A blog about debt, credit and bankruptcy

June 14, 2019 By Jen Lee Leave a Comment

The Next Financial Crisis: Parent Student Loans

I often write about trends that I am seeing with clients or things I read online and this week is no different. The number of times that parents taking out student loans for their children has come up in the past week was pretty staggering. My standard advice is to never take a student loan out for anyone else, including your children, unless you have the assets already to pay that debt off. I am seeing people in dire financial straits who are trying to figure out how to take on MORE debt that they can’t possibly afford.

There are several reasons that taking on student loans for anyone other than yourself is a bad idea:

Most people looking to take on student loans for their kids are over 40 years old. By the time you are 40, you should have about 3 times your annual salary in your 401(k) for retirement. So, if you make $100,000 a year, you should have at least $300,000 in retirement savings. If you are already behind on retirement, there is no way you should be taking on debt that does not improve your own ability to earn or retire.
You owe the money, whether or not your child graduates or ever makes a good living. Most of the parent loans do not even have the student as a borrower or co-borrower, so they have no liability on the debt. I can’t tell you how many people I talk to who owe $75,000 or more and the adult child is now living at home because they can’t find a job or are under-employed. So, not only is the parent trying to pay off significant student loans, but also supporting the adult child.
If a federal student loan goes into default, your Social Security can be garnished up to 15%. Social Security already is not a lot of money, depending on where you live, but taking 15% off the top really hurts.
One of the main reasons that the cost of education is so high is because parents have been willing to sign their lives away for these loans. When the schools come up with the family’s expected financial contribution, they make parents feel like they have to do anything and everything to come up with that huge number that most families can’t afford. We are seeing the effects of that with people in their 50s, 60s, 70s, and 80s who are now defaulting on these loans and the financial stress is crushing at a time when life should be enjoyed.

Please think long and hard before taking on debt for others, even when those others are your children. I know that sounds really harsh, but there are so many options out there that do not involve this type of financial stress and I encourage you to talk to your kids about their goals and realistic options.

This is just a basic overview and is not legal advice specific to your situation. If you have questions about your rights when it comes to debt and credit, you should speak with an attorney in your area for legal advice. If you live in California or North Dakota and would like to speak with Jen Lee Law regarding your situation, please schedule an appointment.

June 9, 2019 By Jen Lee Leave a Comment

Do You Read Your Paystubs?? You Should!

I hear this all the time from people who are not even clients or in a position where they may need to talk to a debt and credit attorney, but it is also prevalent among those needing help. Over and over again, people tell me that they don’t even look at their paystubs and that it is direct deposit to their bank accounts.

Or, even worse, they don’t know how to get copies of their paystubs because the money just goes into their account each week (or 2 weeks, monthly, however often they get paid).

There are several reasons you should look at your paystub and know how to get them:

Deductions for benefits, ancillary benefits (like supplemental life insurance), or other company programs are often wrong. Miscalculations happen all the time and you should really be paying attention at the beginning of the year, or whenever your new benefits go into effect, to how much is being deducted from your check. I also often ask what a deduction is for and people have no idea why their employer is deducting for certain things.
Severe under-withholding or over-withholding on taxes, so that you get to the end of the year and you either have a huge balance due or a huge refund. There are easy tools out there to figure out how much you should be withholding from your pay to make sure that you are on track. In fact, the IRS has a great withholding calculator that will tell you what your exemptions need to be set at to not owe taxes. Please note that you have to use your paystubs to use the calculator!
Gross income is important to know. Gross income is what you get paid before any deductions are taken out. Almost everyone can tell me how much money is deposited into their account on payday, but very few know how much they make from a total income standpoint. If we are looking at a potential bankruptcy strategy, gross income is used to begin the calculations.
Finally, looking at your paystubs is one of the first steps to getting finances organized. We have a tendency to not look at things that stress us out (like a list of our debt, our credit score if it is low, and…our paystubs). It’s hard to create a full financial plan and budget if you don’t know what those numbers look like.

If you don’t know how to read your paystub or see deductions that you don’t understand, which can be common because each company often uses different abbreviations for things, talk to your human resources department about what is being deducted and how to change your withholdings, if necessary.

May 31, 2019 By Jen Lee Leave a Comment

Bankruptcy and Divorce: What Else Can Go Wrong?

I did a presentation a few months ago to a great group of Certified Divorce Financial Analysts and it was called “Bankruptcy and Divorce: What Else Can Go Wrong?” I’m bringing the topic over to our blog because a number of recent cases have involved ex-spouses, soon-to-be ex-spouses, and spouses behaving badly when it comes to finances.

General statistics show that financial stress and money are leading causes of divorce and relationship issues. In California, the community property rules also can cause a lot of problems because not only are your assets shared, but so are your debts. This can really complicate things when trying to figure out how to separate and keep your own credit intact.

For ex-spouses, problems sometimes come up with who was supposed to pay the debt, who actually did pay it, and who is trying to possibly file for bankruptcy. Also, depending on how your marriage settlement agreement, some debts your ex-spouse owes you may be discharged in bankruptcy. It’s very important that you have an experienced family law attorney help you with negotiating and drafting the settlement agreement.

