When faced with the realization that all debt cannot be paid on time, the choices we make must be carefully evaluated to avoid further complication of the situation in the future. Each situation is unique and requires personalized analysis to develop a long-term plan on the road to financial security. Here I will try to lay out some general choices that most people make at one time or another when faced with financial problems and the pitfalls that can go along with these choices.
Dipping into Savings: If you were disciplined enough to save some of your hard-earned money, you may be tempted to dip into these savings to pay debt. Be careful! This should be part of an overall plan. Savings can usually be used to fill the gap during a temporary financial problem, such as temporary loss of job, illness, etc. It should never be used to support a lifestyle that is simply beyond your means. Borrowing from retirement accounts should be a last resort in most cases. If you pull your retirement savings, what are you going to live on when you retire? You may just create a worse financial situation in your “golden years.” Withdrawing from tax-deferred accounts can also have serious tax consequences. This should all be considered before taking out money from these accounts.
Borrowing from Family and Friends: This is always tempting. But beware! What if they need the money back when you cannot repay? They would be faced with financial hardship. And if you do pay them back, before paying any other creditors, you, and your relatives, could face serious consequences. The law provides for fair treatment of all creditors. Paying your relatives ahead of all other creditors is not considered fair. All this should be considered before borrowing from friends and relatives.
Selling Assets: Selling assets to pay creditors should be considered only as part of an overall plan to get out of debt. Before you sell any asset, you must consider if it will be necessary to replace the asset in the future and the cost associated with that. For example, if you sell your home, what are the long-term financial consequences?
Most people in financial crisis did not get there overnight. Their plan to get out will take time too. “Quick fixes” should be avoided and a long term plan put into place immediately. How do you know it’s time to devise a plan? If you do not have disposable income every month, money that is leftover after paying for all necessities, and you do not have at least three to six months of living expenses saved up. You need a plan!
For a free initial consultation regarding consolidation of debt, payment reduction, bankruptcy (personal & business) and other related matters, please contact Susana B. Tolchard at 661-287-9986.