Olga Zlotnik

Your Home as an Investment

Your Home as an Investment
Navigating the Bankruptcy Tide:
Tips to Help You Stay Dry and Steer Clear of Bankruptcy

Olga Zlotnik

Bankruptcy Attorney

When people are being hounded by creditors and going through tough financial times, they come to me for help.  In listening to, advocating for, and helping my clients, I have had the privilege of learning some financial do’s and don’ts.   The truth is that financial trouble can happen to anyone.  For example, job loss, which often times means that there is no longer enough money to pay the bills, is one common reason why someone you know may be forced to file for bankruptcy.  The loss of a job usually is the type of financial hardship in life that is out of our control.  But, some financial issues can be avoided with help and guidance.  Here are some tips to help you steer clear of the bankruptcy tide:

Tip 1:  Don’t Funnel Too Much Money into Your House.

Just the other day, my good friend asked me whether she should put a huge down payment towards the purchase of a house.  Her reasoning was as follows: Because a home is a sound investment, it is best to put more cash down or pay as much as possible on the home to make the monthly house payment lower.  Luckily, it was early enough in the game for me to warn her against it.  While my friend’s perspective echoed the traditional way of thinking about home ownership, it was not correct.  In today’s economy, many people lose homes or properties to foreclosure and/or short sell their homes.  When you lose a property in this way, you also lose, in most cases, all the money you put into the property, including the down payment.  I feel very sad when a client tells me that he made $60,000.00 from the sale of one residence only to use all of the money towards the down payment on a new home, which is now upside down (or worth less than what is owed on the home loan) and being foreclosed on.  You may ask, “what if my home is paid off, then what?”  Well first, congratulations!  But even so, you should still be mindful of this tip because if a creditor sues you and wins (thereby becoming a “judgment creditor”), the creditor can then potentially put a lien against your real property, including the home in which you reside.  Despite the homestead protection afforded Arizona residents, a judgment creditor’s recorded lien can still cloud the title to your house when you go to sell it and present all sorts of issues for you in the future.

Tip 2: Don’t Sign a Personal Guarantee on a Business or Co-Sign on a Third Party’s Debt.

One reason why someone could end up in bankruptcy is because: (1) the person signed a personal guarantee on a business debt or co-signed on a third-party’s debt, (2) the creditor is now seeking payment from the person because the business or third-party defaulted on his/her obligation, and (3) the person can’t afford to pay the huge debt amount.  I know that many times, the signing of a guarantee on a business debt or co-signing on a third-party’s debt is unavoidable because the business/third-party needs the loan to move forward and the creditor will not give the business/third-party the loan without a personal guarantee or a co-signer.  But before you sign that guarantee or co-sign, first consider whether you will be able to pay on the obligation if the business or third-party defaults.  If the answer is “no, there is no way I can pay the debt if the business or third-party defaults,” then avoid signing the guarantee or co-signing at all costs.

Tip 3: Don’t Dip into Your Pension.

You probably have a pension of some kind, whether it be a 401k or an IRA or something else.  But what you may not know is that most pensions are protected or “exempt” from judgment creditors outside of bankruptcy.  Most pensions are also protected inside of bankruptcy.  This means that most creditors can’t take any of your pension to get paid.  When you take money out of your pension to put it into a business or an investment, you are taking what are called “exempt” assets and probably turning them into non-exempt assets.  This is because businesses or investments do not usually receive any protection from creditors (what you can protect from creditors inside and outside of bankruptcy really depends on the exemptions available to you.  For more information on which exemptions you are going to be using, see my guide titled “What’s Protected from Creditors – Inside & Outside of Bankruptcy” at www.olgazlotniklaw.com).  By moving pension money into your business or investment, you are taking an asset that probably would have been protected from creditors and probably turning it into something that creditors can probably now go after.  Also, if the business or investment fails, then the pension money you put in it will not be recoverable.  You may be saying, “but what if I can’t make ends meet and need to use money in my pension to live off of?”  Well, if you are considering taking money out of our pension to make ends meet, then I would suggest you talk to a bankruptcy attorney before you withdraw pension money (as well as a tax professional to learn about the tax ramifications of a withdrawal).  See, you may end up using funds from your pension to pay bills and then filing for bankruptcy anyway.  You could have saved the pension (or a significant portion of it) had you consulted with an attorney early in the game.  Trusted advice from a local bankruptcy attorney can help you avoid losing your pension unnecessarily.

Stay tuned for next month’s issue on additional tips to help keep you dry and out of bankruptcy.  For more information on bankruptcy, debt, and litigation-related issues, please visit www.olgazlotniklaw.com



Please note that the information provided is for informational purposes only and does not constitute, and should not be considered legal advice. Transmission of the information contained here and receipt by the reader is not intended to create and should not be construed as creating an attorney-client relationship. The only method of establishing an attorney–client relationship with me is by a retainer and fee agreement signed by me. The bankruptcy law services described herein are with respect to bankruptcy relief under the Bankruptcy Code. We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.