Bankruptcy and the Looking Glass

Ok, so what do I know about making money? I’m a Bankruptcy Attorney. Unfortunately for me and my kind, you just don’t see the neighborhood Bankruptcy Attorney driving down the street in a Porsche, attending banquets with the rich and famous, or having the private yacht “readied” for the weekend. Well here is a reality check. Anybody that will be sailing around in his or her private yacht this weekend already has money. In fact, just give me just one good-sized yacht and I will make plenty of money. Man oh man, what I could do with a yacht…… Where were we? Oh yes, making money.

See, what you want to know about making money, is how to do it when you don’t have any to begin with. Unfortunately, I don’t have the absolute answer yet. Hey, I’m a Bankruptcy Attorney. The day you see me at the banquet, is because I sold that yacht.

However, the advice I can give comes from my experiences with failure. Oh, do I hate that word. Just remember, there is one positive thing that comes with every "failure". It’s learning how not to succeed. And in learning how not to succeed at a particular task, you have, at minimum, narrowed the scope in your search for success. This same lesson holds true in all aspects of life, including making money. You want to know how to make money? Why not learn some of the common ways people fail at making money? Then don’t  do what they did. This may not provide you with the precise path to riches. But maybe the scope of your search for success will narrow.  

I know, it seems backwards, like this advice is coming through one of Lewis Carroll’s looking glass mirrors, but that is the view I am presented with. I see people every day who haven’t made money. I will tell you the common mistakes they made. My advice to you – Don’t follow their lead.  

I have heard it all. They are so convenient. I need one in case of emergencies. What if I need to rent a car or purchase a plane ticket? I need one for the business. I have to have a credit card to use on the Internet. Trust me, I have heard every excuse. Credit cards are the number one reason people file bankruptcy.

In my business I call credit cards “The debt they don’t really want you to pay.” Think about this. How does a credit card company make money? Aside from minimal transaction fees, they make money when you pay interest, plain and simple. Consider the credit card holder that pays of their entire card balance at the end of every month. In a twelve-month cycle, the credit card company has sent 12 monthly accountings (and usually a yearly accounting), has provided 24-hour a day customer service for 365 days, fraud protection, access to funds through merchant accounts and banks, and often use incentives like free miles, discounts, etc. As concerns the credit card holder who pays off the card balance at the end of every month, what was this person charged for all these services? Nothing. This person paid no interest.

A credit card company makes money when you can’t pay the balance off at the end of the month. A credit card company makes even more money when you are over the limit, pay late, or fail to make your minimum payment. That cushy 9% interest rate hikes to 24.99% because you are in default of your credit agreement. Higher interest means they make more money. This is exactly where they want you to be, unable to pay your debt in full.

So, when you get that notice in the mail that says, we have increased your credit limit. That’s not because you are special. You are getting suckered. The credit card company has reviewed your account, realized you are capable of paying your debt off, and thrown out an enticement for you to put yourself in a position where immediately paying off your debt becomes impossible. Do this with several cards and you become my client.

Then what is the safe balance to carry as concerns credit card debt? Zero. There is no safe balance. If you are carrying a balance on your credit cards, you are one step closer to making an appointment with me. It is as basic as that.

Plan for it. You will be unemployed at some point. One of the most common causes of personal bankruptcy is when the breadwinner of the family loses their job. Most often times this is not even a permanent loss of employment. If you are living paycheck to paycheck, as most people do, two months off work and your world collapses. Benefits from unemployment insurance often don’t cut it. Plan for a short stint of unemployment by having enough non-credit resources available to carry yourself through several months while you find new work.

If you are not insured, you should be looking into some form of medical coverage after you finish the last sentence in this article. The days are gone when you go to a doctor and pay your bill out of pocket. If you don’t have medical insurance and you suffer any significant injury, you will be in my office asking me whether your house can be protected.

Medical bills can be astronomical. At least once a month I have to file bankruptcy for someone who was not medically insured. If you cannot buy medical insurance, look into whatever government programs may be able to help you. If you can afford the insurance, and have declined insurance so that you can save on having to pay the premiums, the looking glass is telling you – “bad idea”.  

Understand that catastrophic emergencies are not the topic here. Other than insurance, it is next to impossible to plan for major catastrophe. Million dollar medical bills, catastrophic property loss, substantial permanent disability and job loss, these things happen. But the end result is usually an unavoidable bankruptcy. The emergencies you can predict are those small emergencies that creep up on us every year. The child that all of a sudden needs braces, the car transmission that needs to be replaced 22 miles past the warranty, the water heater that dies on Sunday at 9:00 pm in mid-winter, or the air conditioner that fails when its 112 degrees outside. These emergencies you can do something about.  That’s right you can actually plan for these emergencies.

