Personal Finance: A Quickstudy Laminated Reference Guide

6 Pages·2021·0.706 MB·English

by  Lita Epstein

WORLD’S #1 QUICK REFERENCE GUIDE
Personal
BUSINESS FINANCE
BUDGET CREDIT SAVINGS INSURANCE BANKRUPTCY RECOVERY
Budgeting
– In the savings part of your budget, determine how quickly you can build your
Why a Budget Is Important
emergency fund and stay on budget
• A budget is a roadmap to your future • Emergency funds will enable you to handle unexpected expenses without busting
• Without a budget you have no idea how to get a handle on where your money is going your budget
• A budget is not written in stone—think of it as a tool to help you meet your
Budgeting Together
financial goals
• Budgets can be adjusted and likely will be after you set up your first one Do you have a spouse or partner with whom you share expenses?
– Some things you decide to do may work, and you continue following those choices • If no, you can continue budget planning on your own
– Some things you decide to cut may actually be needed, and you need to adjust • If yes, you should be sure you include your partner in the process of building a budget.
budget decisions to stay on target You must both agree to the budget, if you are going to have any chance of success
– Some things you might not have thought of including in the initial budget, so you
need to adjust your budget plan Tackle High-Interest Debt First
– Some things you might decide to add after initially preparing the budget, so review
your budget and plan adjustments that can be made to include the new items Now that you have a budget, it’s time to plan how to pay down debt, so you’ll have
more discretionary spending
How to Get Started • Make a list of all credit cards and loans, and include on the list for each account:
– Your total debt
• Add up all your income – Your interest rate
– Determine what you would like to save for known goals (pay yourself first) – Your required payment
◊ Emergency fund ◊ College fund for children • Rank your list by the highest interest rate first, second highest next, etc.
◊ Vacation fund ◊ Retirement • Plan to pay extra on the debt with the highest interest rate; e.g., if you have a credit
◊ Down payment on a house or car card at 18% interest, plan to pay that off first
– Determine how much you have left to spend each month • Plan your budget so you can pay more than the amount due on the credit card with
• Review your spending for the past three months the highest interest rate and make minimum payments on the rest
• Categorize your spending into five buckets • Once your credit with the highest interest rate is paid off, continue to pay the amount
1. Must continue paying, such as you paid on your highest credit account plus the minimum you were paying on
a. Rent or mortgage d. Insurance your second-highest credit account
b. Food e. Loan payments or credit cards EX: If you were paying $100 to your highest credit account, and the minimum
c. Utilities f. Other items unique to you payment on your second-highest credit account was $35, start paying $135 on your
2. Prefer to pay (things you don’t want to give up) second-highest credit account to get that paid off even faster
a. Entertainment
• Keep building this payoff snowball, and you will make a dent in your debt and still
b. Subscriptions
stay on budget. It never hurts to pay more toward a credit card if you get unexpected
c. Memberships
income, such as a bonus or commission
3. Neutral
a. Expenses you don’t feel strongly about Look for Ways to Cut Spending
b. Expenses you could give up to finalize budget
4. Things you can give up • Check your state’s rules for low-income assistance programs, such as low-income
a. Expenses that you can live without utility programs, to see if you qualify and can lower some required payments
b. Expenses that are not required to meet bills • Review your cell phone costs and consider a prepaid cell phone if that will lower
5. Expenses that were not planned and not needed your required monthly costs
• After categorizing your expenses, calculate your average monthly spending • Review your subscriptions, and see if any of them can be cut
– An excellent online tool for doing this is Savology (https://savology.com/ • Reevaluate the way you spend. Don’t order things online when you first see some-
budget-calculator) thing you want. Take a day or a week to think about how much you need the item.
You may be able to reduce your impulse buying
• Is your average monthly spending higher than how much you have determined
• Look for things with low or no ticket costs to reduce your entertainment spending
you have to spend each month?
