Is It Quitting or Starting Over?

The aftermath of Hurricane Harvey weighs heavy on us. The storm is gone, but its impact drags on and on. We are feeling the sticker shock of the expense of “recovery” in our credit card bills, our bank accounts, savings and retirement accounts. Then, we are facing January 31, the deadline for property tax payments and then the April 15 income tax deadline looms.

Many of us are just holding on, hoping for our jobs to start back and our financial situation to turn around, and/or FEMA, the Small Business Association, or some benevolent something to provide us the funds necessary to recover. It is good to be hopeful and positive, but it is bad to be overly optimistic and unrealistic.

Most of us did not have flood insurance, so we are finding out just how expensive water can be when it invades your home or business.

I see many people AFTER they have exhausted their savings and 401-Ks, IRAs and company savings plans which you get to keep in bankruptcy. They have tried to hold on, fix their homes, pay existing bills and to live the life they had before Harvey. Sometimes, reality intrudes into our fantasies. The reality is that after $25,000 in total debt due within 3-5 years, a person who has to rebuild his home, suffer from a loss of pay due to time lost at work, either directly due to the storm, or because their job shut down and had difficulty starting back up after Harvey – the decrease in income coupled with the increase in debt will probably guarantee you will never recover enough to pay off the debt.

Chapter 13 bankruptcy is a debt reorganization. It is enforceable and the lenders cannot deny you that right. With the Chapter 13, you get to keep your exempt property, which is a long list of property in Texas. Part of that is your 401K, IRA, and other similar retirement savings in an unlimited amount. That is a big deal. Keep your retirement plan, pay off what of your debt you are able, reorganize your life and still be able to see college for your kids and retirement as a possibility.

Too many people that I am seeing have soldiered on, hoping against hope that they will get back to work, make up for the lost income and somehow, be able to pay off the debt incurred while trying to rebuild – mostly a pipe dream. (Did you ever wonder where that saying came from? Call me, I know. It’s an interesting story).

What does work, is trying to pay off what you can within what you make. We all set our “budgets” with what we make and spend most, if not all of it. Some have employer contributions to a savings plan, so they save. Those of us who do not, pay ourselves through deposits to our retirement plans, but when the budget gets tight, we forego our retirement plan first. Nearly every financial planner will tell you that you should pay yourself first, your church, second and then those things you cannot live without, house/rent, car payments (maybe), insurance, food and then and only then, your unsecured creditors (usually credit cards, payday loans, or signature loans). As time extends between payments, creditors get more and more apprehensive and then more aggressive in collections.

If and/or when you find yourself in that situation where you are juggling bills and paying them outside normal payment due dates, it is time to seek a solution that you can live with and that the creditors must live with. If the situation is that you do not realistically see things getting better within three (3) years, you should seek help planning a way to recover.

Thinking about tapping your retirement plan to pay your unsecured creditors? First and foremost, retirement plans are usually tax deferred, meaning no tax has been paid on that money and you will have to pay the tax when you take it out. I have a client who liquidated a retirement account and paid off all their bills, now they have 10’s of thousands of dollars in income tax liability which must be paid, and they have no money left to pay the tax man. The IRS is generally NOT dischargeable in bankruptcy.

You should first seek an alternative that will allow you to keep your retirement intact and simultaneously to resolve your debt crisis.

Sometimes, it does not make financial sense to pay off any of your debt. Chapter 7 liquidation may be your answer. If you qualify, you don’t repay any of your debt, except those which are secured by whatever you bought and need/want to keep, and get a fresh start, with your retirement plan still intact.

Don’t be disillusioned and don’t be bullied. Seek professional guidance before trying to pay off debt that your current income will not support.

Please don’t be that average retiree with less than $100,000 in savings at age 64. Sounds like a lot until you factor in how long you will probably live and how long that will last being used monthly to help supplement your social security. But that is exponentially better than being that retiree who used all his retirement to pay off debt and now has nothing for retirement other than Social Security. Usually that person again resorts to credit to make up the shortfall, thus continuing the cycle.

At least investigate the alternatives to paying your way into the poor house.

THIS ARTICLE IS FOR INFORMATION ONLY AND SHOULD NOT BE RELIED UPON AS LEGAL ADVICE. This does not constitute the establishment of an attorney client relationship between you and this lawyer. Most information is of a very general nature and cannot attempt to cover all fact situations. Nothing contained in this web site should be construed to constitute a recommendation of any product, service, or web site.

Weston Cotten is admitted to practice in all Texas Courts, all Federal District Courts in Texas, and the U. S. Tax Court, though not certified as to any legal specialization.
Please visit his website at, or call at 281-421-5774. Office located at 5223 Garth Road, Baytown 77521.

(Federally Required Notice) The Law Office of Weston Cotten, P.C. is a “debt-relief agency” as defined by federal bankruptcy law, we counsel people with debt problems and if needed, we proudly assist our clients in filing for debt relief under the Bankruptcy Code.