Bankruptcy 301

Smart approaches to managing high-income financial distress

 

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Thoughtful financial advice from sharp minds on bankruptcy filing and bankruptcy alternatives

Read the author's introduction to Bankruptcy 301: Smart approaches to managing high-income financial distress

High-income individuals and families in financial distress face unique issues in determining the best solution to their situation. Income level correlates strongly with complexity – the more you earn, the more likely your financial life is extremely complex. As a result, assessing whether you are at the point of needing bankruptcy protection is not as simple as one might think. And figuring out how you might manage your financial situation independently, without resorting to bankruptcy, is difficult when bankruptcy attorneys (in the business of selling bankruptcy, and wholly untrained in finance) are the original source for much of the readily available information.

In bankruptcy proceedings, “high-income” means anyone with gross annual income appreciably greater than their state’s median income – regardless of the magnitude of their non-discretionary fixed expenses like educational loans or medical bills. Therefore, a family with less than $100,000 gross income may be deemed “high-income”, and thus subject to a filing process involving more scrutiny, many months more time, and a less advantageous outcome than they imagined based on the conventionally flippant portrayal of bankruptcy. Knowing in advance the details of the process as it applies specifically to their case would in many cases have affected their decision whether and/or when to file.

As a high-income person, if you do end up in bankruptcy, it’s typically a Chapter 13 case, which looks vastly different than the Chapter 7 cases with which attorneys and the general public are most familiar. Yet, most general advice on “bankruptcy” is actually specific to Chapter 7 cases – without making this clear – and Chapter 13 is treated merely as an afterthought, if at all. This book offers an inversion of the most common approach in personal finance texts, and presents a pointed focus on Chapter 13 bankruptcy, while explaining for comparative purposes how Chapter 7 cases differ.

Indeed, based on my own journey through extreme financial distress, I found that an astounding portion of the publicly-available information about both bankruptcy and its alternatives is at best misleading and sometimes patently false. This book is the product of painfully-won observations about managing a personal financial disaster, supplemented by extensive research. Among the uncommon insights I’ve endeavored to share are:

1. Among high-income households, personal bankruptcy is far more common than the public realizes, and almost always attributable to exogenous circumstances rather than financial incompetence. In Chapter I, I offer persuasive arguments, supported by hard facts, to wield against those who insist on negative judgment.
2. There are important reasons to avoid bankruptcy, especially if you are a “high earner”, but credit score preservation is not one of the reasons. The true costs and benefits of bankruptcy protection (presented in Chapters II and III) are nearly impossible to discern when all potential advisors have an economic stake in your decision.
3. If financial distress is extreme enough such that court protection is the only option, then it’s crucial to immediately recognize that inevitability and start planning for bankruptcy. There are many aspects of a bankruptcy filing that can be planned and optimized, to avoid incurring any more financial damage than necessary. As detailed in Chapter IV, waiting too long with one’s “head in the sand” is an all-too-common and costly mistake.
4. Some heavily indebted people can achieve cash flow improvements similar to those provided by bankruptcy without actually filing for bankruptcy. However, as explained in Chapter VIII, federal bankruptcy protection may well offer the best “deal” around in debt settlement.
5. Optimizing the outcome of extreme financial distress requires creativity, rigorous analysis, and continuous, dynamic re-evaluation. Chapter V illustrates the prudence of spending perhaps a full year thinking about and exploring the bankruptcy option, before ultimately making a calculated and highly personal decision. You might, for example, plan for a Chapter 13, find that you must file a Chapter 11, and then ultimately file a Chapter 7 when personal circumstances shift. As illustrated by an extended narrative example (Chapter I) and case studies (Chapter IX), small changes in the facts of a situation can have a big impact on determining the optimal path.

Dealing with an all-consuming personal financial disaster involves certain “stages of grief” particular to the sophisticated business mind: denial that one can’t financially engineer oneself out of the situation, frustration that there is nobody to turn to for advice on how to avoid a looming bankruptcy, alienation from judgmental friends and family, shock that despite extreme negative cash flow one’s household income would be considered “high”, and exasperation at the daftness and disingenuousness of the attorneys who so completely control one’s future yet lack the aptitude and experience to manage a complex case. In the business world, we are intimately familiar with the frequency and legitimately unsolicited causes of corporate financial distress and the relationship between risk and reward – yet somehow most people have a mental block about translating that knowledge to the world of personal finance. For higher-income households, where the stakes are greater and the fall more dramatic, this disconnect is all the more frustrating.

My sincere hope is that sharing the insights in this book will enable others to more successfully manage their own financial distress, optimize their bankruptcy filings (if applicable) and make it through the process without any more stress and emotional trauma than necessary.

Please feel free to submit comments about Bankruptcy 301 to be posted on this site. The author can be contacted directly at info@bankruptcy301.com.

The information contained in this book is not legal advice, and the authors are not attorneys. Always consult a personal bankruptcy attorney prior to deciding whether to file.