Delaying Bankruptcy Can Cost You More!

29 Aug Delaying Bankruptcy Can Cost You More!

I was listening to Car Talk the other day. A lady called in and described a problem with her automobile. A noise was emanating from the engine and the noise would change in pitch as the engine revved.

After much mirth and merriment, Tom and Ray diagnosed the problem with her car. They said that she needed to carry the car into a mechanic immediately. The lady caller stated that she was trying to keep the car without spending much money for repairs. Tom and Ray said that she could carry the car in now and spend a smaller amount on repairs or she could wait until the problem magnifies and pay significantly more for the repairs.

I couldn’t help but think that bankruptcy often works in the same way. Often people will know that their finances are not what they should be. But, instead of taking proactive steps to find out some solutions or alternatives, they ignore the problem. As with the car, sometimes waiting can magnify the problem and exponentially increase the costs.

How can this happen? Well, for example, as folks allow their credit cards to get ahead of them, sometimes they will obtain a second mortgage to pay off the credit cards. At first blush, this seems to make some degree of sense. For example, the interest rate will often be lower than the credit card rates. Additionally, for a home mortgage, the interest paid can be deductible in some instances further reducing the costs. (Beware of television “experts”: I have screamed at the television on more than one occasion at this one. It takes an expert, such as myself, to assess your situation. Be wary of generic advice that may or may not be applicable to your situation.)

However, if the folks do not accurately assess their cash flow needs, or ensure that they do not run their credit card debt back up, then getting a second mortgage could be a disastrous move. As a point, rarely should folks trade unsecured debt for secured debt. In this situation, by obtaining a second mortgage and paying off the credit card debt, these folks are now stuck with the debt. A chapter 7 bankruptcy case most likely would have gotten rid of the debt and saved a substantial amount of home equity for the debtors.

Another common situation is where the debtors will take out a loan from their pension or take money out of their retirement account in order to pay off debt. This is a bad move for two reasons. First, you are sabotaging your financial future by using funds set aside for retirement in order to pay off debt. Second, by taking money out of your retirement account, you may get hit with a pre-tax penalty for the early withdrawal which means that you now potentially owe the IRS several thousand dollars (which may be a priority debt in bankruptcy that must be paid in full through a chapter 13 plan or is non-dischargeable in a chapter 7). See here for a fuller discussion.

Assuming that the prospective debtors had cash flow that was slowly deteriorating, they would have been much better off to file a chapter 7 bankruptcy and discharged the credit card debt instead of taking the actions as outlined above.

Just as Tom and Ray stated on Car Talk, the delay can cost a lot more than if you took steps proactively to address the problem.

If you are feeling the pinch in your finances, consult with one of the professionals listed on this site today. It does not hurt to at least find out what your options are and perhaps to develop a plan to address your financial issues.

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Adrian Lapas, Esq.

I've been practicing bankruptcy law in North Carolina since 1993, and am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar.
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