Why File for Bankruptcy?

I spoke to my father just a few minutes ago and he has been toying for years to file for bankruptcy. His credit was trashed back in 2002 when my step-mom passed away and he hasn't had credit cards since at least 2005. He is going out of the country for 6 months this winter and was considering filing for bankruptcy next summer. The question I asked him is "Why File for Bankruptcy?"

Personally, I seek to pay off all my creditors, but for him he does not want to. He also does not plan to buy a house in the coming years, he is on social security disability payments and does not own anything of value. He also does not have any retirement money put aside. Due to his health, all he wants to do is rent a place to live, have a basic car to drive places, and spend time with friends and family.

His concerns was that people were telling him that they can potentially pull money out of his bank account or take his social security benefits. I let him know at least in Illinois that they are not able to do so since he does not receive wages and all of his income is from social security. At the end of the call, he agreed with me and is considering not filing.

How many others out there in the foreclosure fiasco will be like my dad in 5 years and realize that all they really want out of life is a place to lay their head, a car to take them places, the ability to spend time with friends/family, and a tv to entertain themselves when no one is around?

My Ethical Viewpoint

A reader recently questioned indirectly my ethics, especially due to me making choices recently to tackle other items ahead of debt payments. Here's the points in no particular order:

- Tree removal versus Debt

Yes, for most situations removing trees in your property are luxuries. Here's our reasons besides the "nice to have done" point:

1. Safety: We had 2 trees that were within 15 feet of our house (and our neighbor's house). Like clockwork every July we have had huge limbs come off the trees (20+ feet). They had missed the houses in the past, but the only ones really left were aimed for the houses. I don't need a 5-10K repair bill because I wanted to stay focus on our debt obligations.

2. Timing: The better times to cut down trees is when there are no leaves on them. It speeds up the process, less brush, etc. That prevents us from paying more money.

3. Time of year discount: During the summer months, tree cutters are a lot more busy because that's when everyone thinks of their outside projects. By doing it now instead of right before the storm, it prevented us from paying more money later.

- Replacement car versus Debt

Yes, we are a 2 car family even though I'm the only one that goes to a job during the week. Here's the main reason we decided to replace my car instead of paying more to debt: My wife's emotional well-being. I know my wife, we have fought a couple rounds of depression together. I know that when she does not have a car at the house, she fights loneliness, feeling trapped, unable to get together with others. Say what you will, but my wife comes before any debt.

- Fun money versus Debt

Theoretically, our fun money should be at $0 since we made prior obligations to our creditors. It's a great idea, but in real life it doesn't work too well.

1. We need to keep running the race. I tried the $0 fun money, it was not worth it. I'd much rather work an extra hour or two than be in that situation.

2. Our "free" entertainment items break down sometimes. My wife has her sewing machine that has brought her many days of entertainment, I have my computer. In the past couple of months we have had a power supply need to be replaced on my computer and some parts replaced on her sewing machine. The money came from our fun money.

- Debt settlement

I view it ethically ok to make settlement offers. Here's when:

1. When the alternative is bankruptcy. Almost 2 years ago I lost my full-time job and started working at Taco Bell. They don't pay much, but we had a whole lot of debt. Everyone was saying I should file for bankruptcy since I was unable to pay. I'd much rather give them something than nothing.

2. The debt has become "old". During that rough period of time when we couldn't pay, most of our creditors ended up selling our debt to collectors. The collectors paid pennies on the dollar in the hopes of collecting something more in the future.

3. They are offering settlements or are willing to listen to one.

4. Bringing the account "current" would be equal to the settlement amount. Because of the many months we could not pay anything, the amount to become current kept growing. At this point in time, if I asked them how much to be current, they would pretty much say as much as the settlement amount.

5. You don't have the money in the bank to pay them everything they want.

- Not making monthly payments on all debts

1. To be current is impossible: We went through a time where we could barely pay the mortgage, let alone any debts. Because we couldn't make payments back then, the amount to bring these accounts current is astronomical.

2. What we could give them would not be enough: This goes back to #1 regarding being current. I've only had 1 creditor be reasonable regarding paying them something monthly until we could do more, which we have done fairly consistently the whole time I've had this blog (except for 1 month, which was really tight).

PS: I've been mulling this post over for over a week, there's probably more I could have put in, but I'm wanting to get this up.

Update on BofA Settlement Letter

I got some really good advice yesterday, so I figured I would give an update on things. This morning I'll be calling the collector back, requesting first that he provide me the offer we discussed into writing and fax it over to me today. Tomorrow, I will try again to have them settle for the full amount on the 17th of next month and then go with my 3 payment plan if they do not like it.

The threat of bankruptcy is mainly just a threat, I have considered Chapter 13 as a way to take care of them (pay over 3 years a set amount that would take care of the $40K). Several places I've read they recommend that threat to have them back off (because they may get nothing then...) I know I owe them and I want to pay them back, but have been unable to until now.

