Take Note of the Early Warning Signs of Possible Bankruptcy

By Jon Arnold

In recent years, the rate of filed bankruptcies has been closely tracked. From the recent high in 2005 of bankruptcy filing, the year 2006 represented a significant drop in the reported number of filings, but after the end of 2006, the rate of bankruptcy filing has started to increase again.

One of the factors for this may be the new bankruptcy ruling laws that requires consumers to attending financial management and credit counseling sessions before they can file bankruptcy. But since that law was put into effect, numerous studies have shown clearly that such counseling does little good for the consumer. The big problem with this law is that it makes the assumption that the consumer who is filing bankruptcy is doing so out of excessive financial mismanagement or credit abuse. Anyone who has spent any amount of time studying the underlying causes for why someone would file bankruptcy can tell you, almost after a casual glance, that this is not the case at all with the majority of consumers who file bankruptcy.

The studies bear this fact out. In fact, out of more than 400,000 consumers that were counseled via these mandatory classes before filing bankruptcy, more than 95% of them continued their bankruptcy filing after completing the classes. The biggest problem here is that by the time a consumer is in a situation to need to file bankruptcy, they have typically exhausted all other viable options, and it is too late to make any significant difference for almost all of them.

The following can be considered early warning signs of possible future bankruptcy that consumers should be aware of:

No/little savings cushion

Most consumers in the US have little or no savings to rely on in case of an expected huge necessary expense. Most Americans spend more than they earn, and they finance their greater lifestyle on credit cards and borrowing from Peter to pay Paul. Although saving is hard, a shift needs to occur in the minds of most consumers about putting a higher emphasis on savings instead of always "living for today".

Consistently living paycheck to paycheck

Many people say they do not enjoy it but find themselves living from paycheck to paycheck, such that when something happens to prevent that next paycheck from showing up, like a job layoff, they are already in deep sneakers. Some reports have indicated that more than 60% of Americans are in this situation.

Higher than 20% non-mortgage debt to income ratio

If you are spending more than 20% of your net income to pay your credit cards and financial obligations outside of your mortgage, this is a problem, and a warning sign that financial troubles could be near.

Always making only minimum payments on credit cards

Almost half of all people who have credit cards carry a balance forward from month to month. If you pay only the minimum payment due each month, it will take you three or more times as long to pay off the balance, even if you don't charge anything more to the card.

Inadequate insurance

Many people consider insurance to be a ripoff – until they need it. Many bankruptcies are due to very high cost of medical treatments or car accidents, where the consumer was inadequately insured to allow the insurance company to carry the burden of the majority of the expense.

If you find yourself in these situations, you should take action to straighten things out so that you do not become the next bankruptcy statistic. In addition, consider your alternatives to bankruptcy such as personal loans or debt consolidation, which offer some financial breathing room without the long-term negative effects of bankruptcy.

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