In recent years, the rate of filed bankruptcies
has been closely tracked. From the recent high in
2005 of bankruptcy filing, the year 2006
represented a significant drop in the reported
number of filings, but after the end of 2006, the
rate of bankruptcy filing has started to increase
again.
One of the factors for this may be the
new bankruptcy ruling laws that requires consumers
to attending financial management and credit
counseling sessions before they can file
bankruptcy. But since that law was put into
effect, numerous studies have shown clearly that
such counseling does little good for the consumer.
The big problem with this law is that it makes the
assumption that the consumer who is filing
bankruptcy is doing so out of excessive financial
mismanagement or credit abuse. Anyone who has
spent any amount of time studying the underlying
causes for why someone would file bankruptcy can
tell you, almost after a casual glance, that this
is not the case at all with the majority of
consumers who file bankruptcy.
The studies bear this fact out. In fact, out of
more than 400,000 consumers that were counseled
via these mandatory classes before filing
bankruptcy, more than 95% of them continued their
bankruptcy filing after completing the classes.
The biggest problem here is that by the time a
consumer is in a situation to need to file
bankruptcy, they have typically exhausted all
other viable options, and it is too late to make
any significant difference for almost all of them.
The following can be considered early warning
signs of possible future bankruptcy that consumers
should be aware of:
No/little savings cushion
Most consumers in the US have little or no
savings to rely on in case of an expected huge
necessary expense. Most Americans spend more than
they earn, and they finance their greater
lifestyle on credit cards and borrowing from Peter
to pay Paul. Although saving is hard, a shift
needs to occur in the minds of most consumers
about putting a higher emphasis on savings instead
of always "living for today".
Consistently living paycheck to paycheck
Many people say they do not enjoy it but find
themselves living from paycheck to paycheck, such
that when something happens to prevent that next
paycheck from showing up, like a job layoff, they
are already in deep sneakers. Some reports have
indicated that more than 60% of Americans are in
this situation.
Higher than 20% non-mortgage debt to income
ratio
If you are spending more than 20% of your net
income to pay your credit cards and financial
obligations outside of your mortgage, this is a
problem, and a warning sign that financial
troubles could be near.
Always making only minimum payments on
credit cards
Almost half of all people who have credit cards
carry a balance forward from month to month. If
you pay only the minimum payment due each month,
it will take you three or more times as long to
pay off the balance, even if you don't charge
anything more to the card.
Inadequate insurance
Many people consider insurance to be a ripoff –
until they need it. Many bankruptcies are due to
very high cost of medical treatments or car
accidents, where the consumer was inadequately
insured to allow the insurance company to carry
the burden of the majority of the expense.
If you find yourself in these situations, you
should take action to straighten things out so
that you do not become the next bankruptcy
statistic. In addition, consider your alternatives
to bankruptcy such as personal loans or debt
consolidation, which offer some financial
breathing room without the long-term negative
effects of bankruptcy.
