Determining Your Financial Reality

Where are you financially? It's a pretty open-ended question, and there's no right or wrong answer. Some people have no idea how much debt they're in, while others know exactly how much debt they owe, down to the penny. Some have an idea of how much debt they're in but don't know how to handle it. You don't need to have all of the answers, but you do need to start asking yourself the tough questions. Let's face it, there are not many people in the world who are financially free. So, if you are with the other 99.9% of us who need to keep control over our finances from day to day or week to week, you are certainly not alone. Some people are financially ok and just need to monitor their finances weekly or monthly and others may need to file for bankruptcy. Either way, no matter where you are, you just need to be willing to make a change and think differently about your money.

If you may need to file for bankruptcy because your finances are not where they need to be, it's ok. There are many reasons that people file for bankruptcy and those that do usually come out of bankruptcy fiscally stronger. Before you can file for bankruptcy, you need to determine your financial reality. Having this information ready when you meet with an attorney will help them determine if bankruptcy is the right solution for you. So, how do you begin taking stock of your current financial situation? Here are three steps to help get you started:

Make a List of Your Debts and Creditors

The first thing you need to do is to list out all of your debts. If you're not sure of all of your creditors, you can obtain copies of your credit reports to help you gather this information. Experian, Equifax, and Trans Union are the three major credit reporting agencies that you can order your credit reports from.

Once you have your credit reports on hand, sit down at the kitchen table or at your desk and start listing out all of your debts. In one column, make a list of all of the cards that have a balance on them. In the other column, write down the amount of money owed to each creditor. In a third column, write down the minimum monthly payment for each card. In a fourth column, include whether the debt is current or late.

Here are the types of debts to include in your list:

  • Credit cards (examples: Visa, Discover, Master Card, American Express, etc.)
  • Store credit cards (examples: Target, Macy's, Kohl's, Dillards, etc.)
  • Gas cards (examples: Mobil, Shell, etc.)
  • Outstanding medical bills
  • Personal debts (example: money owed to family or friends)

Once you've made a list of all of your credit card debt, you'll want to make a list of your secured creditors. Secured creditors are creditors who have collateral attached to the loan, such as car loans, furniture loans, and home loans. These creditors could come to seize the collateral if the loan doesn't get paid. Start by making a list of all of your secured creditors, and then write down the balance owed next to each one. Next comes the hard part. You'll need to decide which ones to keep, and which to surrender. You'll determine this by which ones you can afford to pay moving forward and which you cannot. This is not easy for many people, but this is where tough questions need honest answers. Being honest with yourself will help you determine your financial situation. Can you afford to give up a car? Do you want to? 

Look at All Forms of Income

The next step is to look at all forms of income coming into your household. If you're in a one-income household or if you and your partner both receive regular paychecks, then this step is fairly simple. It becomes more complicated when someone is self-employed or if they rely on commissions. If you don't have a regular form of income, you'll need to look at several time periods to determine your average monthly income. For example, you can look at what you earned last year and divide by 12, or do it over 3-month intervals or 6-month intervals. This activity should give you a much better handle on your income.

Create a Budget

The idea of creating a budget scares many people. As painful and scary as it may be, it's important that you don't skip over this step. This is one of the hardest things you'll be asked to do, but it will help you and your attorney determine whether bankruptcy is the right solution for you. When creating a budget, the first thing you'll need to do is to distinguish between fixed monthly expenses (mortgage payment, car payment, etc.) and discretionary expenses. Start by listing your fixed expenses then list all of your discretionary expenses (fast food, morning coffee, movies, entertainment, etc.). Don't be embarrassed if you have a high amount of discretionary expenses. The goal is, to be honest with yourself and to see where your money is going each and every day, week, weekend and month.

Now that you've created a budget and have listed out your bills, what did the numbers show? Can you afford to continue living the same lifestyle, or do you need to make some changes? Are there things you can cut out of the budget? These are difficult questions to ask yourself, and it's not always easy learning the answers. However, being able to take a step back is the first step in making a change, and doing so will help you make more educated decisions in the future.