Bankruptcy Basics

07/07/22 • 25 min

Economists have long linked a decline in economic activity with an increase in bankruptcy, both business and personal. But bankruptcy isn’t the easy way out that it once was. We’ll explain today on MoneyWise. With the Federal Reserve dramatically increasing interest rates to slow inflation, many analysts are predicting a recession will hit the U.S. within the next year. But bankruptcies are seen as a lagging indicator of a slowing economy. It takes time for companies to begin laying off people as revenues shrink. The unemployment rate remains low, but that trend will end if we enter a recession, especially if it’s a prolonged downturn in the GDP. That said, it may be time for a refresher course on an unpopular topic bankruptcy. When someone can no longer pay their bills and has mounting debt, bankruptcy often seems like the only way out. But there are things you should know before ever considering bankruptcy. We’re not saying that bankruptcy is never the answer to financial difficulty. Sometimes you have no choice. But, we often get calls from folks who are considering bankruptcy, and in many cases, they still have other options, like getting into a debt management plan like the one offered by our friends at Christian Credit Counselors. And you always want to explore those options first because while bankruptcy might seem like a quick way to end your debt problems, there’s nothing quick about it. It has a long-term impact on your credit score. That’s why bankruptcy should only be considered as the absolute last resort. It’s one of the worst things you can do for your score and credit report in general. The exact impact will vary depending on the individual and the credit scoring agency, so you can only estimate how much it might drop. It’s definitely counter-intuitive, but the higher your credit score before bankruptcy the more it will drop after. For example, let’s say your FICO score is 700, which is in the good range. After bankruptcy, expect it to drop by 200 points or more. But if your score was only 680, it might only drop around 150 points. But either way, the effect is huge. The long-term damage is also significant, but here again, the length of the damage depends on several factors, the most important one being the type of bankruptcy you file. This is where a lot of confusion comes in. You’ll hear the damage lasts seven years or sometimes 10 years. So which one is it? Chapter 7 bankruptcy stays on your credit report for 10 years, and then only the public record of the bankruptcy. All other references remain on your report for only seven years and they would include: A Chapter 13 bankruptcy any accounts included in a bankruptcy of either type, and any third-party collection debts, judgments and tax liens discharged through a bankruptcy of either type. Now, why the difference 7 years or 10 years? Because with a Chapter 7 bankruptcy, your debts are wiped out, or discharged. But with a Chapter 13, you agree to make at least partial payment on your accounts. So it would seem the court is trying to give you a break there. But it ll take time for your credit score to make any significant improvement. The black marks from a bankruptcy will be factored in for as long as they appear in your credit report. Still, the damage will gradually decrease over time. FICO estimates that it takes roughly 5 years for a person with a 680 credit score before bankruptcy, to get back to that score, and that’s only if they don’t get into more credit trouble along the way. Now, how should Christians view bankruptcy? As we said, it should only be considered as a last resort. But if it’s inevitable and if you’ve sought godly advice, you may have to file. But remember, Christians should never look at bankruptcy as a way to get out of paying what we owe. Look at Proverbs 3:27, which says, Do not withhold good from those to whom it is due, when it is in your power to do it. If your circumstances change and you can begin to repay your creditors, even after bankruptcy, you should do it. Companies write off bad debt, and for ease of bookkeeping, they might decline to receive your payment, but even then, imagine the powerful testimony you’d give by trying to pay a debt that’s been legally discharged. On today’s program, Rob also answers listener questions: ● Should you entertain a cash offer to sell your home? ● Can you give a rental property to an adult child or should you sell it to them? ● How should you tithe on investment gains? ● When is it wise to dip into savings funds to buy a car? Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to [email protected]. Also, visit our website at MoneyWise.org where you can connect with a MoneyWise Coach, join the MoneyWise Community, and even download the free MoneyWise app. To support this ministry financially, visit: https://www.oneplace.com/donate/1085/29

