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I've been reading through a few of the messages here and thought that it might be helpful to someone if I shared my story. Sharing this story is also therapeutic for me as outside of my father and one friend, I've not shared it and even with the friend, I did not share all of the details.

The reason for my reticence has a lot to do with the normal sort of embarrassment anyone feels in declaring bankruptcy and going through a foreclosure. In my case, it was doubly embarrassing as I am a self employed financial professional and am fairly well known in my local community. I advise people how to avoid this sort of thing and was in the unfortunate situation of being unable to avoid this myself.

My main error was failing to live below my means and failing to plan properly. This left little room when financial exigencies hit. Budgeting and planning are particularly important when one is self employed. The cash flow in any business will ebb and flow at times and having a relatively low amount of fixed commitments allows one to weather the storm in those periods of reduced cash flow. My business is seasonal with heavy cash flow during the first six months of the year and severely reduced cash flow during the summer and during the last quarter of the year. Because my fixed commitments were too high relative to my income, I was unable to save enough cash to tide me over until the next busy season, so I'd routinely obtain advances from several credit cards I had to cover expenses. At one point I was able to obtain a second mortgage to consolidate the credit cards. This just turned out to be a stop-gap measure as I was soon back to using them.

My wife had stopped working after the birth of our second child and about a year after we had purchased a $ 250,000 home at the peak of the market in 1989. Purchasing a house at that time in that price range was one of the biggest errors I made. In addition, my wife leaving work at that point was also an error. I had also committed to an expensive office rent which was another error. And although I love my children and would not change a thing with respect to them, the lack of family planning was yet another error that impacted my family's finances. My problem was that I was spending in anticipation that my income would rise.

At various points, there was a great amount of disagreement between my wife and I. I could see where things were going financially and I began to insist that she get a full time job. One of my greatest frustrations was seeing the “wreck” coming, but not be able to get my wife to see it and act. She insisted that she needed to stay at home with the children while I was trying to get her to understand that there was going to be no home to stay in unless something changed with respect to the financial situation and the quickest thing to do to change our situation would be for her to get a job. We were in the midst of these discussions when she became pregnant with our third child. One of the biggest mistakes married folks make is not talking about money and financial goals before getting married. I recommend anyone getting married to ensure that you and your spouse are in one accord with respect to financial matters. Get yourselves educated. Many people get divorced over this very issue and it certainly caused on strain on my own marriage. Notwithstanding this, the root cause of our problem was not living below our means. Had we done that, we would have likely not been in the situation to begin with.

The birth of my third child pretty killed the idea of my wife being able to generate any income by getting a job. During 1997, I lost a large client (paid me about $ 100,000 in fees annually). The fees from this client were allowing me to keep the financial ship afloat. Even before I lost this client, there were difficulties paying the bills. After the loss of this income stream, things became much worst. To make matters worst, my wife became pregnant again with our fourth child. When I filed Chapter 7 in the fall of 1997, our situation was such that we owed $ 50,000 in credit card debt, $ 216,000 in mortgages on a house that was probably worth $ 180,000 in the condition it was in, $ 30,000 in income tax arrears and about $ 26,000 in equipment leases. I had about $ 5,000 in cash and a variable annuity of $ 27,000 which was unaccessible to me until age 62. My life and that of my family's was in shambles. I had come to the end of my rope and was just tired of the calls from creditors and the financial stress I was under. That stress was taking a toll on my family and my health.

The worst thing about this sort of situation is the emotional anguish, guilt and sense of failure one goes through. I also had a feeling of hopelessness because all I could see was years of paying this stuff off. Since I am in my forties, I could see myself not being free of this debt albatross until my mid fifties while not being able to save much for retirement nor my children's college education. That prospect was frightening. This thing had now become a matter of my families' survival and I was determined to ensure our survival notwithstanding the black marks on my credit. My credit was in poor shape at that point anyway. I wanted the quickest and most direct route to reduce my fixed commitments dramatically so I could begin anew. I was interested in building the savings and investments I should have had all along so as to avoid a situation where I accumulated little emergency, retirement and children's college education funds. Chapter 7 bankruptcy provided the quickest and most direct route to eliminate the debt so I could began working on those objectives. Now, I'd be the last person to encourage anyone to behave irresponsibly and I'd agree that the preferable course of action is for one to handle his or her affairs so as to avoid seeking bankruptcy relief, but I'll depart from others that may suggest that paying creditors is a moral obligation. The first moral obligation one has is to one's family. You do what you have to do to protect them or yourself. The important thing is surviving and using the lesson from the situation to never again willingly live above your means. You never err in living below your means as the worst thing that can happen to you is that you might save too much money.

Once I set aside some of the emotional baggage (some of that still lingers, but I was able to set it aside so as to do some clear thinking about some financial planning), I was determined to use Chapter 7 to the fullest extent possible to get my fixed commitments eliminated or reduced. Again, I am a financial professional, so I began using my training and background to address my own financial situation For example, I had wisely incorporated my business about two years before filing for chapter 7. Since I had entered into certain business commitments as a sole proprietor prior to incorporating, I was able to deal with these using the Chapter 7 while leaving my incorporated business entirely unaffected. This allowed me to break my expensive office lease that I had four years remaining on without the landlord being able to come after me. My attorney was also able work out a settlement with the equipment leases based on the fact that the fair market value of the collateral securing the leases was substantially less than the notes outstanding. Since these leases were secured, the lessors wanted either the equipment back or the money. We settled with them for the fair market value of the equipment which was substantially less than the lease obligation. One of them allowed me to pay them over a six month period. Between terminating my office lease (I moved to a cheaper office location) and settling the equipment leases, I was able to save about $ 2,000.00 in monthly cash outlays.

