Debt is one of the most widespread issues today in the US. Many people owe money that they can’t afford to pay, causing financial problems that affect them and their families.
In the first quarter of 2021, the total household debt in the US amounted to $14.64 trillion. There are around 349 million people in the country in some kind of debt, and this figure is expected to rise.
Most of this debt isn’t because of overspending; many people have debt because of student loans, mortgages, medical bills, and other things that are out of their control.
Given enough work and some good financial planning, debt can be paid. However, in some cases, people are unable to pay their outstanding debts.
When this happens, they file for bankruptcy. Bankruptcy is a life-changing legal process that devastates your credit score and turns your world upside down, so it’s usually a last resort.
If you’re wondering how to avoid bankruptcy, you must begin by addressing your financial problems. Dealing with this is the only way to avoid all of the negative consequences of bankruptcy, and you might even manage to pay everything off.
As your trusted credit union, we at 121 Financial Credit Union want to teach you how to steer clear of bankruptcy. In this article, we’ll outline six steps that you can take to improve your financial standing and settle your debts.
If it seems like filing for bankruptcy might be your only option, read on to see what you else can do.
You incur debt when you borrow from a creditor. Over time, you pay this debt in agreed-upon installments with agreed-upon interest rates.
However, life happens; you might end up owing more than you can pay. Some people even start applying for more loans just to pay off their current ones, but this only snowballs into more debt that they can’t pay.
When you’re unable to repay your outstanding debt, your last option is to file bankruptcy. This legal proceeding starts with a petition and is handled through the Federal Court.
In most cases, it’s the business or the individual who files bankruptcy, but creditors can also file on their behalf. Whatever the case, bankruptcy is said to be beneficial to both parties, but only in theory.
The process gives the debtor a chance to be free from debts and creditors a way to get repayments. The sources of funds would usually be taken from the debtor’s assets through liquidation.
According to the Bankruptcy Code of the US, there are several chapters under which you can file for bankruptcy. The most well-known ones are:
This legal proceeding is seen as a last resort because of the many negative consequences it entails. Still, bankruptcy has its benefits. So expect the following if you ever end up filing for one.
Today, it’s much harder to track spending and much easier to make expenses, given how quick it is to shop online and how good marketing has become.
In fact, it’s been shown that Americans overspend by $7,400 on average annually, and 40% of that is attributed to online shopping.
These unsustainable financial habits are one of the major reasons why people file for bankruptcy. Knowing how to strictly manage your finances is the best way to avoid falling into this trap.
Before you consider filing for bankruptcy, here are a few things you can do to improve your financial standing and pay off your debt.
This might be an obvious thing — who wouldn’t consider increasing their revenue stream when in debt? However, it’s not as simple as it may seem.
You must first evaluate how your current income is spent and how much is being dedicated to debt repayment. Most of your funds are typically assigned for basic living expenses, leaving little to go towards your debt.
In that case, consider finding another job to increase your income. This will allow you to cover your monthly debt payments while still having enough for daily living costs.
One of the best ways to earn extra income is doing side gigs or freelance work. Thanks to the work-from-home movement, you can do most of these no matter where you are.
Taking on more jobs might seem like a drastic measure, but the fact that you’re considering bankruptcy should be enough of a wake-up call. Don’t hesitate here; it’s time to do what you can to save your financial future.
This might be another obvious thing, but lowering your expenses will help you improve your financial standing. Having a budget and sticking to it is much more sustainable and allows you to monitor your spending.
You also need to cut back on many luxuries and other unnecessary expenses until your debt is paid. For example:
These aren’t necessities and shouldn’t be seen as such.
You should also remove the things that make you incur debt in the first place: credit cards. Stash them somewhere inaccessible and pay everything with debit cards or cash to avoid overspending.
Finally, you can completely renew your lifestyle by downsizing, selling old vehicles, and giving up on vacations. It may sound like a huge sacrifice, but these practices will be better for you in the long run.
Settling your debt is different from paying it. While the latter is the end goal, debt settlement is more of a compromise where you only pay a partial amount of what you owe.
A debt relief company of your choosing will negotiate with your creditors until all parties reach an agreed-upon amount. You’ll then pay the lump sum all at once.
While this might seem like a good strategy, there are a couple of considerations to make.
If debt settlement doesn’t pan out, then you can still renegotiate your payment plans with your creditor. They’re often more willing to restructure your payment scheme rather than allowing you to pay a part of it in one go.
Most of them are open to compromises of this kind, but you should remain proactive to make them more inclined. This means being honest about your current financial issues and what you’re doing to fix them.
You also need to be transparent and keep your story consistent. This way, you’ll gain your creditor's trust, and they’d be more lenient in their terms.
Once they agree to negotiate the payment plans, you can either opt for a lower monthly rate or interest. Choose whichever option is more sustainable on your end.
To make it binding, put it into writing. You need to cover your bases to avoid any payment issues in the future.
Another service offered by debt relief companies is debt consolidation. This is another possible option that works similarly with debt settlement.
Debt consolidation involves combining all your high-interest debts into one payment structure.
You can expect lower monthly payments and lower interests in such arrangements.
Still, this process has some disadvantages. Firstly, you’re going to be in debt for a longer time.
Debt relief companies might also increase rates, both regular payments and interests, over the years. This can leave you with more debt if you’re unable to keep up.
If you do end up choosing this option to avoid bankruptcy, you need to proceed with caution; understand the risks and make plans to lessen the impacts in case they happen.
Once your monthly rates are lowered, you might be tempted to spend more again, but you still need to be careful with your expenses. Fortitude and a good amount of financial discipline will be your friends.
Managing finances isn’t a simple thing, and it becomes even more complicated when you’re in debt. That’s why it’s good to work with credit and finance professionals to better understand your spending.
These experts offer a more objective look at your financial habits and any underlying causes for excess purchasing. They can also assist in creating sustainable budgets to help you manage your payments better.
Still, you should be wary of those who might take advantage of your vulnerable situation. Watch out for “professionals” that promise easy ways to pay off your debt.
If it’s too good to be true, then it probably is. These people might just be luring you to make money out of your desperation.
At the end of the day, the best advice you can get is to curb your spending and practice self-discipline.
Filing bankruptcy should be the last resort to free yourself from debt. Before caving and filing, try out these ways to change your approach to your finances; while they may be unpleasant, they’re much less unpleasant than the impacts of bankruptcy.
Try applying these tips to your debt situation. By strictly following them, you can improve your financial standing and eventually pay off your debts.
Borrowing and loans are sometimes unavoidable; that’s just how life works. However, there are ways to avoid accruing too much debt and falling into bankruptcy.
One of these is becoming a credit union member and borrowing from the union. Since these are not-for-profit groups, they cater to the financial wellness and stability of their members more than a traditional bank would.
At 121 Financial Credit Union, we offer an array of services including financial consultations to our members, sustainable and diverse loans, and investment opportunities.
Contact us today and let us help you with your money!