How do we reach the state of bankruptcy and how to avoid it?
To explain how a person reaches the state of bankruptcy, let us imagine a situation where a person has borrowed some money. Let us assume he is under a total debt of £65,000 comprising credit cards, overdrafts and personal loans. He has mortgaged his house to fund a vacation to an exotic locale. Then again, he has used his credit card to purchase goods and services that are well above his means.
Consider another situation when a person borrows a small amount may be just a few hundred pounds. He either postpones its repayment to next month or gets another loan to pay it off. Thus begin a vicious cycle of getting a new loan to finance the previous one and gradually the person is saddled with multiple loans. Some he pays from the earnings and the others he leaves unpaid or refinances their payments.
Both these situations are typical examples of roads leading to bankruptcy. To put it in a nutshell, a complete lack of control over the finances leads to a bad debt situation and then gradually to bankruptcy. The process starts like a small snowball rolling down a hill. As it moves down it gathers more snow and its size starts getting larger and larger. By the time, it reaches the bottom of the hill, its size grows so large that it breaks apart.
How to avoid a bad debt situation?
The first rule is that under normal circumstances, don't borrow more than you can pay and especially not on luxuries you can do without. If you have borrowed money, do a monthly check on your finances so that your expenditure does not exceed your income. If you see that your expenditures are going out of control put a stop at once and do not borrow more money.
Second, be very judicious when using credit cards. In fact avoid using credit cards in case you are a compulsive spender. Credit cards should ideally be used only as a convenient alternative to carrying cash. Avoid spending more than you earn. Take a hard look at your routine expenses. Track them on daily basis and curtail them wherever possible. Talk to your partner or consultant if you cannot decide how to proceed. But at the end of the day, keep your finances under control.