Five Quick Ways to Bankrupt Yourself
Cindy Perman
Thursday, September 23, 2010

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It's always been easy to go bankrupt but the recession made it that much easier, with 15 million people unemployed and struggling to pay their bills.

An astonishing 1.5 million people went bankrupt in the past year, up 20 percent from a year earlier.

"It's easier than most people realize," said Samir Kothari, co-founder of BillShrink.com, a site that helps people find the best, most cost-effective providers for everyday services like cellphones, cable, credit cards and gas.

"There is a general lack of financial discipline in the way people live their lives, manage their money and plan -- not that they don't do it well, but rather that they don't do it at all," Kothari said.

Remember the days when Intuit's Quicken and Microsoft Money software for managing your personal finances became popular? Millions of people bought the software, but as it turns out, they were used about as often as infomercial exercise equipment: Only about 10 percent of the people who bought it actually used it.

toilet_money_bucket_red_200.jpg
©Getty Images/CNBC.com
A how-to guide for bankruptcy, Step 1: Pour all of your money down the toilet.

"There was already a minority of people buying it to help manage their money -- and even those who bought it aren't using it!" Kothari said.

To help illustrate the point -- and maybe help a few people avoid becoming a statistic, here are five quick ways to bankrupt yourself:

1. Doing the Plastic Shuffle

The single best way to go bankrupt is to bury yourself in credit-card debt.

Our parents didn't have the option to rack up tens of thousands in credit-card debt -- credit cards didn't really become widely used until the 1960s. But for today's generation, it's an easy -- and common -- way for people to live above their means.

Transferring balances to a lower annual interest rate can be helpful if used sparingly, and in conjunction with a plan to pay it off, but chronic transferring often just masks a bigger problem.

"People think it will all just work out somehow. They think: 'I'll get a raise. I'll get a good tax refund,'" Kothari explained. "These things are not based on logic but on people being very optimistic about life -- defying reality. I think that's what gets people into trouble."

With the new credit-card legislation, lenders are now required to print on each statement the amount of time it would take to pay off the bill by only paying the minimum, and how much you'll ultimately be paying after all that interest.

"Imagine if you see that it will take you 17 years to pay off your bill!" Kothari exclaimed. "That should help shock America into realizing the trouble with living a reckless credit-card kind of spending game," Kothari said.

2. Assuming Insurance Will Cover Your Medical Bills

So, maybe you budget. You make an allowance for food, clothes, beer.

But do you have an allowance for medical costs?

Here's why you should: The No. 1 cause of bankruptcy is medical bills.

Harvard researchers found that 62 percent of all bankruptcies are caused by medical bills. Even more disturbing: 78 percent of those were people who had insurance.

"Things happen. Surprises happen," Kothari said. "And people don't prepare for the unexpected. They don't have a mindset of, 'How do I prepare myself for the unexpected?'"

Of course, the best medicine is to not get sick. And to that goal, you can do your best to lead a healthy lifestyle. But you also need to live a healthy "fiscal lifestyle," Kothari said -- make sure you're saving every month and building a cushion for the unexpected.

"Then you can be more resilient when life happens," he said.

3. Taking Out Advances on Your Paycheck

So you think just this one time, because you really really have to, it's OK to take an advance or loan on your paycheck?

Sounds like somebody needs a timeout!

If you need to get your paycheck money before it's due, there is some seriously fuzzy math going on.

"Payday loans are financial products that keep you in the poor house," BillShrink says.

When our parents were running short ahead of payday, they did things like split a can of beans for dinner and save the steak for when they're more financially secure.

These are humbling experiences but they build solid financial habits -- not to mention provide great stories they can proceed to repeat to their children 1,489 times throughout their lifetime.

Your parents' stories don't always work to scare you into managing your money better. But here's something that might: Fees on paycheck advances and loans make credit-card interest rates look like chump change.

BillShrink estimates that, when you factor in all the fees, the interest rate is 911 percent for a one-week loan, 456 percent for a two-week loan and 212 percent for a one-month loan.

4. Keeping Up With the Joneses

A huge part of the nation's money problems today are psychological: You see your neighbor, who you know doesn't make as much as you, just bought a luxury car.

How can he afford it, you wonder.

What most people often don't realize is -- he can't.

So you just sit there and think about how much you want it. You convince yourself that if he can afford it, so can you. And then, you just hit the breaking point -- and you buy it.

"There's a strong association between materialistic possessions and status," Kothari says. "Remember 'he who dies with the most toys wins?'"

From new houses and cars to the latest gadgets or exotic vacation destination, it's all very tempting to want to either keep up with -- or outdo your neighbor.

"People think that stuff matters to other people more than it really does," Kothari says.

Here's a statistic to keep in mind the next time you get neighbor envy: There are approximately 181 million people with credit cards in this country and more than half of them carry a balance.

So maybe next time you ask yourself, "How can he afford it?" you can also ask, "Is he one of the 100 million who carry a balance on their credit cards?"

And remember: Whatever you buy is on your credit card -- not his. Before you make a big purchase, make sure you've got the cash in the bank to back it up.

Maybe he should be keeping up with you!

5. Overestimating the Value of an Expensive Degree

The more education you have, the higher your pay, right?

Wrong.

When people take out student loans, few do the math to see what the average salary will be after graduation -- and how long it will take to pay off their loans.

They just assume that someone else has probably already crunched the numbers, making sure the cost of the degree is proportionate to the salary. They assume that because they've invested in education instead of, say, a new pair of shoes or golf clubs that their money was spent wisely.

Well guess what? Those people already got the first question wrong -- before even signing up for the class.

"The for-profit education sector is really, really big industry with huge advertising budgets," Kothari says. "They'll have a guy who says he graduated and now he makes $200,000 a year -- if you compare data on average salary, I'm sure it's not aligned with some of those marketing claims," Kothari said. "They're just selling a product."

So do your homework -- before you go to school.