Handling Financial Emergencies

Financial emergencies can affect people's lives sometimes without warning and sometimes due to the lack of ability or desire to see the warning signs.

A financial emergency can befall for several reasons, and here is a list of the most prominent ones:

  • Illness
  • Redundancy
  • Business failure
  • Overspending
  • Identity theft.

Most people would define a financial emergency, is when the banks cut of your credit. This is not necessarily true. The financial emergency actually begins from the incident that occurred to change your life, either temporarily or permanently. By realizing that fact and as early on as possible, you can prevent all the inconvenience of losing you line of credit and instead even change your life for the better.

After all, banks and credit card companies are staffed by human beings and can be very sympathetic to those who find themselves in a financial emergency. The earlier you approach your creditors in this situation the better off you will be. Before you do so, you should prepare yourself thoroughly, and according to the following criteria:
  • Explain how the situation occurred.
  • Tell the truth, even though it may be painful
  • Prepare a list of proposals
  • Be prepared to make sacrifices, and sometimes large ones.
  • Be realistic in your expectations in repaying your debts. Banks and credit card companies have been through the same scenario many, many times. They are prepared and even expect to wait years to receive full payment.

Many banks will be prepared to allow clients to reconsolidate their debts over years, possibly taking an equity bearing asset as security, usually the family home. This can be a sensible proposal, and the banks will be very happy for you to accept it. They are guaranteed their money back, at no risk, while earning a healthy interest.

Before you accept this solution, take two steps back and analyze it thoroughly. Maybe a better solution would be to downgrade to a smaller property as the chances are your earning potential for the future may be curtailed, given the nature of the emergency. This is usually true in the case of people who have a chronic disease, or lost their business or job. Although this may cause short term inconvenience, in the long term it may provide a better quality of life and considerably less financial pressure.

If there are no assets to be realized, then the picture becomes entirely different, and your creditors will look upon you from a different angle. The only option is to take short term loans which are unsecured and therefore pretty expensive. Whilst giving short term respite, they often create a false illusion of relief.

The best action for the people who find themselves in such a situation, especially those who have reached it through overspending, is to prepare themselves for a whole new reality. Credit cards will become a distant memory, and many say that it is not a bad thing. By becoming lean and mean, many people have extricated themselves from seemingly impossible situations in the space of a few years. By resisting the temptation of borrowing themselves out of trouble, and leading a more frugal lifestyle, they have returned themselves to credibility. Hopefully the path that they have had to take to get there will have taught them a few lessons, and they will not fall into the same trap again.

In an ideal world, families should have some liquid reserves to fall back in the case of a financial emergency. Not easy in today's "buy today, pay tomorrow society," but only someone who has experienced the cold fear of being in a financial emergency will tell you how valuable it can be.