Top 5 Methods for Bankruptcy Prevention

Something urgent came up.  Someone got sick.  Something broke down. Someone lost their job.  Someone encouraged you to buy those new shoes you had to have! Then $100 of credit card debt turned into $500, and $500 turned into $1,000.  Before you knew it, your family was thousands of dollars in debt trying to recover from unforeseen circumstances.  These are often just a few of the reasons that lead people to the hard decision to file for bankruptcy.  But what if these things could have been faced head on and bankruptcy avoided? What if proper preparation was in place to avoid such a stressful situation?

What is Bankruptcy?

Investopedia defines bankruptcy as a legal proceeding carried out to allow individuals or businesses freedom from their debts, while simultaneously providing creditors an opportunity for repayment.  There are various types of bankruptcy, commonly referred to by their chapter within the U.S. Bankruptcy Code.

The most common bankruptcy chapters for individuals are Chapters 7 (Liquidation of Assets) and 13 (Reorganization with Payment Plan).

Why Should Bankruptcy be Prevented?

Bankruptcy tells creditors and loan agents that you have not been a responsible borrower in the past. Bankruptcy will negatively impact your credit score and make the processes of borrowing or obtaining loans for cars or homes more difficult in the future.  Essentially, bankruptcy may stop you from living your best life!  To help consider the options you may have instead of declaring bankruptcy, here are five methods for bankruptcy prevention.

1.  Implement Budgeting Strategies and Decrease Spending

First things first – stop making it rain! Have you ever heard the phrase drastic times call for drastic measures?  This is the time to be drastic! Most bankruptcy cases are a result of financial hardship brought upon by major unexpected expenses such as job loss or medical bills, and not necessarily extravagant spending as some may suggest.  That is why it is imperative to have a budget or plan in place that includes emergencies. As part of the budgeting process, look for ways to cut non-essential expenses.

Consider completely cutting out cable, streaming services, dining out, new phones, and vacations while you’re focusing on balancing your debt situation.  Unfortunately, this also means cutting out impromptu happy hours, shopping sprees, and new car purchases.  Fill up your water bottle with tap water to decrease money spent on bottled water.  Plan meals for the week and make the most out of a single protein by planning meals around the meat.  Also, consider generic brands when shopping; most have the same main ingredient.  Remember, the primary focus here is financial freedom for you.

2.  Increase Income

When faced with bankruptcy, the debt-to-income ratio is most likely high, indicating a significant portion of income is being used to pay debt. This may be the perfect time to consider getting a second job or finding ways to increase passive income using hidden talents or skills.  Be sure to maintain a stable job or career path that adequately produces enough money to cover all your needs and some of your wants.  It’s also never a bad idea to consider applying for a promotion or requesting a valuation of your salary based on your skills, accomplishments, and savings to your company.  As you look around your home, look for things you have never opened or rarely use and consider selling them.

3.  Organize Debts & Set Pay-Off Goals

Make it a priority to reduce debt as much as possible, as fast as possible. The longer the balance sits, the more interest will continue to accrue, which makes paying off debts a trickier, lengthier task.  Before becoming overwhelmed with how the payoff will take place, take time to understand the various debt payoff methods.  Calling a credit counseling agency like CCCSMD can help you determine if there is a debt payoff method that works for you and avoids bankruptcy.  You may consider a do-it-yourself method like the debt snowball, or you may qualify for a Debt Management Program, which organizes your debts into one monthly payment.  Regardless of the method you choose, consistently pay at least the minimum payments each month and pay any agreed-to or negotiated amounts on schedule.

Another option is to consider refinancing your mortgage with a cash out option, or applying for a home equity loan, then using the extra funds to pay off the debt.  As a last resort, consider cashing in any extra life insurance policies that may have significant cash-surrender values or allow you to cash in the dividends.  Once the debt has been paid down, make personal goals to keep debt to a minimum and emergency funds at a maximum!

4.  Create New Goals to Encourage Positive Change

A key factor in starting new healthy habits is identifying the mistakes made in the past, then making a conscious effort to avoid them.  Setting new financial goals gives you something to work towards, and when goals are met, a reason to celebrate all your accomplishments. This may include establishing and consistently contributing to an emergency fund, to have money set aside in case of medical expenses or unexpected car repairs.

In addition, it is very important to understand credit and use it wisely.  Going forward, you should frequently monitor credit reports and pay close attention to statement closing dates and recurring charges to stay ahead of the credit game. Think of your financial future and focus on what you want it to look like; then determine what it will take and stick to the plan.

5.  Get Professional Advice

Asking family and friends for advice is not always the best option, especially if they have never stepped foot in your shoes. It is very important that you find someone who fits your needs. There are tons of resources, webinars, and Financial Advocates available to help you for free at CCCSMD.

Since none of us are perfect, it is inevitable that mistakes will be made.  Failure is not final. Lessons are learned every day. If you’re thinking about filing for bankruptcy, you have already built up the courage to admit you want your future to be brighter than your past. That’s great! Now, don’t suffer alone. Imagine the relief that comes along with an expert helping you to get back on track.  There are so many different resources at CCCSMD available to help with bankruptcy counseling and debt management solutions. If you need assistance with budgeting or would like to speak with one of our Financial Advocates, give us a call at (800) 642-2227.

Emily J. Burton, Writer/Contributor
Owner, Bold Butterfly, LLC