– If no, your spending levels are sustainable, and you should use this information • Dine out less frequently and in less expensive places
to build a monthly budget
– If yes, you need to figure out what you can cut to stay within budget Removing Temptation
◊ Start by cutting out all 4’s and 5’s • Block email from unknown sources
· Does that now put you within your budget constraints? – Could reduce temptation to spend on unplanned items
· If yes, prepare a budget without the expenses you decide can be cut – Makes it easier to keep your focus on getting control of spending
· If no, you’ll need to take a closer look at 2s and 3s to see what you can cut to • Block telemarketers’ calls (same benefits as blocking email)
meet your budget goals
· You may need to revise your savings plans until you can get some debt paid off Recognizing Budget Danger Signs
◊ Give yourself an allowance—be sure to have a miscellaneous line item in your
budget to give you flexibility each month • Now that you have worked so hard to develop a budget and get your financial
◊ As you decrease expenses on things such as interest, you can give yourself a future on the right track, set ground rules with your partner on how budget
raise in your allowance or increase your savings goals changes should be made
• If you find you are not able to continue your savings plans as expected because of
Build Emergency Funds unexpected expenses, review those unexpected expenses and determine if you need
a budget revision or need to get better control on unplanned purchases
• The first type of savings you plan should be for emergency funds
• If you decide you want to add a monthly expense, such as a membership or
– Most planners will tell you to plan to save for at least three months (in case of a subscription, talk it over with your partner and review how this change will impact
job loss). To calculate the amount, consider the amount of cash that would be lost your budget
if you lose your job. Add back in the amount of cash you can use to offset the job • Avoid fighting about the problem. Instead, work together to determine a plan you
loss, such as unemployment insurance or loans from family both can live with and continue on your path to financial security
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Improving Credit Score
Why Care about Your Credit Score? – Check for the correct social security number
– Check your employment history and be sure all information is correct
• Key numbers that determine your financial buying power
– The reason you need to verify your information is that sometimes the credit
• Low scores can cost you hundreds of thousands of dollars in interest over the years
bureaus put wrong information in your file—information that belongs to someone
• If too low, you may even be refused a loan
else. If the other person is a bad credit risk and you have excellent credit
• High scores can get you the best interest rates
history, your score could be negatively affected and hurt your chances of
• Credit scores can impact your insurance coverage
• Low scores may even impact your job choices getting credit in the future
• Check the section of negatives on your report and be sure they accurately reflect
What Is a Credit Score? the information. These negatives can impact your score in a big way
• This can include:
• Mathematical analysis based on how you manage your credit
– Derogatory public records
• Credit bureaus monitor your use of credit
• Using these data, credit bureaus predict your likelihood of repaying debt ◊ Bankruptcy ◊ Foreclosure
• Lenders use the score to determine how much risk they take to loan you money ◊ Tax lien ◊ Garnishment
• High credit scores mean better loan terms and better chances of getting a loan ◊ Judgement
• Most consumers have a score between 580 and 799 – Collections
◊ Anytime you don’t pay your bills on Make certain that the date filed, amount
Credit Score Percentage of Americans time, your account can be turned of money involved, status, and date last
reported are all accurate
800–850 20% over to a third party for collections
Most negative information stays on your
740–799 25% · Check out the collection agency credit report for seven years. If it’s past
670–739 21% and note the original creditor to seven years and still on your report,
be sure you recognize the debt. If question the credit bureau
580–669 18% it’s not yours, question it with the
300–579 16% credit bureau
Data Source: The Ascent report: Average Credit Score in America. · Check the account number and name on the account to be sure it’s your account
Data current as of 2019. Published March 2020 · Check date assigned and date last reported
· Check the amount to be collected and balance still owed
• How the score impacts your ability to get a good mortgage rate ◊ If paid off, check date collection closed and be sure it is removed from your
credit report seven years after closure
Home Purchase Center: Loan amount $300,000, National average
– Late payments and other account issues
◊ As with collections, verify information and be sure it’s your debt. If it’s not yours,
30-year fixed
question it with the credit bureau
FICO® Score APR Monthly Payment ◊ How late will be reported usually as 30, 60, or 90+ days late. Also might say
760–850 2.645% $1,208 collections, charge-off, or bankruptcy
700–759 2.867% $1,243 ◊ These stay as a negative on your credit score for seven years, but usually after
three years the impact on the score is minimized
680–699 3.044% $1,272
– Credit inquiries
660–679 3.258% $1,307
◊ Credit inquiries stay on your account for three years
640–659 3.688% $1,379 ◊ The impact on your credit score decreases each year
620–639 4.234% $1,473 ◊ Be sure you are familiar with all credit inquiries. This can be your first alert
that someone may be trying to use your credit fraudulently
Mortgage rates as of June 24, 2021 Source: Informa Research Services
– Review all your listed accounts for accuracy
Note: In the chart above a person with a score of 760 will pay $265 less ◊ Account type ◊ Payment terms
per month for a 30-year mortgage than a person with a score of 639
◊ Company ◊ Date of last activity
• You can use this Loan Savings Calculator (https://www.myfico.com/credit- ◊ Date opened ◊ Date closed
education/calculators/loan-savings-calculator/) to determine payment levels based ◊ Account number
on your credit score for mortgages and car loans
• There are two major types of credit scores used by lenders: FICO and VantageScore Correcting Credit Report Errors
• Score types are similar, but use slightly different formulas to score individuals—but
• It’s critical to correct any errors you find on your credit report. These are the most
the formulas are a carefully kept secret
common:
• FICO still tends to be the preferred credit scoring service, but VantageScore is
– Inaccurate name
gaining in popularity
– Account that is not yours
Getting to Know Credit Reporting Agencies – Account that is listed more than once
– Spouse’s account on your report, and you are not a cosigner
• There are three major credit bureaus that monitor your credit usage – Payment history not accurate
1. Equifax – Incorrect balance (be sure to check the reporting date. It could be that a payment
2. Experian
was not yet received when the bank reported on the current debt)
3. TransUnion – Past due account
• You can get a free annual credit report from each of the agencies at https://www.
