Nov 20 2009

Bankruptcy Myth – Only Big Spenders File Bankruptcy

The most common myth about bankruptcy is that the only type of person who files is a big spender, irresponsible who is bad with money and lives a lavish lifestyle.  This myth, or rather stereotype, has been perpetrated throughout the decades by people who will do and say anything to get people not to file bankruptcy.

 

The actual truth is that the vast majority of bankruptcies are caused by one of three things: 1) Job Loss or disruption in income (such has reduced hours or pay); 2) Medical Bills; 3) Divorce.  http://bdp.law.harvard.edu/papers.cfm.  In my experience the remaining bankruptcies are the result of a business failure.

 

Are there people who file bankruptcy who live irresponsibly, yes.  But to state that all people who file bankruptcy fall within that category is an outright untruth.  The truth is that the vast majority of people use bankruptcy as their last resort.  The truth is that a disruption in income can lead to a hole which is impossible to dig out.  The truth is that when you are a single mother and your 15 year old child has a heart attack on the basketball court (yes this is an actual case of mine) there are medical bills and a disruption in come.  The truth is that when you get divorced you no longer have two incomes to manage the marital debt and when your X files bankruptcy the creditors come knocking on your door.

 

What is disturbing about this myth is that it doesn’t take into account the creditors lending behavior.  If lenders were so upset about people filing bankruptcy then why do they extend so much credit?  The answer is because they make money when you charge your card (they get a fee from the business who accepts the cards) and they know that people do everything they can not to file bankruptcy and end up paying their minimum’s for months (if not years) and thus pay massive amounts towards interest.  Make no mistake, the creditors have massive risk models and mathematical formulas to rely on so they make money.  Crocodile tears my friends, crocodile tears.

 

The bottom line is this, people file bankruptcy because there has been an event in their lives which effect their finances.  People, rich and poor file bankruptcies.  Blue collar and white collar.  Friends and family.  If there is no more money, then there is nothing left to do.  Bankruptcy exists for a reason, to give honest but unfortunate people a fresh start. 

 

 

 

DISCLAIMER: The information contained in this distribution is intended for informational purposes only. It is not intended to be legal advice.  Your situation may vary and different facts creates different advice.  So do not take legal action based on this content!  Always contact a lawyer near you.  The attorney’s posting this advice are licensed in COLORADO only and thus there may be a dramatic difference in procedures in any other state.  This is not an advertisement for legal services except where permitted by law. 


Nov 18 2009

DIVISION OF PROPERTY: WHAT’S MINE IS MINE?

Part of the divorce process is dividing the marital property, but what constitutes marital property?  Marital property is any property acquired during the course of the marriage except:

(a) Property acquired by gift, bequest, devise, or descent;

(b) Property acquired in exchange for property acquired prior to the marriage or in exchange for property acquired by gift, bequest, devise, or descent;

(c) Property acquired by a spouse after a decree of legal separation; and

(d) Property excluded by valid agreement of the parties.

Property acquired during the marriage is marital regardless of how it is titled or financed unless it meets the above exceptions.   Taking marital property during the marriage and keeping it in a separate name or bank account does not create separate property.  In addition separate property can be converted to marital property if it is comingled with marital property.

Comingling occurs when a spouse takes separate property and mixes the separate property with marital funds.  If the separate property cannot be easily traced back to its separate source then it will be considered to have been comingled with marital property and as a result be considered marital property and is essentially gifted to the marital assets.  A common issue of comingling is when a spouse sells a home owned prior to marriage and puts some or all of those funds into a home that is purchased during the marriage.  If the other spouse contributes funds as well those previously separate monies have now been comingled and likely gifted to the marital estate.

Separate property is also property that was owned or purchased prior to the marriage.  However, an increase in value to separate property during the marriage is considered marital property.  For example if a party owned a home prior to marriage and during the course of the marriage the house went up $30,000 in value, the $30,000 increase in value would be considered marital property and is subject to be divided in the divorce.