Regarding them going after me through court, my concern is the wage garnishment. From what I've read, they can take up to 25% of your paycheck. I'm pretty certain my employer wouldn't let me go because of this, but I've been at places where they would just try to find another excuse to get rid of someone. I am also in the works of starting my own consulting business (shhh!), but don't want them trying to take too much cash that I have troubles keeping it going.

I'm also planning on talking to the tutoring job I had in the spring about doing some work in the coming 2 weeks so that I can ensure a cash flow so that this settlement does not leave me without gas money. My other on-call job has been very slow, I suspect it's because people are hopefully playing outdoors instead of breaking their computers.

BofA Balance Settlement Letter

I have drafted up a letter to send to the Bank of America to settle my $9773 balance with them for $3909.20. They requested on Friday over the phone in the kindest of ways that they want that payment by the following Thursday (6/28) or it will be sent to a lawyer near me to go to court. I of course don't have $4K just sitting around the house and they asked me to borrow it from others. I am sick of debt though and I'm not going to borrow to pay them off, even if I could. Here is the letter I am drafting to them and planning on sending to them on Wednesday. This plan would take out our emergency fund, have us living on bare essentials with no wiggle room. Please provide any feedback on it:

Per our phone conversation, I have been attempting to gather the $3909.20 for the Bank of America balance settlement. Below is our repayment plan of $3909.20 with details regarding all of our expenses and income. The rental income is us renting out 4 bedrooms within our 5 bedroom home, we only have 1 property, with 3 currently rented at the rates of $400, $350, & $300 and one to be rented out at $350.

Income:
Savings: $1700
Rent Income in July: $1400 ($400 on 7/1, $350 when we bring in another renter, $350 on 7/10, $100 on 7/6, $100 on 7/13, $100 on 7/20)
Full-Time Job: $2698.70 (Half on 7/2, Half on 7/16).
On-call Job: $100 (Varies, but previous check was for $50 for 2 weeks).

Expenses:
Mortgage: $990
Automobile Gasoline: $300
Utilities: $482
Insurance: $95
Food: $0 (On Food Stamps)

Cash Flow:
+$1700 Starting Balance (6/28)
-$1303 Bank of America Payment #1 (6/28) = $397
+$400 Rental Income (7/1) = $797
+$1349.35 Full-Time Job Paycheck (7/2) = $2146.35
-$150 Automobile Gasoline (7/2) = $1996.35
-$1303 Bank of America Payment #2 (7/5) = $693.35
+$100 Rental Income (7/6) = $793.35
+$350 Rental Income (7/10) = $1143.35
-$990 Mortgage (7/13) = $153.35
+$50 On-call Job Income (7/13) = $203.35
+$100 Rental Income (7/13) = $303.35
+$1349.35 Full-Time Job Paycheck (7/16) = $1652.70
-$1303.20 Bank of America Payment #3 (7/17) = $349.50
-$150 Automobile Gasoline (7/17) = $199.50
+$100 Rental Income (7/20) = $299.50
+$350 Rental Income (When Renter Rents) = $649.50
-$482 Utilities = $167.50
-$95 Insurance = $72.50

Outstanding Debts:


The above plan is the best that we can do and meet all of our other obligations. If this is unacceptable and the Bank of America decides to forward this to the court, our only option will be filing for bankruptcy.

What do you think?

Changes for April Budget

My wife and I have been talking about April a bit and the months following that regarding our goals with the budget. We were originally planning on doing something of a snowball method, where we pay a small amount on each loan and then all the extra money that we had for the month would go towards our smallest bill. The problem that we have with this is the common method for this is that you pay the minimum balance, which due to us not being able to pay the minimum for several months, is much larger than we can pay. The creditors have finally slowed down on calling, realizing that they aren't having an effect on us to pay quicker. This we fear would get them pressing us again for more than $10/month that we would be sending them.

Here's what we're thinking about doing to get ourselves out of debt:

• April, May and June we will save $1K/month for our emergency fund. Since we have no credit available to us at this time, we need to have enough to purchase a replacement vehicle as well as for any other emergency that may come up.
• July we make a settlement to our smallest credit card (balance is currently $1545, but about 400 of that is fees we have received).
• August, September & October we save up to make a settlement on our next smallest credit card ($3629).
• Next 18 months after that repeat the same pattern. Afterwards settle small 0% medical bills outstanding.

Overall time for our credit card and medical debts we are looking at 3 years to pay it off.

Having some inspiration today, I realized that before we got married, I had my future wife file for bankruptcy in order for us to "start fresh" but that if we had kept her bills and learned the lessons 3 years ago that we're learning now, we'd be in a much better place financially than we are now. As I told her though today, we can have no regrets and can only change our actions in the future.

Today's lesson: Don't file bankruptcy, God can use your debts to help you grow into a wise person. If you do file, you might just be in the same situation a few years down the line.