In their efforts to ensure that airline passengers are aware of air safety, federal authorities use a color-coded system that conveys various levels of risk.
There are three colors which are in use – red, orange and green. Red represents the highest level of risk and is used to convey “severe” threats like terrorist attacks. Orange stands for a “high” risk level, while green indicates a “low” risk level.
Now, what if there was a similar color-coded system which could do the same and alert you against possible threats to your finances? Bankruptcy attorney from Boston Theodore Connolly has created such a system, along with U.S. Bankruptcy Court judge for the District of Massachusetts, Joan Feeney. Connolly and Feeney are also co-authors of the excellent book on debt management titled The Road Out of Debt.
The authors say that this color-coded system will help you assess the degree of threat to your finances, and what steps you should take to handle it. For instance, when your finances face what is categorized as a “severe” threat, declaring bankruptcy will be your best option. If the threat level is not “severe”, you may want to consider other alternatives like reworking your budget, negotiating more effectively with your creditors, or seeking assistance from a credit counseling agency.
In Connolly’s words, “The three main causes of bankruptcy are job loss, divorce and medical bills”. The figures support his statement, as 1.5 million Americans have filed for bankruptcy for the year ended June 30, 2010. Connelly adds, “People want to pay their bills, but when you have so many people out of work, we're just going to continue to be inundated with bankruptcy filings”.If you too need help to determine whether or not you should file for bankruptcy protection, you can use this color-coded threat level system as outlined in The Road Out of Debt, as your guide:
Green Level: You are Safe from Bankruptcy
Green indicates that you are in the “low” threat level. You earn more than you spend, and your debts are minimal and easily manageable. You also have enough savings or assets to overcome a financial crisis.
Indicators that you are in the green threat level:
- All your bills are paid on time
- You put aside some money as savings every month
- Your credit card debt is nil or minimum, and every month you are making payments to bring the total amount due down significantly.
- You have assets to fall back on during emergencies, and also have healthcare coverage.
Blue Level: You Need To Make Some Financial Changes
Blue indicates that though you may not have to go as far as bankruptcy, you do need to sort out your finances immediately. Your threat level is “guarded” and you should be able to graduate to the green level with careful budgeting and less spending.
Indicators that you are in the blue threat level:
- You are not able to clear dues on your credit cards and your debts are increasing
- You have secured debts like a mortgage on your home or a car loan, as well as unsecured debts like personal loans and credit card dues
- Your monthly expenses leave no room for savings
- You are scared that you may lose your job
Yellow Level: You Need To Think Of Bankruptcy
Yellow means that your finances are in trouble and you need to take some serious action. Most people go through this “elevated” threat level while experiencing a professional setback like a layoff, or a personal situation like a divorce. Whatever the reason may be for your financial crisis, you must consider your financial options carefully and negotiate with your creditors.
Indicators that you are in the yellow threat level:
- You have been out of work for over a month
- You are unable to make payments for your secured or unsecured debts
- Debt collectors have started calling you up
- You have meager or no savings, your assets are diminishing, and you have no health insurance
Orange Level: You Must Strongly Consider Bankruptcy
Orange puts your finances in the “high” threat level. You are probably out of work for some time now (maybe even a year or so), and your money problems have worsened. Entering a debt management program is still an option but it is advisable that you know all your alternatives well. Talking to a bankruptcy specialist or contacting a legal aid clinic is advised at this sage.
Indicators that you are in the orange threat level:
- You have been jobless for over three months
- You have not been able to pay your bills for 60 days or more
- You are using new credit cards to pay the minimum amount due on older ones
- You are unable to clear outstanding tax dues or medical bills of large amounts
- Your unsecured debts cannot be paid off in full within five years
- There are pending lawsuits against you
Red Level: You Must File for Bankruptcy Immediately
Red indicates “severe” threat level. You have past-due bills that have piled up and one or more creditors have initiated legal action against you. Add to it the extreme financial stress you are undergoing since you have no source of income to rely on. You are also way beyond the scope of negotiating with your creditors. Since at this stage your options are extremely limited, you will have to file for bankruptcy to get out of this financial mess.
Indicators that you are in the red threat level:
- You have no income or cannot rely on unemployment benefits anymore
- Your home is in the market for a foreclosure sale
- There is no way you can clear secured and unsecured debts
- A court order has been issued and your bank accounts are tapped
- Your car is going to be or has already been repossessed
- Your wages have been garnished (legally withheld to pay your debtors)
There are a couple of other indicators too which clearly spell out the immediate need to file for bankruptcy. One is if you do not have money to pay for your daily needs like groceries or gas and have to use your credit cards. The second is when you are unable to take care of certain legally required obligations like taxes, child support or alimony.
According to Connolly, there comes a time when bankruptcy is the only viable option left. He says, “"If someone is trying to take control of your checking account, or you're going to lose control over some asset, then bankruptcy can stop that and give you time to figure things out”. He also adds, “"Bankruptcy should always be the last option, but when your debts become really overwhelming, and it starts to make your life so miserable that you can't function normally, then it's worth considering”.