Marital property is divided equitably without regard to marital misconduct, in such proportions as the court deems just after considering all relevant factors including:

(a) The contribution of each spouse to the acquisition of the marital property, including the contribution of a spouse as homemaker;

(b) The value of the property set apart to each spouse;

(c) The economic circumstances of each spouse at the time the division of property is to become effective, including the desirability of awarding the family home or the right to live therein for reasonable periods to the spouse with whom any children reside the majority of the time; and

(d) Any increases or decreases in the value of the separate property of the spouse during the marriage or the depletion of the separate property for marital purposes.

Equitably does not mean equally; rather it means fairly and justly.  Oftentimes an equitable division will be an equal division of marital property, but the court is not required to create a perfectly equal division of assets.

As part of the property division the court can require the sale or liquidation of marital property in order for it to be divided by the parties.  The Court can also require professional valuations be conducted to determine the value of marital property for purposes of dividing the property appropriately.

DISCLAIMER: The information contained in this distribution is intended for informational purposes only. It is not intended to be legal advice.  Your situation may vary and different facts creates different advice.  So do not take legal action based on this content! Always contact a lawyer near you.  The attorney’s posting this advice are licensed in COLORADO only and thus there may be a dramatic difference in procedures in any other state.  This is not an advertisement for legal services except where permitted by law.


Nov 18 2009

HISTORY OF MAINTENANCE

The history of maintenance, formerly known as alimony, goes back to the ecclesiastical courts in England.  Alimony is the court ordered allowance that a husband pays support to the wife while separated, while they are involved in a divorce or after they are divorced.  In England the husband was traditionally the property owner and the wife was dependant on the husband for sustenance and support.  Because of this marital dynamic the ecclesiastical court in England held that the husband had a duty to provide ongoing support for his wife even after they divorced.

However, in England, at the time alimony was conceived of, a divorce didn’t sever all bonds between husband and wife.  Rather, while spouses could live apart they were still bound together in marriage and a divorced woman in ecclesiastical England could not enter contracts or be sued because she was still married although by divorce no longer had the obligation to cohabitate with her spouse.  After marriage the rights of a woman to personal property and profits from realty were vested in her husband. The husband was seen as the ruler of the family and responsible for management of the marital property and as such it was his responsibility to protect the wife.  A common law duty of support from the husband arose.

When the concept of alimony was adopted in America the obligation for a husband to support his wife even after divorce continued; however, divorce in America was absolute, meaning the wife severed all marital bonds with her husband and was restored her rights as a single woman.

For decades alimony was considered exclusively a right of the wife; however, this changed over the last several decades.  As women were granted greater social and political equalities the idea of alimony being strictly the husband’s obligation changed as well.  As women started working more and more outside of the home, attending college, holding higher positions and earning higher incomes the original concept of alimony became antiquated.  It was no longer appropriate for the law to presume that it would be the wife who needs financial support should the marriage dissolve.

As a result a critical shift in alimony came about where gender was no longer a consideration in spousal support.  Courts created gender neutral, objective factors to look at to determine the need for spousal support.  This shift necessitated a vocabulary change since “alimony” was traditionally referred to a husband’s obligation to pay a wife.  As such we no longer refer to the obligation to support a spouse as alimony but instead it is called “maintenance” or “spousal support” reflecting that the obligation to support a spouse can be borne by the husband or wife.

Despite the changes that the concept of “alimony” has undergone in the last century, the reality is that it is still primarily women who are the recipients of spousal support.  Presently there is debate whether or not alimony is still appropriate or necessary given the theoretic equality between men and women.  Many courts resist the idea that maintenance should be awarded automatically and require evidence of need before awarding maintenance.  If you are thinking about getting a divorce, make sure to hire a family lawyer to help you sort through important things such as spousal support that may effect the rest of your life.

DISCLAIMER: The information contained in this distribution is intended for informational purposes only. It is not intended to be legal advice.  Your situation may vary and different facts creates different advice.  So do not take legal action based on this content! Always contact a lawyer near you.  The attorney’s posting this advice are licensed in COLORADO only and thus there may be a dramatic difference in procedures in any other state.  This is not an advertisement for legal services except where permitted by law.


