Surviving Bankruptcy

2006-12-13

Mary R. never thought that her tax dispute would lead to financial disaster. But as events unfolded, her position went from bad to worse, until she needed to file for bankruptcy.

Mary worked as a supervisor with a large company; her employer listed her as an independent contractor on her W-2 forms. She paid estimated taxes every quarter as required, and thought no more about it. But the IRS disputed both her status as an independent contractor and the amount that was due; and imposed both back taxes and penalties due.

Being a single mom didn’t help; and with her income, she didn’t have a hope of catching up with the dues. With her mother needing hospitalization followed by assisted living, matters worsened. To help meet expenses, she withdrew $20,000 from her IRA, incurring penalties and taxes; but that didn’t suffice. Between credit cards and other lines of credit, she ran up over $75,000 of debt.

Somehow, she managed – until she lost her job in 2001. With no relief in sight, she filed for bankruptcy. “It was the hardest, most depressing decision I made. Today, I wonder how I bounced back – and whether I’d be able to take it again”.

Five years later, she’s managed a happier second chance; having erased her debts, and building focus on retirement. But she still worries about getting into another tailspin. Here’s her advice for others :

1) Be realistic : Every one hits a bad patch once in a while; but you need to be able to distinguish between temporary and permanent. A layoff or financial emergency could be temporary, from which you’ll recover; parenthood, or long term illness persist.

2) Make serious changes : Regardless of whether temporary or permanent, you need to make changes. You can’t continue the same way as before; tightening the belt and getting rid of high cost expenses need to be done at some time. The earlier you do it, the better you’re able to cope.

3) Negotiate early : Creditors are willing to be flexible, as long as they are reasonably assured of getting paid; they will waive interest or penalties, or work out a different schedule, if you’re upfront with them.

4) Make an umbrella : You never know when things will turn bad; make sure you have an umbrella for a wet patch. Start small, by cutting expenses; but build it up as fast as possible.

5) Keep your eyes on the long term : To solve today’s problems, don’t compromise on the long term. Whether it’s retirement funds, a home, or education, don’t rob tomorrow’s dreams to manage today.

Mary bounced back through another job, this time with a non-profit. Two other part-time jobs helped her build back some more. She moved to a cheaper rental, within walking distance of her office; she manages without a car and the related transport expenses. Her mother’s death also brought some financial relief, without the ongoing payments required. Her son also chipped in, taking small jobs after school to build up money for college.

She’s boosted her savings to 20% of her paycheck, partly to her 401(K), the rest in savings. She’s focused now on three goals – boosting her retirement fund, buying a home, and extending her working life through a business. “Some days, I wonder whether I’ll ever be able to stop; but, as I track where I am now and how far I’ve come, it gives me the strength to go on.”

Related Articles:
» Alternatives To Bankruptcy
» Bankruptcy: Should you file?
» The Effects of The Bankruptcy Law on Filings

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