I bet this the first time you have ever heard the words ‘millionaire’ and ‘bankruptcy’ in the same sentence. I’ll break it down for you here. Most people believe that filing for bankruptcy is the hard bottom of a terrible financial fall. Others believe that it will ruin your credit forever. Both statements could not be further from the truth. Stay with me as I explain and provide sound reasoning for why I believe that you can become a millionaire after bankruptcy.
Getting into credit card debt is easy. You get a very expensive and shiny envelope offering you a pretty credit card making you think you’re desirable, they want you. Except, they do want you, but not because you’re an awesome person. Rather, the credit card companies want you to carry a balance so you’ll pay the average interest rate of 18% that the wealthy don’t pay when they pay off their balance every month. The chart below is an example for someone with $30,000.00 in credit card debt.
Let’s compare person A who is repaying his debts at $500.00 per month for just over nine years, to person B who files for bankruptcy at the beginning of Person A’s payment plan. Person B owes no money for the next nine years and instead of paying debt, he saves $500.00 per month as Person A is repaying his debts. After Person A is done repaying his debts, he will be nine years older with nothing to show for it other than zero debt, while person B will have amassed nearly $55,000.00 in savings with an improved credit score. So who is wiser now? This is a perfect example of the time value of money and employing the right strategy to get you there like a business owner. Would having that money in savings make a difference in your life?
Fear, stigma and beliefs drive our actions. It’s unfortunate that the fear of filing for bankruptcy stops many from learning about it’s powerful benefits before it’s too late. Living in fear and denial only leaves you uninformed and at the mercy of your creditors when they come to collect, sue, then levy your bank accounts, garnish wages and lien your real estate. In the meantime, you’ve been told that bankruptcy will ruin your life forever and you believe it without even calling a bankruptcy lawyer.
So, where do you turn when you need advice? Who you listen to will determine the outcome. Family and friends certainly have good intentions, but do they know the truth? I remember what my grandmother taught me about making decisions. What we do is called, “making soup” of the situation by gathering all the information on a given subject, then sit on it for a day or two before deciding. That way we make a well-informed decision rather than just bouncing around in circles like a dryer sheet will all the misinformed, but well intended advice from non-lawyers. If knowledge is power, don’t you want to be empowered with knowledge that could save you time and money?
Stop right there! If everything you knew about money and bankruptcy were wrong, when would you want to know? I bet you would want to know before you spend your retirement funds to pay debts you could have otherwise discharged in a bankruptcy case. You see, retirement funds are 100% protected from creditors in bankruptcy. That means that no one, but you, can touch that money.
If you withdraw money from your 401(k) account before age 59 1/2, you will need to pay a 10% early withdrawal penalty, in addition to income tax, on the distribution. For someone in the 24% tax bracket, a $5,000 early 401(k) withdrawal will cost $1,700 in taxes and penalties. Add to these costs, the hidden time value of that money, had you left it there until age 65. So, consider your retirement account for your older, wiser and retired self. It’s not likely you’ll be able to recover and save those funds back up once they’re gone. If you let that happen, you could be making the worst financial decision of your life today and you could be forced to live in social security alone when you have not saved enough for those golden years.