Advice for Avoiding Bankruptcy
Learn how to avoid bankruptcy by dealing with your creditors and paying down your debts one debt at a time. Avoiding bankruptcy is a matter of getting your debt situation under control. This requires a little bit of planning. You can talk to a debt counsellor if you want to, but the steps for how to avoid bankruptcy are entirely in your own power. Follow the steps below (except possibly #6) and you’ll slowly start to pull yourself out of the crushing debt situation you find yourself in. I’m not going to lie to you; this is a process of trimming your budget and negotiating with obnoxious creditors. But once you start to pay off your debts and see you can avoid Chapter 7 bankruptcy, you’ll start to feel better about yourself and your debt crisis.
You’ll also grow more comfortable with debt negotiations when you realize that your creditors have reasons to be reasonable and renegotiate your debts. Tell them you’re considering bankruptcy and see how their attitudes change, because in the end, you have the hammer in these negotiations — you can refuse to pay another red cent. So don’t hide from your creditors and don’t hide from your mounting debt. Down that path is bankruptcy court. The power to solve your debt problems is entirely within your abilities. You can set goals and achieve them; in achieving these limited goals, you’ll start to feel better about yourself and start to see your debt burden shrink.
1. Pay One Debt at a Time – Don’t pay off your credit cards and other debts a little here and a little there; pay off one debt at a time. Obviously, make your interest payments for each debt. But when you start paying off your actual debt, set up a pecking order and focus on one debt at a time. Consider paying off all your smaller debts first. Alternately, consider paying off your highest-interest debts at once. The first gives you a sense you are making progress. The second allows you to save money by paying off the biggest interest debts first. Either way, you start to eliminate outstanding debts one-by-one. If you don’t eliminate these debts, you’ll just be paying interest for now on, paying off the size of the original loan many times over without making any progress.
2. Deal With Your Creditors – Contact your creditors and let them know you want to negotiate a new, more manageable payment plan. This is what reputable debt consolidation firms do. Debt consolidation companies know that creditors have probably made a hefty profit off your spiraling debt already, and they don’t really expect they will see all the money you owe them.
If your creditors get surly and become threatening or obnoxious, tell them you are about to file for bankruptcy and see how their attitudes change. Remember, Chapter 7 bankruptcy means you’ll simply never pay off your debts, and your creditors will stop seeing even interest payments. When you let them know you are planning to declare bankruptcy, they know they are likely to see you pay zero of your remaining outstanding debt. So this credit firm might be happy to renegotiate, to assure you pay them a certain percentage of your debt. Perhaps you’ll negotiate down to 75% of your debt, or more likely, 50%. Debtors have renegotiated with their creditors down to paying back only 25% or even 10% of their debts, though these are rarer cases.
3. Set a Budget and Payment Plan – Another option is the old-fashioned way: pay your debts by tightening your budget. You only have a finite amount of money to buy groceries, pay rent and car payments and pay off your debt every month. But you might have disposable income or unnecessary expenses that you could trim off your monthly budget. Play around with the numbers. See if you can trim certain “luxuries” or entertainment expenses you might be able to take out of your budget. If you can do this, that money can be applied to paying off your debt. When you pay off your debt, it’s only a matter of time before your credit card interest payments decrease and you’ll start to dig out of your credit hole. If you can pay down your debts, it’s better to pay debts than declare bankruptcy.
4. Get a Another Source of Income – If you have the time and energy, you might find alternate sources of income. Consider taking a second job for a short period of time. This doesn’t have to be waiting tables at night, though there’s nothing wrong with waiting tables. Here are a couple of options you might not have considered, though.
If you have writing skills, for instance, go on a writers job market like eLance.com and sell your writing skills for profit. You can work from the computer at the house at night, paying down your debt from the comfort and privacy of your own home (and avoiding the night life, which will save you money, too). If writing isn’t your thing, consider becoming a seller on eBay. Perhaps you have something you once collected that is worth some money and just sitting in the attic. Get on eBay and sell these goods. Compact discs, records, books, comics, baseball cards, movies and just about anything else can be sold online. These might not fetch a huge price, but apply all of the profits to buying down your debt. The more you pay off, the less your interest payments will be. In the end, the quicker you pay off your debts, the more money you’ll save. So you’ll be making more money selling on eBay than what you think up front.
5. Dispute Credit Reports – Contact one of the credit rating companies and get a free credit report. They are obligated to offer free credit histories to people who have been turned down for credit recently. Take a look at your credit history and search for discrepancies. If you find bad information on your credit report, bring it to the attention of that particular credit rating corporation. In this way, you can increase your credit rating without paying anything, and you might find that you owe less than you thought.
6. Hire a Debt Consolidation Firm – If you don’t have the time or energy to take any of the steps above, consider hiring a debt consolidation firm to help you pay down your credit card debt and avoid bankruptcy. I place this far down the list for a reason, though. If you use the wrong debt consolidation firm, you’re going to be throwing good money away that could go to pay off your debts. That’s because many debt consolidation firms do nothing to help the debtors pay off their debt, and end up taking their money. In other words, they’re con men preying on people in need. Not all debt consolidation companies are like this, so search the internet, make sure you aren’t getting yourself into a debt consolidation scam, and hire these professionals to help. Remember, though, there’s nothing that a debt consolidation group can do that you can’t do yourself. The good ones will call your creditors and try to renegotiate your debt. Debt repair might dispute bad information on your credit report, but you can do that yourself. In other words, you are paying someone to do your dirty work for you. It might be worth it to you, but if you are in debt, that money would be better spent paying down the interest on your debts.
7. Don’t Rely on Credit – Don’t run up one credit card to pay off another. This creates a credit “death spiral”, where your interest payments slowly (or not so slowly) increase month-by-month. Eventually, the percentage of debt interest gets so high that you can no longer keep up with interest payments. So don’t look at your credit cards to help you pay off debt. At best, your credit line can put off the day when you go bankrupt. In the end, you’ll have to pay down your debt. So stop charging up your credit cards and start paying them down. Once you’re going in the right direction, you can start to see a way out.
8. Cut Up Your Credit Cards – Keep one (or at most) two credit cards. Use these for convenience, but don’t use them to pay for items and services you know you can’t afford. In other words, end your dependence on credit cards. When you only have one credit card, you won’t fool yourself into thinking you have a higher ceiling than you do. Having a half-dozen credit cards with a cumulative debt ceiling creates an illusionary world, where you think you have more money than you really do. Cutting down to one credit card and paying cash brings you back to the real world where your purchases have direct meaning to you.