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When Financial Troubles Come Knocking
01 Nov 2012 12:06 #1
by Tim_Canty Esq
When Financial Troubles Come Knocking was created by Tim_Canty Esq
Here’s a short list of some of mis-steps that can land you in trouble. This is not the way to avoid bankruptcy. In fact bankruptcy may not be such a bad choice at all, given the options.
1. Borrow funds from your 401K retirement plan. (Oh yeah, the IRS says it’s OK.) The concept is that since you put the money there, you can borrow it and then pay it back over time with interest. Since you are only paying yourself back, it’s better than paying creditors. The problem is that you are only trading one debt for another and if anything happens to your income, you will not be able to pay it back and now you have created a tax problem. That “borrowed” money becomes regular income and you have to pay taxes (and penalties!) on your debt. You also now have nothing saved up for retirement.
2. Refinance the house, take out the equity, and use it to pay bills. Luckily, the Great Recession has slowed this substantially and only sterling credit will get you a re-finance. Your house is not a piggy bank. The idea of a mortgage is to buy a home. This is where you live and your mortgage is not rent. It is meant to pay off the loan so at the end of the loan, you own your home. And the equity in your home is protected even in bankruptcy.
3. Raise your deductions on your paycheck so your employer withholds less from your pay so you have more take-home income every week. The IRS frowns on this. But worse yet, while you may be generating money to pay off your debt, you are exposing yourself to a tax claim at the end of the year. Given a choice of who I want to owe money to, it would not be the IRS.
4. Borrow from friends or relatives. So your brother is somewhat successful and has cash in the bank or access to a credit line that you can use to pay your bills. Some call this “credit lending” where one person agrees to lend their credit so you can borrow money, but it should be called the Vampire Effect. You are sucking the financial life out of others around you.
5. Engaging a credit counseling company online who promises to get you out of debt for little or no money. There are strict licensing guidelines for legitimate credit counseling agencies, but the airwaves and the internet are filled with questionable companies who will charge large up front fees, take your money and disappear in the night leaving you with nothing but even more bills than you started with.
You can see why these will cause problems, but they are even larger if you are ultimately left with no choice but to file bankruptcy. Repayments of 401K loans are not a legitimate expense when calculating the means test numbers in a Chapter 7 case. That means you could be forced into a Chapter 13 repayment plan, possibly for five years or worse yet, forced out of bankruptcy altogether. Colorado and the federal government recognize an exemption for home equity (meaning it generally is not at risk in a bankruptcy), but if you have spent that equity, you must pay that mortgage even after bankruptcy or you could lose your home. Of course the IRS get preferential treatment in bankruptcy cases and your tax problems will likely survive a bankruptcy. Repayments to friends and family are recoverable by the trustee so the “friendly” loans that you re-paid within the year before a bankruptcy get unpaid and your friends or family will get sued by the bankruptcy trustee. And finally, once a crook disappears with your money, it is near to impossible to recover it.
If you are experiencing financial problems or you can see it coming down the road, it is always best to get proper qualified information before you do anything. Even if you don’t plan on filing for bankruptcy, it doesn’t hurt to speak to a good bankruptcy attorney to make sure you see the situation properly and aren’t going to cause yourself any issues if things later go wrong.
Got Questions? Get Answers! FREE CONSULTATION!
Timothy Canty, Esq.
(303) 670-2185
[url=http://www.timcantylaw.com" onclick="window.open(this.href);return false;]www.timcantylaw.com[/url]
A Federally Designated Debt Relief Agency
1. Borrow funds from your 401K retirement plan. (Oh yeah, the IRS says it’s OK.) The concept is that since you put the money there, you can borrow it and then pay it back over time with interest. Since you are only paying yourself back, it’s better than paying creditors. The problem is that you are only trading one debt for another and if anything happens to your income, you will not be able to pay it back and now you have created a tax problem. That “borrowed” money becomes regular income and you have to pay taxes (and penalties!) on your debt. You also now have nothing saved up for retirement.
2. Refinance the house, take out the equity, and use it to pay bills. Luckily, the Great Recession has slowed this substantially and only sterling credit will get you a re-finance. Your house is not a piggy bank. The idea of a mortgage is to buy a home. This is where you live and your mortgage is not rent. It is meant to pay off the loan so at the end of the loan, you own your home. And the equity in your home is protected even in bankruptcy.
3. Raise your deductions on your paycheck so your employer withholds less from your pay so you have more take-home income every week. The IRS frowns on this. But worse yet, while you may be generating money to pay off your debt, you are exposing yourself to a tax claim at the end of the year. Given a choice of who I want to owe money to, it would not be the IRS.
4. Borrow from friends or relatives. So your brother is somewhat successful and has cash in the bank or access to a credit line that you can use to pay your bills. Some call this “credit lending” where one person agrees to lend their credit so you can borrow money, but it should be called the Vampire Effect. You are sucking the financial life out of others around you.
5. Engaging a credit counseling company online who promises to get you out of debt for little or no money. There are strict licensing guidelines for legitimate credit counseling agencies, but the airwaves and the internet are filled with questionable companies who will charge large up front fees, take your money and disappear in the night leaving you with nothing but even more bills than you started with.
You can see why these will cause problems, but they are even larger if you are ultimately left with no choice but to file bankruptcy. Repayments of 401K loans are not a legitimate expense when calculating the means test numbers in a Chapter 7 case. That means you could be forced into a Chapter 13 repayment plan, possibly for five years or worse yet, forced out of bankruptcy altogether. Colorado and the federal government recognize an exemption for home equity (meaning it generally is not at risk in a bankruptcy), but if you have spent that equity, you must pay that mortgage even after bankruptcy or you could lose your home. Of course the IRS get preferential treatment in bankruptcy cases and your tax problems will likely survive a bankruptcy. Repayments to friends and family are recoverable by the trustee so the “friendly” loans that you re-paid within the year before a bankruptcy get unpaid and your friends or family will get sued by the bankruptcy trustee. And finally, once a crook disappears with your money, it is near to impossible to recover it.
If you are experiencing financial problems or you can see it coming down the road, it is always best to get proper qualified information before you do anything. Even if you don’t plan on filing for bankruptcy, it doesn’t hurt to speak to a good bankruptcy attorney to make sure you see the situation properly and aren’t going to cause yourself any issues if things later go wrong.
Got Questions? Get Answers! FREE CONSULTATION!
Timothy Canty, Esq.
(303) 670-2185
[url=http://www.timcantylaw.com" onclick="window.open(this.href);return false;]www.timcantylaw.com[/url]
A Federally Designated Debt Relief Agency
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