Is Bankruptcy Really A Fresh Start?

In my 24 years of helping clients in Santa Rosa, California, and throughout Sonoma County, get a fresh financial start I have been reassuring clients, and telling them what a new study by the Federal Reserve Bank of New York has now concluded; people who file bankruptcy do better financially in the long run, than those who don’t.

Today the biggest financial calamity looming ahead of 50% of people is not their immediate debt, but the inability to save for even a modest retirement.  Money spent on monthly payments for credit card debt, personal loans and revolving debt pays the interest on the debt but the principal never goes away.  Those monthly payments to credit card debt is money you won’t have for retirement, college funds or other future needs.

For Most, Filing Bankruptcy is a Huge Relief

You can think of bankruptcy as the doorway out of a hopeless situation.  While contemplating bankruptcy may at first feel awful, it is actually the bankruptcy that gets you out of awful financial circumstances that have likely been developing for years.

Remember, bankruptcy is a rational financial choice made when you have debts that can’t be paid back.  Very few people try to file who can actually pay their debts; the percentage of people who file more than once is very small; and a recent Harvard Law School study concluded that only 2% to 3% of all bankruptcy filings in the United States are fraudulent; 98% of all filings were legitimately made by people suffering from overwhelming debt caused by uninsured medical crises, job loss or downsizing, divorce, and other calamities.  Think of bankruptcy as debt relief that can bring true peace of mind.

What Not to Do Before Bankruptcy

The following is a list of some of the major moves you should avoid before filing bankruptcy.  Remember, it’s not inclusive.  You should consult with a bankruptcy attorney to discuss pre- bankruptcy planning.

• Don’t pay any creditors large or unusual payments, especially those creditors who may be insiders; payments made to family or friends can be recovered by the Court after your bankruptcy is filed.
• Do not take cash advances from credit cards, or make large purchases on credit.  If you charge a lot before filing bankruptcy the creditor can file a complaint in your case, arguing that the debt should not be discharged.
• Don’t borrow from your retirement funds, 401(k) or IRA.  Retirement funds are safe from creditors, so keep them intact.  Instead of draining those accounts, keep them for their intended use, your retirement, and get rid of the debt in bankruptcy.  Don’t jeopardize your ability to retire with a financial cushion.
• Don’t borrow against the equity in your home.  You can protect a generous amount of equity in your home depending on marital status, number of dependents, etc.  Most financial planners strongly discourage turning unsecured debt (credit cards, medical bills, etc.) into secured debt by using your house as collateral and further encumbering it.  Again, keep the equity in your residence and get rid of the unsecured debt in bankruptcy.  The result will be more equity in your home and thus a better financial future.

If you’ve decided to move ahead with bankruptcy then these are some good tips.  But most importantly, contact an experienced bankruptcy attorney who lives and works in your community who will really take care of you and your case.

For a free bankruptcy consultation call me, Attorney Brian Barta, at 707-542-2844