Practical Tips to Avoid Filing Bankruptcy

Sometimes it seems that people are more interested in finding an easy way out of debt rather than learn to live within their means, overcoming the desire to get something for nothing. However, recent statistics give a more positive impression of Americans with the fewest number of bankruptcies filed since 2006. Even in the midst of a fragile economy, people are demonstrating a desire to do the right thing, even when it means doing without. If you find yourself in debt, so deep that you wonder how you’ll ever dig your way out and are thinking that bankruptcy is your only option, you should think again.

There are practical ways to avoid the traumatic, albeit legal, procedures that will eliminate your legitimate debt through bankruptcy. Avoiding bankruptcy will not only relieve you of emotional regrets for reneging on your obligations, but it will prevent the devastating effect it will have on your credit score. There are a number of ways to prevent the necessity of filing for bankruptcy protection. To be effective, these alternatives will require planning, conscientious effort and time.

Determining Your Priorities
This is where the pedal meets the metal in avoiding bankruptcy. An assessment of how you spend your money will clearly show where your priorities have been and where you need to make adjustments. Begin by placing all of your current expenses into categories (housing, energy, entertainment, food, health, etc.) and establishing where your priorities should lie and what you can do without. The key is to be honest about whether an expense is a necessity or a not.

The hardest part is taking the non-essentials and cutting back or eliminating them entirely. For example, cable or satellite television is hardly a necessary expense and can cost hundreds of dollars each month. It would be reasonable to suggest that the service costs too much and should be cancelled, but from the vantage point of cheap family entertainment, it may be a wiser to look into a lower rate service or cut channels and choose instead to eliminate dinner and movie date nights.

Cell phones are another semi-essential service. Is it really necessary to have unlimited services for the kids? If you can’t make that happen, at least consider getting a family plan service to cut a few dollars off the monthly bill. Another example is how you use the resources you need like gas and electricity. While they are necessities, how high you keep the temperature in your home is a choice.

Don’t Procrastinate
Once you realize that you’re vulnerable to missing or making a late payment due to insufficient income, take action. Don’t wait until you’re already behind, as the problem will be magnified and you may need to take defensive action by contacting your creditors to request a reprieve on any increased penalty rates. The tighter your budget the more action you’ll need to take to unravel your debt issues.

Refinance Your Home
Your most important investment is your home. Cut just one percentage point off your mortgage through refinancing and you will see considerable savings. Example: $200,000, 30-month fixed rate mortgage at 6% means monthly payments of $1,199; refinance at 5% and cut your monthly payments to $1,074 – a savings of $125 each and every month.

Combine Your Debts
Debt consolidation is a way to make your obligations easier to manage by consolidating multiple bills into one monthly payment at a lower interest rate. If you maintain a good credit score and a dependable income, debt consolidation programs can be a great way to avoid bankruptcy.

Sell Things You No Longer Use
Americans are a privileged society, but many of us have simply too much stuff, often packed away in boxes in inconvenient places that make all those treasures useless. So, why not use some of that stuff to pay off some of the debt that is weighing you down and help eliminate the idea of bankruptcy? eBay is just one of the online services that provides the tools to help you sell just about anything – furniture, electronics, toys, jewelry. Market your hobbies and service skills, such as pet grooming or babysitting on Craigslist.

Ask Your Creditors for Help
If you’re paying an exorbitantly high interest rate on any of your active credit accounts, it’s time to make a call. Explain your situation and the fact that you may need to resort to bankruptcy. If you’re turned down and have a good credit score, you may still have the option to transfer the balance to a lower interest rate with a smaller minimum payment.

Contact your mortgage lender about the interest rate you’re currently paying and request a reduction. Many banks have hardship programs intended for this type of situation. Let them know of your financial situation and your desire to avoid bankruptcy. Express your willingness to repay all of your debt and ask that they help lessen that burden by lowering your monthly payment. If you’re denied help, begin to compare the rate you’re paying with other lenders to secure the lowest rate possible.

Contact the companies involved in accounts that have been charged off or sent to collection to request a settlement that reduces the amount owed to a level that you can immediately pay off. Don’t be threatening but be firm in any request.

Ask for Help from Family or Friends
When all attempts to make up what you need to avoid bankruptcy fail, ask family or close friends if they can lend you just enough to put you back on track. Calculate what you will need to borrow and how, with their help, you will be able to begin repaying. Never take this step without a signed pledge that promises repayment within the period you have worked out ahead of time.

A popular option you may want to consider is a debt settlement agreement or a debt reduction program. By carefully choosing a firm to represent your interest in negotiating with your creditors, your debt may be reduced by as much as 60%, bringing it to a more manageable level without getting a court of law involved. Keep in mind that these services are not free and the cost of hiring someone to do what you could do on your own may not be worth it.

Turn to the Professionals
Whether you’re hoping to avoid bankruptcy or seriously considering it, seeking credit counseling is a wise move. In fact, new bankruptcy laws require credit counseling before filing. So seeking help in either case will be to your advantage and help you better see your options and to decide a course of action. Ask for references from family and friends and check with the Better Business Bureau before making an appointment to see a credit counselor.

Don’t be embarrassed by your financial struggles or allow how you feel to prevent you from taking action. It happens to people of all income levels, and even the most conscientious, proactive consumer can end up in debt trouble from events that occur beyond their control. What’s important is that you take action quickly once you realize you’re headed for trouble. Put in place a personalized plan that works for your situation to avoid bankruptcy and protect your good credit.


Noreen Ruth is a contributor to www.wowcreditcards.com and numerous financial-related blogs and websites. She specializes in providing information on credit, popular credit cards, money management and debt-related issues. She also enjoys educating consumers about the latest rules and regulations, as well as ways to build, improve and maintain good credit.

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