The most common misconception of an individual who files for bankruptcy is that they were reckless or irresponsible in the management of their credit. While there are many debtors who visit bankruptcy court because of overextension and mismanagement, they do not represent the majority of bankruptcy filers. No matter how well somebody plans for their financial future, no amount of planning will fix the financial problems caused by death, disability, divorce, and loss of employment. But there are steps that can be taken which can help reduce the impact of such unfortunate events, and hopefully prevent financial disaster.
- Save money – This is easy to say, but often hard to do. However, getting in the regular habit of even saving small amounts of money can help create a financial cushion which can assist with a later emergency. For instance, by putting $25/month in your savings account, you will have $300 at the end of the year which can be used towards car maintenance and repairs. Supplementing your monthly savings with income from bonuses and income tax refunds will help create financial independence which will hopefully prevent the necessity from obtaining credit to fix a shortfall in your budget.
- Invest in a 401(k) or IRA plan – If your employer offers such a tax deferred savings plan, you should take advantage of it. Like building up your savings, you can start by making small deductions from your paycheck that will go into your retirement plan. If your employer offers a match, they are essentially giving you free money. While building up your savings account can help you now, investing in an employer-sponsored retirement plan will help you years later. And these types of retirement accounts are exempt in bankruptcy, which means that the money deposited from your wages and your employer’s contributions are protected from creditors.
- Protect your property with adequate insurance – Many people who pay off their car discontinue their full coverage insurance on the vehicle. While this does yield an immediate savings, it can be catastrophic if the vehicle is totaled in an accident. Almost everyone has a need for transportation and having to find new transportation in a short amount of time without any funds can lead to making poor financial decisions. Likewise, having renter’s insurance and homeowner’s insurance is a must, because you could lose both your residence and possessions in a catastrophe, and be left with no resources to rebuild and re-furnish.
- Do not cosign any debts! – If you cosign a debt for somebody else, you are promising to pay the creditor in the event that the original borrower defaults on the payments. Obviously, if the lender is going to require a cosigner, it means they are not convinced that the borrower is a good credit risk. And if the borrower is not a good credit risk, then it could cause a situation where you have to manage their debt as well as your own debts.
- Do not fall for financial scams – With the wide availability of information on the Internet, it is very easy for a scammer to communicate with you and have credibility because of their familiarity with you and your credit. The same goes true for scammers who may send solicitations via text and email. If it is too good to be true, then it probably is. Always act cautiously with somebody who contacts you unsolicited, and requests personal or financial information. When at all possible, transact financial business in person or with a business/individual that already have a relationship with.
Even if you take these steps, you may still become the victim of circumstances beyond your control. A sudden shortage of income or extended increase in expenses can create financial distress. This could lead to foreclosures, lawsuits and garnishments if they are ignored. Our firm offers a free consultation, and we welcome the opportunity to talk with you if you believe that your finances have become unmanageable.