How to Avoid Bankruptcy and Spare Your Credit
Debt is a way of life for many consumers. It can be so overwhelming that bankruptcy seems to be the only way out. Because bankruptcy can have such a devastating effect on your credit score, it's better to seek other alternatives before filing Chapter 7 or Chapter 13 bankruptcy. One of these alternatives may save you from bankruptcy and save your credit, it's better to take it, even if it will take a little longer or cost a little more to get rid of your debt.
If you ultimately have to file bankruptcy, you can have peace of mind knowing you explored the alternatives. Once the process is complete, you can work toward rebuilding your credit score.
Selling Some of Your Assets
Sell whatever you can spare and use the money to pay off your debts. Take action immediately when you notice you can't afford to make payments. If you wait until you're behind on payments, it may be too late to get caught up and avoid further action from your creditors.
You can sell your furniture, jewelry, and electronics on eBay, Craigslist, even in your front yard. Is this a radical way to avoid bankruptcy? Perhaps. Many people can't get past the inconvenience of living without their things, but you can adjust and it's only temporary. It will help you avoid bankruptcy and spare your credit.
Can you afford to pay off your debts over a period of time? You'd have to if you file Chapter 13 bankruptcy either to save an asset or because you failed the means test for Chapter 7. If you take a closer look at your budget, you may be able to cut out those nice-to-haves like cable or satellite television, landline and cell phones. These are examples of some expenses you can cut without too much pain.
If you're already living on a barebones-budget, how about increasing your income by working overtime or part-time? Hobbies and skills can also help you get some extra money to avoid bankruptcy. Here are dozens of ideas for getting extra money to pay off your debt.
Ask Creditors to Help You Avoid Bankruptcy
Your creditors would rather get some money from you than no money at all. Let your creditors know you are having financial difficulty and want to avoid bankruptcy. Express your willingness to pay the debt and ask if they can help ease the burden by lowering your monthly payment or decreasing your interest rate (or both). Many credit card companies and banks have hardship programs intended for this type of situation.
Before you enter a hardship program make sure your monthly payment and interest rate actually go down. Otherwise, you could be stuck with an even higher minimum payment.
If you don't have luck working with your creditors on your own, enlist the help of a professional. Find a consumer credit counselor who has experience working with creditors to get your payment and interest rate reduced.
The new bankruptcy law requires credit counseling prior to bankruptcy filings anyway so it's worth it to strongly consider credit counseling as a bankruptcy alternative.
A consumer credit counselor can work with you and your creditors to put together a debt management plan to repay your debts over three to five years. The debt management plan payments may seem out of reach, but if you look, you may find holes in your budget that allow you to make the payments.
Get Help From Family and Friends
Normally, borrowing money from family and friends is a bad idea. It's been known to create hardships and even end relationships. But there's an exception to every rule, and bankruptcy is one. Take the time to calculate how much money you need to avoid bankruptcy.
Carefully consider how much you're able to contribute to your debt, then ask friends and family to help you make up the difference. Before you approach them with your wallets turned out, come up with a plan for how you will repay them once your financial situation has turned around.
Settle With Creditors and Debt Collectors
Debt settlement is another of those things that should be avoided under normal circumstances. However, the brink of bankruptcy isn't normal. If you have to choose between settling a few debts or filing bankruptcy, settle the debts, but do it right.
First, don't use a debt settlement company. Too much time and extra money goes to these companies. Second, don't settle any debt on which your payments are current. Continue making the minimum payments on any current debts to keep them in good standing. Instead, focus on debts that have already been charged off or sent to collection. Finally, be ready to pay the lump sum settlement amount as soon as an agreement has been made.
Use Everything in This List
Rather than read through this list and decide that none of these things will work for you, consider the entire list as an arsenal of tools you can use to avoid bankruptcy. For example, you may be able to avoid bankruptcy if you sell some assets, cut back on your budget, make a deal with your creditors, and borrow money from family and friends.