In many circumstances, you take on debt because something unexpected happens. You or a loved one may lose a job or face long-term health problems. In other situations, however, the need to file bankruptcy may arise because you have developed some poor financial habits that trap you in a cycle of taking on more and more debt.
How can you tell if you are just worried or if your finances are actually a problem? Although everyone’s situation is different, you may want to consider bankruptcy as a real option if you find yourself engaging in the following bad habits.
1.You are using credit cards for everyday expenses.
Credit cards and other forms of revolving credit can be extremely helpful for those who need to make periodic large purchases or want a backup plan for their finances. However, when you rely on credit cards to meet your regular monthly expenses, that could be the sign of a problem.
The average credit card interest rate is around 16 percent. At that rate, your daily interest is .04 percent per day. While that may not seem like a lot, it definitely adds up. For example, if you have a balance of $10,000 on your credit card for a year, you will have to repay an extra nearly $7,000 if you are making $200 payments per month for 83 months. In that scenario, you end up paying $17,000 for something that should’ve only cost $10,000 if you paid up front.
Your necessary living expenses on a monthly basis should be included in your budget. If you cannot afford to make these payments or you must use a credit card to keep up on a regular basis, you may be overspending, or your income is not enough to cover your lifestyle.
2.You are living paycheck to paycheck.
Living paycheck to paycheck is really not all that uncommon. However, if you are actually completely out of money or over-drafting your account on a regular basis because payday is not coming soon enough, that is a sign of a more significant problem. Taking on payday loans can also make that problem much, much worse.
Spending beyond your means regularly may be a sign that you are buying things on impulse and that you have trouble controlling your spending. It is a good idea to set a monthly budget and stick to it. You can revise it as necessary every few months or once per year. Keeping track of how you are spending money and where it is going can help you spot impulsive or unnecessary spending. On the other hand, if all of your money is going toward regular bills or expenses, you may need to find a way to increase your income, change your lifestyle, or look for another option—like bankruptcy.
3.You do not have any savings.
The Pew Charitable Trust reports that 60 percent of households have experienced a financial shock in the past year. Of those money emergencies, the median amount was $2,000. These hardships could come in the form of job loss, home repair, automobile repair, or a pay or hours cut.
For those who are living paycheck to paycheck, having a sudden expense or drop in income could be financially devastating. In fact, 60 percent of Americans indicate that they do not have enough savings to cover a $1,000 medical expense or car repair. You may end up having to put those expenses on a credit card, which increases the overall cost of the loss as well.
Keep in mind that your emergency fund should not be the same as your retirement fund. You need that money for your retirement; you should have a separate emergency fund that has nothing to do with your retirement. Tapping into your retirement fund could also be a sign of severe financial strain.
4.You are relying on others financially.
Borrowing money from others occasionally or for a significant, unusual expense isn’t really a concern. However, if you are regularly relying on others to pay your normal bills, that is a serious red flag. In many cases, borrowing money from family and friends is the last resort—even after you have used up all of your credit options elsewhere—which makes it even more concerning.
Borrowing money puts strains on your relationships with others, and it just increases your total debt load. Although you can discharge debts to loved ones in bankruptcy, you may not want to, which means that bankruptcy may not solve problems related to borrowing money from friends and family.
5.You are hiding from debt collectors.
Denial about your financial situation can be a serious problem. Those who know they have severe financial problems sometimes avoid any communication that may be about their debts, including checking their mail and answering their phone. If debt collectors are hounding you and bills are piling up, you likely have a problem.
If you ignore your financial situation too long, creditors will come knocking. They can begin to garnish your wages, repossess your assets, and more. Turning a blind eye to the situation will only make matters worse.
6.Your credit score continues to drop.
Your credit score is really the culmination of a lot of financial habits. If you cannot keep up with regular monthly payments, for example, your credit score will drop. If you keep applying for more credit options, then your score will fall as well. If your revolving credit balances are high, that will hit your credit score too.
You may have heard that bankruptcy will harm your credit, and that is true. However, by the time many people file bankruptcy, their credit score is already so bad that adding bankruptcy to the mix really will not have that much of an adverse effect.
Your credit score is a crucial indicator of your financial health, so if it starts dropping, there is likely a poor financial habit or decision to blame.
Considering Bankruptcy? Get Help!
If these financial habits seem familiar to you, bankruptcy might be a good option for your situation. In fact, our New Jersey attorneys can take a look at your financial practices and determine if you should be worried about having to file bankruptcy in the near future. Contact us today to schedule a free consultation with one of our trusted New Jersey lawyers to get started.