Things to Think About
Before Filing Bankruptcy

Borrowing Will Not Get You Out of Debt

It sounds right. Borrow more money and pay everyone off. Too good to be true and it just doesn't work. There are so many loan offers, people think there some of them must be good--often there’s not.

Bill Consolidation Loans--Do They Make Any Sense At All?

It's all over the place. Companies trying to convince you that if you go to them, they will lump all your bills together and you will only pay one low monthly amount. But at what cost. It's all just mathematics. If you pay less each month, then the time to pay takes just that much longer. Worse of all you have to add a percentage for these so called "debt consolidation" companies, so that they can make a profit and you end up further in debt. What a nightmare. er

Home equity loans  at high interest

If the interest is low, a home equity loan can help you get out of debt. Home equity loans now at their all time low, about 7%, if you have good credit., low debts, and real equity in their homes. That's great news. Here's the other side.

The problem is that most people who are in financial problem, are carrying substantial credit card balances and cannot get approved for low interest home equity loans. Lots of people end up changing their 19 % credit cards for a 18.5% home equity loan. That would save $3.00 per month--and remember there are the costs to getting a home equity loan.

Take my warning. Never get a home equity loan at more than 10% interest. If you are not able to pay the credit cards, you will not be able to pay the home equity loan either. ANd you stand a chance to lose your house.

Transferring Credit Card Balances For a Low Introductory Rate

Be careful about the offers to transfer your credit debts into a new one that offers a low interest introductory rate. Sometimes they don't even charge Internet for six months. Sounds good -- at first.  

Those would be great, if in fact they would make it possible for you to get out of debt. But it usually does not do very much. Most people find that they can make the payments until the interest rate goes back to a high 18 - 21 %. Then they are back were they started.

There's even another potential problem. Transferring your balance balance if you cannot afford the regular interest rate--after the low introductory rate is expired--is credit card fraud. (The credit card companies say it is.) 

If you are considering doing a balance transfer, do the math first. Determine if you will be able to afford the rate after the introductory period. If you cannot, don't bother. Nothing good will come of it.

Avoid using your retirement benefits.

The more desperate a person becomes, the more mistakes are made. One of the greatest concern is to lose the retirement funds that were saved slowly over the course of years. If your retirement funds can pay your bills off, it makes some kind of sense. But if you are depleting your retirement just to stay ahead of the bill collector that makes no sense.

Don't cash in your IRA's or borrow from your 401(k) plan

Owing money can make you desperate. Some people even cash in their IRA's. Be very careful before you do that. If you cashed in your IRA's or 401 (k) and had enough to pay all your debts, it may make sense. But if you will still owe money, it's just a waste of your hard earned money. Early withdrawal of these funds makes you liable for penalties and taxes which may not be discharged in bankruptcy.  ERISA and 401K funds are exempt from creditors in bankruptcy, as are IRA funds in most states (except deposits made within 6 months before filing).  If you don't use these funds, you will have them to use after bankruptcy.

What the so-called "Credit Counselors" fail to Tell You

Let's face it. Credit Counselors are everywhere. It must be a good business. Well, it is in fact. You should know that although the credit counseling services are usually set up as non-profit corporations, most credit card companies pay a commission to the services for the money they collect. You may or may not be receive any benefit from working with a credit Counselor. But you can be sure, the Credit Counselor is definitely better off. Look at what the Credit Counselor is suppose to do. They try to negotiate a deal with the credit card companies. This is very hard to do and generally unsuccessful. Some creditors will agree to accept partial payments, but many won't. 

Another problem is that credit counseling shows up on your credit report. You can get bad credit from credit counselors just as easily as from filing bankruptcy. After trying to work with the creditors directly doesn't work, many people go to credit counselors to see what they can work out. Here again, you'll be shocked at how little the credit card companies will work with you.

I recently spoke to a client who was trying to buy a 1998 Mercedes Benz. His credit was denied. When he spoke to the dealers and told them that he had been using a credit counselor for the past 3 years, he was told that he should have filed a bankruptcy 3 years ago. Now his credit would have been better. The credit counseling showed up in the credit report as a negative factor.  

If you definitely decided to try credit counseling, make sure you meet them at their office. Don't use some unknown company you find on the internet that wants to do everything over the mails. Some of these operations turn out to be scams.

Remember, unlike bankruptcy, Credit counselors cannot force the credit cards to stop collection actions.

Continue making payments on vehicles which you intend to keep.  

If you purchased a car and had it financed , the bank can usually repossess the vehicle without notice to you anytime you are in default in your payments.  Other types of secured creditors will ordinarily take longer to act on a debt that is in default.

Note: If your car has been repossessed but not yet sold, you may be able to get it back if you file Chapter 13 quickly.

Do not pay $600 or more back to relatives or business associates who have lent you money. 

Payment of a total of $600 or more to an "insider" (which includes relatives and business associates) within one year before you file bankruptcy is a "preference." The trustee may recover preferences from the person that was paid and divide the money between all of your creditors. (Payment of $600 or more to any other creditor within 90 days before the case is filed is also a preference.) 

Do not put property you own into someone else's name to avoid it being taken by creditors or the trustee.

This is completely illegal and is considered a fraud on creditors and can result in your discharge being denied.  In addition, the trustee can take the property from the person to whom it was transferred .

A Final Word

If you hare having financial problem, be very careful not to throw good money after bad. Take your time to make an informed decision.

If you want to ask a follow-up question, please call me at 212/661-3344 or 973/465-760.

Good luck.

Moses Apsan