• Any time you ask for a correction you have the right to ask for a copy of the
annualcreditreport.com/index.action
corrected report for free
– Be sure to go back to the main free annual credit report to order each agency’s report
• When you send the letter requesting a correction, the creditor is expected to respond
to your claim with the results of its investigation in 30 to 45 business days. Send any
How Your Credit History Is Analyzed by the Credit Bureaus
documentation you have with the request to help prove your case
Credit types 10% of score
New credit 10% of score Exploring Credit Score Myths
Credit history 15% of score Myth 1: Closing Accounts Can Help Your Score
Amounts owed 30% of score • If you close older accounts, it will make it look like your credit history is shorter,
Payment history 35% of score and your score will drop
Note: 65% of score depends on your paying on time and not carrying too much debt • When you close accounts, your available credit also drops and can lower your score
EX: You have three credit cards with credit lines of $3000 each for a total of $9000
• Generally, credit bureaus like to see you using between 10% and 30% of your credit limits
available credit. If you close one of these cards your available credit will drop to
EX: If your total credit availability on credit cards is $20,000, then the best credit $6000. Suppose you have $1500 on a credit card you are paying off. With $9000
scores go to people using 10% or less or $2000 of the $20,000 credit available available credit you are using just 17% of available credit, but $6000 available
credit you would be using will go up to 25%. That will lower your credit score
Understanding Your Credit Report
Myth 2: Lowering Your Credit Limits Can Help Your Score
• Check your identifying information
– If you find more than one name, verify that all names are ones you’ve used. Report • As explained with closing accounts, a lower credit limit will lower your available
any names that are not yours credit and increase your percentage of credit usage
– If you find addresses you did not live at, report incorrect addresses • A higher percentage of credit usage will lower your score
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Myth 3: Checking Your Credit Report Can Lower Your Score – If the seal is broken on the credit card machine, don’t use it
• There are two types of credit checks—hard and soft • Phishing—emails are sent that appear to be from your financial institution. Always
• When a lender checks your score to determine whether to offer credit, it is called a go to the website directly, and don’t click on an email link
hard credit check. Your score will be affected negatively • Changing your address—thieves can change your address with your credit card
• When you check your credit score using a free service like Credit Karma (https:// companies
www.creditkarma.com) or Credit Sesame (https://www.creditsesame.com/ – Always check your account directly online to be sure this hasn’t happened
free-credit-score/), that is a soft credit check and does not affect your credit score • Stealing your purse or wallet—be sure to alert all your financial institutions as soon
Myth 4: Putting a Statement in Your Credit File as possible
Can Improve Your Score Secure Your Information
• Shred personal information before putting it in the garbage
• The law requires that credit bureaus allow you to put a statement on file to indicate
• Safeguard your social security number. Don’t allow any financial institution to use
the debt is in dispute
your social security number as part of your account number
• These letters are not coded and do not impact your credit score
• Secure your online accounts with strong passwords
Maintaining Your Credit Score – GCF Global offers some good tips (https://edu.gcfglobal.org/en/internetsafety/
creating-strong-passwords/1/)
• Pay your bills on time. Late payments can have a very negative effect on your score,
especially when your score is high Possible Signs of Theft
• Set up automatic payments to avoid being late • Your bills don’t arrive when expected. A thief could have changed your address.
