BANKRUPTCY TRAPS

Few people want to file bankruptcy. Most people are forced into it by disaster, bad decisions or good intentions gone wrong. Three common mistakes people make to avoid bankruptcy frequently make bankruptcy more likely and cause greater harm in bankruptcy:

1. Refinancing the home to pay credit cards.

This creates debt that must be paid in order to keep your house. Neither Chapter 7 nor Chapter 13 can discharge the home equity loan without causing you to loose your house also. If the credit card debt is too large to handle it is time to consider negotiation to reduce the interest and/or the amount to be paid (use great caution due to the possible income tax problems-see Debt Tax Trap), debt consolidation if it stretches the payments over a much longer time with a lower rate or bankruptcy. Agreements to pay the creditor less than the amount owed may create taxable income. Consult a competent tax or bankruptcy advisor before you enter such an agreement.

2. Trying to live off credit cards while unemployed.

This is the hardest problem to avoid. No one expects to be unemployed long. Use of the cards sometimes looks like the only way to get from one job to the next. If the new job comes in soon enough, it can work. When the new job does not come the balance grows at an increasing rate. While rare, the credit card companies have sought to prevent discharge of the debt in bankruptcy when there was no realistic expectation that the debt could be paid when it was incurred.

3. Taking out a loan on a 401(k) plan or pension.

The law as to repayment of Retirement Plan loans has changed radically for the better. Visit attorney Charles Kennedy’s Blog on Good News for Senior The Good News for Seniors and Others for more information.