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Many avoid bankruptcy out of fear

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The mystery isn’t why so many people file for bankruptcy each year. It’s why more people don’t.

Each year, only a fraction of the Americans who could benefit financially from bankruptcy actually seek relief. Economists say some don’t file because collectors aren’t aggressively pursuing them, while others may strategically delay filing because bankruptcy could benefit them more down the road.

Many bankruptcy attorneys have a much simpler explanation: Fear, a lack of information and misplaced optimism keep people from getting a fresh start.

A temporary pause

About 14% of U.S. households — or roughly 17 million — owe more than they own, according to Federal Reserve Bank of New York estimates. Many of these households could benefit from having their debts wiped out, but fewer than 1% of U.S. households actually file for bankruptcy each year. Last year, there were 752,160 personal bankruptcy filings. Researchers refer to this gap as “missing bankruptcies” — the filings that could be happening, but aren’t.

Now, there’s an additional set of missing bankruptcies: the cases people normally would have filed in recent months, but haven’t. Bankruptcy filings dropped dramatically in the second quarter of this year, to about 60% of the average for the previous five years.

Courthouses were shuttered by pandemic closures, which made it harder for creditors to pursue foreclosures and wage garnishments. Those are two big drivers of consumer bankruptcy filings, says David Cox, a bankruptcy attorney in Lynchburg, Virginia, and co-author of “Consumer Bankruptcy: Fundamentals of Chapter 7 and Chapter 13 of the U.S. bankruptcy code.”

Borrowers have benefited from various forms of coronavirus relief, such as suspended payments on federal student loans, mortgage forbearance and expanded hardship options for loans and credit card accounts. The $600 weekly bump in unemployment checks, which expired in July, also kept many people afloat, Cox says.

Lower jobless benefits, along with the reopening of courts and continued high unemployment, mean the lull in bankruptcy filings is likely temporary, says Jenny Doling, a bankruptcy attorney in Palm Desert, California, who serves on the American Bankruptcy Institute’s Chapter 13 Advisory Committee.

She worries that people will wait too long to file. Too often, people drain retirement funds or other assets that would be protected in bankruptcy to pay debts that will ultimately be erased, she says. Putting off bankruptcy also can make it harder to come up with the $1,500 needed to file a typical case.

You won’t lose everything

Cox says many of his clients delay filing because they fear they will lose cars, homes and other property. They are pleasantly surprised that they aren’t stripped of everything they own, he says.

“There’s a misunderstanding about how bankruptcy works and what it would take from you,” Cox says.

The majority of people who file the most common type of bankruptcy, Chapter 7, don’t have to give up any of their possessions. The types and amount of property you can keep vary by state, but typically include clothing, professional tools, wedding rings and at least some equity in your home. A few thousand dollars of equity in a car is usually protected as well. If you have assets that wouldn’t be protected in Chapter 7, you could file for a Chapter 13 repayment plan instead.

You can get credit again

A bankruptcy filing remains on your credit reports for up to 10 years. But credit scores can start to recover soon after you file. It’s possible to get a VA or FHA mortgage two years after a bankruptcy. Most loans require you to wait at least four years.

People can start to rebuild credit a few months after their bankruptcy case is discharged by getting secured credit cards, which require a deposit, or credit-builder loans, available from some credit unions, community banks and online.

The problem with anxiety — or unrealistic optimism

Debt often leads to anxiety and depression that makes taking action difficult, Cox says. Many of his clients arrive at their first meeting with grocery sacks full of unopened bills.

But misplaced optimism can also be a problem. The same hopefulness that causes people to take on too much debt also can lead them to put off the reckoning, he says.

“You always think, ‘Our income’s going to increase, things will be better going forward,’” Cox says.

Anyone struggling with debt now should consider consulting a bankruptcy attorney, Doling says. The first visit is often free, and referrals are available from the National Association of Consumer Bankruptcy Attorneys. Consulting with an attorney doesn’t obligate you to file, but it could help you avoid expensive mistakes if you later decide that’s your best option.

