Home > Common Mistakes by Debtors
Common Mistakes by Debtors
First and foremost, people who file for bankruptcy protection should NOT borrow from their 401(k) or similar retirement plan to payoff debts. To do so is to waste a hard-earned and valued asset which is usually exempt from the person's creditors and the bankruptcy trustee appointed by the Court to oversee the bankruptcy case. When a person files a bankruptcy case, they can usually discharge the debt they just paid with their retirement funds. Worse of all, they are then left without those funds at retirement. In today's world where we are all responsible for saving for our own retirement, this is a mistake we cannot afford to make.
Debtors should not transfer any assets to their family members or business partners within two years before they file a bankruptcy case. Such transfers can usually be recovered by the bankruptcy trustee.
Debtors who are married should usually title their property jointly as "tenants by the entirety with the common law right of surviviorship." Whenever possible, they should borrow in their individual capacity. In that way, the jointly-titled marital property is exempt from the individual creditors of either of the married individuals.
People who are considering using a "debt consolidation" or "counseling" company to pay their debts should compare the benefits of bankruptcy to such payment plans. People who file for bankruptcy protection after paying such companies have often wasted valuable funds at a time when they can least afford it. For people who prefer a repayment plan, there is always Chapter 13 bankruptcy. The repayment plans available to Chapter 13 debtors are vastly superior to the plans available through such companies. The most significant difference between the two is that Chapter 13 repayment plans are based upon the debtor's "disposable income," whereas private debt consolidation firms simply require a person to repay a percentage of their debt regardless of whether they have the disposable income to make the payments. The private repayment plans often benefit the creditors more than the debtors, whereas Chapter 13 repayment plans are court-ordered and designed to get the debtor a fresh start at the earliest possible moment.
Did you know? The demographic group which saw the greatest percentage of increased bankruptcy filers in 2006 is for people over the age of 55 years. Americans are getting older... many have substantial debts they will never be able to repay... and they don't want to burden their families with their unpaid debts.
If you borrow $5,000 at 15% on a credit card and make only the minimum monthly payments, it will take you 32 years to pay off the debt, at a cost of $12,790! The amount of consumer debt in the economy is increasing at staggering rates, from $1.32 trillion in 1998 to $2.52 trillion in 2008.