Bankruptcy is what happens in bad Hindi movies.
The gigantic lock sealed tightly with tape, the notice full of legal mumbo jumbo stuck to the door are images we have seen on screen. But can it happen to us?
While your instinctive response might be a resounding 'no!', you would be surprised at the number of well-to-do families heading straight for bankruptcy. We know of a businessman whose annual income is Rs 2 crore (Rs 20 million), and who may be heading for bankruptcy in five years.
How? We spoke to Certified Financial Planner Amar Pandit, who says, "There are various situations that can take a person to bankruptcy. But the biggest tell tale sign is when he is not in a position to service his debts adequately."
And bankruptcy is not pretty. Advocate Nirupama Kar says, “If a person goes bankrupt, all his personal property, bank balance, investments get attached,” which essentially means that you have nothing to fall back on.
Sounds scary, right? Here are five questions for you. Pat yourself on the back every time your answer is 'No'.
1. Are you borrowing too much?
Look around you. Nine out of ten people would be servicing a loan. Some even service multiple loans! That is because today, we don't think twice about buying what we cannot afford.
You make a beginning with your your first default on your credit card bill, move to bigger things such as your car loan, the personal loan you took for a vacation. And, soon, your spending spree is out of control.
Without any liquid assets, your entire pay cheque goes into consumption.
Pandit suggests a thumb rule, “For home or car loans, ensure that the monthly payment outgo towards your borrowings is not over 35 per cent."
For those taking high cost business loans to fund aggressive growth plans, the outgo can be stretched to 45 per cent, if you consider the fact that the asset will bring you income. But any more than that means danger.
2. Have you neglected medical insurance?
If you are in the pink of health, it is difficult to imagine an illness could make you bankrupt. But it can.
In the United States, medical bills are a factor in one out of five bankruptcies.
PAGE_BREAK
This is because a critical medical situation not only means mean a major loss of income, but the lack of adequate medical cover to pay hospitalisation costs would also mean eroding your savings.
In our book, this is frightening. We have topped our medical insurance ever since we heard this. Why don't you?
3. Do you have inadequate life insurance?
This one is critical, not only for you, but for your family, too.
Imagine this: You have taken a home loan and have not covered the same. Your death will devolve the debt on your family, which may not have adequate assets.
Result: They will be left without a roof over their head because the bank will exercise its rights to take over your home.
It is your worst nightmare come true. Insure your life with an adequate amount to help your family maintain their lifestyle.
4. Have you forgotten your piggy bank?
There is a reason your mother taught you about savings using that little plastic piggy bank: to make you understand the importance of having an emergency fund so that you are never caught unawares. Sudden illness in the family, an accident or a temporary loss of job are realities of life that creep up on you when you least expect them.
Here are two reckoners:
PAGE_BREAK
i. If you are in the lower tax bracket, you need to have around six months of your monthly expenses in fixed deposits.
ii. If you are in the higher tax bracket, give a thought to floating rate funds/liquid funds.
5. Are you a guarantor to too may of your friends' loans?
You may value your friend, but are you willing to go bankrupt for him/her?
If not, it would be a good idea to release yourself from the position of guarantor. Advocate Nirupama Kar warns: “All your personal assets could be attached, including bank balances, property and investments, leaving you bankrupt."
If you are pushed into this, Amar Pandit suggests that you keep up to 35 per cent of your gross income safe. Debt exposure beyond this figure can mean financial disaster.
Okay, how many times while reading this did you pat your back?
a. Five pats make you God.
b. Anything between three and four means you need to watch out.
c. Less than two means you are already bankrupt but just don’t know it yet!
Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.
Comments
0 comment