Nov 5 2009

MAINTENANCE AND ITS EFFECT ON CHILD SUPPORT

Maintenance, also known as spousal support and formally known as alimony, is when one party provides continued financial support to the other party after the divorce to assist in maintaining their reasonable and necessary financial needs.

There are two phases of the divorce process in which maintenance can be ordered.  The first phase is during the pendency of the divorce process which is referred to as temporary maintenance and the second phase is after the divorce is final is referred to as permanent maintenance.  Permanent is a bit of a misnomer as it doesn’t necessarily mean that you will be paying maintenance for the remainder of your life, but simply means that the maintenance obligation is part of the Permanent Final Orders or Agreement.

Temporary maintenance can be calculated in two ways:  the first method is called presumptive maintenance which is appropriate when the partie’s combined income is $75,000 or less.  In those cases there is a presumption in favor of an award of temporary maintenance to be calculated by taking 40% of the higher income party’s income minus 50% of the lower income party’s income.  If the remainder is zero or less than zero then the presumption is that no maintenance is appropriate; if the remainder is positive than the positive amount is what the presumptive maintenance would be.

Presumptive maintenance can be overcome by evidence circumstances that would make application of the presumptive maintenance unjust or inequitable.  Temporary maintenance in a situation where the parties combined income is higher than $75,000 is determined based on the same factors as permanent maintenance, is described below.

The Court evaluates all relevant factors in determining if maintenance is appropriate including but not limited to:

(a) The financial resources of the party seeking maintenance, including marital property apportioned to such party, and the party’s ability to meet his or her needs independently, including the extent to which a provision for support of a child living with the party includes a sum for that party;

(b) The time necessary to acquire sufficient education or training to enable the party seeking maintenance to find appropriate employment and that party’s future earning capacity;

(c) The standard of living established during the marriage;

(d) The duration of the marriage;

(e) The age and the physical and emotional condition of the spouse seeking maintenance; and

(f) The ability of the spouse from whom maintenance is sought to meet his or her needs while meeting those of the spouse seeking maintenance.

If maintenance is appropriate it can be paid over time on a monthly basis or in lump sum.  How long maintenance will be paid for is based on a case by case basis and generally is a reflection of the length of the marriage, the amount of time needed to allow for the recipient spouse to find appropriate employment or gain additional training or education to earn a higher income.

Maintenance can be, by agreement of the parties, contractual and non-modifiable ,which means it cannot be changed.  However, maintenance that is ordered by the Court is always modifiable and subject to change based on a change in circumstances so substantial as to make the maintenance award unconscionable.

When maintenance is awarded in cases where there are children it is considered income for the party who receives it and as a result it impacts the calculation of child support.  Higher income for the party receiving child support results in lower child support.

Another consideration when considering maintenance situations and its impact on child support is that maintenance is taxable income to the recipient and tax deductable for the payor, whereas child support is non-taxable to the recipient and provides no tax benefit for the payor.

DISCLAIMER: The information contained in this distribution is intended for informational purposes only. It is not intended to be legal advice.  Your situation may vary and different facts creates different advice.  So do not take legal action based on this content! Always contact a lawyer near you.  The attorney’s posting this advice are licensed in COLORADO only and thus there may be a dramatic difference in procedures in any other state.  This is not an advertisement for legal services except where permitted by law.


Nov 5 2009

TRUTH ABOUT CHILD SUPPORT- OTHER CHILD SUPPORT OBLIGATIONS/OTHER MARRIAGES

A parent’s child support obligation to their children is paramount to most other financial obligations.  The law has struggled with how to deal with support obligation when a party has several children from different people.  Historically, the legislature has felt that a child should not receive less support simply because the parent had subsequent children with a different person and they now have less income.  However, this philosophy posed problems with respect to the degree of support that subsequent children were receiving.  Up until about a year ago the law would not allow consideration in determining child support obligation of children born after the child who was the subject of a support order.  However, recently this law has changed so that financial support for all children born before and after the child(ren) who are subject of the support calculation are taken into account.

