Are you considering declaring bankruptcy? In certain circumstances, bankruptcy can be a useful tool to wipe your slate clean. But it also comes with serious consequences. Before you declare bankruptcy, consider that there may be a better way forward. Read on to learn how you can avoid bankruptcy.
Why Avoid Filing for Bankruptcy
If you think you have nothing to lose by filing chapter 7, think again. The repercussions of declaring bankruptcy are manifold and may include the following:
Loss of privacy
When you file for bankruptcy, it becomes a matter of public court record. Unless they are sealed, all bankruptcy documents become available for public viewing and are accessible through your county clerk’s office or online anytime.
Damage to your credit report
This is arguably the biggest one. After filing for bankruptcy, your credit score will take a serious hit, and the negative mark on your credit report will linger for 7-10 years. Having a bad credit history can prevent you from obtaining favorable rates on loans, getting approved for apartments, and can even hurt your job prospects.
Loss of assets
Personal bankruptcy is filed as either chapter 7 or chapter 13. In a chapter 13 bankruptcy, you’re able to protect your assets but will be required to pay all or part of your debts through a repayment plan for three to five years. If you file for chapter 7, the most common type of bankruptcy, a trustee may gather and sell your nonexempt assets to pay your creditors. This means you’d tank your credit score and still possibly lose your possessions.
Loss of income
As stated, a chapter 13 bankruptcy obligates you to repay some of your debts. Repayment may be taken from your paycheck for up to five years after the bankruptcy is filed.
Even if you’re buried by debt and think things can’t get much worse, bankruptcy can still hurt you and should only be treated as a last resort.
How to Avoid Bankruptcy
There may be a better way forward to get you out of the woods of serious debt that doesn’t require such drastic and long-lasting measures. Consider these bankruptcy alternatives to pay off your debts:
Evaluate your finances and spending habits
There is a societal tendency to blame a person’s debt woes on poor savings and irresponsible spending habits. And while it’s true that sometimes overspending is the source of a debt problem, the number one cause of filing for bankruptcy is medical bills.
Regardless of how your debt became unmanageable, it’s important to take a good, hard look at your financial situation and spending to see where cuts are possible.
Make a list of all your debts and essential expenditures. Then make a list of all your non-essential expenses. Eliminate all discretionary spending such as eating out, tech gadgets and fancy appliances, unnecessary clothing, gym memberships, cable, and streaming services. There are cheaper or even free alternatives to many of the creature comforts we find hard to give up, and in reality, giving up those that can’t be substituted likely won’t be as difficult as you imagine.
Try to reduce your food and utility costs, and consider downsizing to a smaller house or less expensive vehicle. Create and stick to a bare-bones budget, then dedicate all the money you save towards paying down your debts.
Negotiate with your creditors for lower interest rates
Do you think there’s no way your creditors would be willing to cut you a break when you owe them so much money? You might be surprised. The “b” word–bankruptcy–can be a very effective tool for getting your creditors to negotiate with you; they would much rather get some money than none. As soon as you realize you cannot continue to meet your monthly minimum payments, let your creditors know that you’re struggling financially and want to avoid bankruptcy, and they may be willing to work out an agreement.
Many credit card companies offer hardship programs intended for such situations. While there are no guarantees, in some cases, they might agree to lower monthly payments, reduced interest or fees, or a change in payment terms that can alleviate some of your burdens.
Before entering a hardship program, get your terms in writing. With luck, your creditor will lower your monthly payment, lower your interest, or both! And if you are so lucky, stick to the agreement since they’ll be unlikely to negotiate twice if you break your end of the deal.
Consider credit counseling and debt management
If you’ve tried negotiating with your creditors on your own, but they won’t budge, a well-trained credit counselor may be the ally you need. Consultation with a debt management specialist at a non-profit credit counseling organization will cost you nothing. These professionals have experience working with creditors to get your payments and interest rates reduced and can help you avoid bankruptcy.
When you enlist the help of credit counselors, they may recommend an affordable debt management plan to help you pay off your debts. If you choose this option, the credit counseling agency will negotiate an agreement on your behalf for an affordable repayment plan, which will enable you to pay off your debts over a period of three to five years. You will pay the debt management service each month, and they, in turn, will distribute your payments to your creditors. This has the added benefit of relieving you of the hassle and anxiety of dealing with debt collectors and creditors on your own.
The debt management service provided by these agencies is not free, but it is far less expensive than opting for debt settlement and far less injurious to your credit score. In fact, credit counseling typically does not hurt your credit, and you’ll usually only pay around $25 a month.
Consider a debt consolidation loan
Are you juggling payments for several different loans or credit cards and struggling to stay on top of them? Debt consolidation can help. When you consolidate your debts, you’re essentially taking out one large loan at a lower interest rate to pay off all your other outstanding debts.
This can be a good option if you are typically very conscientious with money and are not in debt because of financial mismanagement since you’ll need to calculate whether a debt consolidation loan will actually save you money once you factor in interest and fees. It’s also imperative that you’re able to consistently make timely payments. If you feel this describes you and you’re confident you could afford the payments, debt consolidation may enable you to pay off what you owe in one fell swoop while eliminating the hassle of dealing with multiple statements, due dates, and interest rates.
You’ll want to consider this option carefully, however. Be sure to find out if any outstanding loans charge prepayment fees and find out how much they cost. Also, check to see if you’ll be charged an origination fee for the consolidation loan, as these fees could potentially nullify your expected savings.
Weigh the decision to take out a home equity loan to consolidate your debts with extreme caution, as you risk losing your home if you default on the loan. It almost never makes sense to pay off unsecured debt with secured debt, and home equity loans are not recommended for this reason.
The idea of selling your possessions to pay off debt can be a tough pill to swallow, but if it can help you avoid bankruptcy, it’s worthy of consideration. Furniture, electronics, jewelry, collections, and antiques can all fetch a decent profit, and there is no shortage of places to sell. You might give thought to consigning some of your belongings, selling to a pawn shop, or selling directly on eBay or Craigslist.
Get an estimate from a trustworthy and experienced dealer of what they’d be willing to pay for specialized items such as coin collections or antiques.
If you live somewhere with public transportation and a car is not a necessity, contemplate selling it.
Boost your income
In today’s economy, there is no shortage of side hustles that allow individuals to work just a few extra hours each week or take on a full-blown second job. Regardless of how much time you’re able to commit to it, a second job in any capacity can earn you the extra money you need to help pay your bills and avoid bankruptcy.
Consider driving for Uber or Lyft on the weekends, renting out a room on AirBnB, using your skillset to do freelance work on Upwork or other online platforms, babysitting, or cleaning houses. They’re all great options if they can help you pay down credit card debt or other troublesome bills.
Settle your debt
If you’ve tried everything else, turn to debt settlement before you resort to bankruptcy. By agreeing to pay your lenders less than what you owe, you’ll reduce your debt load and make your monthly payments more affordable.
Settling your debts can also hurt your credit score, but it won’t do as much damage as bankruptcy.
Not confident in your negotiation skills? Enlist an experienced debt settlement firm to be your advocate.
Not sure where to start? Reaching out to your creditors is a great first step. The more you proactively work with them to pay off your debt, the likelier you both are to come to an agreement.
Lara is a personal finance writer that enjoys helping people live a balanced life. She covers the essentials — think budgeting and healthcare — and the finer things in life, such as food, travel, and design. In her free time, she enjoys reading, climbing, and cooking up globe-spanning fare for her favorite people.