After the discharge (early 1998), I struggled with what I was going to do with my house as I stopped making mortgage payments after filing for BK. My family was much larger than it was when we originally got it and we definitely needed the space (it was a four bedroom colonial). After filing the BK, although cash flow was improving, it was insufficient for us to be comfortably making the payments on both mortgages. After going back and forth, my wife and I initially decided to save it and I borrowed $ 30,000 from my father so I could do a workout with the mortgage companies. The first mortgage holder was willing to reduce my interest rate and do a term extension if I was able to get the second mortgage holder to subordinate (i.e. allow the first mortgage lender to record a new first mortgage with revised terms while maintaining a second position on the property). The second mortgage holder refused to do this unless I settled with them by paying them $ 15,000 (about half of what I owed them). I was only willing to give them $ 5,000 considering the fact that they would get nothing in foreclosure (since we had gotten discharged in the Chapter 7, they would not be able to come after me for any deficiency).

It was at this point that I really began agonizing on the house. My two older kids had grown up in the neighborhood and I preferred not to move them. We had been there for ten years and liked the area. I could have agreed to give the second mortgage holder what they wanted and still worked out something with the first mortgage company, but, once setting aside the emotional aspects, I began thinking about which was more risky; letting $ 30,000 go and recommitting to an obligation that I should have never gotten involved with in the first place or keeping that $ 30,000 in the bank and finding a house to rent for substantially less than the mortgage payment I would have to commit to. The financial downside on keeping the home was committing to an obligation that would not allow me begin a savings program while the financial downside to letting it go would be another black mark on my credit in addition to the BK. I did some checking with a couple of mortgage lenders and was told that I'd have to wait about two to three years after the foreclosure to be able to get a mortgage with a reasonable downpayment and interest rate. I opted to let the house go rather than commit to a life where I might be continuing to live above my means. I took some of the money my father lent me and paid off our car note and some of the tax arrears and begin looking for a rental. We were very fortunate to find a home to rent in a less expensive neighborhood for about $ 800.00 less that what the mortgage payment would have cost me had I opted to keep the house.

My main thing with both of these actions was to get to a situation where I could begin saving money for retirement and my children's college educations and to eliminate the stress of working to pay everyone else. The only way I could accomplish this was to not continue with the errors that I had made previously by using chapter 7 and the foreclosure to create a situation where I would be living substantially below my means. I am now saving/investing the equivalent of a mortgage payment monthly (about $ 2,000 monthly). This rate of savings has been assisted somewhat by the fact that I've been able to replace some of the cash flow I lost from the large client I had. In addition, as I eliminated certain obligations (i.e. car note, lease payments and etc.), I continued making the same payments into mutual funds. Although my older two children will likely not be able to go away to go college unless they win scholarships(they're 12 and 10 years old), my younger two ( 3 and 1 years old) will be able to go away. My retirement is also more secure. One can't account for unforeseen circumstances such as illness and etc., but even those situations are easier to deal with to the extent that one has some savings.

Outside of the issue of being able to save money, there's also the issue of how one spends mental energies. When an individual is living beyond their means, much of their waking moments are spent about worrying about their financial situation. This is stressful and can have an effect on mental and physical health. It detracts from family relations. It detracts from your creativity, especially when one begins considering all the things he or she could be thinking about or doing if it weren't for the financial problems. Unfortunately, the bad choices we make often create these sorts of scenarios. Fortunately, I made some difficult, but good choices with respect to how to extricate myself from the financial mess I was in.

My thinking now is that the best way to improve one's credit rating is to eliminate as much as possible the need for it. Having cash eliminates the need for credit. Outside of a house or a auto, I plan to use credit sparingly, if at all. For the first time in a long time, I've been able to structure my affairs where that is now possible. Since the BK and foreclosure, I have been able to obtain credit cards from Capital One and Providian. These companies seem to specialize in extending credit to people with bad credit histories. Recently, I was considering the purchase of a used automobile and Capital One, which has an auto financing subsidiary, agreed to extend an auto loan at approximately 12% APR, not the cheapest rate, but not bad. I decided to pass on this for now and keep my current vehicle (which has 137,000 miles on it, so I'm going to need one at some point, but I'd rather do it later than sooner, but it's nice to know that I can get financing). I plan on getting buying another home within the next couple of years. I checked with a couple of mortgage companies here recently and since my BK discharge was over two year ago, it's not a barrier to obtaining a mortgage. The foreclosure is the main problem since it occurred a little over a year ago. I'll just wait it out until the credit clears. My rent payment is extremely reasonable, so I see need no need to rush into anything. The longer I wait, the more financially secure we'll be anyway before parting with money for downpayment and closing costs. As it stands currently, we pretty much have the downpayment banked.

There is life after bankruptcy and none of us is exempt from making the sorts of errors that result in this action being necessary. I, for one, see my BK and foreclosure as tools that have provided me a second chance to do things over again because I've used them to extract the maximum practical benefit for my family. I intend to keep those benefits by using the wisdom provided from the financial adversity I faced.

God bless all.
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