We have a guest attorney here today to offer you some tips on avoiding bankruptcy. As someone who has “been there done that” while it might seem like a quick fix at the time, there are many downfalls.
Hi, I’m David M. Offen, Esq. and I’d like to share with you four ways to avoid bankruptcy, from the perspective of a Philadelphia bankruptcy attorney who has seen it all.
1. Live Within Your Means
By far, this is the most problematic area for individuals and for families. We are pitched services and products 24-7, and it is admittedly difficult not to indulge in “retail therapy” and overspend.
First, how do you know if you are living within your means? You should first sit down and create a budget in writing. That budget should set forth your monthly income and expenses in full – do not forget to pay yourself first, i.e., deposit 10% of income to savings.
If you find your income is insufficient to meet the necessary expenses, then you need to either find a way to increase your income or find a way to eliminate or reduce some expenses.
Quick Ways to Increase Income
- Take on part-time seasonal work
- Ask for a raise or more hours or overtime at your current job
- If your spouse stays home with the kids, he or she can find part-time work from home
- Sell unneeded or unused possessions, such as collectibles, jewelry, clothing at a yard sale or online auction.
Easy Tips for Reducing Expenses
- Go out to eat only once or twice a week
- Shop around for a more affordable cell phone plan
- Save on your electricity bill by making sure to turn off lights when you leave a room
- Shop for a less expensive cable package – perhaps you would be satisfied with internet streaming?
- Used clothing, furniture, books, and other media are much less expensive than new. Go to yard sales, flea markets, and only auctions and shop there. Use your local library.
- Turn your thermostat down in the winter, and up in the summer, to save on heating and air conditioning costs.
- Downgrade your cable plan or go with streaming your favorite shows over the internet.
- Make sure you are not paying every month for memberships or subscriptions that you are not using.
- Use coupons and buy in bulk for big savings
2. Save for that Rainy Day
By “rainy day” I mean a day when an unexpected significant expense arises, such as if your mechanic is changing your oil and finds a cracked head gasket, or your washing machine springs a leak. Or it could be a day when your hours are cut at work, or, you are fired or you quit your job. What to do?
Conventional wisdom used to be to have six months’ income saved for an emergency. Some experts now recommend eight months. Regardless of which you choose to save for, having savings ensures that should a large expense unexpectedly arise, or should your income stream be interrupted, you can deal with it with no disruption to you or your family.
Saving a bit every paycheck will add up over time – I recommend saving 10% and doing that first, before paying any other expenses. Budget for that.
When you have to dip into savings for an emergency, resume saving as soon as you can. Having these funds in reserve will give you a sense of calm and confidence that you can meet any financial challenge that crops up.
3. Use Credit Wisely
Here’s what happens when people don’t have a budget or don’t stick to a budget, or a rainy day arises and they have no savings to fall back on – they rely on credit cards to pay expenses, and their credit card balance inevitably balloons to the point where they cannot pay the monthly minimum much less hope to pay off the full balance.
I see this all the time in my practice. In this situation, people with steady income file Chapter 13 Bankruptcy. People who have lost their job or have experienced a reduction in income in these circumstances file Chapter 7 Bankruptcy.
Now, I’m not advocating cutting up your credit cards – using credit cards wisely helps keep your credit score high. I am a big fan of credit cards that give you points, air travel miles, or cash back – I regularly use two cards, one for gas and the other for all grocery shipping – then pay them off in full each month while racking up points and free gas!
If you find yourself burdened with overwhelming credit card debt, and you despair of ever paying it off, it might be a good idea to schedule a free consultation with a local bankruptcy attorney to discuss your options.
If you are not willing to contemplate bankruptcy and debt settlement options, then you have to figure out how to pay off your credit cards over time. The rule of thumb is to pay at least twice the minimum on the credit card with the highest interest rate and pay the minimum on your other cards. Once that card is paid off, similarly pay off the card with the next highest interest rate, and so on.
4. Have Adequate Insurance
Health insurance, auto insurance, homeowner’s or rental insurance – these are must-haves, especially if you have a family. A medical emergency, a car accident totaling the car, or a home fire or burglary – I have known these calamities to force families to file bankruptcy. However, if you are adequately insured you are prepared for any of these otherwise devastating events.
You might also consider income insurance, again, especially if you have a family and your income is on the higher side. Unemployment insurance from the government will not replace your income in full and will be inadequate to pay your fixed expenses, like your mortgage. Private income insurance is worth looking into – it is not cheap, but it will provide you with peace of mind knowing that if anything happens to your job it will not disrupt your family.
Last, you must have life insurance on the family’s primary breadwinner. If something happens to the family breadwinner, there must be a substitute income source in place to protect and preserve the lifestyle of the rest of the family.
About the author: David M. Offen, Esq.
A native to the Philadelphia area, Mr. Offen attended Temple University College and Law School. Mr. Offen is licensed to practice in the States of Pennsylvania and New Jersey. He is a member of the Eastern District of Pennsylvania Bankruptcy Conference and the National Association of Consumer Bankruptcy Attorneys and maintains an active blog on all aspects of a bankruptcy filing and current events.