Most Frequent Mistakes Made by Prospective Bankruptcy Clients in Colorado

August 23, 2010

By: David M. Serafin

As a general matter, the most frequent mistake is waiting too long to consult with a Denver Bankruptcy lawyer. Sometimes, the client will have already sold the house or car, or cashed out their 401(k) or other retirement plan prior to contacting me.

An example will help illustrate. A single client has an $80,000 annual salary, with a $3,000 monthly mortgage payment and a $500 monthly car payment. Most problematic is credit card debt of $75,000 (at a 20% to 30% interest rate). After running the numbers, it should be obvious that the client cannot continue to timely make the mortgage, car and credit card payments in full. So, the client sells both his home and car to free up more funds to pay off the credit cards, even though he still cannot pay off the credit cards. The, the client borrows funds from his 401(k) or retirement plan, whereby he’ll incur an income tax obligation should he fail to timely pay back this loan.

At this point, because the client no longer has a mortgage or car payment to offset his gross income for purposes of the chapter 7 Means Test, it will be much more difficult to qualify for chapter 7. Instead, the client may unnecessarily be required to file a chapter 13 with a five year payment plan. (The loan from the 401(k) or retirement plan, cannot be discharged in bankruptcy.)

Had the client consulted with me earlier, before selling the home or car, I would have recommended filing for chapter 7 bankruptcy, which would have eliminated the credit card debt and allowed him to keep the home, car and untouched 401(k) or retirement account balance, which may all be exempt from any claims by the bankruptcy trustee or creditors.

In fact, once you fall behind, credit card debt is very difficult to pay back in full as credit card companies typically charge interest rates exceeding 30%. (Nor can such obligations, if incurred for personal use and outside the context of business expenses, be deducted for personal income tax purposes.)

In addition to consulting with an experienced Denver bankruptcy lawyer, I recommend that you carefully examine your budget and finances. How much do you owe for credit cards? How many credit cards do you have? What is the interest rate for each credit card? From here, you can formulate a plan to determine how long it would take to become debt free. And, if such a goal appears unrealistic or would require the repayment of debt for years to come, then bankruptcy may be a viable option.