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.
What Is Bankruptcy?
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:
- Chapter 7: Chapter 7 bankruptcy is for individuals or businesses that have little or no assets. This usually clears them of their unsecured debt.
- Chapter 11: Chapter 11 is for businesses and is focused more on reorganization. This allows the debtor to keep their company and get a chance to make a profit again.
- Chapter 17: Chapter 17 is best for those who don’t qualify for Chapter 7 and have a steady income stream.
Pros and Cons of Filing for Bankruptcy
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.
Pros
- It allows you to start fresh with your finances by clearing you from most debts.
- It may help you get rid of old tax liabilities that you weren’t able to pay in the past. This is usually for liabilities that are more than three years old.
- It may be better for your credit score than repossessions, missed debt payments, lawsuits, and other scenarios.
- You no longer have to handle calls from creditors, lawsuits, or declined credit cards.
- You’re allowed to keep most of your valued possessions, to a certain degree.
Cons
- Filing for bankruptcy causes a dramatic drop in your credit score, which will be evident for 7 to 10 years.
- A history of bankruptcy might make it harder for you to apply for loans or mortgages in the future.
- You still can't clear your student loans.
- You may lose some luxury possessions, such as real estate, vehicles, and jewelry.
- Filing for bankruptcy can make you feel defeated and unmotivated.
- You can’t file for bankruptcy after a few years if you find yourself in debt once more.
How to Avoid Filing for Bankruptcy in 6 Steps
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.
1. Increase Your Income
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.
2. Minimize Your Spending
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:
- Gym memberships
- Streaming site subscriptions
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.
3. Settle Your Existing Debt
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.
- The first and most important is where you’re going to source the money to pay — you don’t want to take out another loan at this stage.This might also hurt your credit score, since debt relief companies will encourage you to stop regular payments while they negotiate with your creditor.
- Lastly, your creditor might be unwilling to negotiate in the first place, leaving the fees you’ve been paying to the debt relief company pointless.
4. Negotiate Payment Plans
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.
5. Consider Debt Consolidation
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.
6. Seek the Help of a Professional
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.
Final Thoughts
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.
Let Our Credit Union Help
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!