While it may be the prudent thing if you have hit the perfect storm of setbacks, avoiding bankruptcy and paying off all debts is the best decision for most people.
Credit missteps are recorded in your credit reports for a period of seven years. Bankruptcy is such a significant hit to your credit, that you probably won’t be able to borrow money, get an unsecured credit card, or any of the other common ways to use other people’s money until that 7 year period is passed. This happens for a reason. Credit reporting agencies determine that if you go bankrupt, you aren’t someone who can handle more credit, and they’re usually right!
How to Avoid Bankruptcy
When we are talking about any problem there are usually two paths to take, preventative measures and clean up measures. So whether you are on the edge of going into bankruptcy or just concerned about it being a possibility in the future, this list has some good ideas for you.
Do a Budget
If you aren’t doing a budget and you are thinking about bankruptcy, then you haven’t taken the most basic of steps in getting your finances in order. Take the time, get your budget going, because you will never know if you can pay your bills if you aren’t spending your money on paper, each month before the month begins.
I promise if you have never done a budget before, you are going to find some areas where you are overspending. Finally, expect your budget to not work exactly right for the first couple of months. Most people take 90 days to get a budget that accounts for all spending and income.
Put together an Emergency Fund
One of the quickest ways to get yourself into a debt bind is not have a pool of money in savings that is just for emergencies.
If you are in the process of paying off debt you should consider having an emergency fund of $1,000 to $2,500 dollars. Those who have paid off all their debt except for the house should have three to six months of expenses saved up.
Eliminate your Debt
Some people get nervous just thinking about having debt, while others don’t get serious until they start missing payments. No matter what your tolerance, having debt can really hold you back from reaching your goals.
When my wife and I starter our debt freedom march we used the debt snowball to organize and eliminate our debts one by one. There are other tactics, but this one worked very well for us.
Pick up a Side Hustle
If you are not paying your bills on time then you have two options, cut expenses or make more money. Since you made it this far you know that your monthly budget is the best way to identify where to cut spending, but if that doesn’t get you to breaking even on your bills, then pick up a side job.
While pizza delivery seems to be the go to job for making some extra buck, there are other ways to make money fast that may offer more flexibility. Becoming a driver for Uber or even doing some online work can really help your cash flow and keep you from bankruptcy.
Check Your Credit Report Every Four Months
You can check your credit report for free from each of the three credit bureaus using annualcreditreport.com. You do not have to get all three reports at the same time so get one every four months to make sure that the report is clean and you are not getting hit by either identity theft or debts you forgot about.
Keep Track of your Credit Score
By having some sort of credit monitoring service you can make sure to catch when something weird is going on with your credit report. Since most of these services give you monthly or weekly updates, you can quickly know when something is going wrong with your credit.
Also, more services are checking your credit score to determine your rates. This can be insurance or any situation where you have to make monthly payments.
Individual Voluntary Agreement (IVA)
An individual voluntary agreement uses the mediation of an IVA company to help you reach an agreement with your creditors. When your creditors understand that you are on the verge of bankruptcy, they realize that they are on the verge of not getting paid back at all. At this point, most businesses will be willing to cut their losses, only taking the money from you that they can get without making your choose bankruptcy. A company like Creditfix – IVA facilitators – will put all of your outstanding debt into one single payment, paid monthly. It will be determined according to what you are able to actually pay, without the possibility of ongoing interest, fees, and debt growth from the companies you owe. It has a period of only 5 years, meaning you can get back to your feet more quickly than (and without the huge credit hit of) bankruptcy allows.
Talk to Your Creditors
If you are on the edge of not being able to make payments or you have started missing payments, it is imperative that you talk to your creditors and explain your situation. Your creditors have no interest in you going bankrupt. They want you to keep paying your bills so they can keep collecting interest.
If you go into bankruptcy, your creditors will immediately stop getting paid and they then must justify to a court why they should be a priority in getting paid. Talk to your creditors and get on a new payment plan to get your debt paid off.
I am not a big fan of debt consolidation. The reason is, consolidating debt doesn’t fix the behavior that got you into debt in the first place. In fact it frequently allows people to afford the payments and go out and get more debt.
However, if you can adjust your debt accumulating behavior, consolidation can be a great way to get some traction in paying off all your debt instead of hitting the bankruptcy courts.
Bankruptcy is being used way too much by the public at large, instead of learning sound financial principles. If you are considering bankruptcy, take as many of the steps above as possible so you can save your credit and learn how to manage your money and spending so you never end up in this situation again.