Avoid These Mistakes That Will Lead to Household Bankruptcy

Shannon Quinn - April 30, 2021
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Please don’t take out a payday loan. Credit: Shutterstock

7. Falling Prey to Payday Loans

When you’re in financial trouble, you might have considered getting something called a payday loan. If you’re not aware, it’s a private company that is willing to loan you money, but you end up giving back 400% of what you borrowed. The vast majority of people who take out payday loans don’t have a college degree, make less than $40,000 per year, and are predominantly African American. Basically, they’re loan sharks who are targeting the most vulnerable communities. All you need for a payday loan is a paycheck, a checking account, and a photo ID. They will lend to anyone, even if your credit score is terrible.

People take out these loans because they think it’s a quick fix for their problems. And they already are in such bad financial straits that they may not qualify for a credit card, or a traditional loan with a bank. Even though it might alleviate your stress for a day, it’s going to make the problem ten times worse down the line. For most people who end up borrowing money, they can’t afford their payment. So then it rolls over into a new loan with the company at an even higher interest rate. For a lot of people, these payday loans force them to file bankruptcy in order to escape them. So please– don’t do it.

The more debt you have, the harder it is to live. Credit: Shutterstock

6. Having a High Debt-to-Income Ratio

Whenever you try to take out a loan, or you’re checking your credit score, they always look at your debt-to-income ratio. As in- Can you really afford this? How long will this debt take to pay off? But let’s be real. A lot of companies will ask for your income, and take your word for it. It’s easy to agree to payment plans or open a new credit card that you actually can’t afford. They’re trying to make money, and they don’t care if it ends up ruining your life in the process. You need to look out yourself, and figure out your own healthy debt-to-income ratio.

I’ll never forget what a customer said when I worked at a bank. Their account went into the negative, and they angrily said, “Why didn’t you stop me from spending? Why didn’t you call me? You’re the bank. Isn’t it your job to manage my money?” Uh…No. It’s the bank’s job to hold your money. You would need to hire an accountant to monitor your spending for you. Remember that it’s not the credit card company’s job to tell you what you can and can’t afford. It’s not the bank’s job to cut you off when you’ve had too much. It’s all on you. Don’t let it get out of hand.

Is peer pressure causing you to spend more money? Credit: Shutterstock

5. Giving In to Peer Pressure

The phrase “Keeping up with the Joneses” is famous for a reason. It’s human nature to be competitive and feel like we are achieving just as much as the next person. This has become especially true in the age of Instagram. But this habit of constantly comparing ourselves to others is a form of peer pressure. It doesn’t matter if you’re a full grown adult. We’re still going to feel pressure to be like people who are the same age as us, and this can push us to spend money we don’t actually have.

You need to look at your own personal financial situation as an objective observer. Try to take your emotions out of the situation, and just look at the math. Can you really afford it? Don’t make decisions based on what your friend can afford. Figure out what you can afford first. For example, just because two of your friends bought a house recently or went on a vacation overseas doesn’t mean that you should too. 

Drinking and smoking is actually very expensive. Credit: Shutterstock

4. Maintaining Expensive and Unhealthy Habits

Did you know that 78% of former NFL players end up declaring bankruptcy just two years into retirement? This is often because they indulge in unhealthy habits, and never stop to think about how they are going to invest their money for the future. They also assume their windfall of money is going to last forever, when it’s really just a finite amount. If you’re worried about money, ask yourself how much your bad habits like smoking, drinking, and unhealthy snacks costs you every month. The average smoker spends $2,295 per year on cigarettes, and the average household spends $525 per year on alcohol. (This number is obviously much higher for people who drink regularly.) That’s a huge chunk of money going towards bad habits.

I know someone who had a great job working in the legal field. She received a huge inheritance, including two additional houses. The total value was something like $500,000. Instead of using her inheritance to pay off her mortgage and debt, she quit her job and started indulging in unhealthy habits like smoking, drinking, food, and gambling.  Eventually, her husband got laid off from his job, and they lived on the remaining inheritance. They blamed the economy for not finding a new job. But she never stopped her bad habits. She lost everything, and had to declare bankruptcy. This situation is actually very common among people who get a huge windfall of money, and people who win the lottery. I look at her situation as a very slow-moving car crash. She could have hit the breaks or turned the steering wheel at any time.

You should never miss a payment towards your bills. Credit: Shutterstock

3. Missing Payments Towards Your Creditors

One of the surest ways to guarantee ending up in bankruptcy is to stop paying towards your debt. Even if you only paid a tiny amount of money towards your debt each month, it shows that you were trying. Most of the time, credit card companies will not take you to court until you have failed to make any payment for months at a time.

Call the banks, credit cards, and loan companies to see if there is an option for a payment plan. Sometimes, they will allow you to have the payment reduced down to just the interest. Then, when you get back on your feet, you can go back to making higher payments again.

If you refuse to sell anything, it’s inching you closer to bankruptcy. Credit: Shutterstock

2. Refusing to Sell or Give Anything Up

If you’re in a difficult financial situation, one of the first things you can do is to sell your valuables. Nowadays, this is easier than ever. With apps like eBay, Depop, Facebook Marketplace, Mercari, Etsy, and Poshmark, you can sell almost anything if you have an Internet connection and a cellphone. Selling things you no longer need can be a good way to make some quick cash and pay a bill. Remember that some day, when finances get better, you can always buy that thing back. Holding on to your material things is not worth the shame, regret, and stress of declaring bankruptcy. 

I have been selling things on eBay since I was a teenager. Since this is such a big part of my life, it’s something that I talk to people about often. Whenever I met someone that was in a difficult financial situation, I would suggest that maybe they should sell something on eBay or Craigslist to get some emergency cash. I knew if they just listed their unused games online, they could earn $500 overnight and solve their problems. But for whatever reason, they refuse to let go of those things. Remember it’s just stuff. Usually, whenever I give something up in order to maintain my finances, it opens the door for something much better to replace it later.

Bankruptcy often happens because people avoid the issues. Credit: Shutterstock

1. Ignoring The Issue and Pretending It Will Go Away

Last but not least, you shouldn’t ignore your problems and pretend that it will somehow magically go away. I’ve met so many people who went bankrupt or were on the edge of bankruptcy because they totally ignored the reality of the situation. But if they had just faced the problem head-on and dealt with it, they could have maintained their finances.

Most of the time, this attitude comes from fear. If you feel so incredibly overwhelmed with financial problems, it’s easier to just pretend it’s not real. But trust me when I say that if you ignore the problem, it will only get worse. If you need advice, look at this guide on settling credit card debt from the FTC. There are so many options in place for you to make things right before you end up in bankruptcy court. All it takes is facing the issues early, before it gets out of hand.

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