• Check your credit card balances regularly online to be sure you don’t miss a bill and Check your account online for unknown charges. Call your bank
also to identify any fraudulent charges as soon as possible • You start to receive bills or account statements for an account you did not open
• If your credit card due date falls at a bad time of the month for you, talk with your • You are denied credit, even though you have a good credit history. Follow the steps
credit card company to change billing dates. Most will accommodate to get your free annual credit report (see p. 2)
• You get a call or letter about a purchase you didn’t make
Protecting Your Credit Identity
If You Suspect Theft
Reduce Exposure by Understanding How Thieves • Place a fraud alert on your credit reports TransUnion—800-680-7289
Get Hold of Your Personal Data • Close all accounts. Banks will help you close Equifax—800-525-6285
• Dumpster diving—thieves rummage through trash to look for bills and other personal accounts and open new ones if fraud is suspected Experian—888-397-3742
information. Shred this information before putting it in the trash • File a police report
• Skimming—collection devices are sometimes attached to credit card machines, • Report it to the Federal Trade Commission
such as at the gas station. (https://www.ftc.gov/faq/consumer-protection/report-identity-theft)
Savings
Paying Yourself First • As you accomplish the goals you set, you will enjoy the benefits of savings
• Your successes will make you more and more dependent on building savings and
Starting to Save Is a Mindset—You Need to Pay Yourself First
less likely to build up your credit cards
• After developing your budget, you should have determined how much you can save
• This will help you shift from a spending to a savings mindset
• To avoid blowing through that savings, set aside the amount you want to save as
soon as you get your paycheck Saving for Long-Range Goals
– Best way—set up a savings account and have the money automatically transferred
to the savings account on payday Determine Your Long-Range Goals
– If allowed, you can even set up your automatic draft so most goes into checking Retirement Savings: Workplace Plans
and a self-determined amount goes into savings • Pensions
– What you don’t see in your check, you can’t spend – Few companies provide traditional pension plans today
– If all the automatic options are not available, then set up a note in your calendar – If your company offers one, be sure to participate
to make the transfer on payday • 401(k)s or 403(b)s
– Both are retirement savings plans that both you and your employer can contribute to
By Paying Yourself First:
– 401(k)s are common to for-profit companies
• You make it harder to dip into savings
– 403(b)s are common to not-for-profit companies
• Hopefully, this will enable you to stop and think before spending on something
– Governmental entities also provide other types of retirement plans, but they are
not planned
similar in savings opportunities
• If you must spend on something not planned: – In many companies, the employer will match your contribution up to a certain amount
– Stop and think—is this really necessary, or can it wait? – Always try to contribute enough to get the full company match. If you don’t get
– Don’t spend the money the same day; sleep on it the match, it’s like giving away free money
– If you can do it when you first start, add 1% per year each time you get a raise
Saving for Short-Term Goals
EX: If you get a 3% raise, take 2% for yourself and add 1% to your 401(k) plan. You’ll
• Most important short-term goal is an emergency fund still get a raise, and long-term you will have the money you need for retirement
– Determine your cash needs for three months. This should include:
• IRAs (Individual Retirement Arrangements)
◊ Rent or mortgage
– Traditional IRA
◊ Insurance
◊ If you don’t have a retirement plan at work, you can deduct the amount you put
◊ Car payment
into an IRA on your taxes
◊ Credit card payments
◊ Money is not taxed as it grows over the years
◊ Food
◊ Money is only taxed as you take it out, at the tax rate you pay in retirement,
◊ Any other payments that you must make each month without fail or face late which is often lower than the tax rate you pay when working
payments or, even worse, bankruptcy or foreclosure ◊ In 2021, you can contribute up to $6000 ($7000 if age 50 or older)
– Multiply the total you calculate for must-spend needs by three ◊ You must start taking out your money at age 72 (70 ½ if you reached that age
◊ Once you build this fund, you should have enough cash to survive most before 2019)
emergencies – Roth IRA
◊ If you are in an area where layoffs are common, you may want to increase the ◊ Contributions are not tax-deductible, but you don’t need to pay taxes when you
multiplier by the number of months that is common in your area to find a job take the money out
if laid off ◊ Money grows tax-free
◊ If an opportunity comes up for which you did not budget, you can consider ◊ There is no age at which you must start taking the money out
using this fund, but be sure to restore it as soon as possible Savings to Buy a Home or Car
– Make plans to establish this amount of money in an emergency fund before • Determine how much you need
setting other savings goals • Put the money aside in a separate account
• Determine other spending goals you would like to accomplish in the next 12 months • Think twice before you use it for something else
• Start saving for those goals as soon as the emergency fund is in place Savings for Your Children’s Education
• Consider starting a 529 plan
Saving for Medium-Term Goals
– Tax-advantaged investment plan you can use to save for your child’s education
• Determine spending goals you would like to accomplish in the next two years – Also known as Qualified Tuition Programs
• After meeting your short-term goals, you can start saving for these medium-term goals – Savings grow free of federal income tax
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– Withdrawals are tax-free when used for qualified education expenses ◊ Risk is that if you don’t replace funds, you may not have enough for
