How Do I Keep From Declaring Bankruptcy After Law School? An Interview with Bankruptcy Lawyer Jeena Cho

jeena choLet’s face it — law school is expensive (very expensive) and most students graduate with a ton of debt. Pair that with a lousy job market, and it’s easy to start thinking about ways to make your student loans go away.

Today, I’ve called in San Francisco bankruptcy attorney Jeena Cho of JC Law Group PC to offer her counsel.

Take it away, Jeena!

I’m getting ready to start law school, and I’m very concerned about the loans I’m taking out and my overall finances. What are the three most important things to keep in mind as I go through law school, to avoid finding myself in your office declaring bankruptcy?

I am sure your readers already know this, but in bankruptcy, the bar is set so high for getting rid of student student loans — both federal and private — that are essentially non-dischargeable in bankruptcy. This may change in the future (let’s hope) but filing for bankruptcy is going to be of limited help in dealing with student loans.

The three important things to keep in mind are:

1. It’s not free money.

Lenders have made it incredibly easy to borrow money and it’s easy to underestimate how hard it will be to repay your debt after law school. Be frugal. Watch every dollar. Set a budget. Borrow the absolute minimal amount to survive. Student loans should not be used to upgrade your wardrobe, your car, or your lifestyle. It’s also not beer money or a vacation fund. It should be used to pay for tuition, fees, books and bare bone living expenses.

I know this may sound harsh but the more money you owe when you graduate, the more limited your career options will be. Let’s face it, you can’t repay $100,000+ loan on a $50,000 salary working for a non-profit organization when you live in a city like San Francisco. Be smart and get roommates or rent a slightly less than perfect apartment to save on your fixed monthly expenses.

2. How much will your net income be?

When I look at how completely naive I was about my finances, it’s laughable. I just assumed, as long as I can land a job earning 6-figures, it should be no problem to repay my 6-figure student loan debt. In my mind, the logic went something like this: I will use 25% of my income ($25,000) and be out of debt in 4 years. Easy, right? It was a real shocker when my paycheck ended up being barely over $4,000. That is really not that much to live on in most large cities.

Here’s an example of what your $100,000 paycheck might look like:

Gross Income: $8,333 ($100,000/12)

Taxes: $3,333 (40%)*

Health insurance: $350

HSA contribution: $200

Disability/life: $60

Net Income: $4,390

*Your taxes will vary widely depending on where you live, your marital status, children, mortgage and other deductions.

Run your best case and worst case budget scenario. What’s the absolute minimum you can earn and still repay your debt?

And here’s the other thing to consider. That six figure salary is a myth for most attorneys. Other than the few who make it into medium and big law firms, expect to make less than six figures. And if it provides any comfort, 90% of the people I know that went to work for big law hate it. Most have moved along to other jobs, happily taking a pay cut.

3. Interest is toxic.

After graduation, it’s tempting to pick the lowest monthly payment. Depending on the repayment period (10 years vs. 25 years), your monthly payment can vary a great deal. However, consider the big picture.

Let’s assume you borrowed $100,000 at 7% interest.

Monthly payment on:

25 years = $707 per month. ($212,100 total)

10 years = $1,161.08 per month. ($139,329.60 total)

Difference of $454.08 per month.

However, let’s look at the amount of interest you’ll end up paying:

25 years: $112,033.76

10 years: $39,330.18

That’s a $73,000 difference!

The longer you repay your loan, the longer you will be exposed to the interest rate. Interest is toxic because it takes away from your ability to save for a house, a car, a family, and your retirement. (Caveat: If your interest rate is super low, it might make more sense to pay the lowest monthly payment.)

My advice to students – especially for those that have private loans with high interest rate is to repay it as quickly as possible!

By the way, crunching numbers isn’t a strength for most law students (as well as lawyers). Let’s face it, we probably would be doing something else if we were good at numbers. There are many handy dandy calculators to help you do this. See, for example.

I am in law school, and I’m thinking about starting my own practice when I graduate. What should I be doing now to make this happen?

Learn the art of running a successful business. In order to have a successful practice, you must 1) be an excellent lawyer and 2) a good entrepreneur. I know that most attorneys don’t think of themselves as a business owner or an entrepreneur, but that’s exactly what you are.

There are gazillion books on entrepreneurship, running your own business, starting your own business, etc. Start browsing them and reading. Talk to other successful business owners. Learn the basics of finance.

Dream it. Imagine what you want your perfect solo practice to look like. Who are your ideal clients? What does your day-to-day life look like? Are you in court everyday? Are you working from a busy office full of people? Are you working from home? From a cafe? How much client interaction do you have? How will your clients find you? How many hours are you working per day? What type of law do you practice? What problems are you solving?

It may be hard to know the answers to these questions while you’re still in law school but as you go through your internships and other legal experiences, pay attention to your preferences.

Build it. As a recent grad, you have one definitive advantage over the older, established lawyers — your ability to use, understand and leverage technology. Start honing your technical skills. Learn to build a basic WordPress website. Write — often. Grow your Twitter and Facebook followers. Establish yourself as a brand. This way, when you do open your solo practice, marketing and connecting with people over the web will be second nature to you.

Could you talk a bit about what you do all day at work, and how it’s similar to (or different from) what you thought you would be doing when you started law school?

Well, when I was in law school, I thought I’d spend my day lawyering. What I actually do on a day-to-day is more like: 30% therapist, 30% financial advisor, 30% lawyer and 10% business strategist.

There is such a huge disconnect between what they teach you in law school and what I do everyday. Not only in terms of the business end of things like reviewing your P&L, balance sheet and reconciling your trust (IOLTA) account but also in terms of client management.

What I learned over the years is your that clients’ legal issues don’t exist in a vacuum. For example, in my practice, I meet with clients that are deeply in debt. The legal issue is how do I get the client through Chapter 7 or Chapter 13 bankruptcy. But oftentimes I am working with the client to overcome their fears, embarrassment, feelings of failure and anger. Debt often leads to tremendous amounts of stress and causes problems with other things like work or marriage. Having compassion for the emotional experience that your client is going through is hugely important and a skill definitely not taught in law school.

Another skill that I wish I had learned in law school is self care. How can I manage my stress and care for myself without losing myself in the clients’ problems? That’s a hard balance to find — being an advocate and helping your client but not completely losing yourself. I have found that developing a regular meditation practice was hugely helpful in managing stress and finding a balance in my life.

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Thanks, Jeena! Solid advice all around.

More about Jeena:
Jeena Cho is a San Francisco bankruptcy attorney with JC Law Group PC. She works with individuals and small businesses on finding solutions to overwhelming debt problems. She practices with her husband. She’s the author of the book How to Manage Your Law Office, published by LexisNexis. Connect with her on Twitter: @Jeena_Cho.

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