Previous Episode

Will You Ever Have Enough With Ron Blue

Did you ever notice that every time you have enough to make ends meet, someone moves the ends? Many people wonder, Will I ever have enough money? The answer for Christians should differ from that of the world. We’ll talk about that with Ron Blue today. Ron Blue is a financial advisor, a co-founder of Kingdom Advisors, and the author of Master Your Money: A Step-by-Step Plan for Experiencing Financial Contentment. The very first chapter of Master Your Money tackles the question, Will I ever have enough? Blue says after achieving a great deal of success in the corporate financial world, that question and others began to trouble him. He asked, Will I ever have enough? Or, If I do have enough now, will it be enough when I retire? And, by the way, how much is enough? He says everyone, rich and poor, asks these underlying questions more frequently than he or she would like to admit. These questions are constantly in our subconscious, and therefore we all deal with them somehow in our decision-making. Either we tend to hoard our resources, or we tend to live out the philosophy of "get all the gusto you canyou only go around once:' The Christian, additionally, is confronted with the question, What Is the appropriate Christian lifestyle? In the world’s most affluent society In all of history, very few individuals ever achieve a position of being able to live off the resources they’ve accumulated. The vast majority are dependent on the government, relatives, or charity, or they must continue to work in order to have enough income to meet their needs. Yet there are exceptions, and Blue says he has had the privilege of meeting and working with many people who are better equipped to handle their future and the uncertainty it may contain. One of the dramatic exceptions is that of a retired pastor who never earned more than $8,000 in one year. He met this humble man because he wanted to know if he had enough financial resources to live out the rest of his life. At the time of his question, he was eighty years old; he had been retired for twenty years; and his wife had just begun to require full-time nursing care. His question, therefore, was a justifiable one! As it turned out, this pastor had never borrowed money ever! He and his wife had tithed, saved and invested regularly, and as a result, they had over $1,660,000 worth of cash and stock holdings. Again, he’d never earned more than $8,000 per year! But how do the rest of us answer that question, Will I ever have enough? Blue says that’s a question each of us must decide in prayer with God, Who owns everything and gives us everything we have. But practicing four key principles of money management will certainly make it easier to have enough, and we find all of them in the parable of the talents in Matthew 25:14-30. They summarize what the Bible has to say about managing money. If you haven’t reread those passages lately, please do! KEY PRINCIPLES: 1. God owns it all. Very few Christians would argue with the principle that God owns it all, but we often fail to realize that every spending decision is a spiritual decision. 2. We’re in a growth process. God uses money to test us. Money and possessions are a very effective tool that God uses to help us grow. We should always ask, God, what do you want me to learn? instead of whining, God, why are you doing this to me? We should remember that not only is God in control but that He’s promised to provide for our needs. 3. The amount isn’t important. In the Parable of the Talents, the master uses the same words with the servant who was given five talents as he used with the servant given just two. You can conclude then, that the amount you have is unimportant, but how you handle what God has given you is very important. 4. Faith requires action. We see how the master dealt with the servant who hid the one talent in the ground. He was thrown into the outer darkness. Applied to us, we often know what God would have us do with His money, but we’re so bombarded by the things of the world that we become paralyzed and fail to act. So we must always pray for God’s calling as to how we handle money and then have the courage to follow through. On today’s program, Rob also answers listener questions: ● Are IRA assets protected against lawsuits? ● Are I-bonds a wise investment? ● Should you consolidate a first and second mortgage? ● When does it make sense to pull money out of a retirement account to cover expenses? ● Should you use investment funds to pay off your mortgage? Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to [email protected]. Also, visit our website at MoneyWise.org where you can connect with a MoneyWise Coach, join the MoneyWise Community, and even download the free MoneyWise app. To support this ministry financially, visit: https://www.oneplace.com/donate/1085/29

