Nobody wants to think that they\’ll ever have to face bankruptcy, but this in itself leads to the problem of some people living in denial, even when there are obvious warning signs that their finances are completely out of control. Living in debt has now become the norm for almost everyone in developed countries – a situation brought about thanks to reckless lending by banks and credit card companies. But when do you know that you\’re no longer living with a \”normal\” level of debt?
Here\’s a quick checklist to help you figure that out:
Personal Debt
Have you calculated your total personal debt within the last 12 months? Or have you ever taken the time to calculate how much you\’re spending each month vs. how much you\’re earning? If not there’s a very good chance you’re already living far beyond your financial means.
Foreclosure Issues
Are you missing mortgage payments, or you\’ve only been able to make part payment on your mortgage for the last several months? Mortgage arrears can start gathering interest with frightening speed, so the fact that you\’re unable to make regular mortgage payments is a major indicator of financial stress.
Creditors
Have creditors or debt collectors been calling you? You might not think this is a big deal because you can always hang up on them, but that doesn\’t mean they\’re going away anytime soon.
Credit Card Living
A key indicator that you\’re heading for financial trouble is that you\’re living off your credit card i.e. you use it to buy your groceries and gas each week. You might even use it to pay your utility bills, or even worse you have multiple credit cards, several of which are already maxed out. Owning multiple credit cards is rarely a sign of a healthy financial bottom line.
FICO Score
A FICO score in the region of 300 to 400 means you\’re now viewed as a credit risk by financial institutions, such as banks and credit card companies. Why? The average FICO score is in the region of 700, so if you find yourself towards the bottom of that scale (300 being the bottom) then that has to tell you something. A poor credit score leads to not being able to take advantage of mainstream borrowing and having to rely on \”alternative\” sources of finance instead.
High-Interest Loans
If the only loans you can qualify for are non-traditional (high interest) \”money lender\” loans then you\’re also well on your way to bankruptcy, and probably have been for several months.
Minimum Payments
Can you only ever afford to make the minimum payments on your credit card or store card each month? Or, even worse, are you missing payments on these on a regular basis. Once you find yourself in a situation where you\’re missing payments on any form of high-interest debt then you need to stop spending and investigate your personal finances immediately.
Debt Management Plan Ineligibility
This type of plan is usually the final step before having to declare bankruptcy; they allow you to reduce your monthly payments, or make one single payment instead each month. If, however, a debt counselor finds you\’re financially incapable of participating in a debt management plan, then declaring bankruptcy is your only other option.
Are You Bankrupt?
Although there\’s a huge stigma attached to it, bankruptcy means nothing more than you now owe more than you\’re capable of repaying based on your current income. The first step is to gather together everything you consider to be an asset, including any real estate you own, stocks or bonds you hold, and any non-bank savings you might have. Write that total figure down, and be completely honest with yourself when doing that; now isn\’t the time to lie to yourself to make things seem better.
Once you know your total assets you\’ll then need to spend some time working out your total debt, or liability. This means going through bank statements, credit card statements, cell phone bills, cable bills, store card statements, and any other bills you have to pay on a regular basis. Make a note of the total amount you spend each month.
If the amount you owe (your liabilities) is greater than the total amount you own (your assets) then it\’s safe to say that you\’re moving rapidly towards having to declare bankruptcy.