Fort Lauderdale Bankruptcy Lawyer Blog

Although many well-intentioned people borrow against their retirement accounts in order to pay off credit card debt, it's actually one of the worse things you can do in the long run. Yes, it's very tempting. Some pension plans have a hardship withdrawal provision. The money is just sitting there and the creditors are bugging you non-stop. You really meant to pay the money back anyway...you just lost a job or had an illness and plans changed. But think about it carefully as there are tax consequences, retirement consequences and bankruptcy consequences.

Tax consequneces: Retirement investments are given favored tax-treatment by the IRS while you are saving the money. Normally, you don't pay taxes on money that you put in an IRA account or a company sponsored plan. If you cash out before you reach 59, you incur early withdrawal penalties and a tax penalty at the end of the year. You get back a lot less than what you put in and risk running up your tax bill.

Retirement consequences: I will never agree that it's a good idea to wipe out your future income in order to pay creditors today. There will come a time when you cannot work. Social security is not so secure and doesn't provide a lot of income anyway. You may not absolutely need that money today because you are working or still able to work - but there will come a time when you need it to survive. There are other things you can do to eliminate credit card debt other than eliminating your future income.

Bankruptcy consequences: Any withdrawal that you make from a 401(k) plan within the six months prior to filing a bankruptcy case is treated as income on the means test. In some cases, that is not a problem and you will still qualify for a Chapter 7 bankruptcy. In other cases, a withdrawal has put my client out of a Chapter 7 and into a Chapter 13 because they exceeded the median family income when I added in the withdrawal. Then the withdrawal gets counted as income for the purposes of determining your monthly payment to the court. Not a good idea.

If you are thinking of withdrawing money from a 401(k) to pay off credit card debt, pause first and schedule a free consultation in our Coral Springs or Davie office. Find out first if doing so will cause you unwanted consequences. Informed decisions are better decisions!

One year after exiting bankruptcy, GM says it is on track to become profitable. General Motors is predicting it will enjoy its first profitable year in six years after reporting a $2 billion profit for the third quarter.

In June, 2009, GM filed for bankruptcy and discharged debt, bad contracts and reorganized under the protection of the bankruptcy laws. This month, GM is set to offer its stock to the public at a price expected to be in the range of $30 per share. A year ago today, GM shares were hovering at less than $5 a share. What a difference a bankruptcy and a year make!

I often draw a parallel between companies that file for bankruptcy protection and viewing your family's financial assets as your own mini-company. GM is a great example of using the bankruptcy laws to shed burdensome debt and start all over again. As the CEO of your family, you can also take advantage of the bankruptcy laws to potentially place your finances in a stronger position and shed debt that is keeping you in the never-ending credit loop. You can't afford to pay for things because you have to pay a major portion of your earnings to creditors. But if you didn't have to do that, you'd have the money you need to pay for things. Does it sound familiar?

Although filing bankruptcy isn't a guarantee of a brighter future, it may offer you the opportunity to get out of the credit-trap that so many find themselves in. A fresh start may be just what you need to start enjoying life again.

From the FHA guidelines:

A borrower whose previous principal residence or other real property was foreclosed or has given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for a new FHA-insured mortgage. However, if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower and the borrower has re-established good credit since the foreclosure, the lender may grant an exception to the three-year requirement. Extenuating circumstances include serious illness or death of a wage earner, but do not include the inability to sell the house because of a job transfer or relocation to another area.

If you have a foreclosure and then file bankruptcy in order to eliminate any potential deficiency judgments from the foreclosure, the longer waiting period would apply (see my blog article about buying a home after bankruptcy). For example, if you file bankruptcy and then your house is sold at foreclosure a year later, you would have to wait three years from the date of the foreclosure sale in order to qualify for an FHA mortgage again - even though it's only a two year waiting period after a bankruptcy.

As a Fort Lauderdale bankruptcy lawyer, many assume that I always recommend bankruptcy to prospective clients. Some of my best referrals come from people who schedule their free consultation and the facts of their case lead me to recommend other solutions.

One of the scenarios where bankruptcy might be avoided is if you have little or no assets that a creditor could take. Most people in this category are retired, have no wages that could be garnished (in Florida, a creditor can garnish your wages if they have a final judgment against you and other exemptions don't apply), and do not own a car or have income other than social security. That segment of the population is what we call "collection proof." They may get a judgment against them, but there is nothing a creditor could do to collect their money. I've had clients in this category choose bankruptcy not because they had to - but to stop the creditor harrassment and gain peace of mind again.

But what if you own some assets and/or have a job? Wages are an asset that a creditor can garnish in Florida with certain restrictions. For example, if you are a head of household, they cannot garnish your wages but you will have to file a Claim of Exemption with the court when you receive your notice of garnishment. If your creditor objects to your claim of exemption, then you will have to go to a hearing to prove that you are a head of household. If you are a non-head of household, Florida Statute 222.11(2)(c) allows creditors to garnish only 25% of your wages.

One asset many people overlook and creditors love to take are cars. For some reason, people are under the impression that a creditor cannot take your only car becasue you need it to go to work. WRONG. Creditors don't care if you can't get to work. They only care about getting their money and your car (whether there is a loan against it or not) is an asset that they can sell and recover something. The good news is that if your car is picked up by a creditor, you can get it back by filing a bankruptcy right away.

If you have a lot of assets such as cars, investment property, money in bank accounts, etc - these can legally be taken and sold to pay off your debt. In cases like these, a Chapter 7 or Chapter 13 bankruptcy is sometimes your best option.

Another point that I'm going to briefly address here. Retirement money, 401Ks, and pensions are off limits to creditors. They cannot touch them. You should not touch them either to pay off unsecured debt -- no matter how much creditors harass you or how attached you are to your credit score. If you have to choose between dipping into your retirement money or filing bankruptcy, the majority of the time you should file bankruptcy. Using your retirement money may buy you a few months of relief from your creditors but you're only buying time and not solving the problem. The saddest cases for me are the ones where people have gone through their entire 401K feeding creditors and THEN come in to file bankruptcy.

I'll repeat it again -- your 401K money is protected against creditors - they can't touch it. You shouldn't touch it either to pay credit debt.

When it comes to bankruptcy, every case is unique. One can always find both reasons to avoid bankruptcy and reasons to file. The internet is a great source of information and it's good to educate yourself on the laws, but the internet is like a blank piece of paper...it will hold whatever anyone puts on it - whether it's true or not - and you have no way of knowing whether what you're reading is correct. Your best option is to consult with a Broward County bankruptcy attorney and then make the best choice fror you.