Courts rule that Social Security benefits are protected from payment to unsecured creditors in Chapter 13

On March 25, 2013, the Ninth Circuit Court of appeals in San Francisco, in the case of In re Welsh, 2013 U.S. App. LEXIS 5880 (9th Cir. 2013), joined the Fifth and Tenth Circuit Courts of Appeal (In re Ragos, 700 F.3d 220 (5th Cir. 2012) and In re Cranmer, 697 F.3d 1314 (10th Cir. 2012)) in holding that it was not bad faith for a debtor to decline to devote social security income to paying unsecured creditors in a chapter 13 plan. This is good news for individuals considering chapter 13, as it may permit them to subtract from their projected disposable income (the income used to make one’s chapter 13 plan payment) social security benefits, thus lowering the monthly chapter 13 plan obligation.

Your Financial Life

February 25, 2013

Whenever I meet with a prospective client, one of the questions I inevitably receive is “When will my credit score go back up after filing bankruptcy?”. What my client is really asking is “When can I borrow money again and go back into debt?”.

The problem with this question is that it reflects a fundamental misunderstanding of the proper order of priorities  in one’s financial life. Through the very sophisticated marketing of the banks,  credit card companies and mortgage lenders, we are all led to believe that the most important facet of our financial life is a high credit score. This is simply not true.

In my opinion, a more proper ordering of our financial priorities places credit score well below the top spot and looks something like this:

1.  GET RID OF YOUR DEBT.  This is what the people on Wall Street call “de-leveraging.”  Whether you pay the debt off, settle your accounts and pay in part or discharge the debt in bankruptcy, just get rid of your debt.  Remember, continually carrying high interest debt, such as credit card balances, is nothing more than financial slavery to the lender.  Just look at the box on your credit card statements that shows you how long it will take you to pay off the debt with minimum payments (now there’s an eye-opener) and how much the payment needs to be to pay the balance in full in three years.

2.  SAVE.  Let me say that a little louder: SAVE!  We have all heard the advice we should have “x” number of months of living expenses saved away.  This can seem like a daunting task, and indeed be very difficult in these times of high fuel prices, increasing food costs, college tuition increasing much faster than the rate of inflation and the decreasing buying power of our dollar.  However, if you have regular income, you should be able to put something away nearly every pay period.  Make it a habit.   Start with a goal of just one month of living expenses.  Once you achieve this goal, go for two months.  Continue this process until you hit the 6 month mark.

3.  INVEST (yes, more saving).  If your employer offers a 401k plan, take part.  If your employer offers a 401k plan and matching funds, you had better be taking part or you are just throwing away free money.    If your employer does not offer a 401k plan, then begin investing in something like a Roth IRA.  (Disclaimer: I am not an investment consultant and always refer my clients to experts in that field for proper advice).

4. CREDIT SCORE.  Now you can worry about your credit score.  When an individual files for bankruptcy protection, their credit score takes a short-term hit.  Generally, there is a two-year period following the discharge (the order in the case that absolves you of your legal obligation to repay certain debts)  in which the credit score will stay low and your ability to borrow is limited.  After that two years, however, and given consistent income and good financial behavior, your credit score will increase.  Remember, the banks, credit card companies and mortgage lenders need your business to stay in business.  That is why you receive solicitations for credit cards, auto loans and mortgage refinancing in the mail.  In fact, when the loan portfolio of a large, publicly held lender decreases it can hurt the stock price and, in turn, the dividend if the company pays one.  That makes for unhappy shareholders.  Again, and as much as the lending industry may not like to admit it, they need your business.

In summary, you work hard for your money.  Don’t work to pay someone else.  Rather, pay yourself.  Saving as a habit will, over time, lead to greater freedom and a lower level of stress.