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Virginia Bankruptcy Information & Tips
Helping People Through Bankruptcy
We’ve talked to twenty thousand families about their financial problems. I know how far people will go to try to avoid bankruptcy. So I see too many people who have made really expensive mistakes while trying to get out of debt.
So, I’ve posted this web page to help you avoid some of the mistakes I’ve seen time after time. If this helps you stay out of trouble while you get out of debt, that’s great. It’s my gift to you.
You Can’t Borrow Your Way Out of Debt
Bill Consolidation Loans – Do They Ever Make Sense?
High Interest Home Equity Loans
Transferring Credit Card Balances
Don’t Cash in Your IRAs or 401(k)’s
Don’t Borrow from Your 401(k) Either
What Credit Counselors and Debt Management Plans Don’t Tell You
What Your Credit Cards Will Cost You
Bankruptcy Do’s and Don’ts: You Can’t Borrow Your Way Out of Debt
When you stop and think about it, it’s obvious that you cannot borrow your way out of debt. But there are so many loan offers, people think there must be a good reason for them–often there’s not.
Bankruptcy Do’s and Don’ts: Bill Consolidation Loans–Do They Ever Make Sense?
How much money you owe determines your debt situation. What interest rate you have to pay is also important. How many companies you owe money to really doesn’t matter, except when it comes to saving $0.39 stamps, so people who advertise consolidate your debts into one payment are just trying to mislead you. Companies offer to “consolidate” your debts by rolling them all into one high interest loan and charge you fees and insurance so you end up further in debt than you were.
There’s no advantage to you in that.
Bankruptcy Do’s and Don’ts: High interest home equity loans
High interest home equity loans are especially bad–that’s why they are advertised so much. According to a recent article in the Wall Street Journal, people with high interest home equity loans are seven times more likely to file bankruptcy than people who don’t have them.
A home equity loan can help you get out of debt if the interest is much lower than you are paying now.
For example, if you owe $20,000 on credit cards at 19.5%, $332 per month pays them off in 20 years. Your total payback is $79,680.
If you refinance that $20,000 on a home equity loan at 10%, $230 per month pays them off in 13 years. Your total payback is $35,880. You save $102 per month and 7 years.
Home equity loans now are running about 4%–but that’s for people with good credit, low debts, and real equity in their homes. That’s the good news. Here’s the bad news.
Most people who are carrying substantial credit card balances cannot get approved for those low interest home equity loans. Lots of people end up changing their 19.5% credit cards for a 18.5% home equity loan. That would save a big $5.00 per month–and the costs of getting the home equity loan are usually more than that $5.00.
Never, never, never get a home equity loan at more than 8% interest. If you can’t pay the credit cards, you won’t be able to pay the home equity loan, either. (Remember, you can’t borrow your way out of debt.)
Bankruptcy Do’s and Don’ts: Transferring Credit Card Balances
If your credit is still good enough that you are getting pre-approved credit card offers, you may be tempted by those 2.9% introductory rate offers.
Those are great offers if they make it possible for you to get out of debt. But too many people find that they can make the payments until the interest rate goes back to 18.9%. Then they can’t.
Then there’s a problem. Doing a balance transfer if you cannot afford the regular interest rate–after the 2.9% is expired–is considered credit card fraud. (Or at least the credit card companies say it is.)
If you are thinking about doing a balance transfer, do a budget. See if you’ll be able to make the payments at the introductory rate–and see if you will be able to make them when the regular payment kicks in. If you can’t afford to pay the money back, don’t borrow it.
Bankruptcy Do’s and Don’ts: Don’t Cash in Your IRAs or 401(k)’s
Remember We All Get One Day Older Every Day
Many people who are desperate to pay their bills start tapping into their retirement. If your retirement funds can pay your bills off, maybe that makes sense. But if you are emptying out your retirement just to keep up the minimum payments for a few more months, that’s a complete waste of money. You will have less and still owe just as much.
