When facing financial hardship, it is very common for individuals to make irrational decisions due to stress that further worsen their financial situation. This is a compiled list of common missteps to avoid:
- Do not file for bankruptcy. Even though credit analysts say bankruptcy stays on your credit report for 10 years, the truth is that bankruptcy is more like a lifetime sentence. For instance, if you decide to obtain a bank loan, the lender’s application typically ask if you’ve ever filed for bankruptcy. In most cases, answering yes means your loan application will be disapproved. For those seeking new employment, some employers ask that same question on their application. Filing for bankruptcy makes you toxic to both lenders and employers, so avoid bankruptcy at all costs.
- Avoid debt consolidation agencies. Participating in a debt consolidation program has the same negative impact as filing for bankruptcy, but to a lesser extent. Such programs negatively impact your credit for a period of up to 7 years.
- Stay away from Payday loans, Pawn loans and Auto Title Loans. The dangers of these types of loans have been well documented in the media. The problem arises when you are unable to fully pay back the loan by its maturity date – then your loan is extended, the interest rate skyrockets to around 400%, and you are caught in a vicious cycle until you are able to pay the loan in full, high interest rate and penalties included.
- Don’t borrow money from friends or relatives. You’ve seen this before on shows like Judge Judy, where relationships are ruined between family members or friends due someone not being able to repay a loan. Rather than asking for a loan, ask for a cash donation.
- Don’t get a student loan and start a 4-year degree. A typical thing for individuals to do in a recession is apply for student loans and start a 4-year degree. Their beliefs are that, after the completion of a degree, they will be able to get higher-paying jobs. Unfortunately, in this recession, the lucky ones who do go ahead and successfully complete their degrees end up joining the long line of unemployed college graduates. To add insult to injury, these unemployed college graduates are now left with a hefty student loan obligation. A better alternative would be to get “in demand” professional certifications, which are cheaper and often open up doors to higher-paying jobs.
- Do not pay time-barred debt. If you have unsecured debt that has been delinquent for a period of over 7 years, chances are the debt may have expired or is close to expiring. If this is the case, the creditor cannot legally collect on the debt because the statute of limitation has expired. You may still receive calls from collectors, but the key is to not acknowledge the debt or make a payment, or else it will reset the clock. Please check with a lawyer to determine if your debt is time-barred.
© Copyright 2010, Ugonna Chukwu, CPA