3. What is your emergency backup plan?
Now is the time for the painful game of “what-ifs.” What if your husband loses his job? What if grandma’s health fails? What if your own health fails? What if you and your spouse split up? The point of this litany is not to send you running for the aspirin bottle, but to help you be prepared if the unthinkable happens. As difficult as it may be, you need to make a plan and to consider what could be done now to make that plan feasible. Add a separate line to your budget for these just-in-case safety precautions.
The emergency backup plan may cause you to rethink some of your financial commitments. Pay particular attention to timing. In finances,
long-term commitments are the most dangerous kind. Sometimes they are unavoidable, such as when you buy a home or go to college. But whenever possible, go for a shorter commitment, since that will give you what you most need in times of trouble—flexibility. So, for example, choose a 36-month car loan instead of a 60-month commitment. If that drives the payment up too high, then heed the warning: You cannot afford this car, and you should opt for something cheaper. Once you pay off this car, hang on to it for an extra year or two and keep making payments to yourself. After two or three times around, you can pay for your car in advance, giving yourself that much more flexibility in your budget. Details may vary on any loan, but think of every long-term commitment in terms of walking a tightrope—so long as your family is on the rope, there is a risk of disaster. Take the shortest walks you can.
You should also assess your insurance coverage. Should you purchase a disability insurance policy, just in case? Should you beef up your life insurance policy? Talk with your parents about their plans. Can you help them buy long-term care insurance? Perhaps your siblings could help out as well. Long-term care insurance can give several families—your own, your parents’ and your siblings’—a better chance of surviving financially if your parents need daily assistance. When everyone is healthy, the thought of disability can seem like a remote possibility, a bad dream that strikes others, not busy families with young children. But the fact remains: Medical problems send three-quarters of a million families to the bankruptcy courts each year. So think about more insurance. If you never use it, then count yourself lucky.
Help that won’t help.
A growing number of credit card companies have begun to hawk “credit protection” insurance, urging you to “protect your family” in the event of a job loss, disability, or death in the family. This sounds like a perfect prescription, but buyer beware. Most of these policies do nothing more than make the minimum monthly payment on the balance you were carrying at the time you lost your job or developed a disability. Some policies also promise to discharge your debt in the event of your death, but this, too, is a flimsy benefit. Regardless
of your insurance status, your heirs will not be required to pay your balance; in most cases the credit card company will write off your debts even if you never purchased the credit protection insurance.
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Moreover, if you don’t have an outstanding balance, credit insurance doesn’t do a thing for you. Worst of all, this form of insurance is wildly expensive. If you carry a $3,000 balance, you’ll pay over $300 a year for an average policy.
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If you can scrape together some money, buy a real disability policy from a reputable insurance company or put your money in the bank. Credit insurance is a sucker’s bet.
When the House Is Already on Fire
What about those families for whom the fire drill comes too late? They are the ones most often ignored by the advice peddlers, and they are the most likely to be victimized by unscrupulous creditors. These are also the families to whom this book is dedicated, so we offer them a few direct words of advice and (we hope) comfort.
Avoid the blame game.
With the benefit of 20/20 hindsight, it is tempting to beat yourself up about the smarter choices you might have made. But if you are like nearly 90 percent of the families in financial trouble, you got that way because something lousy happened to you. Maybe your business went under, your husband left you, or you got too sick to work. If you made the decisions you did in order to take care of your family, then, at least in our opinion, you have nothing to feel guilty about. Go easy on yourself; your creditors certainly won’t.
And go easy on your spouse. Your financial well-being isn’t the only thing at risk right now; so is your marriage. Consider this: If your family is like most, your marriage may be more vulnerable right now than at any other time in your life. Myra, a dental hygienist in a small town in Pennsylvania, filed for bankruptcy after her husband lost his job. She sums up the problem neatly: “Except for the financial problems that almost destroyed our marriage, we have a perfect relationship. Money is the only thing that we argue about, but that’s enough to ruin even the best friendship.” Husbands may feel shamed by their inability to provide,
and wives may feel overburdened by the demands of bill collectors, bosses, and children. Be kind. You are both under enormous strain right now, and taking it out on each other will only make things worse.
You should also know that you are not alone. There are several million families in situations not too different from your own. They worked hard, tried to provide for their families, and ended up in financial hell. You may not know it, but scattered among the folks in your grocery store, your PTA, your church or synagogue, and even your family, are men and women just like you—people who have done their best for their families and who are now in financial collapse. You are in good company.
Hold on to your treasures
. The greatest danger for a family in financial distress is not bill collectors (although they can be the most annoying). The greatest danger is false optimism. We heard it over and over again in our interviews: “We thought Mark would be back at work right away.” “I thought I could work things out with my husband after a little time apart.” “We didn’t think grandpa could go on like this much longer.” These families knew they had been hit by a disaster, but they didn’t respond fast enough because they thought it would pass quickly. That is the deadly trick about a financial crisis: It is nearly always impossible to predict when it will end. For families already in trouble, now is the time to plan for the worst, just in case the bad news doesn’t get better. So turn off the phone, ignore the junk mail, and pop in a video for the kids. It is time for some cold, hard calculations.
A family facing a financial crisis should think like a family at war. You must concentrate on preserving what matters most, and you must let the other things go. When trouble comes, ask the central question: Which of your assets do you most want to hold on to? Maybe it’s your car, your home, or your health insurance policy. Decide which things you value most, and
pay those bills first
. It doesn’t matter who else is making demands on your resources or what they are threatening you with. Once you are in trouble, you will need to fight—and you should be fighting for the things you care about, not trying to satisfy the loudest or most aggressive creditor.
