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Bankruptcy Filings Are Down But Does That Mean The Economy is Improving?

February 14, 2012

I recently read an article that said that nationally bankruptcy filings are down 8%.  Normally, that would be an indicator that the economy is improving, however the writer suggested that this was not the sign of an improving economy but was really proving that the economy was worse off than most people realized.  He felt that people simply cannot afford to file for bankruptcy protection and as soon as they can afford to do so, bankruptcy filings will increase.  There are people who look at these indicators and use them to overestimate their own personal financial situation.

Given the economic hardships that the country has faced the last couple of years, people are looking for any positive sign they can, hoping that the economy has turned and that more prosperous time are ahead.  While I join the nation in hoping that we are on the road to economic recovery, too often I see potential new clients who let their hopes for a better future cloud their judgment leading to further stress and financial problems that could have been avoided.

I know that no one wants to admit that they are in financial trouble; however, recognizing the signs early and getting competent advice regarding your options is always the best thing to do.  So what are the early signs that you may be experiencing financial difficulties?

1 – You are only paying the minimum amounts due on your credit cards.  Most people will tell you that when they are paying the minimum amounts due on their credit cards they are “paying their bills” and are not in trouble.   That is far from the truth.   If you take a look at your credit card statement, it will show you how long it will take you to pay off the current balance, assuming that you make no more charges on the card, if you only make the minimum payment that is due and that payment is on time each and every month.   Often, it is stated that it will take as short as 8 years and as long as 22 years to pay off credit card debt.  22 years to pay off a credit card and what will you have to show for it?  Anything you bought with the credit card will be long gone.  Your credit score may be good but you could go broke keeping it.  If you don’t have a viable plan to pay off your credit card debt in a reasonable amount of time then you could be in financial trouble.

2 – You are not contributing money to a retirement account nor have other savings plans for contingency purposes.  The sad truth is that many Americans are living paycheck-to-paycheck and do not have any savings for emergency purposes and are not contributing fully to a retirement plan.   They need the money now to meet their monthly obligations.  While I love what I do and enjoy coming into work every day, I want to be in a position to not have to do it every day and be able to afford to retire, not depending on Social Security in my golden years (who knows if it will even be around at that time).   The only way to ensure that you can retire is to start saving now.  It is never too late start.  This includes starting savings accounts for emergencies, major asset purchases including cars, children’s educations, and even a vacation.  When you are spending all of your paycheck on basic living expenses with no savings, you may be in financial trouble.

3 – You are paying too much of your income to maintain your residence.   This is probably the most sensitive subject that I deal with when talking to clients.  Too often, I see a client who has a house that is severely underwater and they are spending a large portion of their net pay each month to make the mortgage payments.  They scrimp and make the payments usually before the payment is late so that a late fee isn’t imposed but yet allowing additional interest to accrue.   In my opinion, home ownership should be treated as a business decision and when owning the home is no longer a good business decision, yet you are still paying for the house, you may be in financial trouble.  I am not advocating that everyone who is upside on their real estate walk away from it but rather I am stressing that when you see that the property is taking too much of your money income and is worth much less than you owe on it, you may be in financial trouble.

There are, of course, many more signs that you may be in financial trouble.  No matter what factor is causing you to review your finances, once you see the signs, it is always best to seek competent legal and financial advice regarding your debt.   The sooner that you do it, the more options you may have and the quicker you can get back on the road to recovery.

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