Understanding Why You are in Financial Trouble
Before deciding whether or not to file for bankruptcy, it's a good idea to sit down and take a personal inventory of the reasons why you're in financial trouble. This is one of the first things a good bankruptcy lawyer will have you do, in fact, after the initial consultation.
Bankruptcy may give you a fresh start by wiping out your debts, but it won't prevent you from making the same mistakes again after your debts are discharged. Understanding why you have money problems will help you to avoid winding up in financial trouble again.
Only a few people who file for bankruptcy can honestly say that they had no part at all in creating their own financial problems. Very often, people file for bankruptcy because they had unexpected medical problems that quickly wiped out their savings and affected their abilities to work. That's one of the most common reasons for filing. Other times people unexpectedly lost their jobs and truly couldn't find work where they could make enough money to pay their bills. And in recent years, many people have become victims of financial fraud or identity theft.
It's not fair to "blame" people for life events like the above which were largely beyond their control, but there is one common thread that runs through them that all of us can learn from, namely, to try to prepare for the unexpected, as best as we can. Probably the most important thing we can do in this regard is to have a savings account, which we'll talk more about here.
On the other end of the bankruptcy spectrum are people whose financial messes were completely of their own creation, usually fueled by reckless spending and a profound lack of personal or financial responsibility. These are people who deliberately lived beyond their means, running up bills at an astounding rate, possibly even with the intention of filing for bankruptcy at some point.
And then there are the rest of us: the people in the middle, whose financial situations were partly the result of circumstances, and partly the result of mistakes we made managing our finances. In our cases, circumstances such as the recession, loss or reduction of work income, medical bills, and so forth certainly contributed to our financial messes; but we might have been able to weather those circumstances had we been more responsible managing our money in general.
In other words, most of us who filed for bankruptcy had at least some part in our financial crises. Recognizing and addressing these mistakes will go a long way toward helping us rebuild our credit -- and our lives.
What Kind of People Get Into Debt
Financial mistakes are easy to make and hard to recover from. People who find themselves in financial trouble tend to be better at spending money than they are at getting money. Most people call this habit "living beyond one's means." Others are a bit less polite about it and just call it "irresponsibility."
Whatever you choose to call it, a chronic habit of spending money more quickly than you can earn money is going to lead to the well running dry. That's probably obvious to you by now, if you're reading this page. But to lump all of our financial mistakes under the heading of "irresponsibility" doesn't help very much in changing those habits. In order to avoid making the same mistakes again, we have to identify the specific traits that got us into trouble.
It's been my experience that most people who have money problems have a lot of the same personality traits and behavior habits. Let's look at a few of these. Try to be honest and to keep an open mind: It's pretty certain that at least some of these traits will apply to everyone reading this page.
Super-Optimism: The "Things Will Get Better" Financial Mistake
One of the most common personality traits of people who get into financial trouble is something that I call "super-optimism," which I define as a belief that "better days are coming" that's not backed up by any actual evidence or objective reason to believe that.
This belief actually is pretty understandable for most of us because we were taught to believe it. Every generation of Americans has been taught to believe that our futures were brighter than those of our parents. The expectation of upward mobility was something that we just took for granted, and it's a big part of the reason for super-optimism.
That sort of magical thinking may be fine for children, but it doesn't work so well for adults. For many of us, the assumptions that we would enjoy more prosperous lives than our parents did hasn't worked out too well. Except for a small percentage of people whose incomes have skyrocketed, the average incomes of ordinary Americans have been pretty stagnant since the 1980's. The average income of ordinary working-class and middle-class people has gone down dramatically during that time.
Consequently, many people whose financial plans were based on the assumption that "things would be better down the line" have found themselves not only disappointed, but in serious financial trouble. For most of us, things haven't gotten better. They've gotten worse.
Here's a suggestion: When you find yourself saying things like, "Things will be better in a few years," ask yourself why you believe that. Is there some objective basis for you to think that your finances will be better a few years down the road?
Sometimes there is a good reason. Maybe there's an annuity or some other investment instrument that will be maturing in a few years. Maybe you have an inheritance coming. Maybe you're due for a raise or promotion that's guaranteed by an employment contract or union agreement. Or maybe a business you recently started is showing good revenue and you have a justifiable expectation that it soon will become profitable.
But more often there's not any good reason to believe that "things will be better in a few years." It's wishful thinking, hopeful thinking, thinking that's based upon what we were taught to believe -- but there's no objective, factual basis to believe it. When we believe that things will be better down the line, but we can't come up why realistic reasons why we believe they'll be better, that's super-optimism. It's a form of magical thinking, and it's a dangerous thing.
