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Over the past several years, many American families have been forced to answer the question of what to do in a cash flow crunch, when you just don’t have enough money to cover the bills and keep food on the table. According to the Mortgage Bankers Association, an average of 250,000 new families enter into foreclosure every three months, with most of these families receiving little to no training on the correct steps to be followed when experiencing a cash crunch or even considering bankruptcy.
The first thing to remember when you notice a shortage in funds, get laid off at work or experience a health crisis, and you just don’t have enough money to cover everything…is DON’T PANIC! Our founding fathers made sure that debt cannot lead to incarceration, so relax and know that you cannot go to jail for failure to pay your bills. Staying calm is one of the biggest challenges faced when experiencing a financial hardship, so count to ten, take a few deep breaths and know that everything will be just fine.
Losing your job or experiencing a major crisis usually requires a much different approach than running a little short for the month or needing some extra cash for an unseen expense. When you experience a life changing event and you know that you may not have the cash flow to cover all of your expenses for quite some time, the very first step is to identify which bills must be paid and which can wait until you solve the current hardship situation.
Deciding which bill to pay comes down to two things, do you have equity in the debt and is the debt secured by a physical asset. Real estate is usually one of the first assets to be considered as it is both secured and has most likely built up at least some equity. If you have you have an emergency savings fund, enough income to cover the mortgage payment or at least $20,000 or more in equity, then saving your home is likely the best first step. Next, make a list of all the debts that are either secured or have built up equity, which usually consists of autos, boats, furniture or other recreation vehicles.
Unsecured debts such as credit cards, signature loans and other lines of credit are the last debts to be considered when experiencing a financial hardship. Unsecured creditors will hire attorneys, send threatening letters, call your work and family, and do just about anything to get your attention. The truth is, they have no tangible asset attached to the debt and can do nothing but file with a judgment and wait.
Again, pay the debts that have equity or are secured by an asset. The rest of your unsecured debts can wait until you decide on your best course of action.
Author
Chad Sunyich
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