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Options to Filing Bankruptcy

Can't Pay the Bills? There are two obvious things you can do when faced with this situation: (1) reduce expenses, and (2) increase income. Lets take a look at each of these options.

1. Reduce expenses. Seemingly insignificant amounts can add up to a considerable expense over time. Consider cutting small indulgences and luxuries such as dining out, daily lattes, and the like. Think about your driving habits and see if you can drive less or consolidate trips. Postpone unnecessary purchases. Take a look at where your money goes every month and make an assessment of where you might find savings. Are you paying monthly for a storage unit, for example? Ask yourself how much your stuff is really worth? Does it make sense to hold on to it?

What about expenses that are fixed or that offer very little flexibility in how you spend? You have to pay rent, but is moving to a cheaper place a practical option? You might get a bit of savings on utility bills by adjusting your use of electricity, water, and gas, but ultimately you can't just shiver in the dark. It might be possible to cut the cell phone bill, cable TV, or the internet, unless these are on long term contracts. Food bills may offer some room for savings but you still need to eat. A busy schedule can make you dependent on quick, pre-made meals that are usually more costly than home cooking. Grocery bills might be trimmed by cutting out fresh vegetables or other high quality foods but it may also mean higher doctor bills later on. So, if you've already taken some of these measures and you still feel like you're underwater, what should you do? Let's look at the second option.

2. Increase income. Can you take in a roommate to share the rent? How about increasing the hours you work, or taking a second job? What about borrowing money? This is a temporary solution and it comes at a cost - sometimes, a substantial cost. Credit cards, cash advances, and short term loans, like payday loans, carry very high rates of interest and can be extremely burdensome. Even if the interest and fees are reasonable, a loan still has to be repaid. If you can't afford your expenses now, how will you afford the same expenses plus the loan repayment? You might borrow against your house, if you own a house and have equity in it. The loan, however, will still have to be repaid from your income. You might sell your belongings, but only for a while until you run out of stuff to sell.

In addition to reducing expenses and increasing income there are some less obvious options. Some of these options are advertised, because they can make money for the person paying for the ads. These include things like debt consolidation, and reverse mortgages (if you're old enough). The cost for these services will come out of your pocket, one way or another. Lets take a closer look.

Debt consolidation. A company, for a fee (usually a percent of the money they handle) tries to get your credit card creditors to agree to accept less than the full amount of the debt you owe, usually waiving some interest. The consolidator collects a monthly payment from you, and sends the money on to the creditors. Some consolidators will take their fee up front; some may take it at the back end. Creditors are not obligated to accept the partial payments, and if any one of them files to sue you, the debt consolidator can't help. California law requires that debt consolidators not take their fees "up front." However, there is little nationwide regulation of debt consolidators, and some place their interests ahead of those of their clients.

Refinancing a home. If you have equity in your home, you might be able to extract some of it to use for paying outstanding bills or for living expenses by refinancing the home. In the past, refinancing a higher interest mortgage with a new mortgage with lower interest rates might have made good sense even when you incurred several thousand dollars in fees for the new mortgage. But if you have a newer mortgage that is already below 5%, it may be less attractive. Also, if you are already having credit problems, your lower credit score might mean that lenders won't approve a refinance. Finally, your home equity (up to $72,900 in Alaska) is exempt from creditors' claims, but if you remove that equity to pay bills, the protection is gone. You've effectively converted exempt money (the home equity that you get to keep even if you're sued or you file bankruptcy) into cash that is not exempt. If you use it to pay credit card bills, and the credit cards get charged up again, you might end up in bankruptcy anyway, and you'll be without the home equity that you could have saved.

Reverse mortgage. Federal law allows persons at least 62 years old to sell their home, while retaining a "life estate." Thus, they can remain in possession of their home, continuing to pay the taxes and insurance, and maintenance, while having extracted the equity to meet their current needs. The money they receive can be paid out as a lump sum, or as a monthly payment. When they die, the house passes not to their heirs but to the company which purchased it. Thus, an elderly person can use the money they saved up in their house equity while still being able to live in the house. The "loan" won't need to be paid back; it will come out of the estate left to the kids. You need to own the home outright, or have such a low mortgage that the proceeds of the reverse mortgage will pay it off. The costs of the transaction are high, and will be paid from the home equity (reducing the benefits that the "seller" can get).


At the Law Offices of H. Frank Cahill, in Anchorage, we represent clients throughout Alaska, including, Wasilla, Dillingham, Palmer, Valley, Kenai, Fairbanks, Kodiak, Seward, Soldotna, Homer, Juneau, Wrangell, Petersburg, Bethel, Nome and Sitka; in Fairbanks-Northstar Borough, North Slope Borough, Northwest Arctic Borough and Bristol Bay Borough; and across the Kenai Peninsula. 

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.