Bankruptcy Does Not Solve Financial Stress

Research recently released by Mintel indicates that young adults have become de-sensitised to debt. One in five young adults would consider bankruptcy or Individual Voluntary Arrangements (IVAs) as a solution to the burden of high levels of debt. Whilst bankruptcy may appear to reduce the amount of debt owed it doesn't reduce the level of financial stress. It simply swaps one type of financial stress with a different type of financial stress.

Todd Davis, senior finance analyst at Mintel, said: "Student loans and the endless stream of credit card offers, overdraft extensions and hire purchase mean that there is no longer the stigma of going into debt that there once was. But the fact that it is now more accepted has done little to alleviate the stress of accumulating high amounts of debt. Bankruptcy is now widely accepted among young adults mainly because it is the natural follow on from rising debt but also because the Government has made the conditions of bankruptcy less painful."

We train ourselves from an early age that debt is ok, we use frivolous shopping as a means of stimulation, enjoyment, tribal affiliation or an opportunity to socialise. Mintel's research indicated that 25% of young adults indulge in frivolous shopping (when we buy stuff we don't need with money we don't have). We train our minds to associate excitement with purchasing to such an extent that the monthly credit card bill arriving with an available balance prompts the unconscious question, "What shall I buy?" We mistake the available balance on our credit card bill as money in the bank. There are three issues with this lifestyle.

• Sooner or later the credit card bill catches up with you. For many people this is an incredibly stressful experience. Feelings of anxiety or depression are not unusual.
• By not changing the conscious-unconscious relationship between spending and excitement, you will take on more debt as soon as you are no longer officially bankrupt. This process leads to long-term poverty just as yo-yo dieting contributes to long-term obesity.
• A choice such as bankruptcy can have long-term career implications as some professions do not allow those who have declared themselves bankrupt to practice. It's really important to get quality impartial advice when considering bankruptcy or an IVA.

So how do we move out of this spiral? First we need to retrain our minds so that we associate pleasure with an available balance in our savings account not our credit card. Here's one way of achieving that.

1. Set up a standing order that transfers money from your current account to a savings account. Get one with a savings book so you can put the book in a drawer and forget about it. Arrange for the money to be transferred as soon as you get paid or better still get your employer to pay part of your salary directly into a savings account.
2. Now this accumulation of funds isn't for spending. Eight months after you have opened the account take your passbook to the bank and get it updated so that you can see the transactions over the last eight months. Focus on the buzz and feelings of satisfaction as you look at the balance in your account.
3. Now for the really important part...don't spend it...put the savings book back in your drawer for another eight months. Over time you will retrain your nervous system so that you associate pleasure with saving. By keeping it in the back of your drawer and forgetting about it for a while, you're making sure you don't spend it before you have an opportunity to enjoy that sense of achievement. It's also a good idea to check out tax efficient savings options so you are maximising your return on the investment.

The next thing to tackle is that credit card debt. It's important to see it as it is, but not worse than it is.

1. Make a list of all your credit cards, the outstanding balance for each one, the minimum payment required and the interest rate. It takes 10 years and 7 months to repay a credit card balance of £360 if you are making just the minimum payments. The great news is that we can make compounding interest work for you rather than against you.
2. Set up standing orders so that you are certain that you are meeting all your credit card minimum requirements.
3. Now focus on the credit card that carries the highest interest rate and commit to making an additional minimum payment each month. Set up a standing order so that it happens without you focussing on it. Once you have repaid the outstanding balance on this card do the same thing for the credit card that carries the next highest interest rate.
4. Choose the credit card that carries the lowest interest rate. This is the one that you will use for emergencies. Cut the other cards up so that you are not tempted to top up the outstanding balances and undo all your good work.
5. When those credit card statements turn up on your door, really focus feeling great as you watch that balance melt away to nothing.

Of all the sources of stress today - relationships, work, competitive, financial, environmental - financial is the most insidious. You can never leave it behind for a moment, it's always sitting there on your shoulder. Swapping one label (high level of unsecured debt) for another (IVA or bankrupt) doesn't reduce the level of stress that you're carrying. Taking action to change what is causing the stress at its root is the only way to ensure a life beyond stress. As the old saying goes, If you keep doing what you're doing, you will keep getting what you've got.