– Each state determines its own rules for how plans are structured retirement
– Often if you use the plan in your state there are additional tax benefits, but Other Large Savings Goals
most states allow out-of-state participants • Your imagination is the only limit on large savings goals
– You can compare state plans here: https://www.collegesavings.org/ • Be sure to balance these goals with other major savings needs
529-search-and-comparison/
Prioritize the Savings
• Different types of 529 plans
– Prepaid tuition plans • Determine which is the most important Plan all goals with your spouse
◊ 12 states offer prepaid tuition plans • If all are important and you want to start or partner, so you are both on
◊ You can prepurchase future tuition at a predetermined rate today saving immediately, determine how much you the same page
◊ You can prepurchase one to four years of tuition costs for a young child, can comfortably set aside each month once
and the plan pays for tuition at the rates when the child reaches college age you have your emergency fund in place
Caution: Depending on rules, you may not be able to use the funds for • You may find you need to split your savings between long-term and medium-
out-of-state schools. Shop carefully term goals
– College savings plans • The key is to put together a savings plan and stick to it
◊ Rather than being based on tuition, these plans are based on the market
• If you find you can’t stick to it, develop a new plan that is more workable for
performance of the underlying investments
you, even if it means you have to lengthen the amount of time to succeed in
◊ Most states offer a variety of age-based investment options—the options
each of your goals
are more conservative as the child nears college age
• The only bad thing you can do when planning savings is to give up trying
◊ Plans also offer a money market, FDIC-/National Credit Union Administration–
insured option, which offers more protection of the investment principal
Use Multiple Savings Accounts
• Roth IRA alternative
– Funds can be drawn from a Roth IRA to pay educational expenses without penalty • You should plan for at least three savings accounts
– Expenses must be for one’s self, a spouse, a child, or a grandchild 1. Short-term goals
– Funds must be used for qualified education expenses: 2. Medium-term goals
◊ Tuition, fees, books, supplies
3. Long-term goals
◊ Equipment required for enrollment or attendance
• It’s important to have separate accounts, so you need to make a conscious
◊ Room and board, as long as the student is enrolled at least half-time in a
decision to spend money from one type of goal rather than another
qualified higher-education institution
• Separate accounts give you more time to think about your priorities
◊ May be a good idea if you are not certain your child will go to a qualified
higher-education institution • The more roadblocks you put in the way of using your savings for an unplanned
◊ If they don’t go you have more for retirement purpose, the better chance you will have of successfully meeting those goals
Insurance
Is Insurance Worth Budgeting For? – Healthcare marketplace—the government marketplace provides numerous
options, depending upon the state in which you live. You can also get premium
• Insurance helps to minimize financial surprises
support
• However, be certain to look for ways to minimize the price of insurance
– Association or union—your professional association or union provides
• Only take the insurance you need to minimize risks. Don’t over insure and pay
health insurance options
for more than you reasonably need
– Privately—you can buy it directly through an insurance agent
Life Insurance • Types of health policies
– Health maintenance organizations (HMOs)
• Why buy life insurance?
◊ Least freedom to choose healthcare providers—you will not get reimbursed
– Protect your family financially if one member dies
if you choose to see a doctor outside the network
– Provide peace of mind that your family will have the money they need, even
◊ Less paperwork than other plans
if you die
◊ Will select primary care doctor who will decide when and to which specialists
• Key terms you need to know
you can go. Will require a referral before you can see a specialist
– Death benefit—amount paid to beneficiaries
◊ Usually has the cheapest premiums
– Beneficiary—the person or people you want to get the death benefits
– Preferred provider organizations (PPOs)
– Premium—the regular payments for the insurance
◊ A bit more freedom to pick doctors, but still usually has a closed panel of
– Cash value—if you choose whole life, the tax-deferred savings included in
doctors if you want full coverage
permanent life coverage (not a good alternative to an IRA because of the
◊ You may not need a referral to see a specialist (be sure to check the rules
insurance premiums and hidden fees you must pay)
of the plan you selected)
• Types
◊ More out-of-pocket costs if you see a provider outside the network
– Term Life
– Exclusive provider organizations (EPOs)
◊ Set term for the insurance, and then it expires
◊ A bit more freedom to choose doctors than an HMO, and you may not
◊ If you die before the term ends, your beneficiaries get the designated
need to get referrals to see a specialist
death benefit
◊ No coverage for out-of-network providers
EX: If you buy $100,000 term life policy, the death benefit is $100,000
◊ Lower premiums than a PPO, but more than an HMO
◊ You pay a monthly premium through the term of the policy – Point-of-service plans (POS)
◊ Be sure you get a term policy with level monthly payments throughout ◊ Blends the benefits of HMOs and PPOs, which gives you a bit more freedom
the term
than you have with an HMO
◊ Most affordable type of life insurance, but you can outlive it
◊ More paperwork if you use an out-of-network provider, but you will have
◊ Can afford much higher death benefits than you could with whole life insurance
coverage
◊ Can cancel without losing value
◊ Must choose a primary doctor who coordinates your care and refers you
– Whole Life
to specialists
◊ Also called traditional, straight life, or ordinary life
◊ In-network providers will be cheaper to use than out-of-network providers
