There are several reasons people file bankruptcy. The usual reasons people cite are medical bills and job loss. These are what you will see when people are looking to score political points or argue for this or that new law or regulation. However, what I think these studies lack is true insight as to what is going on. I’ve been a bankruptcy attorney for a number of years, and have helped hundreds of people start over and am intimately familiar as to why people are looking into bankruptcy assistance. So take a look, and hopefully other peoples’ lessons will help you avoid bankruptcy and a trip to my office.
1. Car payments. For some reason, people are under the impression that a car payment is a requirement to owning a car. I’ve checked the law and it is not. Instead of buying what one can afford, people buy as to what someone will lend them. I see people who spend almost as much on a car payment as they do on rent. When I ask if they did not have the car payment would they be ok, a fair number of clients respond things would be easier. I get it, you need a car, not arguing that point. However, do you need an Escalade? The purpose of a car is to get you from Point A to Point B with A/C and heat. Everything else about a car is a waste. You should not be driving a nicer car than your attorney. In case you are wondering, for most of the last 5 years I drove a 1997 Toyota Avalon with over 240,000 miles on it. People will then stress that they are worried about breaking down. Even if you fix a car every month, it will still be cheaper to fix it than be stuck with payments for 5, 6, 7, and probably soon to be 10 years. Also, everyone has a cell phone these days, so getting help is not difficult. Leading me to….
2. Cell phones deals. While I am not saying you shouldn’t have a phone, why is your cell phone payment $200+ each month? If you are struggling, maybe a disposable phone and a $40 a month plan is better. Yes, you cannot as quickly as update your Facebook status, but “broke” is not much of a status.
3. Adult children. If your kid is over 18, out of high-school, then they should be taking care of themselves. Period. This does not mean they cannot live at home, or you cannot help out when they need a meal, but at some point cut the cord. Parents will give their kids money, while the kids don’t work, every month and do not see what the problem is. The kid’s job becomes sponging off the parent, and the parent gets stressed out because they cannot afford everything. Cut the kid off. They will survive. They are young. They can function without sleep for days on end so they should be able to work multiple jobs. Don’t believe me? Try it. Lack of new clothes and food will force the kids to become adults to provide for themselves. You spent 18 years taking care of them, now take care of yourself. Avoid bankruptcy and cut the kids off.
4. Co-signing. Whether it is a student loan, a house, car, phone, jewelry, or whatever, never co-sign for someone you are not married to. Why does that person need a co-signor? Because they are a poor credit risk and the person loaning them the money does not think it will be paid back. If the person loaning the money doesn’t think they are going to get paid, then you should expect to be the one doing the paying. Even worse, you will not have the asset being borrowed on. What is even worse, by the time you find out the loan is in default, several payments will have been missed, causing extra fees and higher rates. So don’t co-sign. Ever. Do this and avoid bankruptcy.
5. No budget. A budget is not evil. It does not prevent you from doing things. Almost every person filing bankruptcy does not have a budget. It can be written, it can be the envelope method, it can be a spreadsheet, it can be on clay tablets for all I care, but have a budget. It is a plan on how you are spending your money. When you file bankruptcy, you are forced to do a budget, so do one in advance and avoid bankruptcy.
6. Lack of savings. Save when you can. Put it in your budget. Eventually something will break or you will need a new(er) car and will need money to pay for these things. Various people will say various amounts about how much you need for savings, but I don’t care if it is only $20 in a coffee can, start the habit. The credit card is not an emergency savings plan. Look, the A/C will go out. The kid will break an arm. The tire will get a flat. This will all happen on the same day. If you have only $500 saved, you can at least address one of these problems without panicking at what to do. The more you save, the less you panic. Think of it this way, you will have to pay for these things anyway, so save and plan for it on your terms, instead of borrowing on someone else’s terms. So avoid bankruptcy and save.
7. Not enough jobs. This is not a complaint about the economy or big business. This is focus on the individual not working enough. You are not going to get rich working 40 hours a week. You also cannot keep up with the Jones’ working 40 hours a week. Some jobs are not 40 hours a week. So go get two, three, or however many it takes to get out of debt. No, your life will not be fun. Work will not be fun. That’s ok. Work is not supposed to be fun. If work was fun, you’d get paid a lot less. Work at McDonald’s (I did), deliver pizzas, referee soccer games, teach a class, walk a dog, clean the restrooms at a bar on the weekends (did that also), do whatever it takes. The benefits are two-fold. First you will have more money and second you will have less time to spend money that you make because you are always working. Now, I know as one gets older it is harder to physically work 80 hours a week, so do it while you can to get and stay out of debt and build your savings.
8. Eating out. People eat out too much. Every time you do, that is $40 or more out the door. Eat at home. Pack a lunch. Eating out usually tastes better and is easier, but do it less and get out of debt and avoid bankruptcy.
9. The inability to say “No”. This could really apply to many of the above categories. People have to learn to say no to life’s impulses that are causing them financial harm. It is the classic portrait of the angel and devil on one’s shoulders; one saying to save, the other to spend. It is always more pleasant, in the short run to say “Yes”. It feels good, it is a positive word, it puts a smile on the sales person’s face when you do. Say “No”, instead. To the kids, to the car salesman, to the dinner out, to temptation, to whatever is costing you money. If it is truly a need, as opposed to a want, it will be there tomorrow. There are no once in a lifetime deals. The deal will come up again, and often at a better price, if you wait.
10. The ATM card. In some ways this should almost be number one, but I’ve given up hope on winning this battle. It is a fact that using an ATM card is easier than using cash. Not to pay for things, but emotionally. People will spend minutes in line, counting out pennies, instead of breaking a $100 (no different in how much you have) but think nothing of swiping a card. Why? Because the physical act of parting with money causes pain. The ATM swipe does not. Easy to buy a $5 coffee with a card or a phone. Not as easy to party with the money. You want to avoid bankruptcy? Ditch the ATM card and use cash. Go into the bank and withdraw cash as you need it. Talk to your teller, they are nice people, really. Using cash, and writing checks for bills, will help you budget, and let you know immediately what you are spending money on.
So that is one person’s educated opinion on why people file. I hope to never see you in my office for one of these reasons. Life happens, I get it, and people need a fresh start and that is what I provide. Sometimes I just wish I wasn’t as busy.
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