The recession has caused many people to get caught in a bad cycle of robbing Peter to pay Paul. As this cycle continues, it will inevitability reach a point of no return, the point when Peter does not have any more money to rob and you now owe both Peter and Paul.
Before we can find a solution, we must first recognize why we are in the cycle in the first place. Not all of the reasons for the cycle may be your fault and you may not even be able to control the reasons. You may have lost your job or had your work hours or hourly rate cut due to the down turn in the economy. You may have had unexpected medical bills or unexpected home or auto repairs. There may be other reasons for the cycle but whatever the reason, there are lots of creditors waiting in line with their hands out demanding a payment. And with little or no money to go around, what do you do?
Don’t ignore the problem. Sticking your head in the sand is not a solution and will just make things worst by increasing late fees, interest charges and further ruining your credit rating. You must take positive action.
First, STOP SPENDING MONEY. Don’t borrow from a payday loan, don’t pawn your car, don’t borrow from your 401k. You can not borrow yourself out of debt. You need to take stock of where you are so for the next few days, make due with what you have. Sort through your expenses, bills and income to get a clear picture of your position.
Next you need to put pen to paper and write down everything. Every debt you owe, all credit cards, medical bills, utility bills, mortgage or rent, car payment, food bill, everything. Review these bills and expenses to see if any can be reduced or discontinued. (For example, you may be able to cut out internet or cable)
The third thing to do is to decide which bill has the highest priority. Your life necessities should be at the top. Housing, Food, Utilities, and transportation. You may notice that credit cards and medical bills are not on that list. (Some financial gurus will even leave utilities out of the top of the list.) If there is not enough money to cover the bills on the bottom of the list then you may have to accept that your credit score may just take a hit.
If your cash flow problem is temporary in nature and you do not have any cash reserves to meet your needs, then this may get you through your situation and you can recover once your income returns.
However if your problem is long term or permanent then you may need to consider other options. Do you need to file for Bankruptcy? It depends, filing for bankruptcy is not always the solution. If your bills are not that monumental or your financial prospects are likely to improve, a bankruptcy filing may be a major overreaction. The Supreme Court of the United States has stated that “the principal purpose of the Bankruptcy Code is to grant a fresh start to the honest but unfortunate debtor”. If you feel you need the fresh start that the bankruptcy code provides, feel free to call us to review your options. Also check back for future blog entries on other topics of interest.