415.963.4004By: San Francisco Bankruptcy Attorney, Jeena Cho
There are lots of common mistake broke people make. I see it all too often. Potential client, sitting in my office, worn out and battered - having fought an unnecessary fight for too long. One of the most frustrating things I find as a bankruptcy attorney is meeting with clients that waited too long to come see me. They did what they thought was right - borrow or liquidate their 401(k), IRA, sell their cars, home, and other belongings, only to end up in my office. What saddens me is that none of that was necessary. It wasn’t necessary to get the second job, sell their assets, etc.
Often, they put themselves in a worse position by doing what they think is right. Let’s consider a hypothetical. A single, 31 year old, at a steady job making $70,000. Mortgage payment of $2,500 per month and a vehicle payment of $400. Credit card debt of $80,000 (interest rate 29.99%). Doing the math, it will take a monthly payment of $1999.61 for THIRTY years to pay off that amount. (Total repayment amount: $719,859.60) Assuming he’s withholding is 20%, his net take-home pay is $4666.67 per month. His credit card payment is almost 50% of his net take home pay.
Doing the math, it is impossible to make his mortgage, car and credit card payments with his current income. So, he sells his home, sells his car. But still, he can’t make his credit card payments. So, he borrows against his 401(k). Let’s say he borrows $20,000. Now, he has no home, no car, and a 20k loan that will be taxed if he does not pay it back within the statutory period. So, now his monthly payment is reduced down to $1499.71. But, he still has to pay back his 401(k).
Now he comes to see me. Well, unfortunately, it will be much more difficult for to put him into a Chapter 7 because he doesn’t have his mortgage or car payment to off-set his income. So, now he’s looking at a Chapter 13 with a repayment period of 5 years. The 401(k) loan, unlike credit card debt is not dischargeable in bankruptcy.
Had he come in to see me before taking any of these actions, I would’ve told him - file for Chapter 7 bankruptcy. Dump your credit card debt, most likely keep your home (depending on amount of equity), keep your car and your 401(k). All exempt property. See Exempt Property.
Most people don’t realize how much it actually takes to get out of credit card debt. With creative credit card rules, such as Universal Default to charge the maximum interest rate (currently set at 30% in most states), that 70,000 debt will balloon and triple in no time. I encourage you to take a realistic look at your finances. Figure out the total amount you owe on credit cards, and other debt and use this handy calculator to see what it will take to get out of debt. Ask yourself, how much can I afford each month? At that monthly repayment rate, how long will it take for me to be debt free? If at the end of the day, you do not want to be in credit card debt for 30 years, or 40 years and want to start fresh, you should seriously consider bankruptcy.
Do you have questions about bankruptcy or debt settlement? Contact us.