Most important, do not, under any circumstances, put those assets at risk. You will be bombarded by offers to “lower your monthly payments” by taking out a second mortgage or cashing out the equity from your home.
Don’t do it
. Refinancing their homes to pay down other bills is the single biggest mistake made by families in trouble. The mortgage companies (and even some financial advisors) may tell you it is savvy to replace your high-interest credit card debt with low-interest mortgage debt. But if you are in financial trouble, you will probably be steered into a high-cost, subprime mortgage, making any gains illusory. Worst of all, you will be jeopardizing the roof over your family’s head. Take a moment to consider. Do you honestly believe those “low monthly payments” are a free gift? Not a chance. If the mortgage lender gives you a lower rate than the credit card company, it is because the mortgage lender gets something in return—the right to push you into the street, seize your home, and sell it.
If your troubles get bad enough, you can file for bankruptcy to eliminate your high-interest credit card debts and cash advances, but bankruptcy cannot help with a home equity loan or a refinanced mortgage. You must pay the mortgage lender in full (plus all penalties, late fees, and interest) or face foreclosure. The chance to save a few dollars a month on your credit card bills is not worth running the risk that you won’t have a place to live.
Plan strategically.
If the bills keep piling up, take a realistic look at your overall situation. Can you pay off your debts in the next two years? If the answer is no, talk to an attorney, read a good book about your legal options, and look into filing for bankruptcy.
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But be aware that bankruptcy is essentially a one-time option that will be unavailable again for six years. Once you file for bankruptcy, you must fly without any parachute.
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If at all possible, wait until the crisis has passed before declaring bankruptcy. If you are out of work, wait until you have found a new job. If you have a child who is seriously ill, wait until he is better and the health insurance has paid what it owes. It can be extremely tough
to hold on that long, especially if collection notices are stacking up and creditors are calling you every night. But if you wait, you minimize the risk that you will once again find yourself buried in debt after you file for bankruptcy. The bankruptcy system gives a rare opportunity for a second chance. If you wait to file until the worst of your problems are over, you give yourself the best odds of getting exactly what you need from the bankruptcy judge—a fresh start.
Guilt-free default.
What about all those bills you will never repay? Whatever you do,
don’t
reassume any old debts that were discharged by the courts. One in four families signs on to pay off debts they no longer owe after filing for bankruptcy.
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Why? Because they don’t understand their rights. As the story about Sears showed (chapter 6), creditors routinely bully bankrupt families by threatening to repossess the family’s possessions. Except for the house or the car, this is nearly always an empty threat. Creditors almost never repossess, because it is just not worth their time and money. It typically costs a creditor at least $350 to send a truck to your house and cart something away, and even more to clean it up and resell it.
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Are your used goods actually worth that much?
Another favorite tactic is to warn families that no one will ever issue them another credit card after they file for bankruptcy. Many creditors hire agents to patrol the waiting rooms in the bankruptcy courts, typically friendly older ladies who make seemingly generous offers: “The company is willing to extend you a line of credit,
if
you’ll agree to repay the balance on your credit card.” But think again before you sign. These agents may seem like nice people, but they are peddling poison. Not only will you get stuck paying a bill you no longer owe, the effective interest rate on that new line of credit may be as high as 1,000 percent!
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How will you get a new credit card if you forfeit your old one? By opening your mail. Within six months of filing for bankruptcy,
84 percent
of families had already received unsolicited offers for new credit.
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Half of bankrupt families received more than thirty offers! You may find that after filing for bankruptcy you are
more
popular
with credit card companies than ever before. Lenders know that you cannot declare bankruptcy again for six years, and they believe you may still be under enough financial strain that you will soon end up carrying a balance and making minimum monthly payments—rocketing you to number one on their list of favorite customers. So don’t worry, there is life after bankruptcy. You will have a lot more credit at your disposal than you need (and probably a lot more than you should use). So just hang tough, and don’t let yourself be bullied or threatened. The creditor is not your friend, and you should not sign away your future before the ink is dry on your bankruptcy petition.
We hear the chorus of self-blame and guilt tuning up. These companies lent you money, so aren’t you obligated to pay them back? Yes, you are—up to a point. But you are also obligated to keep a roof over your children’s head, to put food in their mouths, and to get them the medical care they need. Children take precedence over creditors.
Besides, most of those lenders
knew
you would have a tough time paying them back. They had your credit reports. They knew how much money you earned, and they knew how much you owed.
They took a calculated risk
. If everyone had stayed healthy and you hadn’t lost your job, you would have paid your debts and your creditors would have made a handsome profit. But that didn’t happen. Whenever a bank makes a loan, it hopes to make money, but lenders know that there is some chance that the money will never be repaid. The interest charges and penalty fees are designed to cover those risks, and the banks are doing just fine, even when they lose from time to time.
Think like a businessperson. Do you imagine the CEO of United Airlines and the president of K-Mart were wracked with guilt when their companies filed for bankruptcy? We doubt it. They did what they thought best for their shareholders and customers, and if that meant that some creditors ended up with the short end of the stick, then so be it. They saw it as simply a matter of business. When your family’s welfare is at stake, so should you.
Stay Home?
Should you (or your spouse) quit your job and stay home so you won’t be in any danger of falling into the Two-Income Trap? If you are like millions of parents, you are already up to your eyeballs in mortgage payments and tuition bills, and pulling out of the workforce will only make things worse. For you, the financial fire drill and some very angry calls to your senator are the best you can do.