12 Oct Bankruptcy Planning: Ten Dumbest Things NOT to Do–Part Two
You’re considering bankruptcy, or just suffering through financial problems due to job loss, divorce, illness, other problems, or a combination of all of those things, and you want to avoid costly mistakes. Continuing my list of things NOT to do, here is part two. Call them pitfalls, call them dumb ideas, call them mistakes, but whatever you call them, don’t fall for these.
6. Be careful of trying to pay mortgage payments ahead. Sometimes what looks like smart financial planning turns out to be a problem. One example is an attempt to pay your mortgage payments ahead. Let’s say you know you are going to be on short term disability for a while. You take your savings and use it to pay your mortgage payments (or even car payments) ahead, for the time you won’t be drawing a regular paycheck. You might well think that is sound financial planning. The problem with your plan is that the mortgage company may not apply the money as you intended. Many banks and mortgage companies will apply any excess over your current payment (and any escrow shortages) to principal. So, if you send them three payments this month, they will apply the money to any the current month first, and then to principal. Next month they will still look for you to make a payment. The problem is that once they have applied the funds in that way, it is almost impossible to get them to reverse it. A better idea: leave that money in savings until it’s time to make the payment. If you are worried that you’ll fritter the money away, put it in a wholly separate savings account. Or write the checks out, but wait to send them until the payment is due. Even if your mortgage company seems willing to apply the payments as you intend, I would be cautious. Many of these practices are driven by regulation or language in the mortgage documents, and the lender may not be flexible at all. (By the way, it’s worth noting that some lenders, including student loan lenders, use the opposite tactic, called “paid ahead status,” to get you, too.)
7. Don’t borrow against your home to pay unsecured debt. Don’t take unsecured debt (like credit cards, medical bills, personal loans and payday lenders and turn it into a mortgage. It is far easier to deal with unsecured debt, and protect your assets, than it is to pay off a mortgage on your home. Not to mention the fact that it could cause you to lose your home.
8. Don’t wait until the wolves are at the door before seeking help. This one is easier said than done, and often it is the folks who are trying the hardest who are the worst offenders. I recently met with a couple who told me that they had been struggling with the decision to seek help for three years. During that time, they lost their home and two investment properties to foreclosure, closed their business, and practically everything. Ironically, they knew more than most about what they could do, and should do, but were so engaged in the struggle that they ignored the advice they would have given anyone else. I don’t know any bankruptcy lawyer who doesn’t see some version of this story on a regular basis. Seeking help early can be invaluable, can help you avoid the worst mistakes, can help you preserve assets, and may help you avoid bankruptcy–exactly the things you are trying to do on your own. Seeking help is not an admission of defeat, it’s a way to fight better.
9. Don’t exhaust your cash. This sounds a lot like paragraph 5, but my focus here is a little different. One of the most persistent urban myths about bankruptcy is that you aren’t allowed to have bank accounts, or any cash. It isn’t true–you can keep your bank accounts and you not only can keep some cash, you are going to need it. Filing bankruptcy will immediately, and probably for some time, put you on a cash basis, and you are going to need a little bit of a nest egg to cover both ordinary expenses and emergencies. An experienced bankruptcy lawyer can tell you how much it is safe to keep, and what steps you need to take to protect your cash from creditors, whether you are in bankruptcy or not. Laws can vary from state to state, so you need to ask someone who is familiar with your jurisdiction.
10. Don’t ignore the problem. It is tempting to just stick your head in the sand. It is stressful and unpleasant to deal with financial problems. I occasionally have a client who comes in carrying a grocery bag full of unopened bills and notices. I can identify with the impulse to stick them somewhere unopened. But it can cost you, especially if you are missing critical notices of legal action taken against you. You can lose your rights, and sometimes your property, by not paying adequate attention to what your creditors are trying to do. Read your mail–that is crucial. You can talk to your creditors or not–I usually recommend NOT talking to the ones who call you, but if you want to talk to them, you place the call to them. You tend to get someone higher up the totem pole that way, who is actually in a position to help you. File your tax returns, even if you can’t pay the taxes–there is nothing more crucial than this. Besides the legality of failing to file tax returns, you need to know how much you owe in taxes. I’ve had more than one client over the years who didn’t file a return because he didn’t think he had the money to pay, only to find out years later that the actual tax was fairly minimal. Of course, the penalties and interest due for failure to file is NOT minimal. Even if you are what lawyers call judgment-proof, you still need to track follow what your creditors are doing, to make sure they don’t do something they aren’t supposed to. So don’t be an ostrich, man up, and go see someone about those financial problems. I’d be willing to bet you’ll feel better afterward.
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