◊ Provides coverage for entire life—does not expire like term life
– Catastrophic plan
◊ Premiums are higher, but they also build up a cash value that can pay
◊ Available to people under 30
premiums or provide loan money
◊ Lowest premium
◊ Can be used as a tax-deferred savings vehicle, but there are better investment
◊ Three primary care visits before deductible applies. Deductibles are
options—such as an IRA
high—$8,150 for an individual and $16,300 for a family in 2020. Once you
◊ Historically, people must buy less than they need because of the higher
premiums. Often end up canceling if costs become unaffordable meet your deductible your medical costs are paid for 100% of covered benefits,
but be sure you take a close look at the list of covered benefits before buying
Health Insurance ◊ If you choose this type of plan, be sure you keep close track of your out-of-
• Why must you have it? pocket expenses so you can prove you’ve met the high deductible
– Costs if you get sick can bankrupt you – Medicare/Medicaid
– Without health insurance some providers may refuse to see you ◊ Both are governmental plans
• Can buy several ways ◊ Medicare is for people 65+
– Employer-provided—your company offers a health insurance option ◊ Medicaid is for people with low income. Coverage qualifications vary by state
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Insurance (continued)
• Key terms for using health insurance • If available, take the policy at work because it is very expensive to get as an
– Premium—the dollar amount you pay to get the plan individual policy, if you can get it at all in the state in which you live. Your
– Deductible—The amount you must spend on health care before coverage health status will also impact your premiums and whether you can get indi-
starts. Some plans include coverage for various types of preventive care (such vidual insurance at all
as a pap smear if you are a woman) before you meet the deductible • Provides a source of income if you can’t work because of injury or illness
– Copays—this is your share of the appointment cost with a doctor after you • Without disability insurance, many people are a paycheck or two away from
meet the deductible. Sometimes it’s a flat dollar amount. Other times it’s a major financial distress
percentage of the treatment costs • Average disability claim lasts 13 months. Mortgage foreclosures happen 16
times more often because of disability than because a person dies
Car Insurance
Liability Insurance
• Be sure you know your state’s minimum insurance requirements before you
start shopping for insurance • Protects your assets from claims involving injury or damage to other people
• Be sure you have enough insurance to protect your assets. If you are in an or property
accident and get sued, the claimant can try to collect against all your assets • Covers any legal costs or payouts up to the policy limit if you are found legally liable
to pay the award • Payouts are to third parties, not the insured
• Check your current coverage to be sure you know what you are paying • Can’t be used to protect you against intentional damage or criminal prosecution
• When you shop for competing quotes: • Personal liability insurance is also known as an umbrella policy
– Be sure you are comparing apples to apples—check all terms closely – Coverage kicks in when other coverages are exhausted
– Call the insurance companies if you have questions about coverage before EX: You or a member of your family is at fault in a major car accident.
you buy Personal liability coverage will kick in when your maximum car insurance
– Research the company on your state’s insurance website, as well as talking coverage is exhausted
with family and friends regarding the company’s reputation when paying – Can cover legal costs for other types of damages
(or not paying) claims. Cheap insurance is worth nothing if you pick a EX: If you are sued for libel or slander, legal fees will be covered
company that rarely pays its claims or tries to lowball its customers – Coverage limits start at $1 million, and if you have significant assets, can
– Don’t forget to cancel your old policy if you buy a new one go higher
– Review your insurance needs with a broker to help you determine how much
Disability Insurance
liability insurance you need
• Some employers provide disability insurance at work; otherwise you can contact – Premiums are usually fairly low, and the coverage is well worth it if something
your insurance broker for an individual plan major goes wrong
Personal Bankruptcy and Recovery
Chance to Restart Your Financial Life – You do get to keep most of your possessions, such as clothes and furnishings,
because they aren’t worth the time of the court to try to sell them
• Don’t fear personal bankruptcy
– A bankruptcy trustee will review your possessions and decide what is worth
• It gives you a do-over to correct your financial mistakes
trying to sell. The rest you get to keep
• Many people face bankruptcy after a major loss:
– An auction of used household goods usually doesn’t make enough to pay back
– Devastating long-term illness
creditors, so the bankruptcy trustee will let you keep the goods
– Divorce
– When completed, a Chapter 7 bankruptcy will wipe out your debt, and you
– Job loss
won’t owe anyone anything, unless you reaffirmed some of your debt, such
– Loss after a court suit
as a house or car
• American law allows bankruptcy as a compassionate financial fresh start
– Some debt can’t be discharged. This includes:
When to Consider Bankruptcy ◊ Student loans, recent taxes, back child support
◊ Loans from a pension plan. If you don’t repay them the money taken out
• Debt relief from unsecured losses, such as credit card debt
could mean you’ll need to pay significant taxes and penalties
– Bankruptcy will erase most, if not all, of this debt
– Don’t try to go it alone
– Also includes medical bills, which can be a big help to get your life back
– Work with a bankruptcy attorney to be sure that the choice is best for you
together after a major illness
and that you file everything correctly
• Halt foreclosure action
2. Chapter 13
– Filing bankruptcy will halt the foreclosure and give you time to work out
