Monday, September 5, 2011

It's The Economy - Your Economy

Now that the economy is no longer an issue, we have to turn to a new topic- "The Economy", but a different sense of the economy - YOUR economic condition. This may mirror the government's or, perhaps, you may actually understand the state of your finances, as you read this.

Are/If you are in a position where "deficit spending" is necessary for you to pay your bills (not unlike the issue of the Federal debt-ceiling - we had to get Congress to let us borrow more so we could pay the interest on the bill we already have incurred) which is like getting a new credit card with an extra few thousand dollars of credit available so you can pay the interest due on the other cards, and buy food, or pay the mortgage, or put gas in the car or... well you get the idea, you need to reconsider your position immediately.

Unlike the United States of America, you cannot keep getting more debt without near term (tomorrow or the day after) consequences. Consequences like bill collectors calling; Court appearances being required; car payments missed; a mortgage payment missed or paid more than a month late; a foreclosure; or just ANXIETY and WORRY about what you are going to do when the credit limit is exhausted.

Here is a short check-list to review:

1. Is the reason for the excessive debt, spending, reduced income, or both?

2. If it's reduced income, is the situation temporary with an end in sight or long-term?

3. If the debt is due to spending but not because of a loss of income, what caused the spending? Necessities, like food and shelter, or costs that could have been deferred, like extra clothes, a "new" car, a vacation? If the run-up of credit card or other debt is because of buying or spending for necessities, you cannot fix the problem alone. If the debt is for any other reason than necessary living expenses, then STOP SPENDING NOW.

4. In either case, figure how much you owe to each creditor. Then determine how much is due each month; for credit cards use the minimum payment PLUS 10% of that payment; for long term debt like a mortgage or car loan, use the actual payments due each month. When dealing with medical bills, remember that most often a call to the doctor or hospital with a discussion about a monthly payment plan will bring results that you may be able to afford - and may be with no interest.

5. Compare the monthly payments to creditors, ALL OF THEM, to your take home income. Remember that if you get paid weekly, you should multiply your take home pay times 52 weeks and then divide the result by 12. If your pay is every other week multiply your take home by 26 and then divide the result by 12. That way you have accounted for the 4 "extra" weeks each year.

6. Make the same comparison of monthly payments to creditors to your GROSS INCOME -No Deductions for taxes, insurance etc taken.

7. If you divide your payments to creditors by the amount of your income (net income first, then gross income) you will see quickly whether you can afford the payments (based on general averages). For example: Gross income = $4000 per month - monthly payments to creditors (called debt service) = $ 2,000 per month (that is a Debt to Income, called "DTI", Ratio of 50%), you are probably running out of groceries or gasoline or RUNNING UP CREDIT CARD BALANCES, because there is not enough money to go around. The ratio should be no more than 40%! Even that is a stretch against GROSS INCOME

8. Once you reach that point, unless you take immediate action, like earning more money, cutting back living expenses and LOWERING THE MONTH DEBT SERVICE, you will end up losing a car, losing a house, AND LOSING YOUR PEACE OF MIND.

9. If the Debt Service cannot be lowered, if you cannot cut back on payments to creditors without a foreclosure or a repossession, and if your income is maxed-out, YOU SHOULD CONSULT AN ATTORNEY ABOUT BANKRUPTCY.


Look for the next post which will explain about the "okayness" of filing for Protection From Creditors by a Bankruptcy Filing. (Coming to a theater near you (actually just this blog) on 9/9/11)

Author's Copyright by Richard I. Isacoff, Esq, September, 2011

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