Rate of Descent

Many people facing financial difficulties due to lay off or other loss of job follow a familiar course. At first, they live from current account balances and use credit cards to make purchases instead of cash. Then, they start to receive unemployment and supplement with savings. Then they begin tightening their belts for real, trim costs, and eliminate luxuries. Then they start withdrawing 401K or IRA funds to supplement their reduced lifestyle costs. Then they go to banks, or mortgage brokers, to find someone who will buy their equity on a second mortgage, or “home equity loan.” Then, when all else fails, they go see a Bankruptcy lawyer. All the while, they are convinced that the right deal, the right new job, will fix everything.

When they go the bankruptcy lawyer they learn that they have created a non-dischargeable tax liability, sold their untouchable exempt homestead equity to a bank to no real end, ruined their credit rating anyway, and they are still not ready to go bankrupt to save their homes because they have no revenue to support a reorganization. If they haven’t been out of work for long enough, or they received a severance package, they may still have to file for reorganization instead of getting immediate relief. What they learn is that family finances are a lot like a heavy jet, things must be planned well ahead of time because it is simply not possible to pull up and out of trouble when the rate of descent has become too high.

The moral to the story is that unless you happen to be a Bankruptcy lawyer, it is unlikely that you have the knowledge necessary to avoid the mistakes above when you are hit with a loss of income. Planning your next moves can make the difference between a successful restart to your financial success or a dismal loss of any chance to fully recover.

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