Some people who are struggling with debts start cashing in their IRA’s or 401(k)’s.. Make sure you have a long term plan before you do that.
If you can cash in your IRA’s or 401(k)’s to get out of debt, that may make sense. Cashing them in just to keep making the minimum payments is just a waste of money. When the money is gone the debts will still be there.
Also, remember the tax consequences of cashing in the IRA’s or 401(k)’s.. They will withhold 20% of the money when you cash out, and that’s only the down payment on the taxes. The 20% is the early withdrawal penalty, but you will still owe taxes next April on the money you took out.
Suppose you have $10,000 in an IRA and decide to cash it in. The IRS withholds $2,000 so you only get $8,000. You use that to pay off your credit cards. Next April you’ll find you owe the IRS $3,000.
Bankruptcy Do’s and Don’ts: Don’t Borrow from Your 401(k) Either
If you can borrow from your 401(k) to pay off all your debts, maybe that makes sense. But borrowing just to keep making the current payments is throwing money away.
You know you will have to pay back the 401(k)–the money will come right out of your check. But if that doesn’t leave enough money to make the house or car payment, then you have really put yourself in a mess.
Bankruptcy Do’s and Don’ts: Transferring Assets
Some people, when they realize they are in trouble, start moving money around. They give the car to their brother-in-law or pay back the $5000 they’ve owed mom for seven years.
Don’t transfer assets without talking to a lawyer. If you are legally solvent (“solvent” means you have more money than you have debts) you are generally free to do what you want with what you have. But if you are insolvent (“insolvent” means you owe more than you have) asset transfers can be serious legal problems.
In many cases there are safe ways to do what you want, and also very dangerous or illegal ways. Do not transfer assets when you are in financial difficulty without talking to a lawyer first.
What Credit Counselors and Debt Management Plans Don’t Tell You
Most people have heard that creditors will work with you when you are in financial trouble. People who try that, usually find out it’s not true. Some creditors will agree to accept partial payments, but many won’t. A lot will raise your interest rate to 32.99% when you call and say you are having trouble.
After trying to work with the creditors directly doesn’t work, many people go to credit counselors to see what they can work out. Here again, you’ll be shocked at how little the credit card companies will work with you.
There are three things you should keep in mind when you talk to credit counselors.
First, although the credit counseling services are usually set up as non-profit corporations, most credit card companies pay a commission to the services for the money they collect. A report by the Consumer Federation of America says that many of so-called non-profit debt management programs are just fronts for profit-making businesses. Two state attorneys general went after one of the best known debt managers for false advertising and fraud. Some, but not all, of the bad ones have been closed down by the government.
Second, credit counseling shows up on your credit report. When your credit report says you are in a debt management program, it tells the world that you are NOT able to pay your bills on time. Every week I see people who tried to buy a car after two years in a debt management plan. They come to see me because the dealership finance manager tells them,” If you had filed bankruptcy, I could put in you in a new car at maybe 11% interest. With credit counseling, you cannot get a car loan at any price.”
In Northern Virginia, Consumer Credit Counseling Service used to have several offices where you could discuss your budget and your debts with a trained counselor. But they have gone out of business and their phone number is now answered by one of the national organizations that I don’t like as much. (The credit card companies really sold Congress on how good these credit counseling services were as an alternative to bankruptcy–then, as soon as the new law was past, the best ones closed. Something suspicious about that.)
So my very weak recommendation is Money Management International. At 866-889-9347. I don’t know anybody better and I know a lot who are worse.
Credit counselors cannot force the credit cards to accept lower payments–and the honest ones will tell you that. I see one or two people a months who got garnished while in a debt management program. Even worse, I spoke to a person whose home was foreclosed while she was paying her credit cards through a credit counselor.
The latest thing is companies on the internet that advertise that they will negotiate settlements with your creditors. Most of these are barely disguised scams.
If you read your contract carefully, here’s what you might see. You are paying a monthly fee to them to represent you in debt negotiations. That monthly fee is less than you’ve been paying on the cards–but the debt negotiator is taking nearly all of it. They will settle up with the cards when the money in your account is enough to pay the settlement amount. But it’s never enough because they are taking out their monthly fee.