What this means is that support is reduced because the calculation reflects that the parent has less income due to child support obligations related to other children.  To be clear, the parent has to actually be providing support to receive this credit; if the parent does not provide financial support and has no parenting responsibilities they should not receive the reduction in support due to support of other children.  The goal of this revised law is to provide equalized support for all children versus preferring children born first.

This revision in the law is relatively new and while new child support calculations will use this method of giving credit for children from other relationships, a party cannot seek to modify child support based solely on having an after born child.  However, if a party has a basis for modification outside of just requesting consideration for after-born children, then the modification can factor into the calculation an adjustment for support for children from other relationships.  For more details on modifying child support please see the blog entry on “Modifying Child Support”.

Parties often want to know that if they are remarried and have subsequent children with their new spouse, does their new spouse’s income come into play for the purpose of calculating child support for the prior born children.  A new spouse’s income does not directly factor into the calculation for child support, but there are various scenarios where a spouse’s contributions do come into play.

One likely scenario is when a new spouse is paying for health insurance for the minor children.  That contribution will be factored into the child support obligation.  Another situation would be if there are joint marital investments that are income-producing the court certainly can factor a percentage of the income as income to be credited to the party who has a support obligation.

Parties are allowed to redact personal financial information of their new spouse within reason so that the confidential information of their spouse is not disclosed; however, there will be certain information that is relevant in situations such as above where the spouse’s contributions will be explored.

DISCLAIMER: The information contained in this distribution is intended for informational purposes only. It is not intended to be legal advice.  Your situation may vary and different facts creates different advice.  So do not take legal action based on this content! Always contact a lawyer near you.  The attorney’s posting this advice are licensed in COLORADO only and thus there may be a dramatic difference in procedures in any other state.  This is not an advertisement for legal services except where permitted by law.


Nov 5 2009

Are Credit Cards Dischargeable in Bankruptcy?

Whether a debtor is filing a Chapter 7 or a Chapter 13 Bankruptcy, credit card debt is generally dischargeable; however, there are a few exceptions to this rule.  In order for a creditor to dispute the dischargeability of a debt owed on a credit card, they must file an adversary proceeding and succeed in showing why some or all of the debt should not be discharged.  To do this,  creditors commonly attempt to show that the debt in questions was incurred by fraud, that the debt incurred by a debtor who knew or should have know that repayment was impossible, or that the debt was incurred to pay other non-dischargeable debts such as student loans or taxes.

If a creditor can prove that the debtor committed fraud in obtaining or using the credit cards then the creditor can succeed in their non-dischargeability action.  A common example of this is proving that the card was obtained under false pretenses.  This usually occurs when the creditor can show that the debtor made a materially false statement on their credit application and that the credit was extended because of this false statement .

A creditor may also prevail in a non-dischargeability action if they can show that the debtor never intended to repay the debt, thus fraudulently incurring the debt.  While each jurisdiction has a different standard for determining the dischargeabilty of credit card debt, there are common factors that increase the likelihood of a creditor prevailing on such a fraud claim.  Common factors weighed by courts in these suits are:

  • Charges incurred shortly before filing bankruptcy or after consulting with a bankruptcy attorney;
  • A large balance at filing;
  • Exceeding the credit limit on a card;
  • Making multiple charges on the same day;
  • Sudden changes in the debtor’s spending habits;
  • Large cash advances before filing;
  • Using the credit cards for vacation or travel expense;
  • Using the card for “luxury goods or services”;
  • Using the card when unemployed and without other means of repaying the debt;
  • Borrowing from one card to pay for another;
  • Few or no payments on a credit card after incurring substantial debt; or
  • Filing bankruptcy on newly issued lines of credit

Even if none of the above factors are present, credit card debt may still be non-dischargeable if the cards were used to pay off debts that would otherwise not be discharged in bankruptcy.   Common examples of non-dischargeable debts are student loans, most taxes, and debts owed to governmental units.  Please contact an attorney for a full list of non-dischargeable debts.

