The common misconception of the debtor in bankruptcy is an individual who was reckless in borrowing, and irresponsible in paying back their debts. While mismanagement and over-extension are present as causes in some bankruptcy cases, even the most well-intentioned consumers who have built up their credit and amassed a tidy savings can still wind up in the office of a bankruptcy attorney. When they do, these are the mistakes that inevitably have led them there:
Buying a Time Share
Easy to buy and virtually impossible to shed, time shares can be a slow drain on your monthly finances. Additionally, annual/quarterly fees and assessments can surprise you, and put you in a budget crunch. Letting it go into foreclosure – which is the most common result- will damage your credit. Slick talking salesman can persuade even the most financially astute individuals, so the best thing to do is pay for your own vacation and avoid the pitch altogether.
Cosigning a Car Loan
Just because you can manage your finances doesn’t mean that your children or grandchildren can manage their finances. The fact that a lender requires a cosigner is an indication that they already consider it a risky loan. By the time that you find out that there is a loan default, it may be too late for you to correct it, and you wind up with a repossession on your credit. Moreover, the lender will probably come after you first, because of your established credit and assets.
Taking Out Student Loans for Children
Student loans are too easy to obtain, and institutions of higher learning are not always truthful in reporting the numbers of graduates who actually have jobs in their fields of study. Just like cosigning a car loan, the risk that your child may not complete their education – and leave you on the hook for the debt as well – is too great a risk to bear with the amount of money at stake.
Not Having Disability Insurance
If you are actively employed, and you don’t have disability insurance, you need to obtain it. This is especially true if you are the highest earner in the household, and your income is necessary to service the house loan and any vehicle loans. But having disability insurance alone is not enough if you are guilty of ….
Not Having Enough Money in Savings
Even if you have disability insurance, and become eligible for monthly payments, they may not start for 60-90 days from the date of disability. And the income that you receive will not fully compensate you for the loss of earnings. So you will need to have a financial reserve to hold you over until the disability income starts, and to bridge the monthly gap between your disability income and normal earnings until you are able to return to work.
Starting a Business
There is nothing wrong with someone who decides that they need a career change and want to become their own boss. But starting a business without adequate research and your own capital can be catastrophic, especially since there may be a significant period of time in which the new business is not profitable, and you will need your savings to keep the business and your household solvent. You will probably be asked to provide a personal guaranty on any contracts and loans for the business, which means that you cannot escape liability, even if the business is incorporated. Under no circumstance do you want to leverage business debt against your personal assets, such as your home. If the business fails, you will lose all of your business and personal assets.
Cashing Out a 401(k) Plan
Maybe you have changed jobs and think that it is easier to cash it out and invest it yourself. Or maybe you are starting a business (see above) and you need your 401(k) as seed money. Either way, you could suffer adverse tax consequences which could put you in a financial pinch the next April, when tax time rolls around. And you may have deprived yourself of years of meaningful income when it is time to retire.
Not Making a Down Payment on a Vehicle Purchase
If you have great credit, financing a vehicle with little or no down payment is fairly easy. But it doesn’t mean it’s a good idea. Unless you have gap insurance, you run the risk of being responsible for any deficiency claim if the vehicle is totaled in a collision. And even if you keep the vehicle safe and sound, you may wind up with negative equity if you try to trade the vehicle in later, which will increase the debt on a subsequent purchase. This is especially true if you purchase a vehicle which becomes unpopular later due to defects, recalls or poor performance.
Not Having Uninsured Motorist Coverage
If you are injured in a collision with an at-fault, uninsured driver, you may have little insurance resources available to compensate you. If you have full coverage, it may pay for your vehicle, but any medical bills or lost earnings will never be recovered.
It is easier to gamble legally than ever before, and it will only become easier as many states move to legalize sports gambling. But even buying lotto tickets can add up over time, and a small win may generate an emotional need to spend more money. Thousands of dollars can be lost in an attempt to “hit it big”, or just recoup previous losses. Even if you win, there will be tax consequences that you may not be prepared for at tax time.
Hopefully anybody who reads this will learn something(s) that they can do to protect their income, their family and their financial future. But even if you have made one of these mistakes, don’t compound it by allowing your pride or embarrassment to prevent you from seeking legal protection.