This goes on until you start getting court papers. Then you find out you’ve paid all that money for nothing. Sorry, we did our best, they say.
What Your Credit Cards Will Cost You
Is Interest Working Against You, or Working for You?
Jane gets a credit card while she’s in college and runs up $2,500. She thinks that’s not a very big balance, but she doesn’t want it to grow any bigger. So she only uses the card to charge $25.00 hair cuts every month, and she faithfully sends in the $62.00 minimum payment per month. The credit card carries 18% interest.
At age 65, Jane still owes–you guessed it–$2,500. How much interest has she paid on that $2,500 over the 45 years? Would you guess $1,800? or perhaps $4,500? Jane PAID $20,500 IN INTEREST CHARGES!
Now suppose Jane never got that credit card. She spent $25.00 in cash on hair cuts every month, and put the other $47.00 in an IRA with a mutual fund that over the 45 years averages 12%. Jane’s IRA WOULD BE WORTH OVER ONE MILLION DOLLARS TODAY!
(I want to thank Consumer Credit Counseling Service for helping me with this example. CCCS used to have several offices around Northern Virginia to help people with budgeting and debt problems, and they also had some valuable education programs. Shortly after the 2005 new bankruptcy law, they closed down.)
Bankruptcy Do’s and Don’ts: Family Budget and Savings
Once you have your new start, it is very important the your family budget starts to provide for savings.
There are two kinds of saving–short term and long term. You should plan to do both.
Short term saving is saving for things you want like a vacation or an appliance. Short term savings also includes saving for things you will need, like repairs for the car. You do not want to charge those things and pay interest on them. You want to have money saved to pay cash.
Some people have been charging those things so long that they cannot imagine saving money or paying cash. These people say to me, “if I don’t have a credit card, how will I pay for the car when it breaks down” or even “how will I buy schools clothes for the kids in the fall.”
The way to pay for things after the bankruptcy is with cash. And if you aren’t paying interest rates, you can start saving cash.
Long term saving is primarily saving for retirement or saving for college for the children. Long term savings can include 401(k) at work and possibly additional retirement like an IRA.
The best internet site I know of on family budget and savings is www.choosetosave.org. Click on their financial tools and look at the budget calculators. It is primarily funded by the Fidelity Investments.
One of the changes required by the new bankruptcy law, is that you need to watch an internet movie about budgeting and savings before you go to your bankruptcy hearing. We recommend Hummingbird at HBCCE.org and lots of people tell me it’s helpful. (It’s also mandatory; your bankruptcy is thrown out if you don’t take the class.)
Life After Debt
Your new start in bankruptcy benefits you in five important ways:
The creditors stop calling you.
They cannot garnish you; and
In three years you can have good credit, and
Most people sleep better, and
You’ll focus better on your future when you aren’t worried about your past.
What do I mean by good credit? In three years you can have credit good enough to be able to get a car loan at around 7% or lower. (Maybe much lower at a credit union.) In two years you have credit good enough to finance house at the interest rate most people are paying–assuming that you are making enough money to afford the house.
Here’s the key. Ninety percent of your credit score is based on that last three years. So once you have three good years, you’ll have good credit.
Why do so many people say seven years with bad credit?
One reason that many people take longer than three years to get back to good credit is that some credit card companies keep right on reporting people as late after the bankruptcy is over.
While they credit card companies are required by law to report information accurately, the truth is they often don’t.
We also sue the credit bureaus or credit card companies. If we have to sue them for you, we get your credit report right, and also try to get you a little money. (Typically, about $500.00.)
I’m in touch with about two dozen lawyers around the country who are working together to fix this problem. Since we started suing the credit card companies, a most of the worst offenders have fixed their procedures. So you have a better chance that you would have a few years ago of having your credit report right after your bankruptcy is over. But we still work with you to check it–and we keep working until it IS right.