Ultimately, the best way to protect against an objection to the discharge of credit card debt is to consult an attorney before filing a bankruptcy case.  If you believe that some debt may be non-dischargeable due to any of the above factors, it is wise to put as much time between the last credit card use and the date of bankruptcy filing as possible.

DISCLAIMER: The information contained in this distribution is intended for informational purposes only. It is not intended to be legal advice.  Your situation may vary and different facts creates different advice.  So do not take legal action based on this content! Always contact a lawyer near you.  The attorney’s posting this advice are licensed in COLORADO only and thus there may be a dramatic difference in procedures in any other state.  This is not an advertisement for legal services except where permitted by law.


Oct 27 2009

TRUTH ABOUT CHILD SUPPORT-OVERVIEW

The obligation to pay child support in Colorado is based on the idea that both parents owe a financial responsibility to their child and the obligation to pay child support is the right of the child, NOT the right of the parent receiving child support.  Colorado has developed child support guidelines which provide the presumptive child support obligation owed in most cases.

The goal of the child support guidelines is to provide child support based on the parties combined adjusted gross income and allocate child support in the amount of support that the child would have been given had he lived in an intact household.

Child support is not intended to cover every and all expenses related to having a child, rather it is intended to provide basic support for a healthy upbringing and the parents are expected to share the additional incidental costs of raising children as those expenses arise.  Expenses such as school fees, extracurricular activities, orthodontic bills and similar costs are not covered by basic child support and are divided between parents outside of the child support obligation.

In determining the amount of child support to order, the court considers all relevant factors, including:

(I) The financial resources of the child;

(II) The financial resources of the custodial parent;

(III) The standard of living the child would have enjoyed had the marriage not been dissolved;

(IV) The physical and emotional condition of the child and his or her educational needs; and

(V) The financial resources and needs of the noncustodial parent.

Although there is a set formula for determining child support the court can deviate from this formula with good cause.  However, a parent’s obligation to pay child support is paramount to most other financial responsibilities and only special circumstances warrant deviating from the basic child support obligation.  Often times a parent will claim that they cannot afford the guideline child support because they have too many credit card bills or not enough disposable income after paying for their expenses.  Keep in mind hardship alone is not a reason to deviate from the standard child support guidelines and it is only in situations such as serious illness, medical expenses or other similar situations that are often beyond the control of the obligor that the court will consider deviating.

The basic factors that are considered to determine child support are: how many overnights each parent has with the child, each parent’s gross income, who pays for health insurance and how much the child’ s portion is, if there are any work or education related day care costs, any income earned by the child, as well as any extraordinary expenses.  These are the basic factors that are considered to determine child support.

People often ask if they can just waive child support.  A waiver of child support is not binding on the Court and it has been deemed against public policy to enforce a waiver of child support.  Child support is for the benefit of the child and while a parent can agree not to pursue child support or agree to a reduction in support this agreement is not permanent and can be modified.  So even if you have a written agreement that says one parent will not seek support from the other parent, this is unenforceable by the Court.

Child support can be modified at any time if there is a 10% change (up or down) in the child support obligation.  However, the court does not automatically review the support amount so it is the parties’ responsibility to seek a modification if they believe one is appropriate.  Any agreed upon modification in child support needs to be done in writing, signed by both parties and submitted to the court.

Child support is ordered by the Court and in cases of divorce child support is generally made retroactive to the date in which divorce was filed.  In cases where the parents were never married the child support obligation can go back to when an Allocation of Parental Responsibilities action is filed or back to the date of birth if an action to establish paternity is filed.

The obligation to support a child ends when the child turns 19 or is otherwise determined to be emancipated.  Child support will automatically terminate when a child turns 19, however if you have other children for which support is owed and they are not emancipated you will need to modify the existing obligation for those children to reflect that support is now paid for one less child.

