It is difficult to know how deep your financial hole is if you still have the ability to borrow money. I often meet with people that needed a bankruptcy months before they came in but were unaware they were headed to this point. You can use the power of your credit score to keep you from going under by covering your existing debts with new borrowed money. People understand that robbing Peter to pay Paul is not a winning strategy but they fall prey to it all the time.
The credit system we have rewards people for making payments on time. Your credit goes up as time goes on and you make timely payments. Then you can get more credit. Then as you make more payments on time on the new debt your credit continues to get better and you get more offers for credit.
At some point your credit score begins to suffer. The payments you are making no longer pay down the debt and the balances on your credit report only increase. The same algorithm that gave you good credit now begins to lower your credit score because those balances are no longer safe.
Suddenly there is no more new credit. You cannot borrow any more money and you begin to tread water financially. You are making minimum payments on the debt and there is no ability to cover basic bills without using your existing credit. Now you realize it will take 20 years to pay off the debt at this rate. You realize that a single disaster, a single financial setback, will cause you to default on one or more of you debts. This is the point of no return. It is where you must decide on an alternative course of action which for many people leads to a bankruptcy.
I like to think that there are certain pressure points for everybody in their financial lives that cause them to stop and think through things. I would suggest to you that once you cross a certain level of payments to cover your monthly debts there is no going back to normal.
The problem is not understanding that idea but knowing when there might be an inevitable default coming. You need to learn how you get to that point and what the signs are of impending financial doom.
When people have a good credit score and they are able to borrow money easily they can fool themselves into thinking that the grass is evergreen and there will never be any problems or a downturn. When your credit is good then the credit available to you far exceeds your ability to pay down on that credit. The algorithms tell creditors you are a safe bet and the creditors offer you money. Because your credit score is good and they are offering you money you take it. You spend that money because to some extent you think it will be okay – otherwise your creditors would not have given you the money.
It is a circular firing squad. The risk for your creditors and you becomes built in and everyone involved is on the merry go round of financial disaster. The mistake is not in accepting a line of credit or a credit card. The mistake is using it to such an extent that the monthly payments to cover the debt forces you to borrow more money to cover the debts or pay basic bills.
The first time you are paying a basic household bill using credit is when you should realize you are in trouble. It is one thing to have a gas card and pay that off every month. It is entirely another to put your grocery bill on your visa card because you don’t have enough money in the bank to cover your basic expenses. This is the point at which you cross over and are robbing Peter to Pay Paul but most people don’t realize it at first.
Why would you consider a bankruptcy at this point? You still have credit. You can still hold out. A miracle might occur. You could get a better job, pick up more hours, or find some other way to cover the debt. But once once you have started covering basic bills with credit cards or lines of credit that cannot be paid off in full each month then you are in the position that a bankruptcy or some other way of dealing with the debt besides paying it off is in the works.
Time is the reason to consider a bankruptcy rather than digging the hole deeper. If you are in a position where the bankruptcy is inevitable then you might want to consider how long it will take to dig out from the financial hit you are going to take from defaulting on the debt or filing the bankruptcy case.
If you are borrowing money to pay on borrowed money then you are in a vicious cycle that can run on for years before it becomes a mathematical requirement that you do something else. I don’t think you should wait years before getting to a professional and seeking advice on your options. If something is done early enough it might be possible to avoid a bankruptcy altogether and do a debt management plan with a certified credit counseling company. It might also turn out that you need a bankruptcy sooner than you think.
It takes years to recover from a financial disaster. It will not happen over night. I suggest that if you go even a few months of borrowing money to pay on basic bills so you can also pay on your debts then you need to talk to a bankruptcy attorney. That does not mean you need to file a bankruptcy today or that you will have to file one in the future. It means you should be advised about the consequences of filing a bankruptcy. It means you should find out about your options in bankruptcy. It also means you can prepare yourself financially and you can make sure it is planned out correctly if you have to file for bankruptcy.
Waiting in many cases is only prolonging the amount of time it will take to recover from the defaulted debt and the bankruptcy. Often we have clients come in before there is a default, before their credit has taken a huge hit due to the amount of debt they are carrying. If they file the bankruptcy before the downturn to their credit score then they can recover their credit much faster.
How did they know it was time to talk to a bankruptcy attorney? Almost always the answer is that they realized very quickly that the money they were paying out to credit cards or personal loans was forcing them to borrow money. These are often people that keep good records and know what they are paying out. They get in early and they recover quickly.
Robbing Peter to pay Paul can only go on for so long. If you think you are at this point you should consider talking to us about your options. There are several consumer bankruptcy attorneys in this office and we are happy to sit down with you and go over your finances and explain what you can do in bankruptcy. If we think credit counseling is appropriate we will refer you to a certified non-profit credit counselor here in Kansas.
Time is the one commodity you cannot get back. There is no trading for it or buying it. Once it is gone it never returns. You think the only Peter you were robbing is the credit you use to pay the debt you already have – the Paul in our story. That might be true. But it is not the only way you are robbing Peter to pay Paul. The other Peter you are robbing is your future to pay the Paul of your present.
If you want to save time in your financial recovery please give us a call. Stop robbing Peter to pay Paul.
