A Personal Fiscal Cliff

26 Oct A Personal Fiscal Cliff

Coming to terms with the idea that a bankruptcy is necessary is never easy.  Just like the government many individuals are not earning enough money and are spending more than they earn.  The end result is an accumulation of debt.  Take recent news stories about the United State’s looming fiscal cliff and the inability to come to a consensus on how to deal with it an you have on a macro level what individuals are experiencing on a micro level.  For the government balancing the budget is easier than for individuals.  In the government’s case it can adjust spending and raise revenue (income) or both.  For individuals expenses can be lowered to a certain point.  Also for individuals, income maybe raised through working a second job or taking on more hours.  The problem for many individuals who are in credit card debt is that expenses have been lowered and cannot be reduced further and extra income is not available.  For those individuals in ten thousand, twenty thousand, fifty thousand or more of credit card debt, very few options exist to satisfy the debt.  Some common mistakes individuals make in trying to pay back debt include cashing out retirement, borrowing from family and friends, taking out another credit card to pay for the first, debt settlement / debt consolidation.  Unknown to many the taking of retirement funds early have two consequences, first early withdrawal requires payment of taxes.  Taxes consist of the applicable tax rate plus a ten percent penalty.  Many of these individuals end up owing money to the IRS which is the worst creditor to have.  Second early withdrawal depletes money needed for retirement; the using of retirement funds now mean you don’t have them in the future.  Bankruptcy can preserve your qualified retirement funds: 401k, IRA, pension… Borrowing from friends and family only shift the burden from one party to another.  In most cases family and friends do not have the amount needed to fully pay off the debt.  The end result is that the payment serves as a temporary fix to a more permanent problem.  In most cases the partial payment made temporarily lowers the balance only for it to go right back up again after the creditor resumes adding on late fees, high interest rate, and over the limit fees. The borrowing from one credit card to pay for another, also known as borrowing from Peter to pay Paul approach is similar to borrowing from friends or family.  The Peter to pay Paul approach compounds the problem because instead of one creditor two creditors exist.  Two creditors who will try to collect.  Finally debt settlement or debt consolidation have less than a ten percent chance of working.  In the case of debt consolidation a debtor would need to come up with a lump sum amount to settle the debt.  In the case of debt consolidation monthly payments are made to the consolidator who often is not making payments to the creditor.  The creditor is then left with the inability to contact the debtor and is forced to sue to collect the account.  Also during this time the debt continues to climb through late fees, over the limit fees and attorney fees.

If you think that you are close to the edge of a financial cliff, contact me.  I offer a free consultation with no pressure to file bankruptcy.  If nothing else you receive free attorney time to answer questions and determine what is the best help for you.  Many individuals are keeping tabs on the news coming out of Washington regarding the pending fiscal cliff when a personal fiscal cliff is right in front of them.