DISCLAIMER: The information contained in this distribution is intended for informational purposes only. It is not intended to be legal advice.  Your situation may vary and different facts creates different advice.  So do not take legal action based on this content! Always contact a lawyer near you.  The attorney’s posting this advice are licensed in COLORADO only and thus there may be a dramatic difference in procedures in any other state.  This is not an advertisement for legal services except where permitted by law.


Oct 23 2009

The Chapter 13 Process

The Chapter 13 process can be very complicated and a debtor should always seek the assistance of an attorney to ensure that the case is handled properly.  While every case is different, there is a general time line that is followed in all cases.  A Chapter 13 is a reorganization of personal debt much like a Chapter 11 is for business debt.  This means that a debtor will make monthly payments to the Trustee for a period of three to five years.  This payment is determined by assessing the income and expenses of the debtor. The assumption is that all disposable income will be paid to the Trustee to be distributed to creditors.  The Trustee will distribute this money to creditor based on the priority and amount of the creditor’s claim.  If the debtor makes all the payments required under the Chapter 13 Plan then any remaining debt will be discharged.

In preparing for a Chapter 13 Bankruptcy, the first thing a debtor must do is gather the information needed to file their case.  Some of the common pieces of information that a debtor will need are tax returns filed in recent years, the past six months of pay stubs and information concerning their creditors.  The debtor will also have to take a credit counseling course within the six months prior to filing their case; this class can usually be completed online or over the phone.  Please contact a bankruptcy attorney for a complete list of what information is needed to file a Chapter 13 Bankruptcy as every case is different.

After gathering the information, the debtor’s attorney will draft all the documents necessary to file the case including the proposed Chapter 13 Plan.  Once everything is in order, the debtor will review and sign the documents and the attorney will file them with the court.  On the day that a Chapter 13 Bankruptcy is filed, an automatic stay goes into place preventing any collection efforts by creditors.  This means that creditors cannot sue, garnish or even call the debtor.  The next major step in the process is the Meeting of Creditors (aka 341 Meeting).  At the Meeting of Creditors, the debtor will sit down and answer a number of questions for the Trustee assigned to their case.  The line of questioning will depend on the facts of each case, but the Trustee is generally ensuring that everything that was filed by the debtor and their attorney is true and correct.

Approximately three weeks after the Meeting of Creditors, there will be a Confirmation Hearing.   At the Confirmation Hearing, the Judge presiding over the case will hear from the debtor’s attorney and from the Trustee regarding any disputed matters.  In some cases, the debtor and objecting parties are unable to resolve their dispute and it is necessary to take the issue to hearing so that a Judge may resolve it.  More commonly, however, the parties will come to an agreement and it will not be necessary to take the issue to hearing.  Once all outstanding objections are resolved the Judge will sign off on the Plan and the debtor will make the agreed upon payments to the Trustee.

DISCLAIMER: The information contained in this distribution is intended for informational purposes only. It is not intended to be legal advice.  Your situation may vary and different facts creates different advice.  So do not take legal action based on this content! Always contact a lawyer near you.  The attorney’s posting this advice are licensed in COLORADO only and thus there may be a dramatic difference in procedures in any other state.  This is not an advertisement for legal services except where permitted by law.


Oct 23 2009

The Chapter 7 Process

While the Chapter 7 process can vary greatly based on the complexity of the case, most cases have very few issues and follow the same basic time line.  Generally, in a Chapter 7 with few complications, the entire process takes approximately five to six months.  A Chapter 7 Bankruptcy is a liquidation process and any assets not protected by the applicable exemptions will be liquidated in order to raise money for creditors.

The first things a debtor facing bankruptcy will have to do is gather the information needed to file their case.  Some of the common pieces of information that a debtor will need are tax returns filed in recent years, the past six months of pay stubs and information concerning their creditors.  Please contact a bankruptcy attorney for a complete list of what information is needed to file a Chapter 7 Bankruptcy as every case is different.

After gathering the information, the debtor’s attorney will draft all the documents necessary to file the case.  Once everything is prepared, the debtor will review and sign the documents and the attorney will file them with the court.  On the day that a Chapter 7 bankruptcy is filed, an automatic stay goes into place preventing any collection efforts by creditors.  This means that creditors cannot sue, garnish or even call the debtor.

