item!)

  • Have you taken out new loans to pay off existing debts?

How Much Can I Afford to Pay Creditors?
Another good indication of whether you need to seek debt retirement is comparing your overall budget to standard personal budget models. In order to cover all the contingencies of modern life -- including insurance, medical, and rising gas prices -- you probably should not be paying more than 15% of your monthly income on debt repayment.

Alternatives to Bankruptcy
Do Nothing: If you live simply, with little property and income, you may be what's known as "judgement proof." Anyone who sues you has little expectation of collecting from you. A creditor can't take away such essentials as basic clothing, ordinary household furnishings, personal effects, food, or Social Security, unemployment, or public assistance benefits.

Stop Harassment from Creditors: If you're mainly worried about being harassed by creditors, there are alternatives to bankruptcy. Federal and state debt collection laws may protect you from abuse and harassment.

Negotiate With Your Creditors: If you have some income or assets you can sell, you may be better off negotiating with creditors. It can either buy you time to get back on your feet -- or even wipe out a portion of what you owe. In a creditor's eyes, 50 cents on the dollar is better than nothing -- which is what they'll get if you go bankrupt.

Debt Counseling: If you don't want or like to negotiate yourself, you can get help from a nonprofit credit or debt counseling agency. To find agencies in your area, go to the web site of the United States Trustee and click "Credit Counseling and Debtor Education." I hesitate to single one firm out -- and this is not an endorsement -- but Clearpoint Financial offers a wealth of information on restructuring debt and bankruptcy. The biggest advantage of debt counseling over bankruptcy? No bankruptcy will appear on your credit record. But debt management programs will not protect you from collections if you miss a payment. In fact, a single creditor can pull the plug on a debt management plan. In bankruptcy, you are protected from these eventualities.

Types of Personal Bankruptcy
There are two major forms of personal bankruptcy: Chapter 7 (liquidation) and Chapter 13 (structured repayment). The ins and outs of these are somewhat complex. I recommend you read Nolo Press's excellent discussion.

How to Obtain a Bankruptcy
There are two basic ways to obtain a bankruptcy: file it yourself or hire an attorney. If you consider yourself detail oriented and have somewhat more time available to you than you spend preparing your yearly taxes, consider buying a book from Nolo Press. Most people, however, opt to hire a local lawyer who is experienced with your state's bankruptcy laws. Expect to pay a lump sum for your bankruptcy, most likely $900 on up -- which is in addition to the federal filing fees of approximately $300.

A Serious Decision
Whether or not to file bankruptcy is a serious decision, with serious consequences for your credit standing, and so is not to be undertaken lightly. Whatever you do, do not use this article as your sole basis for pursuing a bankruptcy. It's my hope that you will use these resources, however, as a starting point for finding out what you need to know to take the next step.


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