3 Essential Tips to Avoid Ever Filing Bankruptcy

I work with Philadelphia Bankruptcy attorney David M. Offen, Esq. and he shared three techniques that help people – even shopaholics! –  remain financially solvent. 

1. Use Credit Wisely

It is essential in today’s society, and in today’s market, to achieve and maintain a reasonably good credit score. Why? Because those of us with the best credit scores are offered the best interest rates on credit cards and the most favorable terms on car leases and loans and mortgages. This makes borrowing money less expensive for those who have, by their credit history, show they are low-risk. 

By way of contrast, those of us with lower credit scores are often preyed upon by predatory lenders offering outrageously high-interest rates and longer terms. And when people with lower credit scores apply for a mortgage or car loan or lease, often more of a down-payment is required in order for the lender to take a risk on them.

Those people who need to borrow the money the most, pay the most. It doesn’t seem fair, does it?

So how does one achieve and maintain a reasonably good credit score? 

Pay your bills in full and on time 

This means your monthly bills, like mortgage or rent, car, utilities, student loan, credit card minimums. If you can’t pay a bill in full or on time, contact that creditor – chances are they will work with you to get paid partially or over time rather than just report you as a dead beat to the credit agencies.

Avoid having high revolving-debt (credit card) balances for long periods of time

If you must make a large purchase with a credit card, commit to paying it off in as few months as you can manage. If the credit agencies see you maintaining high balances for several consecutive months, that is a red flag that you are struggling to make ends meet and your credit score will take a hit.

Do Not Rely on Credit Cards for Living Expenses

If you find yourself using credit cards for things like groceries or gas – and not because you are using the card to get the points or the airline mileage – and you are not paying those credit card balances off every month, you are living beyond your means.

Using credit cards like this is a problem because if it has become a habit, chances are you are only paying the minimum due each month and the balance is ballooning. Eventually, you will be unable to pay even the minimum monthly payment. This is what causes bankruptcy.

If you think you might be relying overmuch on credit cards, don’t panic. Just take a few minutes to sit down and write down all of your necessary monthly expenses – if you know the exact amounts, great, but you can also estimate. Add your expenses up, and compare them to your monthly income.  Did you come out in the negative or the positive?

If positive, great – put 10% of income aside for savings, and you are doing well.  If negative, then you either need more income or to cut expenses.

Three Painless Ways to Increase Income

  1. Shop in a points or cash-back situation
  2. Take on a part-time or seasonal job
  3. Sell unneeded or unused belongings online or at a yard sale.  Try online for the higher end items like electronics or jewelry or collectibles. 

Eight Painless Ways to Reduce Monthly Expenses

  1. Look at your cell phone plan – would a family plan be less expensive?
  2. Do the same with your cable plan. Many people are viewing programs streaming from the web. 
  3. Save electricity by turning off appliances when not in use, and turning off the lights when you leave the room. 
  4. Shop in big-box stores and buy essentials in bulk – you will save a lot!
  5. Are you paying for any magazine subscriptions or memberships (gym?) that you are not using, really?  Cancel them.
  6. A Kindle or other pad-type device makes reading the latest novels or getting a new cookbook instant, and much cheaper than a print copy.
  7. Save on heat and air conditioning expenses by turning the heat down a degree or two, and the airconditioning up a degree or two. 
  8. If you need to purchase something online or in a store, wait until it goes on sale or try finding a coupon. You can also ask the salesperson if there is a discount available.  If you don’t ask, you don’t get! 

2. Save!

This is as important as using credit wisely. Everyone must save for a rainy day, meaning a day when some significant and unexpected expense occurs, such as the dishwasher breaking down or the car needing new tires, or when you have a sudden and unexpected dip in income. 

If you don’t have a “rainy day” savings, what happens? Well… people without savings rely on their credit cards.  Then you get into the problem of maintaining a large revolving balance, the credit score taking a hit, the balance ballooning under the effect of the high-interest rate, and then the minimum monthly payment increases to the point where you cannot afford to pay it.

Conventional wisdom is to put aside 10% of income for retirement. But in addition to your retirement savings, you need an emergency fund to avoid being caught short in case of an emergency. How do you build that?

By saving for the emergency fund first.  Put 10% of income aside in an interest-bearing account until you have three to six months’ worth of income set aside.  Once you have that, put that 10% in another interest-bearing account for retirement.

The day will come when you have to dip into that emergency fund. So do it knowing that those funds have been working for you in the meantime, accruing interest and that you will not be paying exorbitant interest on the money you just took out.

When the emergency has passed and you have funded it successfully, replenish your emergency fund by diverting that 10% into that account until it is full again.  Then resume retirement savings.

3. Take Out the Insurance You Need

The Types of Insurance Most Families Need

Most families need homeowner’s (or rental) insurance, car insurance, and health insurance.  Without these, you could be hit with an expense that would ruin your finances now and for years – such as a house fire or a car accident that totals your car, or a major medical problem. These events can be devastating enough without the financial means to recover from them. Don’t skimp on these types of insurance – that would be penny-wise and pound-foolish.

What about Life Insurance?

If the family has a primary breadwinner or two breadwinners, they should have life insurance naming their dependents as beneficiaries. Depending upon the benefit amount, such a policy could do as little as pay for funeral expenses, to supporting dependents in place of the insured’s income. 

What about Income Insurance?

High-earners should definitely consider taking out income insurance if unemployment compensation could in no way meet their expenses if they lose their job.  Not having income insurance in this instance is a recipe for a bankruptcy filing.

About the author:

Veronica Baxter is a legal assistant and blogger living and working in the great city of  Philadelphia. She frequently works with Philadelphia bankruptcy attorney David M. Offen.