Debtors Who File Bankruptcy Understand That Cash Is King

August 25th, 2009 by Reed Allmand

There’s a very interesting advice column in the Dallas Morning News, where a financial advisors advises a couple to hold on to their cash as opposed to using it to pay off debt. The couple seeking advice said that they would receive $100,000 in December and wanted to know if it would be wise to use it to pay down a $250,000 adjustable-rate mortgage.

Here’s what the columnist had to say:

“The biggest asset you and your husband have is yourselves. I suggest you use this $100,000 as working capital for “US2 Inc.” The second most important resource you can have is cash. While you can cut your interest payments by paying your mortgage, paying it down will reduce your flexibility because it will reduce your cash resources.”

This advice is critical, especially for those financial issues such as foreclosure and credit card debt.  Cash is definitely KING in financially difficult times when credit is scarce and the possibility of job losses is high. Even if the couple had paid down their mortgage by $100,000, they would have only saved $4,750 in each of the next few years, according to the columnist. Many debtors who are trying to avoid bankruptcy use their precious cash resources to pay down credit card debt or a mortgage instead of saving or investing the money and creating a cushion for a possible job loss or other financial emergency.  Many of these debtors deplete their savings to pay creditors find themselves facing foreclosure after a “surprise” job loss and eventually need to file bankruptcy anyway.  For those who file bankruptcy, they get the added benefit of protecting their future income (i.e. cash) from creditors, which makes a huge difference for their long-term financial prospects.