The people drowning in debt are usually scared when they come into Bankruptcy Court.
On the 26th day of the government shutdown, many federal workers who are already under financial stress are understandably wondering whether bankruptcy is the only option.
They’ve likely never been in a courtroom before, and the road to this point hasn’t been pleasant. It could have been one major blow — like a lost job or an accident — or even a slow descent with bills and bill collectors calls piling up.
On the 25th day of the government shutdown, many federal workers who are already under financial stress are understandably wondering whether bankruptcy is the only option.
After 12 years serving as a bankruptcy judge, the Hon. Margaret Cangilos-Ruiz, the chief judge for New York’s Northern District Bankruptcy Court has seen it all. She recently took some time from her case docket to share her insights with MarketWatch on how people can avoid ever setting foot in her courtroom.
Some consumer bankruptcies are precipitated by events beyond someone’s control, but a number are entirely within a person’s power to stop, she told MarketWatch.
She said she tries to be crystal clear with debtors on how they must settle their obligations, but she hears them out, too. “They need reassurance they are respected, the court listened and heard what their plight is,” said Cangilos-Ruiz.
Here are her tips on how to keep your finances from falling off the edge into bankruptcy:
Courtesy Judge Margaret Cangilos-Ruiz
Judge Margaret Cangilos-Ruiz, chief judge of the bankruptcy court for the Northern District of New York, and chair of the Sub-Committee on Adult Education for Justice for All: Courts and the Community.1. Keep an eye on your credit-card balance
Chief among her tips: “Never carry a credit-card balance,” said Cangilos-Ruiz, who scrutinizes her own monthly statement to verify all the charges are valid and monitor her own spending habits. “Try to pay your balance, all your bills, on time.”
If timely payments can’t happen, she added, pay it back as soon as possible or arrange a repayment plan to minimize late fees and penalties.
‘Never carry a credit-card balance. Try to pay your balance, all your bills, on time.’ —Hon. Margaret Cangilos-Ruiz, Chief Judge of New York’s Northern District Bankruptcy Court
Likewise, she added, “be conscientious what your credit score is.” Almost everyone will come to a point in their lives when they’ll need to borrow money for some sort of expenditure, the judge noted.
Average FICO FICO, +1.35% scores hit an all-time high several months ago. Those influential three digits impact borrowing rates, she said. Knowing one’s credit score can help them make a better decision on when to jump, or hold off, on a decision to borrow.
2. Know your spending (and savings too)
When Cangilos-Ruiz talks money basics to community groups, she talks about habits and the difference between wants and needs. Cangilos-Ruiz encourages people striving for financial independence to start with a simple exercise: Write down every single expense in a week.
By mapping out all the spending, people can then prioritize where their money should — and shouldn’t — be going. “Watch out for the daily latte, which is a habit, but it adds up,” she said.
The judge encourages people striving for financial independence to start with a simple exercise: Write down every single expense in a week.
There is one habit she very much encourages. “Anticipate with income coming in, make a habit that a certain percent is set aside.” The same goes for socking away, at least a little, to a 401(k).
In Cangilos-Ruiz’s experience, consumer bankruptcies typically involve inadequate savings “to cover the unexpected.” That’s a familiar problem for many Americans: four in 10 couldn’t cover a $400 emergency expense in 2017, according to a survey by the Federal Reserve.
Credit cards are a major cause of bankruptcy, according to a 2018 study by CompareCards.com. Some 42% of credit-card debtors say they have problems making ends meet, followed by car repairs (29%) and medical bills (27%). Eating out and shopping tied at 22%.
3. Improve your financial literacy
There are other ways to get started early in life to avoid such problems. If these pointers sound familiar, that’s because they are — but too few people appreciate them. That’s partly because they’re not taught about it in school, Cangilos-Ruiz said.
Cangilos-Ruiz has been involved in an outreach program trying to foster better public awareness of the federal courts and financial literacy.
Generally speaking, America has a financial literacy problem, she said. Many “think some people are born Rockefellers and others aren’t.” In reality, it boils down to a realistic understanding about spending within one’s income, she said.
Also see: Teaching people about money doesn’t seem to make them any smarter about money
Financial literacy, like civics education, should be a requirement in all school curriculums, she said.
New Jersey just enacted a law requiring educators to include financial literacy for all Garden State middle schoolers, starting in September. Seventeen other states require high schoolers to take a personal-finance course.
Cangilos-Ruiz has been involved in an outreach program trying to foster better public awareness of the federal courts and also educates people about personal finances. The program, Justice For All: Courts and the Community, is run through all the courts within the Second Circuit, a jurisdiction covering New York State, Connecticut and Vermont.
4. Maintain your financial independence
Budgeting sounds like a chore, but it can help prevent future problems. Cangilos-Ruiz chairs its adult education programs, and has spoken at women’s shelters about financial independence and to high school students about the true costs of higher education — including student loans obligations that can be very difficult for debtors to wipe away.
Cangilos-Ruiz has spoken at women’s shelters about financial independence and to high school students about the true costs of higher education.
She’s also talked to new Americans, who, in her opinion, seem to quickly grasp the core ideas of a sound home budget. “Immigrants coming in, they get it. Hard work, saving and not expending on too many luxury goods and things that really aren’t a necessity.”
Cangilos-Ruiz’s mother, Rose, grew up in a Brooklyn brownstone and her father was a banker. The Great Depression hit, greatly shrinking their budget and showing Rose how fragile finances can be. She clipped coupons, sought out the lowest prices, and kept an eye open for free services and entertainment.
“She was always excellent about keeping her finances in order and imparting that to her children,” Cangilos-Ruiz noted.
The number of bankruptcy petitions is at its lowest point since 2007, and there are varying explanations for the drop. But in Cangilos-Ruiz’s own court, filings were up 1.5% last year. She said there would always be an ebb and flow with filings.
Commercial bankruptcies will always a part of the system as markets change and businesses take risks and fail. Consumer bankruptcies will also be a part too because of unforeseen disasters and bad decisions, she said.
“If you are informed about your budget and spending, I think that a number of people could avoid having to file if they controlled their spending early on,” she said.
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