– This is a reorganization of your debt
an alternative solution
– You must work with your attorney to develop a plan to pay off at least part
– Using one type of bankruptcy called Chapter 13, you may be able to work
of your debt
out a repayment plan with the court that erases some debts and mandates
– The bankruptcy trustee will review your plan to be sure your creditors can
a payment plan under court supervision for others (more about that later)
recover as much as possible, given your financial situation
• Car repossession
– Repayment plans can be for three or five years
– Bankruptcy can temporarily stop repossession
– You will be under court supervision for the duration of the plan
– As part of a Chapter 13 bankruptcy you may be able to work out a payment
– You pay the trustee your disposable income determined in the plan, and
plan under court supervision
he or she will pay your creditors
• Fix a financial mess after divorce
– If you successfully complete the plan, your remaining debt will be erased
– Be sure to discuss impacts of the filing with your divorce attorney if you are
– If you fail to complete the plan, you can ask for a hardship discharge. If the
considering filing for bankruptcy
court agrees, your unsecured debts will be erased, but you will still need to
– It can be a good alternative to restructure debt and help you get back onto
pay your secured debts, such as loans on your house or car
sound financial footing
– You can also consider converting to a Chapter 7 bankruptcy, if you just can’t
• Halt IRS seizures
repay your debts
– This will give your attorney time to negotiate a debt settlement with the IRS
– Your financial life will be controlled by the bankruptcy trustee while you are
– You can’t erase tax debt
working on paying off your plan.
• Prevent garnishment of wages
◊ You must get trustee approval to sell any assets
– Sometimes a creditor will win a settlement in court and try to garnish your
wages Filing for Bankruptcy
– Bankruptcy can stop garnishment
– If debt is unsecured, it may get wiped out by bankruptcy, and you’ll never Are You Eligible?
have to pay it • For Chapter 7 or Chapter 13 your debt must be primarily consumer debt
• Business debtors would seek protection under Chapters 11 or 12 (beyond the
Two Types of Bankruptcy for Individuals scope of this guide)
• For Chapter 7—If you earn more than the median income for your state you
1. Chapter 7
– Allows you to liquidate and wipe out most of your debt must take a means test, which looks at your sources of income and expenses
– You may have to give up your property • For Chapter 13—Your secured debt can’t exceed $1,267,850, and your unse-
– If you want to save your property, such as your house or your car, you’ll need cured debt can’t exceed $419,275. If your debt exceeds these limits, you’ll need
to use Chapter 13 to file under Chapter 11
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Personal Bankruptcy and Recovery (continued)
– Your tax filings must be up-to-date – Personal loans
– You must be employed and have enough income to cover the monthly amount of – Obligations under leases and contracts
the payment plan proposed – Utility bills
Do It Yourself or Seek Legal Advice • Debts you can’t get discharged include:
• While you can do it yourself, it is recommended you seek legal advice – Back child support and alimony
– Requirements and decision of type of bankruptcy you are eligible for and should – Court-imposed fines and restitution
seek can be complicated – Debts you owe because of civil judgement from willful malicious acts or for
– You need to know personal injuries or death caused by drunk driving
◊ How to pass a means test if you want to file for Chapter 7 – Recent back taxes
◊ How to do a repayment plan, if you seek Chapter 13 – Student loans
◊ How to report your assets appropriately – Unfiled taxes
◊ How to appropriately report income and expenses – Debts you did not list as part of the bankruptcy—so be sure you don’t miss a debt
– You need to file the paperwork correctly, or the judge could just deny the case. • Complete a court-ordered personal finance management course
If you make a mistake the judge can dismiss the case, and you have to restart the Steps to File Chapter 13
process all over again • Complete a credit counseling course approved by the bankruptcy court
– Competent legal help can get you through the process more easily • Be sure all income taxes due have been filed
• If you can’t afford legal help, you may qualify for legal services in some states. Not • Develop a repayment plan
all states provide it, but it’s worth checking – Compute disposable income
What Happens Immediately after Filing for Bankruptcy – Compare disposable income to debts you will pay in full. You must have enough
• Most debt collectors must stop calling you and must stop collections efforts income to pay off the debts you confirm in your plan within five years, or the judge
• If a debt collector calls, inform them you filed for bankruptcy and that they should will not approve your plan
contact the court – If your income is enough to pay off all required debts, the judge will expect all
• Foreclosures on your home are halted, at least temporarily other disposable income will be used to pay any other debts during the time period
• The IRS can’t issue a lien against your property or seize your property or income, of your payment plan
but it can: • Meet with your creditors
– Continue a tax audit • Meet with the judge, who is the one who can confirm your repayment plan
– Issue a tax deficiency notice • Possible endings
– Demand a tax return – You complete your repayment plan, and your remaining unsecured debt is discharged
– Issue a tax statement – You can’t complete your repayment plan, and you ask the bankruptcy court for
– Demand payment of a tax assessment a hardship discharge
– You can ask to convert your Chapter 13 bankruptcy to a Chapter 7 plan, but you
Steps to File Chapter 7 Bankruptcy
may not be able to save all your assets
• First you must complete credit counseling approved by the bankruptcy court
• Calculate monthly income Repairing Your Credit History
• Subtract allowable IRS expense amounts. You can find them here: https://www.irs.