“The people who do much better in bankruptcy are the ones who came in and got advice early on,” Doling says.

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Opinion: Few 401(k) participants changed portfolio allocation when market tanked

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The rumor has been that 401(k) participants took little action when the stock market declined by more than 30% in February and March 2020. A Morningstar study provides some numbers to back up the lore.

The data come from a major record-keeper for defined-contribution plans. The starting point was snapshots for two dates: Dec. 31, 2019 and March 31, 2020. To be included in the analysis, the participant had to show up in both samples. That is, they had to be enrolled on or before Dec. 31, 2019 and still in the plan March 31, 2020. This construct ensures that observed changes reflect active decisions by participants as opposed to the sponsor replacing one fund with another. The final sample consisted of 635,116 participants across 509 plans.

The important finding is that only 5.6% of participants enrolled as of Dec. 31, 2019 changed their portfolio allocation during the first quarter of 2020. Participants who adjusted their portfolios changed their equity allocations. Most of these changes were relatively small, with an average equity reduction of about 10 percentage points. However, older participants who changed their accounts made larger changes than younger participants, particularly if they were invested more aggressively.

Much of the report goes on to look closely at the 5.6% who did move their money. For this exercise, the report identifies four types of participants: self-directing their accounts, using a target-date fund, defaulted into a managed account, and opted into a managed account. The pattern across participants shows that those with professionally managed solutions — target-date funds or managed accounts — were much less likely to change their allocation.

On balance, this report seems like good news. Buying high and selling low doesn’t end well.



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I’m 28, have zero debt, a 401(k), Roth IRA and $45K in the bank. My parents want me to save for a home. I want a Tesla Model 3. Who’s right?

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Dear Quentin,

I’ve been flip-flopping back and forth between buying a new car or putting a down payment on my first home. With my parents being very money-minded and keeping a careful eye on my finances (still), I’m caught in a predicament.

The original plan was to save up 20% to 30% for a down payment on a condo in the suburbs of Los Angeles and buy into the market within the two years or so, and right now I’m about 40% towards that goal.

However, with the Green Act possibly on the horizon again, the Model 3 has been a temptation, especially with all the extra bonus incentives my state offers, with a net final price of around $27,000. I’m not desperately in need of a new car, but this seems like a great way to save some money on a vehicle with smart features.


With the Green Act possibly on the horizon again, the Model 3 has been a temptation, especially with all the extra bonus incentives my state offers.

I am 28 years old with zero debt as of January 2021. Retirement wise, I am well on my way to maxing out 401(k) contributions this year, and I have already maxed out my Roth IRA contributions, and if everything stays the same, I’ll have about $60,000 in retirement by the end of the year.

In terms of liquid assets and investments, I’m sitting on about $45,000 as of right now. I currently save and/or invest 50% to 60% of my take-home pay, since I moved back home with my parents after being laid off last year, and started a new job remotely.

I don’t know if I should (a) purchase the car straight up and empty out my savings as I will probably have the time to save up the money again before a potential housing crash, (b) not purchase the car and keep saving for the down payment, (c) do both or (d) invest the money elsewhere.

As financial conservatives, my parents are strongly against me buying the car because it’s a depreciating asset, and they believe entering the market should be my priority, so they think that I should have the down payment waiting, to jump into the market whenever I see a good deal.

I believe I can buy the car and strap down, and save more aggressively to replenish the funds. Any advice for me?

Pressured by the Parents

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com

Dear Pressured,

What the hell! Give into your impulse, splash out on the Tesla
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Model 3. You will be empowered by the knowledge that you are using your spending power to get America back on its feet, while making a cool statement that you have finally arrived. Fully embrace the American dream of being smack-bang-wallop in the middle of the eco-warrior, Tesla-driving, tech-savvy zeitgeist. All any of us have is today, after all and global warming is coming for us all in the end.

