Bankruptcy.

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Late last year my wife and I came to the conclusion that we would have to file for bankruptcy.  She was laid off in June of 2008 and my company had halted many benefits including overtime and pay raises, all due to the economy.  I know, a lot of people reading this now are rolling their eyes at me, probably even labeling me as “irresponsible” and “greedy”.  This is not the case.

When we moved to south Florida all we could really afford was a town home, it was the second cheapest property we found here (the cheapest was a “fix-er-upper”).  The home was a good deal, newly refurbished (the previous owner bought it as a fix-er-upper), all new appliances except the AC unit and we needed to purchase a washer and dryer.  Everything else was new and up to code.  Since then we’ve had to buy a new car (ended up with a Kia Rio Cinco), a new air conditioner, plus a couple of thousand dollars defending ourselves from an oppressive HOA.  We never lived a lavish lifestyle (no luxury cars, no big screen TVs, no long vacations).  We tried to do things the right way and unfortunately the economy caught up to us – the tipping point of our finances was when I needed to use a credit card to pay for basic things like food (and not being able to pay off the balances).

We started talking to our attorney in December of 2008 (who has been great throughout the process, even after the filing).  We couldn’t afford it at the time but probably could in a month or two.  He gave us information on online courses we’d need to take before filing.  The courses cost money but the good news is that the University of Nebraska (one of their departments) is doing a study.  You take a survey before and after the course and they’ll pay you $35 (the course was $20 or $25).  There was also the option to take another survey three months down the road for another $20.  Yes, you’ll make money with this.

During the time we gathered what paperwork we needed.  The attorney stated that we were a classic example of people who should do chapter 7 bankruptcy (all assets liquidated but the slate is completely clean.  This is unlike chapter 13 where you keep everything and the court sets up a payment plan to repay all of your debts).  The rules were simple for chapter 7:  You had to make less than a certain amount in the past 6 months.  My wife’s unemployment and my pay were way below this.  We could only keep $1000 worth of “stuff” each (worth in the resell or used market).  Since we never bought high end luxury items – we were also well below this.  We were also allowed to keep $1000 worth of cash each.  Again, the only time we saw that many digits in our bank accounts is when I had to send out a mortgage payment.

One advantage of Florida bankruptcy laws (I don’t know about other states) is that you can “reaffirm” secured debts – mortgage(s), car payments, and so on.  We reaffirmed the car loans and the mortgages on our home.  Since what we owned on them was close to what they were worth we could keep them as long as we kept our payments current.

We officially filed in January of 2009 – once the paperwork was signed and submitted all creditors were not allowed to contact us and we were to forward all correspondence to our attorney.  He said it could take up to a week for them to get the word so give it a week for the phone calls to stop and 2-3 weeks for the letters to stop.  All debts incurred before this were put on hold (except reaffirmed debts) and any money we made afterwards were inaccessible to creditors (technically if we won the lottery the next day they couldn’t touch it).

Our appointment with the creditors was in March.  This was a lot less intimidating / stressful than I thought it was.  We sat in a room with other people filing and there was a table.  We sat at the table with the attorney and the “creditor” (someone assigned for your creditors).  They ask some basic questions, ask for ID (drivers license).  The whole process was over in less than 15 minutes (I was expecting at least an hour).

The final part of the process was when we got a letter in the mail sometime in late May, 2009.  All of our debts were discharged (in long-worded legal mumbo-jumbo, we had to call our attorney to find out exactly what it meant).  Our slate was clean and we didn’t have to look back anymore.  I honestly wish we didn’t have to, but it was great to be able to breathe a sigh of relief from all of this.

This is something I’d never want to go though again but I am glad it is over with and I’m glad ours went smoothly.  Yes, I am sure our credit score took a large hit on this but we haven’t needed to apply for any loans or credit cards recently.  We’ve been able to meet our expenses with our bank check cards and even, on occasion, go out to see a movie.

I do have some pointers for people contemplating filing for bankruptcy.

1)    Consider all your options.  Is it worth filing or not?  There is the expense and the hit on the credit score to consider, and the possibility of losing things like your house, car, and any expensive luxury items you may have.

2)    Hire an attorney and ASK QUESTIONS.  There are little things here and there that will confuse any average person.  If you hired an attorney, this is exactly why you hired him – ask away.  Be 100% sure you understand everything before you sign anything.  They’ll even go through your credit reports with a fine tooth comb with you – if anything looks odd, ASK!

3)    Educate yourself.  Going back to #2 – ask the attorney any questions you have.  Look on the internet for information regarding bankruptcy.  Learn how money and credit work.

4)    Build up a small stash of cash.  No, I’m not saying hoard tens of thousands of dollars but you should have a small stash incase something happens – car repairs, new appliance needed etc.  You should have one built up anyway but if you do not – start now.

5)    Throw out those pre-approved credit card applications.  You can’t file for another 10 years and they know this.  You don’t want to get stuck in the same situation you were before and the banks know people will be tempted with pre-approved applications.  Just throw them out.

6)    Keep up to date with bills that are not on your credit – especially when your home is involved.  Reaffirmed mortgages, association fees, taxes – all of these are NOT covered by bankruptcy but they can take your home if you do not pay them.  Even though utilities cannot take your home, living without them can be a pain.

7)    Start a financial plan.  Budget all of your expenses and build up a plan to start saving – put as much as you can afford to into your savings, even up your 401K contributions or if you have direct deposit, have some of it go straight into a savings account.  Bank of America offers “keep the change” – if I charge $7.25 on my check card, they’ll take $8 out and put the other $0.75 into my savings account.  I know it doesn’t sound like much but it is turning out to be about $20 a month for the little I use my card.

8)    Recover and move on.  Once the filing is done, the meeting is done, and the process is over with, reevaluate your situation and plan for the future.  If you do decide to get a credit card to help build your credit back up, get one with as low of a balance as possible.  Charge some things on there but pay the balance off in 2-3 months.  Don’t get over your head (again).  Be very wise about your money.