• Clean up your credit report
gov/businesses/small-businesses-self-employed/national-standards-food-clothing-
– Types of negatives and how long they stay on report
and-other-items
◊ Late payments—up to 7 years
• Subtract secured and primary debt payments
– Total due in payments for next five years on your mortgage ◊ Collections—up to 7 years from the time the collection was assigned to the
– Total due over the next five years on your car note agency. Be sure that all collections state discharged in bankruptcy
– Total due over the next five months on other secured items ◊ Court judgements—up to 7 years
◊ Tax liens—if paid off, up to 7 years. If unpaid, forever
◊ Your equity line
◊ Chapter 7 bankruptcy—up to 10 years
◊ A lien
◊ Chapter 13 bankruptcy that has been successfully completed—7 years from
◊ A personal loan
– Total all secured debt payments for next five years and divide by 60 to determine time of original filing
◊ Chapter 13 bankruptcy not successfully completed—10 years
cash needed for the next five years
– Next, total any debt in arrears and the payments over the next five years and divide • Correcting errors
– Watch the negatives, and be sure they drop off when expected. If not, contact the
that by 60 to determine cash needed for the next five years
– Total priority debts, which include: credit bureau
◊ Bankruptcy—be sure the type of bankruptcy is included
◊ Back child support
◊ Accounts in bankruptcy—make sure all debts included in bankruptcy are charged
◊ Back income taxes
off and no longer due
◊ Secured credit cards
◊ Old delinquencies—make sure delinquencies older than 7 years (except for ones
◊ Secured personal loans
that must be on for 10 years) have been removed from credit report
• List Unsecured Debt—All other debt not secured by a lien on your property
◊ Paid-off debts—if you paid off a debt, be sure to correct the credit report
• File using forms from bankruptcy court webpages (or provided by your attorney)
• Check your credit report for free yearly at https://www.annualcreditreport.com/
• Assign a bankruptcy trustee, who will control your financial life through the bank-
index.action
ruptcy process
• Meeting with the creditors—you will meet face-to-face with any creditors who want
Getting Credit after Bankruptcy
to challenge the bankruptcy—this is when you’ll be glad you have an attorney to
assist you • Repair your credit as discussed above before you try to apply for credit
– Trustee will ask questions about: • Get your credit score for free at Credit Sesame (https://www.creditsesame.com/
◊ Your bankruptcy petition, your assets, your tax returns free-credit-score/) or Credit Karma (https://www.creditkarma.com/)
– As long as all is done properly, the meeting will likely last less than an hour – Both websites have excellent content to help you rebuild your score
• Bankruptcy can be finalized by the trustee, and you will never see a judge, as long – One favorite tool is a credit score simulator to see how different actions will impact
as the bankruptcy trustee does not raise questions. Also, if you ask for an exception your score: https://www.creditkarma.com/tools/credit-score-simulator
to the rules you could end up before a judge • Once out of bankruptcy, you’ll likely get lots of applications for secured credit
• Debts that can be discharged by the bankruptcy court: cards—be careful not to get yourself back into the same mess using credit again, but
– Bank credit cards you will likely find that you need at least one credit card in order to:
– Department and retail store cards – Rent a car
– Doctor and hospital bills – Stay in a hotel
– Loan balance due on assets you lost, such as a repossessed car or home lost to foreclosure – Other activities that require identification and proof of credit
– Mail-order and catalog purchases • You may need to seek a cosigner at first to get credit until you rebuild your
– Most lawsuit judgements reputation
U.S. $6.95
Author: Lita Epstein, MBA
Disclaimer: This guide is intended for informational purposes only. Due to its condensed format, this
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