There is a right way and a wrong way to go broke.
According to Meaghan Tuohey-Kay, a Hawthorne-based attorney who specializes in bankruptcy law, the wrong way is very common. It usually begins with a divorce, a job loss, or medical bills. Then you let debt pile up until there is no way you could ever pay it back. Maybe you take out payday loans to make payments on credit card bills, but that only makes things worse. Before long, creditors are calling, repo men come for your car, and the bank forecloses on your house. Your credit is ruined, you have no home, and without a car, no way to get to work.
The right way is to simply declare bankruptcy.
Bankruptcy normally allows people to keep their home and their car, silence the creditors, and rebuild their lives once they are in over their heads; at the cost of a temporary hit to your credit rating.
Tuohey-Kay had been scheduled to give a free seminar Tuesday, December 3, at the New Jersey State Bar Association in New Brunswick. The lecture had to be canceled as this issue of U.S. 1 was going to print. For updates on bar association seminars call 800-343-3529 or visit www.njsba.com.
There are many myths surrounding bankruptcy and money management, and Tuohey-Kay wants to clear them up. “Bankruptcy isn’t necessarily the most horrible thing to happen to somebody, and it really does provide a fresh start,” she says. “In the end, almost everybody feels better. Everybody universally says, ‘That wasn’t as bad as I thought.”
If anyone was born to be a bankruptcy lawyer, it was Tuohey-Kay. She grew up in Hawthorne, where her father was a federal bankruptcy judge and her mother was a teacher. Tuohey-Kay went to Fairfield University in Connecticut and Widner in Harrisburg, Pennsylvania, for law school and learned the family business. Tuohey-Kay began practicing bankruptcy law about 15 years ago, after her father retired.
“It seemed like family destiny,” she says.
Tuohey-Kay says she finds it rewarding to help people who have fallen on hard times through no fault of their own. The financial bungler who racks up debts on jet skis and fancy vacations is almost unheard of, she says. “That’s a stereotype you hear, but usually people are pretty smart about their lifestyles.”
Tuohey-Kay will give advice about what to do if you can’t pay the bills:
Go to a lawyer as soon as possible once you realize you are in over your head. By the time your car is repossessed, there is nothing a lawyer can do.
Don’t listen to any TV advertisements. Almost every financial product advertised on TV for debtors, from payday loans to “free” credit reports to credit counseling, is a bad deal. Credit counseling services, even some nonprofit organizations, often promise help to people who are in debt. In exchange for a fee, they offer to negotiate with debtors to write off debts. However, Tuohey-Kay doesn’t see their services as being very useful, and they can cost up to $200 a month.
“What they are doing for you, which is working out payments with credit card companies, is usually something that you could do for yourself. You can call the credit card company and work out different terms.” Also, the effects of having the company write off debt will dog your credit rating, which will make loans more costly in the future. “There’s no magic bullet. Unfortunately the only thing that is going to fix your credit report is time,” Tuohey-Kay says.
Another common TV ripoff is the “free” credit report, which actually costs you money. The only real free credit report is at www.annualcreditreport.gov. It is a service operated by the government that allows you to check your credit rating once a year for free, no strings attached.
Understand how interest works. Tuohey-Kay audibly gasps in horror when the subject of payday loans is raised. A lender might loan someone $100 and ask that they be paid back $115 on their next payday. It sounds tempting but that’s an annual interest rate of nearly 400 percent, and if the borrower rolls over the debt for another pay period it just gets worse. It’s not uncommon for payday loans to have interest rates of 1,200 percent or more (compared to a traditional mortgage with an APR of about 4.5 percent.)
It’s no wonder that Tuohey-Kay says, “I would never advise anyone for any reason to take out one of those payday loans.”
Don’t obsess over your credit score. “By the time you’re in my office, your credit score is the last thing you need to worry about,” Tuohey-Kay says. If you get back on track financially, your credit rating will fix itself after a number of years. This fact has implications about which bills you should pay, if you can’t pay them all.
Pay your car loans and mortgage first. Since you are trying to protect your home and livelihood, these are the most important bills to pay if you can’t pay them all. However, people tend to pay credit card companies before these more important obligations. “Credit card companies are the most aggressive about collections,” she says. “Your mortgage company isn’t going to call you four times a day. People tend to pay the loudest creditor.” Tuohey-Kay says it is usually not a good idea to take out home equity loans or tap into your 401k to pay credit card debt. Also, a bankruptcy attorney will usually give a free consultation and help you figure out what to do.
Remember that there is light at the end of the tunnel. Tuohey-Kay says many people emerge from bankruptcy the better for it. Bankruptcies do stay on your credit report for 10 years, but they don’t prevent you from getting loans They usually mean you have to pay a higher interest rate. However, they can be good for the debtor in the long run. “Bankruptcy is the bottom,” she says. “Until you file bankruptcy, you are just digging the hole deeper and deeper. When you declare bankruptcy, you stop digging and you start to climb out.”