Trying To Avoid Bankruptcy? 5 Big Mistakes You Could Be Making

Contact Us Now

I have been handling bankruptcy cases for over 20 years in Southern Maryland.  In all those years I have never had someone come into a consult and say “I just got back from Disney and now I want to file for bankruptcy.”  No one wants to file for bankruptcy.  People will try just about anything to avoid it.  Most of the time they try one last thing that hurts them and really had very little or no chance of solving their problems.  Most of the time these last ditch efforts just delay the inevitable and result in people just throwing good money after bad.   All too often these clients at some point end up telling me “I should have come to you a year before I did that.”

Trying to avoid bankruptcy is understandable. After all we all have been told to never give up.  But financially it can be a big mistake.  You need to set aside your emotions and make a cold financial decision.  Kind of like when you have an old car that you breaks down just a month after you spent money on that big repair.  It can be hard to do. but sometimes you have to cut your loses and move on.  If you about to try one of the things on this list please come see me for a free consultation first. At the very least you will at least have a better understanding of the bankruptcy that you are trying so hard to avoid.  This way you can make an informed decision about how far you want go before you cut your losses and move on.

Here is a list of some of the common last-ditch things that people come to wish they hadn’t tried:

Paying A For-Profit Debt Settlement Company

Using a for-profit debt settlement company is risky and could cause you tax problems.   Basically what these companies do is collect money from you while your credit tanks.  When they have enough money they go to one of your creditors and see if they will take a partial lump sum payment as payment in full.  Of course they first collect their fee.  Needless to say some creditors may not be willing to wait their turn.  All too often someone working with one of these companies comes to us wondering why one of their creditors has filed suit against them.  Some creditors even refuse to work with some of these companies.  So you may not be able to reach a settlement with all your creditors. Even if you succeed you will end up receiving a 1099 from your creditors for the forgiven debt.  This forgiven debt counts as income that you have to report on your tax return.  Phantom income can cause you to end up owing taxes.  You may have just gone from a credit card problem to a tax problem.  For more on these companies see the Consumer Financial Protection Bureau’s article Should I Use A Debt Settlement Service.

Making a 401K or TSP Withdrawal

I’ve got all this debt and a bunch of money in a retirement account that I am not using.  This seems like a logical solution.  I’ll just pull the money out and get caught up on my bills or even pay some off. Yet it so often just delays the problem.  If the withdrawal only gets you caught up on your bills you are likely to fall behind in a few months.  If you do stay caught up, the next time you file your taxes you may end up with a new problem.  First you have to count the money that you take out as income.  On top of that you are probably looking at a penalty for taking the money out early.  I don’t know how these retirement plans calculate what you should withhold for taxes when you make this withdrawal, but it never seems to be enough.   When I see a client with a large tax bill I can almost always count on the fact that they made a retirement withdrawal that year.  Then there are the long-term consequences of having spent your retirement income.  This is money that most likely you could have kept if you had filed for bankruptcy.

Increasing Your Paycheck Withholding Exemptions

This approach also just delays the inevitable and leaves you with a tax bill.   You can’t keep up with your credit card payments so you increase the exemptions on your W-4 so you have more money in your paycheck to pay your bills.  If you have been getting a large refund maybe this isn’t such a bad idea.  Well at least it is a better idea than getting a large refund and using it to get caught up on your bills.   One problem is that most people find that even with the extra money they can only afford to make the minimum payments on their credit cards.  This ends up not really putting a dent in what they owe.  The other problem is that a year later, after not making a dent in their debt, they end up with a huge debt to the IRS.  The one thing worse than having debt is having IRS debt.

Voluntarily Surrendering A Car

Can’t afford your car payment and are facing repossession?  Maybe you bought a lemon? Surrendering the car to the lender may seem like a good idea.  Just keep in mind that unless they agree to accept this as payment in full you still have a problem.  After you give the car back the lender is going to auction the car and still come after you when the car isn’t auctioned for the amount that is owed on the car. Eventually they probably will be suing you for this deficiency, and looking to garnish your paycheck.   And even if they agree to forgive the debt you may end up with a tax problem.  Remember that phantom income issue?

