8 ways to avoid bad debts, bankruptcy court
Bankruptcy lawyers and credit counselors meet every day with clients on the edge of the financial cliff. Here are some of their top tips to keep you from falling off:
1. Get a grip on monthly expenses.
Start keeping receipts and logging every dime you spend. Too many people don't have any idea how much they're spending on everyday expenses. Lawyer Marc Levy makes potential bankruptcy clients walk through their expenses line by line. "I do their budget and they look at it in amazement," he said.
2. Don't wait
Don't wait until you are way behind on your mortgage to get help. If you're four or five months behind, bankruptcy lawyers and credit counselors often can find a way to modify the loan. If you're 26 or 30 months behind, you're in big trouble and loan modification won't be an option.
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3. Don't overspend
Don't overspend on things you'd don't need, like cable TV, internet and cell phone service. If you're clearing $1,200 in monthly take-home pay and you're footing a $178 monthly bill for stuff like that, you're spending far too much. U.S. Bankruptcy Judge Joan Lloyd said she's adopted a rule that debtors pay no more than 5 percent of their monthly income on such expenses. The math: If you net $2,000 in income a month, you shouldn't pay more than $100 on the combined bill. Get a flip phone. Cut off the internet, Lloyd said. "It's really entertainment disguised as need."
4. Get a payment plan to pay off loans
Student loans are a killer, and private student loans are considered the worst because there are few options for modifying loans or recasting payment plans. If you have a federal student loan and your monthly income can't handle the payment, most are eligible for an income-driven repayment plan under the U.S. Office of Education. See https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven. A website for information and advice is https://studentloanhero.com/.
5. Don't co-sign
Parents and grandparents, here's a tip for you about student loans and co-signing on houses, cars and other loans: Don't do it. Bankruptcy lawyers say they're seeing tons of elderly and people headed toward retirement with enormous debts from trying to help a family member who can't secure a loan with his or her own credit. You're risking your own credit history and your future in the process, they say.
6. Ask your creditors for help.
They'd rather get some money than none at all. That's why it makes sense when you have financial problems to ask about reducing the interest rate or lowering the monthly payment. Banks and credit card companies have hardship programs, but it's not something they advertise.
7. Go after the debts
If you have to choose between settling a few debts or filing bankruptcy, go after the debts. But don't use a debt settlement company, which can waste time and money, according to the personal finance website thebalance.com. Also, focus on debts that have already been charged off or sent for collection — not those for which you're current on the payment. And this may be tough, but prepare to pay the lump sum settlement amount as soon as an agreement has been made.
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8. Avoid digging into 401K and tax-deferred retirement savings to pay debts.
Charles Guilfoyle, a Jeffersonville bankruptcy lawyer, wrote on his website that "as a general rule, all funds you have saved through any form of tax-deferred retirement plans are safe from creditor claims." But to keep these funds safe, they must remain in a tax-deferred status. If you cash them in or borrow from them, the money is no longer protected.
Reporter Grace Schneider can be reached at 502-582-4082 or gschneider@courier-journal.com.