Without bankruptcy protection, debt is the kind of thing that can sneak up on an individual or family. It only takes a few weeks of not paying close attention to your finances and they can start to spiral out of control.
You can become distracted by:
- Taking care of an elderly parent
- Overspending on vacation
- A change in personal circumstances, such as job loss, divorce or bereavement
- Sudden and unexpected expenses, such as a vehicle repair or a new washing machine
The next thing you know, you’ve racked up debt on a credit card or withdrawn from your savings account and your struggling with both payments and cash flow. Things continue to spiral out of control and you begin to worry that you have a serious problem where you don’t have enough money to repay your loans and may need to file for bankruptcy.
Bankruptcy Protection is Key
When you don’t know how to manage money or don’t do it very well, you’ll find yourself short of cash at the end of the month on a regular basis. You might feel embarrassed and even ashamed. It’s not good for anyone to experience these emotions on a regular basis. The frustration you feel can be dealt with by using some simple techniques.
The primary way to avoid bankruptcy is to practice bankruptcy protection, but what exactly is bankruptcy protection and what does it mean? In the simplest terms, it means taking care of your money. You might be one of the lucky ones who had a parent or friend who explained to you the value of money and money management skills. But thousands of us grow up without those skills, or don’t take the time to learn them and money itself doesn’t come with any instructions!
Having said that, even people with money management skills can find themselves in financial trouble, especially if their life circumstances change suddenly. With careful budgeting you can minimize the risk of having to declare bankruptcy in the future. These skills can be learned and practiced. With these skills, you’ll be able to do everything in your power to avoid bankruptcy. There are even options such as a consumer proposal which can debt you out of debt without having to file for bankruptcy.
How to Protect Yourself from Bankruptcy
One of the first things you need to do is create a household budget. It doesn’t matter if you’re a new graduate from university and living in a bedsit. You still have a household, so you should have a budget. This will be good practice for when your finances are more complex too.
To create a monthly budget, you must first list all your monthly income and expenses. It’s a good idea to double-check your bank and credit card statements to make sure you’re not missing anything. However, for most people, this will not result in a comprehensive list of expenses.
That’s because every family has what is called leakage, which means they are spending more than they realize and it’s not obvious, or cannot be tracked. Examples could include a last-minute meal with a friend, drinks with work colleagues, or an automated bank payment for a gym membership you rarely use.
To be certain about what you are spending money on, record outgoings for at least two or three months. This exercise will enable you to track your family’s spending. Where your money is going will become transparent. Don’t forget to include any contributions to savings accounts, education funds, or an RRSP. Yes, these are savings, but they are also going to come out of your income. Use an online tracking tool, a spreadsheet, or even just a notebook for your budget tracking.
Another point to remember with tracking is that it’s not guessing. Don’t record how you think you spend your money, because this won’t reflect your actual spending. When you start tracking, you may be tempted to track how you think you should be spending.
Now that you have calculated your income and expenses, you may discover that your expenses are more than your income. If this is the case, you must take immediate action. Make decisions today about what you will cut from your expenses and consider seeing a credit counsellor for assistance.
If your income is higher than your expenses and you’re not saving, this is an excellent time to make some decisions about saving, which we cover in the section below. Beware the trap of having disposable income and not making plans for it, or just spending more. Again, without proper planning, this could land you in serious trouble.
Saving to Prevent Bankruptcy
Now that you have spent two or three months tracking your income and spending pattern in detail, you’ll have an accurate picture of where your money is going, hopefully down to each cent.
However, we’re going to look at setting aside an emergency fund. Now, you may feel that you don’t have the funds to save at the moment but having an emergency fund is an important part of bankruptcy protection. If you ever find yourself in a difficult financial position your emergency fund could be your lifeline.
Additionally, you can also look for something you can cut back on. For example, replace your daily coffee bought at the local bistro or convenience store with one made at home and taken to work in a thermal travel mug.
Ideally, you should have enough in a reserve fund to fund your living expenses for two to three months. Remember, during this time you will need money for your mortgage or rent, as well as food, utilities, transportation, and health expenses.
Next, everyone should focus on accumulating regular savings, invested in the best way possible for your future. Your bank can help with setting up a transfer immediately after your salary has been deposited into your bank account. A financial advisor can provide information on which types of savings accounts or investments will help you meet your financial goals.
These ideas may not be plausible if you are already in debt or are spending more than you earn. In these scenarios you want to seek professional advice on how to get out of debt, such as with a consolidation or a proposal, so you can more forward debt free with a positive financial future.