Debt can often feel like an insurmountable challenge. It can creep up on you over time or can happen all at once because of an unforeseen event, such as unemployment or high medical bills.
If you’re struggling with debt, know that you’re not alone. As 2022 draws to an end, the total household debt in the U.S. has reached $16.51 trillion. People are still recovering from the financial consequences of the COVID-19 pandemic. According to recent research, four in ten U.S. adults reveal someone in their household has lost a job since the beginning of the coronavirus pandemic.
What should you do? While filing for bankruptcy is certainly an option, it can have dire effects on your credit score and can stay on your record for up to ten years. Depending on your situation, opting for bankruptcy may not be worth the damage to your credit. Below, we explain how to avoid bankruptcy and spare your credit.
But first, let’s look at the consequences of bankruptcy and why you should steer clear.
Why You Should Avoid Bankruptcy
“How to avoid bankruptcy and spare your credit” is a frequently searched phrase in Google, and for good reason. Filing for bankruptcy can result in some painful consequences—both financial and emotional.
While there are six types of bankruptcies, most consumers file for either Chapter 7 or Chapter 13 bankruptcy.
With Chapter 7 bankruptcy, the most common type of bankruptcy, the consumer liquidates valuable assets to settle debts. This type of bankruptcy can stay on your credit report for up to 10 years from the filing date.
With Chapter 13 bankruptcy, a 3-5 year repayment plan for your outstanding debt is created. This type can last for up to seven years on your credit report.
If you are considering voluntary bankruptcy, it’s crucial to be aware of its possible effects.
Some consequences include:
Impact on Credit Rating
Filing for bankruptcy will negatively affect your credit report and credit score for up to a decade. This situation can make it harder to secure loans and get a credit card for reasonable rates. It can also potentially affect future employment and real estate opportunities.
Loss of Property
Bankruptcy proceedings may require you to give up your assets to repay creditors.
Other People May be Responsible for Certain Debts
If you have co-signers on unpaid loans, they will be required to take over payments on those loans, which can cause financial strain and damage relationships.
Psychological Distress
Aside from the legal and financial consequences, it’s also important to consider the potential effects of bankruptcy on your mental health and relationships. Filing for bankruptcy can be a stressful and even traumatic experience.
High Legal Fees
Another important consideration is the cost of filing for bankruptcy. The process can cost between $1,500 and $4,000, including filing fees and attorney fees. While you can file independently, that can be risky if you’re unfamiliar with bankruptcy law.
How to Avoid Bankruptcy and Spare your Credit: 10 Helpful Tips
Filing for bankruptcy may be one solution, but it’s not the only solution. Before you go down the bankruptcy path, it’s worth considering alternatives, such as negotiating with creditors and making lifestyle changes.
Below, we’ve compiled a list of helpful tips on how to avoid bankruptcy and spare your credit.
1. Prioritize Necessities
The first step is to cover your basic necessities: food, shelter, utilities, and transportation. Taking care of your basic needs will help ensure that you’ll be able to solve your current financial worries. This approach will also help you avoid getting behind on your most important bills and eliminate the risk of fines and penalties that can make it harder to catch up.
2. Eliminate Unnecessary Spending
While cutting back on expenses won’t relieve all your debt problems, reviewing your spending habits is an important first step. Carefully examine your current expenses and eliminate anything beyond what’s necessary. These may be subscriptions, memberships, or frequent habits like dining out. Reducing unnecessary spending can free up money that you can redirect toward monthly repayments.
3. Create a Budget
Now that you’ve covered your basics and eliminated unnecessary expenses, it’s time to maximize your income. Make a budget that covers your basic expenses, then track the money you receive and where it goes. You can do this manually on paper, via a spreadsheet, or even through a mobile app. Stick to your budget and delay unnecessary expenses like travel or purchasing a new vehicle. Dedicate as much money as possible to paying down your debt.
4. Boost Your Income
Having extra cash flow can give you additional resources for your monthly repayments. Consider working overtime at your current job, looking for a new side hustle, or doing some freelance work. While working overtime can be exhausting, the sacrifice will pay off in the long run.
5. Sell Your Stuff
Search your home for items you might liquidate to get extra cash, such as furniture, electronics, novelty items, tools, clothes, and books. You can use the money you get from selling your high-value possessions to pay off outstanding debts.
6. Downsize
Consider downsizing by moving to a smaller rental apartment or driving an older car. While this may seem like a drastic measure, it can go a long way toward helping you avoid bankruptcy and get back on track with debt repayment.
7. Seek Help From Family and Friends
In times of financial distress, borrowing money from trusted family and friends might be your best option. If you’re on the verge of bankruptcy, don’t be ashamed to ask for help—just make sure to set up a clear payment arrangement plan to avoid fueling resentments. Use your budget to estimate how much you’ll need to borrow.
8. Negotiate with Your Creditors
Communicate with your creditors and tell them you are considering bankruptcy. Chances are, they will be open to negotiation, especially if you express willingness to pay off your debt. They may agree to modify payment terms, waive fees, or reduce your interest rates or overall balance.
9. Consider Professional Help
A credit counselor can help you review your budget and develop a debt management plan. The National Foundation for Credit Counseling has a trusted list of companies and agencies you can work with to help you take charge of your finances.
Also, credit counseling is a requirement before filing for bankruptcy, so it can help to be ahead of the game.
10. Look Into Alternatives
Filing bankruptcy may be the first option that comes to mind if you face significant debt. However, you’ll discover alternatives when learning how to avoid bankruptcy and spare your credit.
Here are some of the other options you can explore:
Debt Consolidation
This money management solution entails taking out a new loan to repay existing debts. In debt consolidation, multiple debts are combined into a single, larger debt with better interest rates or lower monthly payments. This strategy can be a good long-term solution, but it’s critical to remain disciplined to avoid backsliding into old habits.
Consumer Proposal
This is a legal agreement between you and your creditors, outlining how you plan to settle your debts. Filing for a consumer proposal is done through a bankruptcy trustee. The trustee will determine your fixed monthly payments based on your income.
Informal Debt Settlement
This solution entails communicating with your creditors directly to negotiate a payment plan that can fit your current budget and meet their terms. This solution can be a considerable option depending on the number of creditors you will settle with and the total debt you have to pay back.
Begin Your Debt-Free Journey Today
People face bankruptcy for many reasons, some of which are out of their control. The tips we shared on how to avoid bankruptcy and spare your credit can free you from debt and help you take control of your finances.
At Power Finance Texas, we understand the struggle of dealing with unexpected financial emergencies. We have decades of experience providing consumers like you with fast and seamless installment loans to help you get back on track.
Reach out today to learn more about our installment loans and how we can help.