Now most of you are thinking, that’s why I have a credit card. Wrong answer. Here is a simple trick I learned from some TV show years back. Sorry, I do not remember the name of the show. But here is the trick. Look back over your last 5 years of major expenditures reviewing all those things that would qualify as small emergencies. These would be the expenditures that you paid eventually, but not items that you were able to pay in less then two months. Determine the highest expenditure that you have had for a small emergency in that 5-year span. Most of you will find that the small emergencies fall in the “thousands of dollars” range. The trick is to save up 75% of that amount and put the money in an investment account, like a money market account, or high yield savings account. During those non-emergent times of your life you will be making money through that fund. And when a small emergency happens, you won’t be facing high credit card interest rates during an already difficult financial moment.

True enough, the next trick is to keep your fingers out of the emergency fund unless you have an actual emergency. And no, a new big screen TV prior to football season is not an emergency.

Don’t purchase what you cannot easily afford. I cannot count how many bankruptcies I have filed over the years for people that have bought cars they simply cannot afford. I was driving to work the other day, and a guy drove past me in a Kia, you know, the one that looks like a Jaguar, but isn’t. The license plate read “PRBYJAG” (Poor Boy Jag for those of you who are not license plate literate). Aside from the obvious chuckle, the whole scene reminded me of this issue in bankruptcy practice. I mean, you got to respect a guy that knows what he wants and also knows he can’t afford it.

When going out to buy a car, don’t get all glassy eyed and foolish listening to the salesman. Know what you can afford before you even shop for a car. Take into consideration, the cost of gas, the cost of full coverage insurance, the cost of registration, and maintenance costs, all in combination with your car loan.

When applying for a car loan, budget your loan for a five-year payoff. You can stretch out the payment term to seven years, but don’t do that solely to afford more car. Rather, budget for a five-year pay-off and only stretch the loan if you are relatively certain the car will last seven years, and relatively certain that during the seven years, considering your expected usage, that the loan balance declination will roughly follow the depreciation of the car. Use up a car too fast, or stretch a car loan out too far, guess what you get? You get a worthless car with a big loan balance. In bankruptcy we call it a deficiency balance.

Over the years, I have seen these deficiency balances climb higher and higher. Depending on the car, some of these deficiencies are well into the mid-$20,000.00 range.

Are you crazy? Here is a person that has gone into purchase a product where a professional salesperson, with their whole bag of financing tricks, could not pull off a sale. Here is a loan that every professional lender has declined. You think you know more about the lending business then the professionals. This is their business. When you cosign to qualify someone else for a loan, you should absolutely expect to pay the loan yourself. Remember, at least two professionals expect it. That’s why they would not write the loan without your signature. If you recognize that you will likely have to pay the loan yourself, and you are willing to do so without sorrow or remorse, then sign away. Otherwise, find a less expensive alternative.

Buy Now - Pay Later

Our entire society has to rethink this mentality. There are some purchases where financing is unavoidable – new house, new car, business capital, etc. I get that. But for everything else, even if you have the credit, and can afford the payments, buying now is not an answer. As a society, we have all but abandoned the idea of saving up to make a purchase. Just ask yourself, when was the last time you spent more then 30 days saving up to purchase something outright? It’s kind of funny. When you do save up, magically the “need” for that item changes over the months. Very often you will find yourself not buying that thing you impulsively wanted 30 days ago. And when you do save up and eventually buy some special item, the appreciation of your purchase takes on a whole different form. Try it. Save up and buy something. It will be strange that first time, but maybe it will become a habit.  

Well, there you go. These are some of the most common reasons that people find their way into my office. Avoid these pitfalls, and maybe some of you will make a fortune. Maybe these little financial tidbits seem rather obvious to you. But, trust me, I would not be in business if it were that obvious.

Look, as an attorney, don’t think I won’t happily accept your money to file your bankruptcy. I will. Truth be told though, I would much rather that you find wealth and happiness in your future. That way, you can let me use your yacht on the weekend when you have to attend the banquet with the rich and famous. Anyway, hopefully, by looking at the opposite of making money, at minimum, you might have a better focus on how to structure your budget and choices allowing that money tree to flourish.