Warning Signs You Might Be Headed for Bankruptcy and How to Avoid It
by Marvin Wolf, Esq.

Maxing out credit cards, charging more than you can pay off each month, and juggling credit card payments. If you are using one credit card to pay another or to help pay your expenses each month, you are already in trouble. Credit card debt is a major factor in most bankruptcies. A good rule of thumb is to use no more than 30% to 40% of your available credit at any one time. This gives you flexibility in case of job loss, illness, divorce, or other threat to your income. If you are using more than 30-40%, you are on the road to bankruptcy.

Paying minimum payments on credit cards. It can take over 30 years to pay off your credit card balance when you pay only the minimum payment. That's because most of your minimum payment is paying for interest only, and not principal. Therefore, if minimum payments are all you can afford to pay, you really can't afford to use your credit cards any more.

Co-signing a loan for someone else. Co-signing loans is a common factor in many bankruptcies when the person you co-signed for defaults on the loan payments and you're held personally responsible for the debt by the lender. If someone does not have good credit on their own, you should not co-sign for them, even if they are a friend or relative.

Over-using home equity loans. Think twice before you use your home equity loan or line of credit for items other than home improvements. Make sure you can afford the payments comfortably. It's usually not a good idea to exchange unsecured credit card debt for secured home equity debt. That dress may be pretty, but don't put up your house as collateral to buy it.

No health insurance or inadequate coverage. Medical bills are an underlying factor in almost half of all bankruptcies. Health insurance costs more and covers less year after year.

No emergency fund. If you live from paycheck to paycheck with little or no savings for emergencies, you're at higher risk of going bankrupt. 43% of American households have saved less than $1,000. A small emergency or brief job interruption can destroy your cash flow.

Tax lien or foreclosure on your home, or repossession of a car or other item you failed to make timely payments on. These are signs that you've lost your grip on your financial situation. Take them seriously. Fees on defaults are high and may include attorney's fees from the lender.

Borrowing too much on student loans. You may end up finding your student loan payments so high you can't afford your living expenses. Since student loan debt is generally not dischargeable in bankruptcy, it can be a drag on your income for many, many years.

Leasing more car than you can afford. Between car lease payments, insurance payments and gas and repair expenses, that car can cost more than your rent or mortgage.

You intend to retire in a few years. If you don't reduce your debt level now, you won't be able to afford payments when you retire because you will be making less money.

Marvin Wolf is a Newark attorney who specializes in consumer and bankruptcy law, real estate transactions and immigration. He practices in New Jersey and New York, and is admitted to the bar of the United States Supreme Court in Washington, D.C. He is a member of the National Association of Consumer Bankruptcy Attorneys, the Union, Essex and Middlesex County bar associations and has served as a volunteer consumer case arbitrator for the Better Business Bureau of Metropolitan New York. This article is intended to convey general legal information and should not be considered legal advice.