Friday, December 23, 2011
Three Bad Bankruptcy Mistakes Before Filing Bankruptcy
The bankruptcy laws are confusing and complicated. Fortunately Congress and the US Supreme Court have given us a guidepost by stating that the bankruptcy laws exist to help debtors who are poor and honest. The bankruptcy trustee will investigate your case to determine whether you are both poor and honest. Excess money or equity in property can be taken to pay creditors, and efforts to hide money or assets will be punished. With this in mind, here are three bad mistakes you can make before filing bankruptcy:
Mistake #1: Cashing Retirement Funds
Most retirement funds are fully protected from creditors and the bankruptcy court. That means if you file bankruptcy, you keep your retirement money. Congress wants you to have money for your retirement.
Along with the obvious problems associated with losing your future retirement money, cashing out retirement funds is also huge mistake because (1) your attorney may no longer be able to protect available retirement money converted into cash; and (2) in some cases the money you pay on a loan may be recoverable by the bankruptcy trustee. Money paid to creditors before bankruptcy does not improve your financial situation or help you recover from bankruptcy. Always discuss cashing out 401(k) or IRA retirement funds with your attorney prior to your filing bankruptcy.
Mistake #2: Transferring Property for Less Than Full Value
Anytime an individual transfers property for less than full value, the transfer seems “suspicious.” This is especially true when the transfer occurs just before a bankruptcy filing. The bankruptcy trustee scrutinizes all property transfers before bankruptcy, and if a property transfer was not a fair and honest exchange, the trustee may avoid the transfer and get the property back.
One common bankruptcy mistake is transferring property to a friend or family member in an effort to hide it from the bankruptcy court. This is a very bad mistake that can result in: (1) losing the property anyway; (2) denial of your bankruptcy discharge; and/or (3) criminal prosecution for bankruptcy fraud. If you need to sell or transfer property before your bankruptcy, contact an experienced attorney and discuss your options!
Mistake #4: Paying Off Loans
When a debtor pays off a loan before bankruptcy, the trustee becomes very interested in your case. First, if you paid a large sum of money to one creditor just before filing, the trustee may ask the creditor to return the money. Second, paying off an unsecured creditor that is otherwise dischargeable (like a credit card or payday loan) is like throwing your money away. You need that money to help rebuild your finances.
Finally, paying off secured property could create too much non-exemptible equity. The bankruptcy laws allow you to keep property up to a certain amount. The protected amount is determined by taking the fair market value of the property minus any secured loans. When you pay off the loans, you increase your equity in the property which may exceed the amount you are allowed to keep. When that happens the bankruptcy trustee may ask you for the property or the cash difference between the equity and the exemption amount. Bottom line: don’t pay off loans before bankruptcy!
Winning the Lottery May Not Help
Who hasn’t fantasized about winning the lottery when you are cash strapped? It seems that winning the lottery would solve all of your financial problems.
Not so fast.
A March 2010 study by economists at the University of Kentucky, University of Pittsburgh, and Vanderbilt University suggests that winning the lottery does not reduce the likelihood of a future bankruptcy. The study examined data from 35,000 winners of Florida's Fantasy 5 lottery from 1993 to 2002, and compared this information with state bankruptcy records. The economists found that more than 1,900 lottery winners filed for bankruptcy relief within five years after winning, a rate double that of the general population during the study period. "The results show that giving $50,000 to $150,000 to people only postpones bankruptcy," the authors concluded.
Not every lottery winner will act like Callie Rogers, winner of a $3 million UK lottery in 2003. Callie spent every dime of her winnings on shopping, cocaine, friends and breast augmentation, and two years ago she was working as a maid. But then, Callie was probably not a skilled money manager, like the three co-workers who won a $254 million Powerball lottery in Connecticut. If you are lucky enough to win a large lottery, these professionals offer a blueprint on how to protect your money from yourself.
Financial management may seem like common sense, but Americans have many pressures to spend now and worry about the consequences in the future. It takes a reasoned approach and discipline to make a budget and stick to it. To help educate individuals and combat financial illiteracy, Congress amended the bankruptcy laws to require debtors to complete a course in financial management before the completion of the bankruptcy case. The hope is that by providing a bit of education, the debtor will take a more active interest in managing his or her finances and avoid future costly mistakes.
If you are battling insurmountable debt, don’t wish for a magical cure. Take charge of your finances and educate yourself about your options. Speaking with an experienced bankruptcy attorney is a solid first step in taking control and building a better future.
Are Your Family Finances Sustainable?
Corporate Knights, a Canada-based sustainability-focused media firm, publishes a unique list every year that predicts the world's most sustainable large corporations. Started in 2005, the Global 100 Most Sustainable Corporations in the World is a list of publicly traded companies that, based on research and analysis, are best equipped to manage the environmental, social and governance (ESG) risks and opportunities they face. The idea is to look at the company today and predict the company's future ability to thrive.
Predicting the financial future of a company is tricky business. Of the original 100 announced in 2005, ten companies on that list are now inactive. Another good example is Eastman Kodak, which appeared on the Global 100 list in 2005, 2006, 2007, 2008, and 2009. Kodak is synonymous with photography, and has a long and proud history. Kodak practically invented the amateur photography market back in 1888. Kodak is also responsible for the first digital camera in 1975 and developed cell phone photo technology. Unfortunately, in recent years Kodak has not changed fast enough to keep up with the changing marketplace. Kodak's shares once soared to an all-time high of $95 in 1997 and was a mainstay member of the Dow Jones industrial average for 74 years. In September 2011 its stock plummeted to close at $.69 a share.
Eastman Kodak is a lesson of how quickly the financial outlook of a company can change. Individuals, like companies, sometimes make bad decisions that can lead to financial trouble. Other times, circumstances happen that simply cannot be predicted. Fortunately, what looks bleak today can be better tomorrow. That is a hope that bankruptcy offers to individuals who are struggling with overwhelming debt. Bankruptcy offers the individual the "do over" opportunity to discharge or restructure debts.