5 Signs You're Headed for Bankruptcy

U.S. consumer bankruptcies are on an upward trend, with 1.6 million filings estimated to come by the end of 2010.

That puts bankruptcy filings at their highest level since 2005, according to the American Bankruptcy Institute. Back then Congress sought to limit bankruptcies through the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

But bankruptcies have soared just the same, says the ABI. “While the 2005 bankruptcy overhaul law aimed to reduce filings, overall consumer debt and continued financial stress have led to consumer bankruptcies climbing back to pre-BAPCPA levels,” said ABI Executive Director Samuel J. Gerdano. “We expect that there will be nearly 1.6 million new bankruptcy filings by year end.”

How can you avoid getting on that undesirable list? Start by knowing the key signs that you might be headed toward bankruptcy. With enough warning, you may be able to take steps to avoid financial calamity and get back on solid financial ground.

Here are a few clues that you may be headed off a financial cliff:

You’re using credit cards to pay for critical items like housing or groceries – Credit cards aren’t meant to pay ongoing household bills, especially if you have any outstanding balance. If you’re using a card to pay your mortgage each month, or are down at the Safeway (Stock Quote: SWY) sliding your card through the checkout line scanner for food and supplies every week, you may be headed down a slippery path.

You have no health insurance – Full-blown health reform doesn’t kick in until 2014 – that is, if the courts allow it. Until then, if you don’t have health insurance you’re just asking for financial trouble. Studies show that medical bills are a common trigger for bankruptcy proceedings. If you don’t have insurance, and you suffer a major accident or illness, that’s a surefire way to go broke.

Abusing a home equity line of credit – This one is hard to accomplish these days, as banks have really tightened the reins on home equity loans. But if you fall behind on your home equity payments, the bank treats it like you’ve fallen behind on your mortgage – and it could try to foreclose on your home. It’s imperative that you keep up to date on your home equity payments – banks and mortgage lenders are watching those payments very closely.

Living paycheck-to-paycheck: Another sign that you’re in danger of sliding into bankruptcy is not having any savings in your financial picture. This tees you up for serious financial trouble if you lose your job or suffer a debilitating illness.

Co-signing loans: Never co-sign a loan for anyone – even a family member. If the borrower forecloses on the loan, the bank will come to you looking for payment in full. If you can’t make good on the loan, then it’s your neck on the chopping block. Co-signed loans are another common theme in bankruptcy proceedings.

Bankruptcy doesn’t have to be inevitable. If you suspect you’re in deep financial straits, take concrete steps to avoid the “final straws” listed above. Your current debt situation may be difficult, but it needn’t lead to bankruptcy.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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