How can I be “insolvent” if I am paying my bills? One of a series

20 Jan How can I be “insolvent” if I am paying my bills? One of a series

Our bankruptcy clients frequently say that they have perfect credit scores. They have been paying their bills on time. Everything is great. It’s just that they can’t make their payments anymore. Maybe the interest rates on credit cards have gone up. Or minimum payments have gone up. Or maybe a sudden unexpected bill came up which was over the client’s credit limit. Now such clients find that they are facing bankruptcy.

How can people be bankrupt with perfect credit?

The answer is that they have been “insolvent” for a long time.

Insolvency is the condition which exists when a person’s assets are less than their debts. Just because a person has credit doesn’t mean that the person is solvent. Solvency means that a person has assets more than debts.

We have a problem in our nation. Millions of families have spent money beyond their ability to repay. It’s not bad that a family can make normal monthly payments on a credit card. However, credit card lines of credit are not assets. They are potential liabilities. And credit card debt, like any other liability, must be repaid.

Once a family files a bankruptcy case, they won’t be using credit cards again to any great extent, if at all. It’s a good idea for such families to go on a “pay as you go” basis.

We recommend that people take these steps after their bankruptcy:

  • Make a budget of all income and normal expenses
  • Arrange for direct payment of mandatory monthly expenses
  • Arrange for direct withdrawal of funds from normal income into long-term savings on a regular weekly, bi-monthly or monthly basis
  • Review the budget periodically but at least twice a year to take into account changes
  • Save for big-ticket items, such as cars, appliances and the like so that you can take advantage of sales and cash discounts

There is life after bankruptcy and it starts with sensible planning and living life in an economically solvent fashion.

Lakelaw cares. We’ll help you build your life after bankruptcy. Call us today at 1 866 LAKELAW (525-5329)

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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