With soon-to-be ex-spouses, there is sometimes cooperation regarding how the debt is resolved. Couples working together to file bankruptcy to clear the debt can often avoid problems down the road when they eventually become ex-spouses still worrying about if the other one is going to pay on that credit card or not.

Finally, spouses behaving badly when it comes to finances can sometimes be somewhat intentional, but it can also be how that spouse has always handled money issues and now it’s becoming the breaking point. I cannot emphasize enough knowing the full financial picture for the family so you can make the best decisions going forward, whether that’s with your spouse or on a different path.

All of the situations we run across when talking about bankruptcy and divorce are different. Each client has a different goal, different assets, different debts, so it’s really important to find out what your rights and options are early in the process. Even better, find out before you even get married.

May 10, 2019 By Jen Lee Leave a Comment

Freezing Accounts

Why Does It Matter Where I Bank?

Often, clients come in for a Debt Strategy Session and we are looking at different options when the question comes up about what bank their bank accounts are at (checking and/or savings accounts). This is a really important question because if bankruptcy is one of the options we are talking about, Wells Fargo accounts can cause a big problem.

Why?

Wells Fargo will freeze your account balance when you file for Chapter 7. There is some debate about whether the total balances have to be over $5,000 or not for them to freeze, but I would rather not take a chance with my client’s rent money.

This is also an important question if you are a signer on someone else’s account. You may not have much money in your accounts, but if you are the signer on your mom’s account with $50,000 in it, mom is not going to be thrilled when her account is frozen and/or the funds are transferred to the Chapter 7 trustee. There is also the issue of proving that the funds are not yours, which put all of the funds at risk in the bankruptcy.

What Can I Do?

There are a couple of strategies that we use when we find out a client has a Wells Fargo bank account and we are looking at bankruptcy options.

First, change banks. Go find a nice bank that doesn’t have a habit of freezing its customers accounts.

Second, if you really want to keep that Wells Fargo account, it is an option to take the funds out of the account before filing, disclose that you have the funds either in cash or a cashier’s check, and then deposit them again after the filing of the bankruptcy. This is a rather convoluted option, but we have had clients who insist that they keep the Wells Fargo account. The important part of this is disclosing exactly what we did so that it is all clear that nothing is being hidden.

Third, you can take the risk that they won’t freeze your account if the combined balances are less than $5,000. But, be sure that your balances are really less than $5,000. This choice bit a debtor one time because he forgot that he was on his aunt’s account and she had a lot of money with Wells Fargo. Accounts were frozen and it was a mess.

In conclusion, choose your friends and your banks wisely. Make sure you get good advice on what you can expect for all of the various options you are considering.

April 26, 2019 By Jen Lee Leave a Comment

Wouldn’t It Be a Great Idea if I Added My Son/Daughter/Dog to the Title of My House??

There are a couple variations of this question, but if often comes up when we are talking to clients. We’ll run through a few ways this comes up and why adding people to deeds is probably not a good idea.

First example: A client comes in and has assets that she wants to protect from creditors, for example, her house. The house has a lot of equity and she does not want liens against the house. She asks, “Can’t I just transfer the title of my house to my son?”

There are a few problems with this idea. From an estate planning and tax standpoint (and I’m not an estate planning attorney, so consult an expert regarding your own situation), but there are potentially significant tax consequences to transferring property this way. From a creditor standpoint, it may be considered fraud if you transfer assets knowing that there are claims against you. That can be a complicated analysis, and depending on which statute is being used, can go back as far as 6 or 7 years to see if you transferred property to avoid creditors being able to collect.

Second example: Same situation as above with a house that the client is trying to protect from creditors, but now asks, “Can I SELL the house to my son for $1?”

Lots of issues here, especially with selling property for less than fair market value and selling to a family member. From a creditor standpoint, it is still a transfer and may be considered fraud if a creditor is able to show that it was done to hinder collections by creditors.

Third example: A client comes in and does not really have any assets, mostly unsecured credit card debt, and looks like a Chapter 7 bankruptcy would be the best option for a fresh start. Towards the end of the conversation, he says, “Oh, by the way, my parents added me to the deed of their house a few years ago for estate planning. The house is worth $1.5 million and they own it free and clear. That won’t be a problem, right?”

Wrong. In a Chapter 7, the trustee’s job is to find assets that are available to sell to pay your creditors. You now have an interest in a $1.5 million house that the trustee would be interested in selling, or at least making a deal to get your creditors paid through some sort of settlement with you and/or your parents. The case has gone from a simple Chapter 7 to a complicated analysis and some risk if you decide to move forward.

The best practice for all of these situations is to do proper estate planning, don’t transfer deeds to family members without getting advice on the consequences of that transfer, and don’t transfer assets to try to get away from creditors. Do proper planning before you need it, as that will be the most efficient (and least expensive!) option.

The Next Financial Crisis: Parent Student Loans

Do You Read Your Paystubs?? You Should!

Bankruptcy and Divorce: What Else Can Go Wrong?

Freezing Accounts

Wouldn’t It Be a Great Idea if I Added My Son/Daughter/Dog to the Title of My House??

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