O'Brien Law Firm, LLC - Bankruptcy

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Assessing your bankruptcy risk

Bankruptcy filings are on the rise in the United States. If you do not have much disposable income, have little savings or carry significant credit card debt, you may have wondered if you are at risk for bankruptcy.

Spending time gaining a detailed understanding of your budget and the types of events that could drive you toward bankruptcy may help you better understand your risk.

Can you meet your monthly budget?

If you have not created a monthly budget yet, now is the time. Take the time to add up all your monthly expenses. Typical monthly expenses in your budget are items such as mortgage or rent, transportation, food, utilities, insurance and medical. Other categories beyond these include savings and personal spending, such as memberships, subscriptions, grooming and entertainment.

Beyond those, you need to account for any debt repayment, such as credit card payments. It is best to pay more than your minimum monthly payment to keep your credit card debt from multiplying out of control. Are you making enough money to meet your expenses and pay down your debt, or are you going further into debt each month? Do you have or are you putting money in savings to help you if your monthly income were to decrease abruptly?

How susceptible are your finances to an unexpected event?

Most bankruptcies are not a result of irresponsible spending but are instead a result of a low disposable income combined with some type of negative event, such as loss of employment or unexpected medical bills. Sometimes an unexpected medical event results in unexpected bills coupled with the loss of employment if the medical event renders you incapable of work for a period of time. Though you have little control over unexpected negative events such as medical emergencies, assess your risk with respect to what would happen if your income were to unexpectedly stop for a period of time.

How quickly can debt snowball?

If an unexpected life event occurs and you either do not have any emergency savings or exhaust what savings you do have, you may find you cannot pay your monthly expenses. Mortgage late fees are typically 3% to 6% of your monthly payment. Being late once enters you into the situation where you now must pay multiple months to become current.

Further, missing credit card minimum payments sometimes results in more than just late fees. Many credit cards have clauses in their terms and conditions that allow the credit card company to jump your interest rate, sometimes to very high amounts, if you make a late payment. If you were already struggling to meet your monthly expenses, your finances can quickly spiral beyond the point where you are able to reasonably get out of the red.

If you get into a situation where you cannot see a reasonable way out of debt, especially if you are in danger of foreclosure or are being harassed by bill collectors, bankruptcy may be a viable option and may help you protect some assets. Pursuing bankruptcy has pros and cons, but if you are in over your head, or expect to be over your head soon, exploring bankruptcy may be a good next step.