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There can’t be any doubt that a credit crunch is upon us. Just look at the delinquency rate on credit cards, the number of homes in foreclosure, car repossessions, etc. All the statistics are registering bad news on their debt Richter scales.

And while we’ve seen an uptick in the number of bankruptcies in the US, the number of people filing for bankruptcy or petitioning for bankruptcy is a lot flatter than you would assume.

Those of us in the consumer debt world have been talking and it feels different this time on the front lines. Different in that rather than get busier, it has gotten quieter in people asking for help.

Now this is just my gut feeling but in some ways it’s feeling a bit like what happens before a tsunami hits. Before the big wave slams into the shore, the water recedes causing everything to go quiet.

Right now it is feeling as if people are experiencing financial pain and are realizing that none of the solutions look painless so they are electing to do nothing at the moment. We are noticing that those people that are reaching out for help, have fewer good options available to them right now because they have waited so long to get help.

  • Bankruptcy in the U.S. has become punitive rather than restorative. Bankruptcy courts in the UK that used to be helpful are now getting so much early traffic asking for help with bankruptcy petitions that they are turning people away.
  • Credit counseling programs remain the smokescreen that they are. With creditors calling the shots, these charitable repayment plans are not created to get people out of debt, but to collect money from consumers on behalf of creditors.
  • Debt consolidation loans and refinancing deals either have or are drying up fast.

So rather than do something to prepare for the potential financial tsunami coming, people seem to be stuck, like the guy below, watching the wave coming and not running for cover.

Tsunami

What You Can Do to Prepare for a Financial Tsunami

The good news is that you don’t need to go out and buy bottled water, duct tape and plastic sheeting. In order to prepare for a financial tsunami you need to do the following:

  • Shed Debt - Focus on paying off any debt you have right now. Sending extra payments isn’t going to give you the relief you will need. You need to eliminate monthly payments.
  • Shift Extra Money and Pay Off Lowest Balance Debts, Now! - While conventional financial wisdom would be to focus on repaying the highest interest rate debt first, focus on paying off your lowest balance debts now instead. Each monthly obligation you eliminate will free up additional money each month, and that’s what you’ll need, rather than paying less interest overall.
  • Treat Cash Like Water During a Drought - Try to preserve every dollar you can for a financial droubt to carry you through uncertain money times ahead.
  • Think Three Times Before You Buy Right Now - Evaluate what it is that you want to buy if it costs more than $500. Really ask yourself it this is something that you must have or you just want. If it is a desire rather than a need, hold off for now and save the cash. Certainly don’t put it on credit. It will still be there six months from now but the pause right now will give you a better ability to really see what may be coming.
  • Prepare for New Bank Fees and Credit Card Fees - As banks and credit card companies begin to feel the pinch in profits due to decreased lending, they will attempt to make up the profits elsewhere. This will probably be through increasing fees.
  • Prepare for Less Income - If you’ve been earning extra money in overtime or extra shifts, starting preparing your monthly expenses as if that no longer existed. In economic slowdowns the first impact, before job loss, is loss of extra income. People that maxed out their financial commitments based on this overtime will be put in a world of financial hurt quickly when it is cut.

Not Chicken Little Here

I’m not trying to say the sky is falling and we are all doomed. What I am trying to say is that something doesn’t feel right at the moment and there is an unnatural calm in the air in the face of really bad economic data. Somethings brewing and if it is a financial tsunami on the way, you can take steps to protect yourself now.

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Steve

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