14 Oct Budgeting To Pay For Bankruptcy
I’ve been asked the question a thousand times. “How can your clients afford to file bankruptcy if they don’t have any money?” Its a good question. Certainly a question I asked before opening my consumer bankruptcy practice 18 years ago. Where does the money come from?
Lets start with the obvious. Family. I have seen parents pay for a son’s bankruptcy, a daughter pay for her mom, a sister for a brother, an uncle for a niece, etc. Family is often the best resource because they are usually the ones most familiar with the situation. While some families may have the resources to pay off a member’s debts, most should think twice before paying only the minimum monthly amount. In other words, a family may be better of helping pay for a bankruptcy, which solves the debt problem, rather than wasting potentially thousands of dollars on financial band-aids that must be reapplied every month.
Aside from receiving family assistance, most parties who file for bankruptcy pay for it themselves.Some may wait for an income tax refund, while others consider the options of 401k loans or liquidating the cash value of life insurance policies. While large tax refunds often indicate sloppy financial planning, its the one time when it can be a financial life-saver.
Just be sure to watch out for the Mean’s Test. Special care must be taken to avoid artificial increases to income before filing a Chapter 7 bankruptcy. For this reason, I generally discourage a client from looking to their retirement accounts or life insurance to finance a bankruptcy. Also, an early withdrawal from a tax qualified account also triggers income tax and a 10% penalty. Don’t be tempted to do this without first seeking counsel.
My advice to anyone considering the possibility of bankruptcy, do not make ANY additional financial decisions before talking with a qualified bankruptcy attorney. We are skilled to understand what can be done under the law, and what needs to be done to file your case. The attorney will study your situation to help you determine which bills must be paid and which bills you can simply ignore. You may be surprised. In most cases, your budget can be reworked to find the money necessary to file your case.
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