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Why and How to Avoid Bankruptcy

 Why and How to Avoid Bankruptcy

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Before asking yourself how to avoid bankruptcy, determine whether you really have to. Just because you’re in a dire situation financially doesn’t mean you have to throw in the towel. In fact, there are plenty of strategies to avoid bankruptcy like mediation, negotiating to reduce your debt, and seeking other forms of help out there.

Why Should I Avoid Bankruptcy?

First, let’s talk about what exactly bankruptcy is since it can be confusing. In essence, bankruptcy is when your debts (or liabilities) are more than your assets or you don’t have cash coming in to pay off your debts. As in, you don’t have enough money to pay your bills. When you file for bankruptcy, you submit a case to a court so you can be declared insolvent. Then the court will decide which type of bankruptcy you fall under–the most common are Chapter 7 and Chapter 13.

Since you’re going through the courts, declaring bankruptcy is serious. Given this fact, there are some potential consequences that you need to understand if you do file for bankruptcy. First, this action will stick around your credit report for seven or ten years depending on which type of bankruptcy you file for. That means you’ll have a negative mark on your credit report, which could affect your ability to get new loans and other things like the ability to rent an apartment.

In addition, you may also need to give up some of your personal property – again, depending on the type of bankruptcy you qualify for. This also means that any loans you co-signed for may fall under the sole responsibility of the co-signer. There’s a filing fee and fees for any legal help you seek.

How Do I Avoid Filing For Bankruptcy?

Considering how serious declaring bankruptcy really is, it’s understandable that you’d want to avoid it. If you’re really struggling to pay the bills, here are a few strategies to avoid bankruptcy.

Sell As Much as You Can

If you have any assets or items that you can sell right now that you don’t need (or can find a cheaper alternative), do so. That way you can use that money to pay off your debts. As soon as you realize you can’t afford payments, figure out a way to pay it all off–an example would be to sell your car and get a cheaper (but just as reliable) one.

As for what you can sell, it can be anything from electronics, jewelry, or even designer clothing items. You can sell them online or at a yard sale–the point is to start bringing in some cash now. While it’s hard to part with some of your things, it’ll help you avoid bankruptcy. If you remind yourself this is only for the short term, then the inconvenience is worth it.

Slash Your Budget To The Bare Bones

Cutting your budget down to the bare essentials is temporary and necessary so you can use any extra cash to start paying off that debt quicker. That’s not to say you can’t have some nice things. It could mean that you downgrade your cable subscription or stick with a cheaper streaming service for now.

Again, look at where you can cut back–work your way backwards from the nonessential items to ones you need to survive like food and shelter. There are some great intuitive budgeting tools to help you figure out where your money is going and offer suggestions on where to cut back. Check a few of the leading tools like Personal Capital, Empower or Money Patrol and decide which one is the best for you.

It may be a reality that you simply don’t make enough even with a bare-bones budget. In this case, you should focus your efforts on earning more. Perhaps you can get overtime at your existing job, work an additional part-time job, or start a side hustle. You’d be surprised at how a few hundred dollars a month can help you.

Ask Friends and Family For Help

Yes, asking to borrow money from friends and family isn’t the best idea since it can create rifts in your relationship. However, desperate times call for desperate measures, so you might have to make an exception. If you’re really trying to avoid bankruptcy, figure out how much you need and determine whether it’s even possible to ask your network for help.

Then comes the uncomfortable conversation where you’ll need to reach out to your friend or family member and explain your situation. Make sure you have all the numbers laid out, why you need to borrow a certain amount, and your exact plans on paying them back.

Talk To Your Creditors

It may seem scary to talk to your lenders, but they’d rather get some money compared to none at all. Many companies offer some leeway for those who are going through some form of hardship, so calling them makes sense. If you take a proactive approach and call them to let them know you really want to pay the debt back, they should be able to work with you.

As for what to say, simply explain your situation and ask if they can help by lowering your interest rate or monthly payment amount–try asking for both and see what happens. Some may say no but work out a payment plan that makes the monthly payments more affordable. Before you agree to any terms, make sure to get them in writing and check to see whether the new payments work in your favor.

Get Credit Counseling

Enlisting the help of a financial professional might be a good idea if you’re feeling lost (though talking with creditors yourself first might be the better route to go). Professionals like a consumer credit counselor can help you work with your creditors to negotiate a payment plan or even reduce your interest rates.

How it works is that this person acts as a mediator of sorts between you and your creditors so that you can pay off your debt over three to five years on a debt repayment plan. In many cases, they offer a simpler way to pay everything off.

Besides, you need to have credit counseling before you can even file for bankruptcy, so if you’re at the point where you are seriously considering doing so, then you might as well find a credit counselor now.

If you go through all the above options and still can’t afford payments, then it may be time to seriously consider filing for bankruptcy. While not ideal, sometimes you don’t have a choice–but we urge you to try as hard as you can in order to avoid doing so.

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