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What you should NOT do if you are heavily in debt

bankruptcy chart When most people start getting into financial trouble, they rarely think about bankruptcy early in the game. They usually try a bunch of quick fixes to try to get themselves back on track. This is the completely wrong tactic. The problem is that most people don’t start thinking about a bankruptcy until they have exhausted all their choices, by which time it is too late to undo they damage they’ve already done. Here is a list of things people do to try to dig themselves out of debt, whereas they should have contacted an attorney first.

They spend all their savings trying to pay down unsecured debt. Now it’s OK to put savings toward your bills. In fact, if you’ve been a careful planner, you will already have months of savings or more to live off of in case you get into financial trouble. But some people think, “I’ve got to get this monkey off my back, so I’ll pay it down.” You should rather prioritize your debts and keep paying the most important stuff like the mortgage.

They transfer their assets to family members in order to keep them from being liquidated. This is possibly the worst thing you can do because the court will consider your actions fraudulent. The added irony is that most people transfer stuff that couldn’t be repossessed anyway. And as if that weren’t enough, once you DO transfer it, it CAN be repossessed.

They break into their retirement funds. People generally do this because they’re embarrassed by their financial dilemma and think it’s more honorable to try to fix it themselves. The problem here is that you will be penalized for taking the money out early, and you might not even get all your debts paid off. In the end, you will simply end up owing more money.

They try to pay off debts they owe to their family before everyone else. This is a well meaning gesture, but it’s not wise. If you do your creditors can go after the family member, and all those good intentions will turn into resentment. The court may even refuse to discharge the debt. Above all you should not use your 401k to pay off a family member because not only will the money you gave the family member have to be given back, you may not have to option to put it back into the account. In other words, the money will be open season for creditors and you will have to start your retirement plan all over.