Brian here. I hope you are having a Happy New Year. Changes are certainly coming to 2021, and not all of them are good. As we start to recover from the Covid-19 pandemic, which may still be many months away, we will have to reckon with the economic damage that has been done. Many people have had prolonged periods of unemployment, and the moratoriums on collection have thrown many people's finances in disarray.
On the one side, the prolonged unemployment, or underemployment has really hurt everyone affected, and people have to prioritize what gets paid and what doesn't get paid. Like the bird's nest, the loudest chick typically gets fed, so people have been pretty good about making their car payments, but with moratoriums on student loans and landlord evictions, a lot of debt has been set aside, in the hopes that something politically will happen to fix the situation.
While it is certainly possible that some relief might come, planning your finances around Congressional productivity is not a wise course of action.
Of course, it is also important to be realistic. Sadly, these days it is not unusual for me to find out during initial client interviews that people have opted to skip their rent payment and instead pay their credit card bills. They aren't doing so with the hopes of paying off the credit cards, but most people simply want to create a small amount of available credit so that they can charge on their card in emergencies.
Unfortunately, this is a very poor financial strategy. With respect to prioritizing your bills, you should always pay for the necessities of life first, especially, food and necessary medication. Once the basic necessities are covered, you need to determine your financial options moving forward.
Bankruptcy is a potential option for debt relief, but it should be done with careful planning. Part of Bankruptcy planning is making sure that 1) you do not run afoul of the Bankruptcy Code and creditor's rights, and 2) that your post-Bankruptcy life will be feasible.
Let's take the second issue first. You need to create a budget, by listing out your income and your basic living expenses (excluding the debts that would be eliminated in a Bankruptcy). For your income, try to stick to an amount that you can count on each month, so don't rely on overtime, bonuses, or other income that is sporadic. For your expenses, you need to do your best to try and ascertain some expenses that oftentimes are hard to quantify. Food expenses are more than just groceries. You need to include everything from Starbucks runs to vending machines.
People will, more often than not, underestimate their food budget. Vehicle maintenance is another item that we often overlook. Your car needs more than just oil changes, and oftentimes we forget about the large maintenance items that happen less often, but usually require heavier expenditures, such as replacing tires or major maintenance cycles.
The point of the budget is to get to place where you know that you can survive, simply based upon your regular income, and then you are in a prime position to eliminate the outstanding dischargeable debt in a Bankruptcy. Your income should meet or exceed your normal monthly household expenses (not including any debt that will be eliminated by the Bankruptcy). If you cannot create a feasible budget, you need to increase your income or reduce your expenses, and until that happens Bankruptcy may not provide you with complete relief.
Back to the first point in your Bankruptcy planning, you need to avoid paying relatives back for money that you owe them, transferring assets out of your name, or maxing out your available credit. In addition, you need to avoid paying on debts that you plan to eliminate in the Bankruptcy. Instead, you need to focus on debts that will survive the Bankruptcy, such as car payments.
You also need to be careful if you are renting and not current on your rent. Many landlords are not actively engaged in eviction activity right now, but that will not last forever. Many people have not paid their rent in many months and getting caught up may not be feasible. If that is the case, you need to understand the interplay between eviction actions and Bankruptcy.
First, you will be able to discharge your back rent in a Bankruptcy, but you will not be able to discharge rent that is due after the Bankruptcy was filed. In addition, while the automatic stay on collection activity is one of the main benefits of filing for Bankruptcy, you need to be careful if the landlord has already obtained a court order authorizing you to be removed from the property. In that case, depending on your jurisdiction, the Bankruptcy case may not stop a pending eviction, so the Bankruptcy case should be filed quite early in the process.
As a practical matter, you also have to be cautious about the rental process, as many potential landlords will not rent to someone who is in an active Bankruptcy. That means that for the 3-4 month process of the Ch. 7 or the 3-5 year process of the Ch. 13. you might find it difficult to find a landlord willing to lease to you. We recommend trying to find an individual landlord (rather than a company) who may be willing to look past your current situation and rent to you.
Your best option is to find a new rental either before or after the Bankruptcy is complete.
Because of this you should not take it for granted that the Bankruptcy will resolve all of your landlord/tenant problems, and you should coordinate this process with your Bankruptcy attorney to make sure that you will be able to keep a roof over your head.
Bankruptcy is one part of resolving your current financial problems, but as we start to repair the damage from the Covid-19 crisis, we need plan a holistic approach to your finances, and when you prioritize your resources you need to be smart about were you apply every precious dollar.