Bankruptcy filings are on the rise in the United States. If you do not have much disposable income, have little savings or carry significant credit card debt, you may have wondered if you are at risk for bankruptcy.
Spending time gaining a detailed understanding of your budget and the types of events that could drive you toward bankruptcy may help you better understand your risk.
If you have not created a monthly budget yet, now is the time. Take the time to add up all your monthly expenses. Typical monthly expenses in your budget are items such as mortgage or rent, transportation, food, utilities, insurance and medical. Other categories beyond these include savings and personal spending, such as memberships, subscriptions, grooming and entertainment.
Beyond those, you need to account for any debt repayment, such as credit card payments. It is best to pay more than your minimum monthly payment to keep your credit card debt from multiplying out of control. Are you making enough money to meet your expenses and pay down your debt, or are you going further into debt each month? Do you have or are you putting money in savings to help you if your monthly income were to decrease abruptly?
Most bankruptcies are not a result of irresponsible spending but are instead a result of a low disposable income combined with some type of negative event, such as loss of employment or unexpected medical bills. Sometimes an unexpected medical event results in unexpected bills coupled with the loss of employment if the medical event renders you incapable of work for a period of time. Though you have little control over unexpected negative events such as medical emergencies, assess your risk with respect to what would happen if your income were to unexpectedly stop for a period of time.
If an unexpected life event occurs and you either do not have any emergency savings or exhaust what savings you do have, you may find you cannot pay your monthly expenses. Mortgage late fees are typically 3% to 6% of your monthly payment. Being late once enters you into the situation where you now must pay multiple months to become current.
Further, missing credit card minimum payments sometimes results in more than just late fees. Many credit cards have clauses in their terms and conditions that allow the credit card company to jump your interest rate, sometimes to very high amounts, if you make a late payment. If you were already struggling to meet your monthly expenses, your finances can quickly spiral beyond the point where you are able to reasonably get out of the red.
If you get into a situation where you cannot see a reasonable way out of debt, especially if you are in danger of foreclosure or are being harassed by bill collectors, bankruptcy may be a viable option and may help you protect some assets. Pursuing bankruptcy has pros and cons, but if you are in over your head, or expect to be over your head soon, exploring bankruptcy may be a good next step.
Baby boomers hoping to transition into a comfortable retirement may find themselves held back or overwhelmed by outstanding debts. Although credit card bills often take up a large portion of a household’s monthly budget, medical issues often contribute to personal bankruptcies.
Approximately 600,000 Americans filed for bankruptcy protection during 2018. As reported by NewsChannel 5, the majority of individuals surveyed could not afford to pay a $400 medical bill. An unexpected visit to an emergency room could leave a baby-boomer household with serious financial challenges.
A health insurance plan covered by an employer may have high deductibles for certain procedures or surgeries. Unplanned out-of-pocket costs for emergency health care could cause an individual to dip into a savings or retirement account. It could also lead to paying withdrawal and tax penalties.
Medical treatment usually requires taking some time off from work to heal and recover. Many individuals, however, do not have sufficient vacation or sick pay that would cover an extended absence from work.
A sudden loss of income often causes families to begin using credit cards as a temporary way to cover necessities. The increase in borrowing, however, leads to higher monthly payments, which many out-of-work individuals cannot afford.
Many baby boomers look forward to retirement, but a crushing debt load makes it impossible to leave their jobs. Bankruptcy may provide a way for age 50+ individuals and seniors to meet their personal financial needs and also create a workable retirement budget.
To afford living on a fixed income requires careful preparation. A fresh start through bankruptcy may help financially overwhelmed individuals restore their retirement hopes.
If you have student loans, you are not alone. In fact, roughly 45 million Americans have outstanding education-related loans. The balance on these loans is an astounding $1.56 trillion, with the average borrower owing nearly $33,000.
Even though student loans were vital to meeting your educational goals, you may be having trouble making monthly payments. While you may have heard student loan debt is not dischargeable in bankruptcy, you should realize this notion is not absolute. If you can show paying your loans is an undue burden, you may be eligible for relief.
A three-part test
For your student loans to be unduly burdensome, each of the following must be true:
This three-part test, known as the Brunner test, may make discharging student loan debt difficult. It is not impossible, however. Accordingly, before exploring other options, you should certainly investigate whether your student loans qualify for discharge.
A tangential benefit of bankruptcy protection
If you decide you are ineligible to discharge your student loan debt, you may not want to give up on bankruptcy altogether. After all, your credit card balances, medical expenses and other outstanding debts are probably dischargeable in bankruptcy.
By filing for bankruptcy protection, you may free up enough funds to stay current with your student loan repayment plan. Furthermore, even if you cannot discharge all your student loans, some related loans may be dischargeable. For example, you may have taken an independent, non-student loan to pay for some education-related expenses.
A bankruptcy filing has both direct and tangential benefits. If you are looking to secure financial freedom, exploring your bankruptcy options probably makes good sense, regardless of what ultimately happens to your educational loans.
Many people consider their home a source of stability. Knowing that you have a comfortable place to return to after a long day and a space in which to safely store your belongings is undoubtedly a high priority for your family.
When you experience financial troubles that you cannot overcome and bankruptcy enters the picture, it can be an intimidating experience. Worrying that you may lose that source of stability your home provides can make it even harder to endure.
However, many states, including Mississippi, offer a method of protecting a portion of your home’s value during bankruptcy. The law refers to this protection as a homestead exemption.
What is a homestead exemption?
The purpose of a homestead exemption is to insulate your primary residence from claims by creditors. Your primary residence is the home in which you currently live. In Mississippi, this exemption protects up to $75,000. Additionally, the property you wish to protect can be as large as 160 acres.
How does a homestead exemption work?
While the value may seem low given rising housing costs, it involves determining your equity after deducting mortgages, taxes and liens. As an example, if you have a home with a value of $350,000 but its mortgage is $300,000, the $50,000 equity you have in your home would be well within the monetary limit that the exemption laws may protect.
Furthermore, money you gain from the sale of an exempted home is likewise exempt. This provides the opportunity to move if you need to, such as to seek new employment opportunities, while still maintaining funds for the down payment your next home would require.
How do you receive a homestead exemption?
Owning or living in a property does not automatically make it exempt. Instead, you must file a homestead declaration with the county tax assessor’s office. That said, you do not have to file the homestead declaration prior to the date you file for bankruptcy.
Chances are you are not familiar with the bankruptcy process and all you want is for the whole event to go smoothly.
Here are five mistakes you can easily avoid to make that happen:
Remember that the law requires you to list all your creditors when filing for bankruptcy protection. Your trustee may not discharge a debt you fail to initially report.
If you owe money to a family member, do not make the repayment prior to filing bankruptcy. The trustee who administers your case may interpret this as a “preferential payment” and disallow it. Your family member will likely have to send your repayment to the trustee.
Do not fail to list a second bank account. Do not try hiding a sum of cash by transferring it to the bank account of a relative or friend. If you attempt to hide assets prior to a bankruptcy filing, you could face fines plus time behind bars.
Do not fall into the trap of believing it is OK to go on a spending spree with your credit card before you file for bankruptcy. Your trustee will likely not discharge big-ticket items that show up just before the filing.
Finally, procrastinating is not a good idea. Every day you wait to file Chapter 7 or 13 only increases the amount of debt you are carrying. Delinquent bills may go to collection agencies and from there to your bank account in the form of wage garnishments. Your creditors will also hound you on the phone. Take the initiative. Learn more about the benefits of filing for bankruptcy and be proactive. The sooner you file, the sooner you can enjoy a brighter financial future.
