I developed a travel hacking hobby for the last few months. As a result, I have been following forums (Flyertalk forum) and Reddit channels (Reddit churning). I often come across stories of people asking questions on applying for a credit card after bankruptcy. You can never imagine just how many families suffer from these financial setbacks every year. Why people can’t avoid bankruptcy?
Even with sound savings and despite a sizeable emergency fund, bankruptcy is just an illness away or just a motor accident away. Some times it’s just around the corner through a job loss. But is declaring bankruptcy the only way to keep creditors at bay?
Are there any better options? Veronica talks about just that in today’s guest post. Enjoy the post.
I spoke with busy a bankruptcy attorney David M. Offen, Esq. and we discussed four ways you can avoid ever needing to file bankruptcy.
1. You Must Live Within Your Means
This is number 1 on the list for a reason – it is by far the biggest problem for individuals and families today. Live within means to avoid bankruptcy.
Services and products are advertised to us 24-7, and admittedly, it can be difficult to resist overspending and indulging in a little “retail therapy.”.
So how do you know whether you are living within your means? Set aside a half-hour, sit down with paper and pencil, and create a budget in writing. You might need to pull up a monthly bank statement to be able to see what you spend where.
You’ll need to record your monthly income and expenses – and do not forget to pay yourself first, i.e., deposit 10% of income, or 1 hour’s wages of every workday, to savings.
If when you write down your income and expense you discover that your current income is insufficient to meet your current expenses, then you need to either increase your income or eliminate or reduce some expenses.
It is untenable in the long term to rely on credit cards to fund your lifestyle – that revolving credit adds up and becomes unaffordable quickly.
Insurmountable credit card debt is one of the three primary pathways to bankruptcy (along with divorce and medical catastrophe).
Four Strategies to Increase Income
- Part-time seasonal side-hustle.
- More hours or overtime at your current job
- If you are married and one of you stays home with the kids, that person can work part-time from home
- Unneeded or unused possessions can be sold at a yard sale or online auction site – things like heirlooms that are not your taste, collectibles, jewelry, and clothing.
Ten Great Tips for Reducing Expenses, Painlessly
- Reduce the number of times you eat out each week
- Shop for a less expensive cell phone plan, or get a family plan
- Turn off lights when you leave a room, and turn off appliances when not in use, to save on electricity
- Find out if there is a less expensive cable package available – check out internet streaming!
- Used items such as clothing, furniture, DVDs, and books are so much cheaper than new ones. Shop on online auctions and at flea markets and yard sales. You would be surprised at the deals you can get.
- Use your local library and borrow rather than buy things you will use once, like a movie or a book.
- Turn your thermostat temperature up in the summer and down in the winter to save on heating and air conditioning.
- Make sure you are not paying every month for things like gym memberships or magazine subscriptions that you are not using.
- Use coupons or wait to buy something until it goes on sale.
- Buy in bulk for big savings.
- Check out SB’s post – 101 ways to save money.
2. Save to avoid bankruptcy
This is almost as important as #1. You must save for a rainy day, and by “rainy day” I mean a day when you have to pay some significant and unexpected expenses such as a big car repair or replacing an appliance at home.
A rainy day can also be a day that your income unexpectedly decreases – your hours get cut at work, or you quit your job, or you are fired.
What do you do on that rainy day if you do not have savings? People who don’t have savings to rely on end up relying inappropriately on credit cards – which, as we all know, is the most expensive money you can borrow.
Experts used to advise having three to six months’ income saved for an emergency. Some experts now recommend eight to twelve months.
Regardless of which term you choose as your goal, having some savings ensures that should your income suddenly decrease or expenses suddenly increase, you can deal with that with no disruption to you or your family.
Saving a bit every paycheck will add up over time – I recommend saving 10% and doing that first, before paying any other expenses. Budget for that.
When you have to dip into rainy-day savings for an emergency, resume saving as soon as you can.
Having these funds in reserve will give you a sense of calm and confidence that you can meet any financial challenge that crops up.
3. Sure, Use Credit, But Use It Wisely
As we talked about before, when people don’t have a budget or don’t stick to their budget, or a rainy day arises and they have no savings to fall back on, they then rely on credit cards to take up the slack.
This is problematic because if using a credit card for this purpose becomes a habit, credit card balances balloon to the point where even the monthly minimum is unaffordable. avoid bankruptcy by using credit cards wisely!
Now, I don’t advocate that you cut up your credit cards – using credit cards wisely helps keep your credit score high, which you need to get an affordable car loan or lease, or a mortgage.
Use a credit card that gives you cashback, points, or air travel miles. Often using a gas card gives some extra discount every time you fill-up.
Whichever cards(s) you choose, be sure to pay each of them off in full each month.
If you have overwhelming credit card debt right now and you think you’ll never be able to pay it off, you might consider scheduling a free consultation with an experienced local bankruptcy attorney to discuss your options.
If you are unwilling to discuss bankruptcy and debt settlement options, then you have to get creative and think of a plan to pay off your credit cards.
Conventional wisdom is to pay the credit card with the highest interest rate at least twice the minimum each month and pay the minimum on your other cards until the card with the highest interest rate is paid off.
Then pay off the card with the next highest interest rate the same way, and so on.
4. Be Sure You Are Adequately Insured
What Insurance Do All Families Need?
Avoid bankruptcy by insuring yourself and your perperties adequately. You must have health insurance, auto insurance, and homeowner’s or rental insurance – this is non-negotiable. Insurance is a financial defense.
An auto accident where the car is totaled, a home fire, a medical emergency, a burglary – these calamities force families to file bankruptcy in the absence of insurance covering the damage and resulting bills.
Who Needs Life Insurance?
You should have life insurance on the family’s primary breadwinner, especially if you are a one-income household.
If something happens to that person, there must be an emergency income source in place to preserve and protect the lifestyle of the rest of the family.
Who Needs Income Insurance?
If you have a family and your income is on the higher side, you might also consider income insurance. How high should your income be to warrant purchasing income insurance?
It should be high enough such that unemployment insurance from the government in your state will not replace your income in full and is not enough to pay your fixed expenses, like your mortgage.
In this case, it is worth your time to look into income insurance. While it is not cheap, it will provide you with the peace of mind of knowing that if you lose your job, your family life will not be disrupted.
About the author: Veronica Baxter is a legal assistant and blogger in the Philadelphia area. She works on behalf of the Law Offices of David M. Offen.