Sending Up a Flare – Signs that Bankruptcy is on the Way
by Ellise Walsh

There is a tremendous stigma to bankruptcy. It is something that none of us ever thought we would face. It is extreme to think of bankruptcy as financial suicide but in some ways, we view it with that level of distaste and dread. “I hope it never happens to me” is a common reflection you and I have felt about that level of financial desperation.

While some of our panic about bankruptcy is exaggerated, it is still clearly a last ditch measure to avoid at all costs. In truth, bankruptcy can be survived and in fact is often the fresh start many businesses and private households need to get a better grip on their financial future. But with bankruptcy laws beginning to tighten, we should be alert to any signals, any warning flares that our financial infrastructure might be sending up that a crisis is on the horizon. If we learn to recognize it, we can step in before it becomes a tragedy.

The inability to carry insurance is one of the signals that your budget is overextended. Life insurance, car and medical insurance are facts of life and while they cost a lot, as responsible adults, we must carry these policies. If our budget has gotten so stretched, no doubt due to high credit bills, that we cannot afford our premiums, that is an early warning sign of bankruptcy to come.

Another signal from your budget that trouble is beginning to get the upper hand is where your credit bills are going. If you credit card levels and other debt indicators is going up more and more despite your monthly payments, that is a situation that can only go on for so long before it all comes crashing down and that means bankruptcy. A quick evaluation of your last three months credit card statements will give you a good picture of the level of crisis this indicator is at.

While you have those credit card bills out, take a look at how much you pay on them each month. Is it over one quarter of your cash flow or are you just barely keeping up with the minimum payments. Yes, those are indicators too for your evaluation of how close you are walking the edge of the cliff of bankruptcy. If you are too close, time to get moving to get away from that drop off point.

In the same category is what you are doing with a home equity loan. If you use them a great deal just to cope with your level of credit debt, that is unhealthy. Moreover, it is dangerous because that debt now has a direct bull’s-eye on your home which is the one asset you never want to put at risk. Be careful with these kinds of loans and avoid them if possible. If you already have them and are having trouble managing them, you have a bigger problem to address in your debt portfolio.

For obvious reasons, most of our warning signs have to do with your personal budget and the health of your finances. Your employment status, chances of making more money or pay increases etc. all have to be factored in as well. But an external force that can come back to haunt you is the level you are connected to others financially outside the immediate budget. If you do not have insurance as we discussed earlier, an emergency can place sudden and disastrous stress on your budget. If you cosign a loan or are financially liable for an individual or business over which you have no control, poor financial planning by someone else can suddenly put a debt on your doorstep that will be hard to chase off.

Any financial action taken against you is a sign of a potential looming bankruptcy. You cannot avoid a lawsuit sometimes and if it if frivolous, it is not as much of a concern. But if a creditor is taking extreme actions, filing suit, getting a lien on your wages or your home or you are having trouble making car or home payments and those assets are in jeopardy, you are much closer to bankruptcy than perhaps you had thought.

If you have reviewed your circumstances and suspect you are close to the edge for a bankruptcy situation, now is the time to act. One of your best resources are those creditors themselves. If you contact them, explain how close you are to using bankruptcy protection and you need help, often they will work out a way to space out your debt, reduce your interest or take other measures to keep you out of trouble. If you go belly up, it’s them that loose so don’t overlook this route if you think you are in trouble.

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