Tips for Tough Times #1

It is human nature: we often wait until the last possible moment (or later) to seek help we need. This goes for medical issues, retirement planning, home repair, etc. It is doubly true for legal matters. This is unfortunate because lawyers can be so much more effective (and less expensive) acting preventively rather than reacting to a crisis. Consulting an attorney practicing in bankruptcy law can benefit one whether filing is imminent or a distant possibility.

One example of the benefit of a proactive use of an attorney is evident during tough financial times. Many people are experiencing layoffs in our present economy. During these times, it is tempting to dip into retirement savings despite tax penalties or deplete one’s home of any remaining equity. While these offer lower initial costs of obtaining financing compared to higher interest credit cards, they may be incredibly costly in the long run.

An individual in Kentucky can claim up to $20,200.00 in a homestead exemption and a married couple can claim $40,400.00 in a Chapter 7 bankruptcy. So, if you have much more than that exempt amount in equity in your home, it is smart to obtain a loan secured on your property to make ends meet while searching for work. However, if possible, you do not want to borrow past that exemption threshold. For example, if you are married and your home is worth $150,000.00 and you owe $80,000.00 on it, you could borrow up to $30,000.00 more secured on the residence to live on, but it might be better to use higher interest credit cards beyond that. By doing so, you have your house sufficiently mortgaged to make it nearly certain that you can reaffirm on those loans in a Chapter 7 and thus keep your house. Also, you have maximized the amount of equity you can exempt and have at your disposal after the Chapter 7 is filed. The unsecured credit would then be discharged.

To make sure this is kept in perspective though, you must be able to afford the payments on the loans secured by your house subsequent to a Chapter 7 filing for this to work. You also do not want to run up debts on luxury or fluff items – this strategy is for the necessities of food, clothing, shelter, and medical care. Of course, this is a strategy for temporary events beyond your control, such as being laid off or suffering a major injury, where you expect things to turn around in a matter of several months. Because of all these complexities, the general suggestions I am offering need to be applied to your specific situation. The facts in your situation may call for a very different strategy so it is worthwhile to invest in preventive legal counsel.