Here’s a cau­tion­ary tale to bor­row with sense

Auckland City Harbour News - - NEWS -

The causes of bank­ruptcy tell a cau­tion­ary tale.

Ev­ery year the In­sol­vency Ser­vice, the govern­ment body which ad­min­is­ters bank­rupt­cies, pub­lishes a list of the top rea­sons peo­ple give for go­ing bust.

For bank­ruptcy, the num­ber one rea­son given by bankrupts was un­em­ploy­ment or loss of in­come (19 per cent).

Also up there are ‘‘ad­verse le­gal ac­tion’’ (12 per cent), as a re­sult of hav­ing guar­an­teed a debt (11 per cent), re­la­tion­ship break­down (8 per cent), ex­ces­sive use of credit fa­cil­i­ties (5 per cent) and ill health and a lack of med­i­cal in­sur­ance (5 per cent).

For peo­ple who en­tered the No As­set Pro­ce­dure (debts be­low $40,000 and no or few as­sets), 43 per cent cited ‘‘un­em­ploy­ment or loss of in­come’’ as the pri­mary cause of their in­sol­vency, fol­lowed by ex­ces­sive use of credit fa­cil­i­ties (14 per cent) and ill health or ab­sence of health in­sur­ance (13 per cent).

And the fig­ures for the 12 months to the end of June last year show peo­ple have gone bank­rupt for less than $10,000.

The lessons of these cau­tion­ary tales: First, don’t take debt lightly. Peo­ple fail un­der it, so make sure it is worth it.

Sec­ond, bad things hap­pen to in­debted peo­ple. If you bor­row money you owe it to your­self to en­sure you can re­pay it what­ever hap­pens.

This means fac­tor­ing in the cost of tak­ing out credit in­sur­ance into your bor­row­ing.

But be aware it can prove ex­pen­sive. As far as I can see, this is the sin­gle most prof­itable form of in­sur­ance ever in­vented (pos­si­bly with the ex­cep­tion of Alien Ab­duc­tion in­sur­ance, un­less that was an ur­ban myth).

It is espe­cially im­por­tant to take debt se­ri­ously if you have kids, though load­ing up with debt early in life for lux­u­ries can have a big im­pact on your abil­ity to own the roof that’s over your kids’ heads later in life.

Thirdly, given that debt is such a se­ri­ous thing, many ar­gue that there is ‘‘good debt’’ and ‘‘ bad debt’’.

Good debt be­ing for ap­pre­ci­at­ing as­sets like houses and stu­dent loans, bad debt for happy things like wide-screen TVs.

There’s a lot of truth in the good debt/bad debt folk wis­dom, the mantra of bor­row­ing to pros­per.

But it is also a trite line. A large stu­dent debt in­curred to pay for a weak qual­i­fi­ca­tion may turn out to be a poor rea­son to bor­row and buy­ing a car to get to work with debt can (depend­ing on the car and the terms of the con­tract) be a sen­si­ble de­ci­sion.

But with­out doubt debt is such a se­ri­ous bur­den it should not be taken on for fri­vol­i­ties like mag­wheels, cos­metic surgery or fash­ion­able clothes. Plus it means you over-pay for ev­ery­thing when you fac­tor the in­ter­est cost in.

And the sad truth is that there are two groups of debtors – those who get in­debted by choice and those who do so as a re­sult of a fam­ily cri­sis which, be­cause they are on low in­comes and have no sav­ings, makes it im­pos­si­ble to cope with with­out bor­row­ing.

Some of the lat­ter group have made poor choices but many are able bud­geters who just don’t earn enough to pay for things like the car break­ing down.

If you are in the first group of debtors, take on debt only af­ter plan­ning your exit out of it and your ‘‘dis­as­ter’’ plans for if some­thing else goes wrong. If you are in the sec­ond group, seek help now.

Mer­ci­fully, bank­ruptcy and No As­set Pro­ce­dures are rare.

In the year to the end of June 2012, 11 in ev­ery 10,000 peo­ple aged over 15 en­tered per­sonal in­sol­vency.

But just as each new cy­clist’s death on the road is a warn­ing for all of us to take ex­treme care to share the road safely, so each bank­ruptcy should be a re­minder to bor­row with sense.

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