Gather Little by Little

Since completing my introduction post, I have received several questions about personal finance. This one is coming from Cindy who is asking when should you file for bankruptcy? This is a very important question as the consequences of bankruptcy will follow you for several years. Therfore, you might want to think twice before choosing this path.

First, understanding what filing for bankruptcy means

I guess that some feel that filing for bankruptcy is one way to get out of debt fast and start over again. Personally I think that one must honor his obligations no matter how dire the circumstances. Having debt means that someone trusted you (even though it may be a credit card company charging you astronomic rates). So beyond the debt, you must honor this trust in you.

I am talking about trust because credit is all about that. Trust takes years to build with friends, family and your spouse but it can be destroyed in a few seconds. It is exactly the same situation with credit. Financial institutions will grant a facility based on your credit history and your credit worthiness. If you fail to make a payment, they may become reluctant to do more business with you in the future as a portion of their trust in your ability to repay has been tarnished.  If you file for bankruptcy, you totally break the relationship. Think of it as cheating on your wife; do you think she will trust you the very next day (let’s just hope she won’t throw the vase of flowers you just offered her ;-) ).

A few things to do before filing for bankruptcy

#1 Consolidate your debt before it’s too late.

This is why it is so important to keep a budget. If you notice that you are slowing taking money from your line of credit or your credit card in order to pay for your daily expenses, your monthly budget doesn’t balance anymore. Seek for debt consolidation advice right away. Don’t wait until you start missing payments. I as said before, if you miss a payment (only one small payment of $10), financial institutions will become reluctant to do business with you. Consolidation can help you liberating a few bucks a month so you can pay down your debt faster and avoid bankruptcy.

#2 Consider having a second job temporarily

Working extra hours will never solve your personal finance problems. If you are seriously deep in debt and are considering bankruptcy, the root of your problems doesn’t lie with your income. That being said, having an additional revenue stream applied directly to your debts for a few months may make the difference between getting out of debt and filing for bankruptcy.

#3 Contact your creditors

Another way to avoid bankruptcy is to contact all your creditors and explain the situation to them. While they surely won’t let you get away without paying, they will most likely work with you in order to find a mutually beneficial agreement. Financial institutions prefer to find a solution rather than turning over your case to a collection agency. Running after unpaid balances represents a huge cost for them and they will be happy to collaborate. They can offer to skip a payment, extend your amortization resulting in smaller payments or consolidate your other debts as mentioned in my first piece of advice. However, make sure to call your creditors before any payments are late. They may not be so kind if you are already behind by 3 months!

#4 Have a meeting with your banker

When we are in the midst of a personal financial crisis, it clouds our vision. We are blinded and strangled by the weight of our debt and we can’t see solutions anymore. Speaking with a financial advisor will help to clarify your budget and balance sheet. He will look at your situation with a different perspective and might provide solutions other than bankruptcy.

#5 I would not use friends and family

It is one thing to lose material things; it is another to jeopardize friendship and/or great relationships with your family. If you are on the verge of bankruptcy, I would try to solve the situation myself and not borrow money from relatives. The relationship may get tense if you are not able to reimburse or worst, if you file for bankruptcy later on. Friends and family will always be there to support you. Talk to them and seek their advice, not money.

Remember, once you have avoided bankruptcy, and get out of debt, you are not done with personal finance. Once the major problem has been solved, one must find the root of it. If you don’t find why you were so closed to bankruptcy, the very same situation may happen again in the future. Avoid the common answers like “I lost my job” or “unexpected expenses occurred” as those issues could have be resolved through a strong emergency fund.