Wednesday, June 20, 2007

Signs of bankruptcy

Are you in danger of filing for bankruptcy? Would you be able to recognize the warning signs if you were?

The AICCCA released its top 5 warning signs that may indicate a path towards hitting rock bottom.

1) Living paycheck to paycheck

If all of your paychecks are wrapped up in bills, especially if those bills include minimum monthly payments on credit cards or other loans, you may be headed for trouble. A loan adjustment, card rate increase, or emergency could quickly send you into the red with little hope of recovery. My solution? Start slashing your spending and immediately begin saving money, at least 10% of your check. Then double up on debt payments to pay them off early, or put together a debt repayment plan (there are many out there). This will eat up a good chunk of your income so that if something does happen, you can either slow your savings or take a break from early debt repayment until you can recover.

However to avoid living on each paycheck doesn't mean you always have money in a checking account. It's silly to keep any money in a no-interest account, which brings us to...

2) No savings cushion

Put aside money for an emergency fund, that should be a #1 priority. At least a thousand or two, even if you have debt. If you're debt free, continue saving. Save for future purchases that people often finance, like automobiles and furniture. There's nothing wrong with spending money as long as you are putting plenty into retirement, have a sufficient emergency fund, have no debt, and are paying cash for those purchases (unless you decide to be savvy and play the "greater return" interest game).

3) More than 20% non-mortgage debt to income ratio

Um, how about zero non mortgage debt. You can't get ahead while you're borrowing money at 10-20% interest. Dump it ALL. The only debt you may need to have is a mortgage (and unless you are subprime - which means you shouldn't have bought a house in the first place - its a pretty cheap debt at that). Anything else is holding you back from financial freedom, because whether or not you can "earn more in investments" you are still letting debt eat into your earnings. You're paying someone else, a bank, to make up for your lack of fiscal management. Your money should work for you!

4) Making only minimum payments on credit cards

If anyone is in this position, cut up those cards immediately. Not only are you borrowing money at a high rate, but you are extending your repayment so long that you will double the due balance by the time it is paid off.

5) Not adequately insured

You don't need perfect health insurance, but one hospital visit can send you into a debt black hole. The basic minimum anyone must have is catastrophic. Your emergency fund can take care of the small stuff if you really can't afford medical insurance.

Seek credit counseling before you think you may need to file for bankruptcy, but be careful. Many of those counseling agencies will try to get you to consolidate bills and you may end up paying more for it in the end (to the agency of course).

1 comment:

Jim said...

1) Yes, I'm living paycheck to paycheck and don't save money because I'm using it to pay off debt.
2) Have one and plan to keep it at 1k so if something happens, there is money to prevent resorting to credit.
3) Yep, way more than 20% for now until I get some stuff paid off.
4) I pay more on one balance to attack the principle and minimums on the remaining cards.
5) Have plenty of insurance on me and my wife just in case.

I'm not bankrupt by any means and do not consider that as an option to 'solve' my problems. Never did credit counseling because most of the time they want to get you in a debt management program which ends up costing more. I know what needs to be done, which is paying off debt, so then I can save. I'm just broke but improving my situation every month.