Many Americans are feeling uncertain about their financial health as the possibility of a recession looms over their heads. One piece of advice that’s being given today is to pay down as much of your debt as possible, even if that means filing for bankruptcy. While this is always important, with a looming recession, it’s even more critical now than ever. There are several reasons for this.
More Available Credit When Needed
Throughout a recession, you may feel uncertain about many things, including your job and paycheck. Without an emergency fund, you may incur more debt as you use credit cards to pay for necessities. Therefore you’ll want to make sure you’ve set aside as much money as possible beforehand.
Experts recommend that you not only pay down your debts but that you also don’t acquire any new ones. As interest rates start increasing, you may want to consider filing for bankruptcy. By carrying outstanding debt you’ll have less cash available if an emergency happens. You’ll also be less likely to max out credit cards if you do need to use them.
Here’s an important scenario to consider. If you have a credit card with a $10,000 limit and you’re carrying an $8,000 balance, your car breaks down and needs an engine overhaul. Most mechanics are struggling to get the parts they need because their supply chain stocks are overseas, where the parts are manufactured. This has caused prices to rise by about 20%. The cost is passed on to you with a bill that’s $2,500 more than you expected. This alone could also force you into bankruptcy just so you don’t lose your transportation.
Avoid Paying Higher Interest Rates
Recessions tend to coincide with rising interest rates. This is what we’re currently seeing today. Unfortunately, this means that if you’re currently carrying debts with variable rates, you’ll see the costs continue rising. For instance, if you have a personal loan or mortgage with an adjustable interest rate, you’ll pay more each month.
The Consumer Financial Protection Bureau allows companies to increase these rates on transactions as long as they provide you with a 45-day notice. Although this wouldn’t apply to your existing balance, it will make your new transactions even more expensive, causing you to assume even more debt than you’d planned for and possibly forcing you to file for bankruptcy so you can pay off your debts and manage your necessary bills each month.
No Searching for Other Credit Sources
During the midst of a recession, access to new debt (e.g., bank loans, credit cards) can also become scarce. This happens because lenders are also at risk when times are tough. So, just like consumers, they tend to be more cautious. Therefore it’ll be more challenging for you to get a loan. If you do manage to obtain them, you’ll notice that their interest rates are higher. This serves as yet another important reason why you should take steps to reduce your debt usage, even if this means filing for bankruptcy.
Those who appear creditworthy during this time are more likely to be approved for new lines of credit from stern lenders. This is why everyone needs to take steps to reduce their debt balance. There are many ways of doing this. You need to find what works best for you.
With a looming recession and interest rates already rising, you may find yourself wondering if now is when you should declare bankruptcy. If so, we would like you to know that we’re here for you at the Weller Legal Group in Clearwater, FL. Reach out to us today.
Picture Credit: Crello