by John G. Merna
Analyzing the true source of your financial trouble and stress prior to considering filing a bankruptcy, whether a Chapter 13 or a Chapter 7, is key to not only recovering quickly but maximizing the benefit that the bankruptcy filing can bring. Follow these simple steps to be better prepared and understand your finances.
1Review Your Real Income
As I am very prone to say to my clients, “everything starts with income”. I have found many people have a mental block about doing a budget. The solution to overcoming this mental block is using a pre-made form found on the internet that breaks down listing your income and the numerous household expenses. It is easier to just respond to the questions asked on a pre-made form then trying to think of everything you spend money on. There are numerous income and expense forms on the internet. Step one is to calculate your total household after tax income (take-home income). I highly recommend you do not take into consideration overtime or bonuses.
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Review Your Real Expenses
Step two is of course to list your reasonable and necessary household expenses. Where people make mistakes in this task is not calculating for “ghost”, “soft”, or unexpected expenses. Ghost expenses are the $10 for McDonalds or that impulse purchase that you make weekly or several times a week. Unexpected expenses included the trip to the mechanic, the home repair, the visit by the plumber, etc. When working out your budget you are only going to get your “real” expenses by going to your check book ledger and reviewing your bank statement for all the ATM or debit purchases. Add a “contingence/emergency” expense to your budget in the amount equal to 5% of your take home income.
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Analyze the Real Income and Expenses For InsiGHTS
Reviewing your “real” budget is going to provide a number of insights. – Are you negative each month? If you have been relying on the overtime that has diminished or disappeared it will become very clear. Has your negative budget forced you to rely on credit cards and driven the balance to the max? Are “ghost” or unexpected expenses driving you negative (Tip: if ghost expenses are a problem, get into the habit of writing down every expenditure daily to assist you in gaining control and reduce these expenses assuming the are discretionary. The practice of writing down the expense just before you make the purchase will provide you with one last moment to determine whether the purchase is actually a “need” versus a “want”. You NEED to get control of your WANTS.
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What to do if your FINANCIAL TROUBLE is negative CASH FLOW.
Bankruptcy only assists in wiping out unsecured debt. It does not assist with a “cash flow” problem. If the source of your problem can be solved by eliminating your obligations to pay on debt, then bankruptcy is a great help. If the source of your financial problem is a negative cash flow bankruptcy is only part of the solution. You will have only have two options to further correct the negative cash flow: get more income or get fewer expenses. This seems like an easy suggestion. However, for many with a growing family their expenses, i.e. cost of living, may be rising faster than the household income, such as happens in times of inflation or shortages. Understanding your cash flow hopefully will allow you to make some hard decisions about what to do to improve or correct it. Is that high mortgage payment on a house that is now upside-down no longer a good investment? Do you really need two expensive car payments? Is private school tuition really affordable for you? Can you really afford to continue to support your adult children?
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Get some budget counseling.
There are numerous non-profit organizations that provide free budget counseling. Take advantage of them. Consumer Credit Counseling Services is a well respected organization with offices nationwide. They also have internet tools to assist in you understanding your budget options. Be careful not to fall for “cheap imitations”. Many website with similar sounding names are just referral sites to attorneys who have paid to advertise or to “for fee” companies. You can get this services for free. I hope this guide will assist you in better understanding your finances.
Give Merna Law a call today at 800-662-8813 to have your questions about finances and how bankruptcy can help answered.
Archive: Financial Trouble
When the Problem Is Structural, Not Behavioral
Many people blame themselves for financial trouble when the real cause is structural. Medical debt in Virginia averages over $4,000 per incident for uninsured or underinsured families. A single emergency room visit can create a debt that takes years to repay on a modest income — and during those years, interest, late fees, and collection costs compound the original balance. This is not a spending problem. It is a healthcare system problem that bankruptcy was designed to address.
Similarly, divorce splits one household’s income across two households’ expenses. The math often does not work regardless of how carefully either party budgets. Military families in Hampton Roads face an additional layer: PCS moves that force home sales at a loss, employment gaps for military spouses, and the financial disruption of deployment cycles. These are structural realities, not personal failures.
Matching the Solution to the Cause
Once you identify whether your financial trouble is temporary or permanent, the right solution becomes clearer. Temporary setbacks — a job loss you have already recovered from, a medical event that is behind you — often respond well to Chapter 13, which restructures your debt around your current income and gives you three to five years to catch up. Permanent changes — a disability, a career downshift, a divorce that permanently reduced household income — typically point toward Chapter 7, which eliminates the debt entirely so you can rebuild from a clean slate.
The free consultation with Merna Law is designed to help you make exactly this distinction. We review your income, your debts, the cause of your financial difficulty, and your goals — then tell you which chapter fits and what the process looks like.
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