Why should you avoid bankruptcy at all costs? Although bankruptcy may seem to be a quick way to escape a heavy debt burden in the short-term, it can have serious financial consequences in the long-term, particularly in the wake of changes enacted to bankruptcy law in 2005.
Those who declare bankruptcy under the new laws may find themselves with a poor credit rating. This could affect their ability to avail of credit at standard interest rates for up to a decade. This means that any loans you are granted will come with high interest charges. In addition, you will be required to attend mandatory financial management classes and continue to make ongoing payments to your creditors.
Although there are many people who have been driven to bankruptcy by unexpected expenses such as high medical costs that have drained their financial resources, the majority of individuals who are on the verge of bankruptcy are those whose poor financial habits have caused them to spend more than what they earn. If you are currently confronting the possibility of bankruptcy, here are some tips that can help you avoid it and gradually restore your financial health.
Reduce your spending
This is something that you have to do, no matter how painful it is. Sit down and write all of your expenses on a sheet of paper so that you can figure out in what areas you can cut down. You might be surprised at how much you can save by making small changes to your spending habits. These can be as small as not buying a daily cup of coffee from Starbucks, cutting down on sodas, and not using your dryer to dry your laundry. One of the areas you should not cut down on, however, is your insurance since it can cost you more in the long run if you suddenly need it but don’t have it anymore. Instead, ask your insurance agent if you can avail of a payment plan or shop around for cheaper rates.
Increase your income
There are many ways to earn more money that you may not have considered. Some of those that you might want to consider include picking up more overtime from your current job, getting a second job, and starting a small home business. You can use the additional money that you’ve earned to start paying off your debts or increase your debt service payments so that you can get out of debt more quickly.
Sell some of your unnecessary belongings
There may be assets in your home that you can dispose of to get more money, such as a second car or jewelry that you don’t normally wear. Keep in mind that if you are forced to declare bankruptcy, you may end up losing these possessions anyway. If you don’t want to sell them, you can consider renting them out instead to get subsidiary income. However, unless your need for money is urgent, you should not pawn your things, since you will only get a small fraction of their value and will have to pay high interest rates.
Work out a deal with your creditors
If you get to the point where you can no longer pay your bills, you should immediately contact your creditors and explain your situation. They may offer options such as a repayment plan or deferred payments.
Get professional help
A professional credit counselor can help you avoid bankruptcy by reviewing your financial situation and suggesting ways you can get out of debt. These counselors can even help you create a debt management plan that they will administer, which includes sending a proposal to your creditors requesting concessions such as waiving penalties and interest charges. Under the plan, you will send one payment to the credit counselor, who will allocate it to pay your creditors.