3 Signs You’re Approaching Bankruptcy and What To Do Next

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Bankruptcy is something that no one plans for or wants. Financially speaking, it’s usually the last step you ever want to take, as it remains on your credit history for 7-10 years. It can also slash hundreds of points off your credit score and make it extremely difficult to get anything from a mortgage to an auto loan to a credit card for years afterward. However, you’ll typically know months in advance if you’re heading in the direction of bankruptcy, and that may give you the time you need to prevent it.

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Here are some signs that you may be approaching bankruptcy, along with tips on how to avoid it if you see it coming.

Signs You’re Approaching Bankruptcy

Except in the case of extreme tragedy, no one just immediately falls into bankruptcy. Usually, you’ll know you’re headed for bankruptcy long before it occurs. Here are three of the most telling signs that you could be headed for a financial disaster.

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You Can’t Pay More Than the Minimum Due on Your Credit Cards

Carrying a balance on your credit cards is a financial no-no, but it’s quite common in America’s consumer-oriented society. But carrying a balance in and of itself is not necessarily a precursor to bankruptcy, even if it’s financially unsound. When you should start worrying is when you can only afford to pay the minimum amount due on your credit cards. Oftentimes, the minimum required payment is only slightly above the amount you’re getting charged in interest every month, meaning it could take literally decades to pay off your balance. Since paying off your debt completely should be a top priority, if you only have the cash to pay the minimum amount due, it’s a red flag that means you’re stretched financially.

You Spend More Than You Earn Every Month

Many people have heard the advice that you should “pay yourself first,” but few seem to follow it. Ideally, when you receive your paycheck, you’ll first tuck away some of that money for savings and investment, then pay your bills, and then live off the rest. But many Americans reverse that order, spending their money first and then planning on saving “whatever is left over” at the end of the month – which is usually nothing. Even worse is if your credit card balance grows every month because you spend more on it than you can pay off. If you consistently find yourself in the position of having no money at the end of every month, or if your credit card balance continues to grow because you’re spending more than you earn, you could be on a long-term path toward bankruptcy.

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You Have No Emergency Fund

Having an emergency fund is a critical step to help protect you from bankruptcy. With a sizable emergency fund, you can cover unexpected bills, from car breakdowns to uncovered medical expenses, without having to go into debt. Without an emergency fund, you leave yourself exposed to taking on additional debt, which can easily compound and get out of control. Although the lack of an emergency fund won’t put you directly on the path toward bankruptcy, it does leave you vulnerable to financial disasters that could. 

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Steps To Take if You’re Approaching Bankruptcy

If you think that you’re headed towards bankruptcy, it’s time to act. Bankruptcy isn’t always inevitable, and the sooner you take action to correct financial missteps, the more likely it is that you can avoid it. Here are some quick fixes that may be enough to stave off a bankruptcy filing.

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Immediately Cut Spending

Bankruptcy comes in many forms, but at its heart, it always amounts to the inability of a person to pay their debts. If you’re in danger of being consumed by debt, the first step you should take is to immediately slash all of your non-essential spending. This means eliminating all discretionary purchases and only paying for things you absolutely have to, such as rent, power and food. Drop the nights out at restaurants and clubs, skip this year’s vacation and hunker down until your savings start rising instead of falling. If you can cut your spending to the point that you’re keeping more than you spend, you’ll be on your way to climbing out of your debt hole.

Talk to Your Creditors

Medical expenses are one of the most common triggers for bankruptcy. If you find yourself in this situation, talk to your medical creditors to see if you can work out some type of payment plan. Many hospitals will reduce your bill if you can pay it in full in a certain period of time, while others are perfectly willing to set up installment plans so you can pay over time. 

If credit card debt is the reason you’re headed for bankruptcy, talk to your bank about working out some type of accommodation. Some credit card issuers will agree to defer payments or interest to help you get through a rough patch, while others might accept a lower settlement balance if you can pay in full right away. Just bear in mind that any type of arrangement you work out with a credit card company is still likely to damage your credit score.

Seek Additional Sources of Income

If you’re headed towards bankruptcy, it means that your expenses are higher than your income. If cutting your spending isn’t doing enough to protect you from bankruptcy, you’ll have to find a way to increase your income. Ask for a raise at work, take on additional hours or find a side gig so that you can boost the income side of the equation. In conjunction with reduced spending, your additional income may just be enough to keep you out of bankruptcy. 

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.

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