The next major step in the process is the Meeting of Creditors (aka 341 Meeting).  At the Meeting of Creditors, the debtor will sit down and answer a number of questions for the Trustee assigned to their case.  The line of questioning will depend on the facts of each case, but the Trustee is generally ensuring that everything that was filed by the debtor and their attorney is true and correct.  If any creditors show up to this meeting, they will also have an opportunity to question the debtor, however, this is rare.  The Trustee will then determine whether there are any assets to liquidate.  If there are assets to be liquidated, the Trustee will do so and distribute the money raised to the creditors.  In most cases, however, there is no liquidation because all of the debtor’s assets are protected by various exemptions.

After the Meeting of Creditors, there is a two-month objection period.  While objections are also rare, they can cause major complications in a Chapter 7 bankruptcy and should always be handled by a bankruptcy attorney.  Assuming there are no objections in a case and any liquidation is completed, a debtor will receive the Order discharging their debts shortly after the objection period ends and the case will be closed.

DISCLAIMER: The information contained in this distribution is intended for informational purposes only. It is not intended to be legal advice.  Your situation may vary and different facts creates different advice.  So do not take legal action based on this content! Always contact a lawyer near you.  The attorney’s posting this advice are licensed in COLORADO only and thus there may be a dramatic difference in procedures in any other state.  This is not an advertisement for legal services except where permitted by law.


Oct 23 2009

7 Steps to Get out of Debt

It seems like everyone out there has advice on getting out of debt.  Some of it is good, some of it is bad.  Most of it is incomplete because as non-attorneys, people who tell you how to get out of debt don’t understand all of the options.  So check out the below steps, some of which you may have heard before, some of which you probably haven’t.

Step 1 – Stop the Bleeding.  In other words, stop using credit.  Some “experts” (I use that word loosely) tell you to immediately shred your credit cards and stop drawing on credit.  That is generally appropriate but oftentimes not possible.  Sometimes people have large expenses, emergencies, or other unanticipated events arise which make immediate abandonment of credit an unlikely event.  So, if you have to wean yourself off of credit that is acceptable.  However, this process should take not more than 2-3 months.  You should start operating on a cash only basis.  I don’t mean start using only green cash, but use your debit card as well.

Step 2 – Create a Budget. Sounds easy, right?  Wrong, this is actually harder to do than most people think.  To do this you first need to figure out your income (bonuses do not count as income).  For a salaried position this is easy.  For those who are hourly, commission based, or have fluctuating income (note another reason why sometimes it is hard to get off of credit right away in that you might have to wait for the next payday) it is much more difficult.  To be honest, the best way to figure it out is to look at the last 12 months and determine an average monthly amount.  That is the first line of your spreadsheet.

The next step is to categorize your expenses.  This is a bit tricky, you don’t want to get too broad.  When you sit down and try to figure out categories for your expenses it is amazing all of the little things that can shift from category to category with relative ease.  But don’t get to narrow as well, you need to be able to track where your money is going.  You shouldn’t need more than 20-30 categories.  As the old saying goes, “KISS”, Keep It Simple Stupid.  Don’t over categorize, keep it simple and easy to figure out.

You should then pay your bills on the 1st and 15th of the month so you can get a sense of your cash flow needs and have the ability to cover the basics, like food and rent.   Remember always try to keep a bit back each month for necessary but unanticipated expenses.

Step 3 – Pay it the Debt. If you can pay your debt you should do it.  Obviously focus on the high interest accounts first.  Try to pay more than the minimum’s.  If you get a tax refund it goes to your debt.  If you get a bonus at work it goes to your debt.  With the exception of a company match 401(k), stop contributing to your retirement and use that money to pay off the debt (though see below if you are nearing retirement age as not building up a nest egg if you are older is not a good idea).  The interest that is charged on credit cards is incredible when compared to the average 10% return you can expect to receive if you invest long term in the stock market.  The better investment is paying off your debt.

