In the first half of 2010, personal bankruptcy filings in the United States totaled 770,000+ people. Filing for bankruptcy is a difficult, emotionally draining process. While it may not be the end of the world for some people, it is still a financial outcome that you should strive hard to avoid. The reasons for bankruptcy filings can vary greatly from persons to persons, and many times it can be out of your control. But sometimes the things you do can accelerate the outcome, and here are eight such ways (in no particular order).
1. Abusing Credit Card Balance Transfers
At times, credit card balance transfers can be a savvy financial move to consolidate and reduce the interest you pay on your credit card account. But many times, it can also easily be a way for you to continuingly shuffle your credit card balance from one credit card to another. A 0% balance transfer may seem like a good idea at the time, but with the advent of high fees without caps, coupled with an improper plan to pay off the balance transfer, you can easily increase your debt to an unmanageable level.
2. Frequently Using Payday Loan / Payday Advances
Payday loan may seem like a convenient means to meet your financial deadlines, especially if cash is tight and you have bills coming up. But the fact of the matter is, payday loans are financial products that keeps you in the poor house. The business practice takes advantage of those without access to traditional/mainstream banking services.
Thought the 29% interest on your credit card was sickeningly high? Payday loans are an entirely different beast. When the fees are factored in (e.g., $17.50 for every $100 you borrow), the interest rate for such a payday loan are a ridiculous 911% for a one-week loan, 456% for a two-week loan, and 212% for a one-month loan.
3. Keeping Up with the Joneses
What’s this? The neighbors just got a brand new luxury sports utility vehicle? Well we can’t be the only family on the block without one too!
Keeping up with conspicuous consumption can be a sure-fire way to dash to the poor house. Just because your peers, family, or neighbors are appearing to do well financially does not mean you need to splurge to match. The quicker we can remove the tie of materialistic purchase with our livelihood, the happier we’ll all be. Spend your money on what’s truly important: a fun trip for the family to visit grandma; or college tuition for the kids. There’s nothing wrong with plopping money down for a nice new European-made SUV, but if you’re buying it just to one-up the neighbors, you’re probably spending your money for the wrong reasons.
4. Spending More than You Earn
This should be rather self explanatory. Budgeting is never fun but declaring bankruptcy is even more of a joy kill. By being careful with your expenses, you can avoid facing debts that may unexpectedly accumulate. Avoid purchasing decisions that involves thought process such as “We can always pay it off later” or “I’ll just put it on the credit card for now.” While there are other methods to quickly reach bankruptcy, spending more than you earn is an almost guaranteed method.
5. Living Larger than Necessary
This is a bit similar to “keeping up with the Joneses” — but in this particular case, you can be doing it without anyone noticing. Just graduated from college and landed an okay job? You don’t need to immediately upgrade your studio apartment to a lavish luxury penthouse. Even if you can afford it, stretching your dollar and living it up at times can be a detriment to your financial well-being. You can easily cross into the “spending more than you earn” zone and find yourself in financial hot water.
6. Underestimating Health Care Costs
Time after time and studies after studies has revealed that medical bills and health care cost are the number one leading cause for personal bankruptcy in the United States. A 2007 study from Harvard researchers showed that 62% of bankruptcy were caused by medical bills, and what’s even more troubling is that 78% of those bankruptcy filers had insurance.
Unfortunately, there’s no easy way out of this potential financial pitfall. Making sure you have the proper health insurance coverage base on your family’s medical history, actually utilizing your doctor’s visit from any health coverage plans you have, and being proactive about your lifestyle/health choices will do wonders to negate any avoidable illnesses that can be devastating to your financial life.
7. Paying for Expensive Degrees that Don’t Pay Back
Here’s the thing about student loans, even filing for bankruptcy will not wipe the slate clean. Along with certain taxes owed and child support payments, student loans are not dischargeable under United States bankruptcy laws. Though you can argue for undue hardship, the granting of this appeal is extremely rare.
Because of this, it is even more important for you to be savvy when you take out student loans for higher education. While the merit and earning potential of a college degree cannot be refuted, as the cost of college steadily rise through the years, more and more students are finding themselves in the troubling position of an expensive degree but with a job that doesn’t cover the cost of said degree.
Be smart about your education choices. You don’t need to specifically go for degrees that lands six-figure jobs, but if your degree ended up costing you $80,000 in student loans and all you can get are $30,000 a year jobs, you may have made an impractical mistake. Figure out what the job prospects for your major/interest may be like, and be realistic about your earning potential with your education.
8. Overindulging in Vices
This will come off a bit judgmental, but sometimes, balance in life is key. A drink now and then is no big deal. In fact, getting smashed is probably one of the finer things in life. There is nothing more enjoyable than having a good time with friends and family, but doing it responsibly is key. And this obviously isn’t limited to drinking. Maybe you love to visit the local card room. Perhaps you love betting the spread whenever your favorite team plays. And of course, there are many more other things that can easily fall into the “vice” category.
Yes, bad habits are a subjective thing. Yes, there are plenty of functioning alcoholics/what-nots out there, but that doesn’t mean they’re not one slippery slope away from a destructive, life changing behaviors. How we choose to live and how we spend our time will eventually affect our pocket book. No doubt that living life on the extreme end can be a quick way to reach bankruptcy courts — but let’s be frank; there are far more important things it’ll affect before the damages reach your wallet. If you ever worry that you’re partaking things on the extreme end, step back, and seek help where appropriate.
Have you or anyone you know made some financial mistakes that led to filing for bankruptcy? Are some of these filings amendable or were circumstances beyond their control? Please feel free to share in the comments below.