Things you should never do with money - Part I

Sometime the decisions we make that can negatively impact our financial future are not always obvious, there are too many entities working against our better judgment when it comes to how we handle our own money. I’m talking about commercial entities and the popular trends we pay so much attention to, that contribute to the ever growing “want list“ that we often mistake for the “need list”. I’m gathering a list of general things called “things you should never do with money”, there are many, and this is the first in a series of several future posts. These are some of the things we tend to give into that eventually get us into trouble:

1. Don’t sign up for another credit card when you’re maxed out - This should be a red flag for any credit card company processing your application that you’re not living within your means and you spend more than you should. Will that stop them from processing your application? Probably not. As long as you have good credit and you make your payments on time, even if it’s only the minimum due, there’s no indication to them that you’re a risk. But is this a sound financial decision for you? If you’ve maxed out your current credit card, you need to stop and look back at the purchases you have made and honestly determine if these are needs or wants. If you get another credit card, what’s to stop your from maxing it out also and ending up with now two cards to pay off?

2. Don’t borrow against your home - Here’s another example of a really bad decision in which lenders are happy to help you dig your own hole. A “HELOC” (Home Equity Line of Credit) is, in my opinion, the worst product ever put out in the financial world. Why? Two reasons, these loans always carry adjustable rates and you’re only required to pay the interest. If you MUST borrow against your home, what you should be asking for is a Home Equity Loan, on which you do pay the principal balance every time you make a payment. With a HELOC you’re only required, and 99% of the time inclined, to pay only the interest of the loan. When do you actually pay the balance? If you max out that line of credit and your balance is $50,000 when will you be able to pay this balance in full? When you sell your house would be one way, but if you’re not selling your house or if market conditions end up putting you upside down, how will you come up with the money to pay this off when it is due in full?

3. Don’t borrow against your retirement account - Depending on your plan, sometimes there are few restrictions for borrowing or withdrawing money, and there’s usually a lot of flexibility for you to do so. Some 401K or savings plans will allow you to withdraw certain amounts of money and you don’t always have to prove hardship. Why do this if you’re not in real need? It’s all impulse. You’ll probably say to yourself “it’s my money anyways”. Well…. yes and no. It’s also the government’s money and that’s a huge liability. The money that’s in your 401k or savings plan is pre-tax money, meaning it gets deducted from your pay before taxes, so taxes will apply when that money is withdrawn. Not only that, but there’s usually a penalty associated with early withdrawals, so if you borrow $5000, the IRS will automatically take 20% or $1000, plus any penalties the savings plan may carry. So if you’re not in real need, don’t mess with this account.

4. Don’t invest in things you know nothing about - There are so many products out there about making money by starting your own business or making money online. Look, a lot of people make a decent living by running their own business and doing business online. But it’s not supposed to be easy and it’s not supposed to be fun as it is often emphasized. It is a lot of hard work. Sure it can be enjoyable and rewarding but fun and easy it is not. Many of these programs almost always over emphasize earning potential with exaggerated figures, but if you visit the advertised website you often find that the program is not at all described and you have nothing to go by other than to enter your personal info for someone to call you later. They will often sell you general information on how to start a business but won’t concisely explain the how to. They also offer coaching programs with phony guarantees, which are expensive so think carefully before signing up. You could end up spending a lot of money for something you could easily research on your own.

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Are you considering bankruptcy?

Personal bankruptcy cases are on the rise. Hundreds of thousands of Americans declared bankruptcy in 2007 and the rate of filing has not slowed down in 2008. A tough economic state and lack of stable employment and job security are only part of the reason. Personal spending habits have certainly contributed to record levels of credit card debt and the current housing market has left many with high balance loans and depreciating values in many parts of the country.

Filing for personal bankruptcy is a tough decision and whatever the circumstances may be for you, it’s important that you educate yourself as much as you can and carefully assess your own financial situation before you proceed with filing bankruptcy. There are several types of bankruptcy that cover not only individuals but small and large businesses and of course special codes for corporations. Chapter 7 and Chapter 13 are the two types of personal bankruptcy and the most commonly filed, Chapter 11 is similar to chapter 13 though this is what an LLC, partnership or corporation would want to file.

This is a quick explanation of what filing bankruptcy is all about, what it does and the effects it can have on your financial future. Please check out the links above for detailed explanations on bankruptcy chapter 7, chapter 13 and chapter 11.

Please take note that none of content here is meant as legal advice nor is it intended to encourage anyone to file for bankruptcy. This option should be a last resort, there are alternatives to bankruptcy that you should consider before filing.

What is bankruptcy?

Bankruptcy is a legal proceeding in which people, companies or corporate entities who can no longer afford to pay their creditors, can get protection through a court order called “The Order of Relief”. Bankruptcy offers a fresh financial start and these benefits are afforded to all by federal law, therefore all bankruptcy cases are handled in federal courts. Bankruptcy puts into effect the order of relief also known as the automatic stay which stops your creditors from attempting to collect payments from you, that is until your debts are sorted out through court proceedings. The automatic stay is further explained in the Chapter 7 page.

During the process of filing bankruptcy you will need to provide specific documentation such as past tax returns, proof of income, a breakdown of all your debts, all property and assets you own, etc. It is possible to file your bankruptcy case alone but the paperwork is complicated and can be confusing. Hiring a law firm that specializes in personal bankruptcy cases is usually the best thing to do. These services aren’t always cheap though, and if you’re struggling to pay your creditors you may have trouble paying the fees for these services, which often need to be paid up front. So it’s important you prepare in advance and allocate some funds early on when you begin to consider filing bankruptcy.

There are a few chapters in the US bankruptcy code. Chapters 7, 9, 11, 12, 13, and 15. You will get a detailed explanation of chapters 7, chapter 11 and chapter 13 on this site since they are the most common forms for individuals, partnerships and small businesses. It’s easier for a bankruptcy attorney to determine which bankruptcy chapter you qualify to file, however by learning about what each chapter does and how they work you will get a good idea for which one will fit you best. Here’s some of the information you’ll need to provide before you file:

What happens after bankruptcy?

Neither one of these chapters will make it easier on your credit once you get a bankruptcy discharge. The difficulties after bankruptcy obtaining credit, renting a place to live, and qualifying for certain jobs will be the same. Unfortunately the fresh financial start can be hard to embrace when you file bankruptcy since it takes time to rebuild you financial life again. The hardships can continue if you’re not prepared to deal with what comes after. Normally after bankruptcy, most credit providers will not want to deal with you. The ones who will, can impose high interest rates and/or high security deposits because of your recent bankruptcy case.

When you file you will be required to take bankruptcy counseling courses, also known as credit counseling, from an agency approved by the US Trustee . You can find a list of approved agencies at this link: US Trustee Approved Credit Counseling Agencies. The costs are usually moderate, $20 to $30 dollars should be a good range to stick to. You will need to take the first part of this personal bankruptcy training before filing and then the second part before you get discharged.

Consider your case carefully and don’t forget that there are alternatives that depending on your situation may be a better option than filing bankruptcy.

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