Even in the worst case scenario, where all you have is debt and no money to pay it, make your word count and honor your commitments.
What is your word worth when things haven’t gone according to plan? What are you willing to do when you are in jeopardy of not being able to fulfill a promise that you made?
You have very likely already experienced a situation that developed in an unforeseen or negative way despite what you felt were your best efforts to achieve your desired result. I am sure it is safe to say that virtually every one of you has been impacted negatively in some way by the economic events of the last several years. Although many aspects of our economy have improved during that time, our economy and that of the world are facing more challenges and there are clearly more questions than there are answers.
As a result, you are probably inundated with an extreme amount of publicity and advertising focused on the negativity surrounding you. You may even feel bombarded, at times, with ideas ranging from the need to enact changes in government policy to the benefits of filing for bankruptcy protection. So much so, that it could be easy for you to believe that the challenges you are facing are insurmountable and that none of your troubles are your responsibility. If you reach that threshold, then it isn’t much of a leap to begin believing that your best, and perhaps only, option is to give up and walk away.
Undoubtedly, the easiest way out of debt is to walk away from it; to file for bankruptcy protection or to simply throw your hands up in the air and let your creditors systematically remove all of your possessions such as your house and your car. While giving up may be the easiest first step, it is hardly ever the best step to take and it should never be considered as anything other than the absolute last resort. Even in the worst case scenario, where all you have is debt and no money to pay it, make your word count and honor your commitments. Your promise has to maintain its value. Because once it doesn’t, you truly have nothing.
Fortunately, there are many things that you can do to avoid making your financial responsibilities somebody else’s problem and it all starts with holding yourself accountable for being educated about the obligations that you take on from the beginning.
If you are signing your name as an indication that you accept the terms and conditions of the purchase you are making, then make sure you fully understand those terms and conditions. If you obtain a mortgage, make it a point to understand everything about that mortgage that has an impact on your financial situation, such as the payment amount, the interest rate, the due date, and anything and everything that could cause any change whatsoever to the terms and conditions to which you initially agree. The same personal accountability applies to an auto loan, a credit card, and a personal loan. Understand what you are agreeing to and make sure that you are prepared to handle the responsibility that comes along with that agreement. With anything you ever take on, it is essential to establish the proper mindset at the onset. While the right mindset will not eliminate the potential for something to go wrong, it will properly prepare you to handle the challenges you will face when something does go wrong.
In addition to understanding all aspects of the agreement you are making when you take out a loan, it is crucial that you fully consider the amount of debt you are taking on relative to your income. Typically, your total debt level should not exceed 50% of your income. More specifically, the total amount of your monthly debt payments should not exceed 50% of your gross (before taxes) monthly income and the amount of your mortgage payment should not exceed 40% of your gross monthly income.
It is never a good idea to stretch beyond these limits, especially if you do not have a contingency plan if something goes wrong, because there will always be something that does not go according to plan.
During your lifetime, something will inevitably occur that will negatively impact your personal finances. You will undoubtedly face circumstances that you did not expect or even create. The real question is how you will handle those circumstances when they arise. The only answer that is consistent with honoring your commitments is to stand up and take an active role in a solution that remains true to your word.
When the day comes that you lose your job or you do not receive income you were counting on or an unexpected expense arises, do not focus on what you can’t do, focus on what you can do. Understand the reality of your financial situation and then craft a plan to address your immediate needs. Itemize your debts and sources, or potential sources, of income. Once you have done this, you will be in position to develop a timeline and answer questions such as how long you will be able to meet your obligations given the current situation.
Once you have your information together, make contact with your creditors and ensure that the communication lines are open. Particularly during recessions and other tough economic times, creditors are acutely aware of the risks involved in lending money and every reputable creditor will respond favorably to a debtor who contacts them as soon as trouble arises and expresses interest in working out a mutually beneficial solution to a potential problem.
Creditors have several remedies available that can have an immediate positive impact on the payments for which you are responsible. Depending on factors such as your ability to pay, the type and term of the loan, and the expected time frame for finding a more permanent solution, remedies can include a temporary suspension of principle payment, an extension of due dates, and in some cases a short term payment moratorium. If you are sincere in your willingness to work with your creditors and you don’t make promises that you do not intend to keep, most creditors will work with you.
While you are assessing your situation and weighing options, it is also important to make sure that you are utilizing all available resources. If you have lost your job, you will most likely qualify for unemployment benefits and it is essential that you understand how those benefits are determined and what you need to do to maximize them given your individual situation. Another resource may be previously untapped savings reserves, such as deferred compensation amounts or 401(k) balances. These options will require some research on your part, but you may have the ability to access these funds under a hardship provision. Researching your entire financial picture so that you can best understand what you can do about the circumstances you are facing is always a worthwhile venture.
It is also important not to allow yourself to have tunnel vision when you are considering your options, especially when it comes to earning income in order to meet your obligations. If you had a full-time job and you lost it for whatever reason, don’t fool yourself into thinking that the only way to replace that job is with another full-time job doing the same thing. If your situation calls for it, be open to getting two part-time jobs or consider changing professions to better adapt to the job market.
Lastly, do not believe those that will extol the virtues of bankruptcy as if it is anything other than a last ditch, no other option course of action. Access to credit is what makes the economic world go around and when you take the step of asking for protection from your creditors via bankruptcy court, you give up that access. Worse, you bring your own credibility into serious doubt. Every action you ever take has a price and if that price is that your word is no longer worth anything, it is in your best interest to do everything you can to avoid that situation.
This article is part of Scott Arney's educational series, entitled The Serial Decision Maker.