Debt Warning Signs

The best way to avoid a financial crisis is to spend less than you earn. You'll be better prepared for unexpected expenses or life-changing events that might dramatically reduce your income or increase your expenses.

It also enables you to have the freedom to make personal choices about your job, where you live, and in many other areas of your life.

Recognising the causes of financial crisis will help you know what to avoid. Below is a list of major circumstances that could put you deeply in debt. When one or more of these happens, it can be overwhelming. If you plan for the unexpected, you will be in a much better financial situation.

If you currently have more debt than you can handle, use the tools under Assess Your Debt and Pay Off Your Debt to understand your financial situation and how to create your own plan for getting out of debt.

Living and Spending Beyond Your Means Loss of a Job Divorce Unexpected Health or Medical Expenses Unexpected Home or Car Expenses Bad Money Advice or Fraud Private arrangements with your creditors

When you don't keep track of what you spend, it is easy to have your expenses exceed your income - sometimes by a lot. After a few years, even a small, month-to-month negative cash flow will lead to financial crisis, and you will need to make important changes to tackle it.

Saving regularly, even a little at a time, will give you a cushion you can rely on when something unexpected happens. This means thinking about saving before a big splurge, such as buying the newest plasma television, or finding ways to save on the little things you spend money on every day. Your savings will give you more flexibility in life choices and a financial cushion that you may need if something goes wrong.

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With changes in the structure of the economy and New Zealand business, many New Zealanders will experience job loss during their lifetimes. Unemployment is stressful, and accumulating debt as a result can compound that stress.

Most financial experts advise having at least three months of your take-home pay saved and available. It's a good goal to work toward.

Depending on the job market and the overall health of the economy, a job search can easily take three to six months - or more. If you lose your job, apply for unemployment right away and make sure you receive the benefits available to you. If you know in advance that your company may be downsizing or closing, limit your expenses and curtail your spending.

Don't pay your bills late or incur other fees. If you can't pay all of your bills in full, call your creditors before you get behind, explain your situation, and ask for a payment plan that enables you to pay what you can while out of work without incurring penalty fees.

If you must take a job that pays less than your previous job, adjust your spending to your reduced income. Create a realistic plan for paying off any debt incurred during your unemployment.

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Often a divorce means expenses increase, while household income declines. Divorce itself is an expensive process. Between legal fees, moving costs and countless other expenses, it simply adds up. In addition, you may be responsible for debt that your spouse accumulated, such as taxes, car payments, or other instances where you may have had joint obligations.

To ensure you are in the best position if divorce occurs, have your own credit card and be responsible about paying it on time and keeping your balance down. Don't incur all of your joint expenses under your name, and ensure that your joint assets are under both your names.

Divorce is a stressful time, and you may feel like splurging on yourself. To keep those understandable impulses in check, look at where you want to be financially in a year. Having lower debt or higher savings will give you confidence and security.

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When a health or medical crisis hits you or your family, it can be devastating both financially and emotionally. If you are unable to work, lost income can spell financial distress. Even if you have health insurance, the co-payments add up quickly. Identify where you can cut non-essentials and ensure you don't make any large purchases.

Track your medical and health expenses carefully. Accounting errors - by both medical providers and insurers - are not uncommon and can add unnecessarily to your costs. Also, explore all your payment options.

Review your bills carefully to ensure they accurately reflect the services you received.

• If you have health insurance, check each benefit statement to be sure you are receiving coverage for all the services your plan provides.
• If you don't have health insurance, talk to your hospital or health care provider about programs that offer free or discounted care. Most hospitals or medical institutions offer these programs.
• If you are unable to pay your medical bills on the payment terms offered, talk to your health care provider, hospital, or doctor about a payment plan.
• If you are unable to pay other regular bills in full, let your creditors know your situation as soon as possible, and ask to work out realistic payment plans so you don't end up incurring additional costs such as late penalties or collection fees.

When your transmission fails, your hot water heater breaks, or water starts pouring in through your roof, it means a large expense that can put your finances in a nose-dive.

Identify where you can cut other expenses to free up money to pay for your emergency. If you must go into debt to pay for the unexpected, explore all your financing options and work out a payment plan.

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Giving a mortgage to a lender who didn’t disclose all fees and costs. Being bullied into an unwise investment. Leasing a car when purchasing makes more sense for you. All of these can leave you with financial troubles. If this happens, cut other costs to make up for the lost resources or added expenses.

If you believe you were the victim of illegal, misleading or fraudulent business practices, first try resolving it by contacting the head of the company or the consumer complaint department. Put your complaint or problem in writing, and keep good records, including copies of all correspondence.

If that doesn't resolve your problem, contact a local or national official with oversight responsibility. Some industries have specific oversight bodies (for example, the banking ombudsman). Otherwise, you could contact government organisations such as the Commerce Commission or the Ministry of Consumer Affairs.

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Your lawyer, budget advisor (or other professional) may be able to help you to make private arrangements with your creditors. Although these arrangements are binding legal contracts, you do not need to involve the courts. For example, such an arrangement might allow you to repay part of your debt in full settlement of the amount you owe. It is important to remember that these are privately negotiated agreements and will be legally binding on you. Negotiating a debt reduction settlement may be an alternative to filing for bankruptcy, applying for a summary installment order or negotiating a proposal under the Insolvency Act 1967. However, watch out for agencies that promise to reduce your debt by very large amounts or promise much lower repayments. Many of these are not reputable and unlikely to deliver. Remember, as with debt consolidation loans, if it sounds too good to be true it probably is.

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