Next Episode

Living Paycheck To Paycheck

It’s not how much money you make, it’s how you manage it that makes all the difference in this world. We’ll discuss that today on MoneyWise. A recent survey by Lending Club showed that more than a third of Americans earning at least $250,000 a year are living paycheck to paycheck. That’s roughly five times the average salary in the U.S. It means those high earners are spending everything they earn and saving nothing and it really brings to mind Proverbs 21:20, Precious treasure and oil are in a wise man's dwelling, but a foolish man devours it. But mishandling money certainly isn’t limited to those in high-income brackets. The survey showed that: Sixty-four percent of Americans earning $50,000 to $100,000 a year live paycheck to paycheck. As do 46% of those making 100,000 to 150,000 per year. And 41% earning 150,000 to 200,000 live paycheck to paycheck along with 36% of those who make between 200,000 and 250,000. So the problem really has little to do with how much a person makes. It’s what our friend Ron Blue calls a consumptive lifestyle. That’s when you’ve given in to the world’s view of money and possessions, thinking they can make you happy. Sadly, many Christians fall into this trap, and it can harm our relationship with God. 1 John 2:16 warns, For all that is in the worldthe desires of the flesh and the desires of the eyes and pride in possessionsis not from the Father but is from the world. When you begin to live by the Bible’s financial principles, being productive, living on less than you earn, saving for emergencies, investing for when you can no longer work, and giving generously to God’s Kingdom, you begin to grasp the lesson of delayed gratification. Looking at just one of those principles saving. You can see what a blessing it is to have money on hand for emergencies so you don’t have to borrow. We all need a financial safety net, no matter how much money we make. Almost no one goes through their working years without losing a job, at least temporarily. Not having an emergency fund of 3 to 6 months’ living expenses is just asking for trouble. When you live that way, it’s inevitable that you’re going to run up debt. Cars break down, companies have layoffs. If you’re not prepared, you’ll have to borrow to meet your expenses. There’s no income limit for being in debt. Some very wealthy people are up to their chins in it. Now, a lot of folks will say they just don’t make enough to save anything, and that’s certainly true in some cases, but not for most people. You know, we also hear from people with very small incomes who wouldn’t dream of living paycheck to paycheck, and they do everything they can to live within their means but also to have an emergency fund. Two things will help you break the cycle of living paycheck-to-paycheck. First, you need to have a spending plan. It’s the only way you can get control of your finances and create a little margin with your discretionary income. Without a budget, it’s almost impossible to save anything. Download the free MoneyWise app to get started. It has three ways to set up your spending plan and you can choose the one that works best for you. You can also sign up at MoneyWise.org to work with one of our volunteer coaches. They can walk you through, step-by-step, on how to develop a spending plan. They’ve been where you are, and now they want to help others manage God’s resources wisely. And they’re really good at finding ways to cut your spending so you can meet your necessary expenses and still have money left over at the end of the month. You know who would have been a great MoneyWise coach if we’d been around back then? The Apostle Paul. In Philippians 4:11-13 he says, Not that I am speaking of being in need, for I have learned in whatever situation I am to be content. I know how to be brought low, and I know how to abound. In any and every circumstance, I have learned the secret of facing plenty and hunger, abundance and need. I can do all things through him who strengthens me. You see, the other way to break the cycle of living paycheck to paycheck is to learn to be content with God’s provision. Everything you have, even your ability to earn a living,comes from God. He’s promised to provide for your needs and He’s always faithful. So pray for a spirit of contentment. And as you do these things, be generous with your giving to God’s kingdom. It’ill break the power that money and possessions can have over you. On today’s program, Rob also answers listener questions: ● Is it best to keep your savings in a bank account? ● How can you minimize your tax burden as you begin drawing Social Security? ● If your adult child is a free spender, how can you help them without enabling them? ● What is the best way to manage life insurance proceeds after the passing of a spouse? Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to [email protected]. Also, visit our website at MoneyWise.org where you can connect wi...