Step 4 – Do the Math. You need to take time, figure out on an excel spreadsheet (or something similar; search for templates on the web) how long it is going to take you to pay off the debt.  You need a realistic picture of how long it is going to take so you can set your expectations early on.  You may be surprised, minimum payments plus a few extra bucks here and there, can take a VERY long time to pay off.  This is even without new purchases.  If you add to the debt, you can kiss the dream of paying off your debt anytime soon goodbye.  You need to be realistic about your timeframe.  If you are close to retirement age, have health problems which prevents working, or any other timing issue in which you can’t wait for it all to be paid off you should consider your other options.

Step 5 – Don’t Pay It. Very rarely is this a good option.  If you don’t pay your debt you will get sued.  You will likely lose because you owe the money.  By the time you get sued the balance will have increased dramatically because of the interest, late fees, and attorney fees (by the provisions you will likely be paying their attorneys to sue you).  In most states after you lose, you will start to be garnished or otherwise collected upon.  They can liquidate bank accounts, garnish a percent of your wages, put liens on houses, take property, none of which is a good thing.  The only time this is ever a good option is if you are judgment proof.  This means that if a creditor gets a judgment, who cares, they cannot legally take anything you own.  The classic example of a ‘judgment proof’ debtor is usually someone with only social security income, no car (or other substantial assets), and renting.

Step 6 – Settle It. Be VERY careful about settling your debt.  There are thousands of outfits out there who claim they will settle your debt and reduced rates.  They will make all kinds of promises to get you signed up and rarely deliver.  There are two types of debt settlement, 1) Debt Consolidation & 2) Traditional Debt Settlement.  Debt consolidation is the program in which you ‘consolidate’ your monthly payments and your debt settlement company pays your bills for you.  This works sometimes, but at least twice a week (I’m not kidding) I get a phone call from someone that says something like this, “I hired this company and they said all my bills were being paid, they never really got back to me when I called them, and now I am getting sued!”

The second route, traditional debt settlement, is where you pay lump sums to your creditors for reduced amounts and settle the entire debt.    The primary problem with this is that you need money to do this and you may get a form 1099 for the forgiven amount and have to claim it as income on your taxes (thus increasing your taxable base and getting you cross with the IRS).

The better advice is to run, not walk away from these companies.  If you decide to do this, be very very careful and do you homework.  Make sure you get everything in writing, including balances that are forgiven.  I have seen on several occasions, after a debt has been settled, the creditor simply sells it to another buyer who starts collecting again.  (Note: think not twice, but three times before you cash out your retirement to pay your debts.  Again, depending on your age or other conditions this is oftentimes a bad idea.  Retirement is almost always exempt in bankruptcy, meaning you won’t lose it!)

Step 7 – File Bankruptcy. If all else fails, file bankruptcy.  The vast majority of people who file bankruptcy end up wiping out there debts and keeping their stuff.  There are two primary types of bankruptcy, Chapter 7 or Chapter 13.  The former is a liquidation where the courts take property that is not protected (depending on the state most property is protected) and the latter is a plan for reorganization where you pay back part of the debt.

Look, here’s the deal about bankruptcy, the vast majority of the time bankruptcy is the better financial option for the individual.  What does this mean? It means that you will save more money filing bankruptcy (even if you do have to turn over some property) than you would paying it all off or even debt settlement.  Moreover, the legal protections you receive in bankruptcy are federal, enforceable, and final.

If you’re worried about the potential downsides of bankruptcy, keep reading these blog posts but contact a Denver bankruptcy attorney near you.  You would be surprised at the type and amount of people who end up filing.

DISCLAIMER: The information contained in this distribution is intended for informational purposes only. It is not intended to be legal advice.  Your situation may vary and different facts creates different advice.  So do not take legal action based on this content! Always contact a lawyer near you.  The attorney’s posting this advice are licensed in COLORADO only and thus there may be a dramatic difference in procedures in any other state.  This is not an advertisement for legal services except where permitted by law.