Using Your Tax Refund To Get Caught Up On Your Credit Cards

After robbing Peter to pay Paul you fall behind on your payments.  But you have a light at the end of the tunnel.  You are about to get your tax refund. Once you get that refund you can get caught up. However unless that refund it big enough that you can actually pay off some of your debt, this is only going to buy you a few months. Much like over adjusting the withholdings on your paycheck this isn’t really going to solve your problems.  Most likely in a few months you will be back to falling behind on those payments.  And that next tax refund may be too far away.

If you are about to try one of these tactics please come in for a free consultation so we can review all your options.  If you have already tried one of these tactics don’t worry, I won’t give you a hard time.  I may joke that no one ever wants to come see me, but I understand why people want to try everything possible to avoid having to file for bankruptcy.  But when you say “I should have come to see you before I ……”  I probably won’t argue with you.   About the only consolation I can give at that point is that you will know for sure that you have done everything possible to avoid bankruptcy.

What do I do next?

You can either learn more about your legal issue right here on our website, or contact us right now for a free consultation.

Don’t wait to discover what you need to know about your legal issue. We wrote many Free Legal Guides so you can get answers to your legal questions today.

Read that guide now. You can learn a lot about your legal problem in about 15 minutes. Then call us for your free consultation so we can discuss the particular facts of your case.

If you have a legal issue things you do now will affect your case later. You should always know your options and be informed before you make major decisions about your legal case.

Then contact us for a free consultation about your case. Every legal case is different. We will need to discuss the particular facts of your specific case before we can give you the best advice.

Our consultations for cases are always free with no obligation. We can do them in person, on Zoom, or over the phone. We will listen to the unique facts of your case and explain the law as it applies to you personally.

We will discuss your options so you can make informed, intelligent decisions about your case. Then you know the next steps to take.

Contact us today. We will make it convenient for you to get answers.

Schedule Your Consultation Today!

  • This field is for validation purposes and should be left unchanged.
Over 2000+ Satisfied Clients

Client Testimonial

I was involved in a motorcycle collision in 2013, it required a year of physical therapy, and 38 days in the hospital. Tucker Clagett worked with my wife and I while managing all legal affairs for us. I had to only focus on my recover while he and his staff handled all other aspects of the claim process. Professional and fair in all aspects.


Next >
Michael G. Google+
Over 2000+ Satisfied Clients

Client Testimonial

This law firm was absolutely the best! All the stuff was so friendly and the lawyer that took care of my case was amazing. Tucker Clagett and his paralegals were great. This is a really caring law firm and I would recommend anyone who has to deal with workers comp to this lawyer or anyone to this law firm.


Next >
Jenny C. Facebook

Why Choose Southern Maryland Law?

We are your community law firm

We have been a vibrant part of the Southern Maryland community for over 55 years. And we believe in community service. Our community has been very good to us, and we try to repay that kindness. We believe giving back to our community is an important part of our job.

One of the oldest law firms here

We are the second oldest law firm in Southern Maryland, serving clients for over 55 years. Thousands of your neighbors have trusted us to be their legal counsel. That’s because we get results, and we treat our clients right. We would never have lasted this long if we did not.

Large enough, yet small enough

We are large enough to provide full service, but small enough to focus on you. Some of the larger firms that opened satellite offices in Waldorf have dozens of attorneys, and even more support staff to handle their clients. At Southern Maryland Law you will be a name – not a number.

Not your grandfather's lawyer

While our firm has been around a long time, we are not what you think lawyers are like. We pride ourselves on being a little more approachable, a little more casual, and a little more likeable than the average lawyer. We are real people with real solutions to your real problems.

Like Free Legal Advice?

Our Monthly newsletter will keep you up to date with the latest legal news and how it will impact you, your business and your family.