Cruise the neighborhoods where you would like to buy a home in your 30s, 40s or 50s (it will all depend on how the property market fares between now and then). Take a good look at those homes, assuming they are not obscured by manicured hedges, and enjoy the view. Drive back to your parents’ house, honk the horn so they can marvel at Elon Musk’s bold vision for themselves, and then and only then ask them nicely if they would make space in their driveway for your Model 3.

I am kidding, of course. You have done everything right so far. Buy the house first and the $27,000 electric car later. You already have a destination in mind. Don’t allow an automobile, regardless of how cool you think it would be to drive, to deter you from that destination. Listen to your parents. They have seen more than you have. They are trying to set you on the road to financial freedom. And as nice as they are to drive and to be seen driving, you don’t need a Tesla to achieve that.

The Moneyist:‘Warren Buffett and Harry Potter couldn’t get those two retired early’: Our spendthrift neighbors said our adviser was ‘lousy.’ So how come WE retired early?

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My wife and I are in our 60s. Should we skip our undeserving children and leave everything to our grandkids instead?

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Dear Quentin,

My wife and I are in our mid-60s and we are both retired. My parents have passed on. I have no living siblings or children. My wife has three adult children in their 40s. None of them are mature, responsible adults (alcohol, drugs, can’t hold a decent full-time job, etc.). They have four children.

We have to make some tough decisions regarding estate planning. Is it a viable option to skip the “middle generation” and bequeath all to the four grandkids? They are aged between 10 and 18.

We don’t want the middle generation to gain from our estate while cheating our grandkids out of their rightful inheritance, and we don’t want our life savings burned up by three undeserving kids while the grandchildren suffer. Can a trust or will assure us that our desired plan will actually happen?

Concerned Grandparents

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com

Dear Grandparents,

Can you skip the middle generation? You can. May you skip the middle generation? You may. I don’t want to sound like an elementary-school teacher, so let me reassure you that my opinion is not a judgment call on whether you should or shouldn’t, it is merely a vote of confidence for you to trust your gut and always remember that past behavior is the best predictor of future behavior.

A trust is a more private option than a will, and you can obviously set out terms of that trust and give the beneficiaries an income instead of a lump sum, if you don’t feel comfortable that your grandchildren would give the money to their parents to support bad habits. You could also provide money from the trust for, say, a down payment for a home in the beneficiaries’ name.


‘Alternatively, you could add terms to the trust to encourage good behavior in your wife’s children.’

Alternatively, you could add terms to the trust to encourage good behavior in your wife’s three children. “Incentive distribution schemes are common ways clients encourage productivity. If a beneficiary is in school, cash distributions from the trust can be made only if the beneficiary maintains a certain grade point average,” according to the Sketchley Law Firm.

Similarly, any distribution to your kids or grandkids could require proof that they have been alcohol- or drug-free for X number of years. ”Distributions may be conditioned on continued participation in drug and alcohol counseling, completion of in-patient rehabilitation programs, or remaining free of any further criminal or traffic violations related to drugs or alcohol,” the Sketchley Law Firm adds.

Your letter comes at an opportune time. I moderated a “MarketWatch: Mastering Your Money” online town hall, and I hosted a session on setting up wills and trusts with Elizabeth Forspan, an estate-planning attorney and partner at Forspan Klear, and Amy Zehnder, managing director and leadership and legacy consultant at Ascent Private Capital Management of U.S. Bank.

Zehnder summed up the difference between a will and a trust this way: “You don’t want all of your stuff to be visible to everyone, dumped in the front yard. And that’s probate! Trusts help to maintain privacy.” Should you decide to have a conversation with your kids about a trust — and you are under no obligation to do so — Zehnder suggests using words like “hopes,” “dreams,” “achieve” and “preserve.”

Forspan recommends that wills and trusts be revisited and, if need be, updated every four to five years. “Any time there is any major change in the tax law, or if there is any change in your family situation, or you get divorced, married or, God forbid, if someone in your family dies, you should always have a plan,” she said. “And appoint a power of attorney should you become incapacitated.”

There is much you can do to help your children and your grandchildren, whether they see it that way or not.

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