In fact, super-optimism is a big part of why many of us went bankrupt. Super-optimism gave us permission to spend more and save less because we convinced ourselves that our financial situations would be better a few years down the road. We simply assumed, without any good reason, that somehow we would be able to pay back all the debts we were racking up.
The cure to super-optimism is to be realistic. Don't simply assume that things will be better in a few years. In fact, plan for them to be worse. Keep your spending under control, don't use credit unless you absolutely have to, and put a bit of money into savings every pay period. If things do get worse, you'll be in a better position to weather the storm; and if they get better, no one ever complained about having a little extra cash in the bank.
Failure to Save
Once upon a time, "saving for a rainy day" was something everyone did. It might just be a few dollars tucked away in a teapot, or a few hundred dollars tucked away in a savings account; but most people set aside a portion of their incomes every payday for the inevitable "rainy day" when they would need some cash.
People who wind up in financial trouble tend not to be savers; and when that rainy day comes (and it's not a matter of if, but when), they have no umbrella.
Part of recovering from bankruptcy involves putting money aside so when minor emergencies strike, we don't have to rely on credit to deal with them. I talk more about this here.
People who wind up with money problems tend to be generous sorts. We love making people happy, and money is a convenient way to do it. We buy gifts for our families and friends, we give to those less fortunate than ourselves, we splurge on family vacations that we can't afford -- all because we want to make those close to us happy. Maybe.
Sometimes, our generosity is actually a reflection of our need to feel accepted and loved. In other cases, it's a form of ostentation -- wanting to show off our success to others. But whatever the reason, generosity becomes irresponsibility when we spend more money than we have and wind up with debt that we have no way of paying back.
We live in a digital world where everything is instantaneous. Especially in the case of younger people who grew up in the digital age, this phenomenon often results in an inability to delay gratification. They find it difficult to think through financial decisions, and even more so to save up money until they have enough cash to buy the latest must-have toys.
So here's a bit of financial advice for the digital generation: Life's not a video game. You don't get to start over again when the game's over. So take the time to read, understand, and consider every credit offer in the light of both the final cost, and what you can truly afford to pay. If a vendor seems to be pushing you to make a quick decision without considering the total cost, walk away.
Loyalty is a good thing -- usually. But sometimes loyalty can hurt us. In the case of people who file for bankruptcy, sometimes their loyalty was part of the reason for their problems. Loyalty to lazy relatives who always seemed to need "a little help." Loyalty to employers whose businesses were obviously dying. Loyalty to clients who weren't paying their bills. Loyalty to investment advisors whose advice wasn't turning out too well.
Recovery, for these folks, requires that they temper their innate loyalty with reality. They have to get a little mean and insist upon a certain level of financial responsibility from others, or else walk away from those people. Loyalty becomes irresponsibility when it results in your getting into debt with no way of paying the money back.
"Wait," you're saying, "I'm not greedy!" But greed is an insidious thing that often seems a lot like loyalty. Sometimes we can be greedy without even realizing it.
This especially applies to our investment decisions. We hit upon an investment or advisor that seems to be making so much money for us that we become willfully blind to the risks and downside potential. (Those who lost fortunes investing with Bernie Madoff are a good example.)
If we "put all our eggs in one basket," and someone drops the basket, we lose everything. So don't let greed blind you. When making savings and investment decisions, put a substantial portion of your assets in safe investment vehicles like federally-insured savings accounts and CDs, even if they don't perform as well as that hot stock you've been watching. Professional horseplayers are smart enough not to gamble with "scared money," and investors shouldn't, either.
Finally, there are some people whose financial problems are due to their being, well, spoiled brats. They're the ones who actually believed their parents when they told them how "special" they were. They believe that they're somehow entitled to have everything that they want, even if they can't afford to pay for those things. The very idea that they can't get the latest iThing on the first day it comes out is unthinkable to them.
These sort will probably be in financial trouble for the rest of their lives because the phrase, "I can't afford that right now," is foreign to them. They can't accept that. They feel entitled to anything they want, and that's that. They're spoiled brats who never grew up. They're also the ones who will take offense at the above paragraph and never visit this site again.
If that describes you, then all I can say is, "If the shoe fits, wear it. Have a good life."
To the rest of you who are still here, I suggest that you take a few days to think about the character traits listed above, whether and how they apply to you, and how to bring them under control in if they do. Understanding these things will go a long way toward avoiding making the same mistakes again, and will help you in your personal and financial recovery from bankruptcy.