The Best Ways to Avoid Bankruptcy

U.S. consumers tied down with debt often reach for the worst-case scenario: bankruptcy. If you are considering a bankruptcy filing, you are not alone; in 2011, the American Bankruptcy Institute reported 1,362,847 non-business bankruptcy cases. While it may be tempting to wipe the slate clean, bankruptcy does not come without consequences.

How Do Bankruptcy Filings Work?

The U.S. Bankruptcy Code addresses non-business bankruptcy petitions in Chapters 7 and 13. Both are filed in court along with proof that you cannot pay the debt; that you do not own assets of sufficient value to cover the debt; and that you acquired the debt intending to pay it back. The type and amount of debt you have determines the type of bankruptcy filing you can make.

Chapter 7 bankruptcy completely relieves debt obligations. However, filing Chapter 7 only applies to unsecured debt like credit cards, medical bills or home equity loans. Chapter 7 bankruptcies do not address child support, alimony, most tax debts, student loans or debt that uses your home or car as collateral.

Chapter 13 filings serve a dual purpose: unsecured debt is canceled and a framework is established to repay secured loans. Chapter 13 petitions can be an effective method to avoid foreclosure on a home. Chapter 7 bankruptcy is limited to lower-income individuals and lower debt loads; Chapter 13 may be the only option for high-income families or those with very high debt.

What are the Consequences of Bankruptcy?

Bankruptcy has immediate and long-term implications. Personal assets such as property, vehicles and retirement savings may be at risk; in some cases, courts can seize them as a means toward paying your debt. Consider this risk carefully.

While you may sleep better at night, remember that bankruptcy destroys your credit rating. Once you have filed, you may legally be denied credit towards purchase of a home or vehicle for up to 10 years. Regardless how financially stable you may be after bankruptcy, the claim will remain on your credit report.

Credit history is used as criteria to evaluate many things; you may be denied a job because a bankruptcy filing can lead an employer to conclude that you are irresponsible. Some volunteer organizations do not allow bankruptcy filers to hold office. Car, auto, life and health insurance premiums will be higher. If you become an entrepreneur, future partners may view you as a bad business risk because of a bankruptcy in your past.

Are There Alternatives?

It is often possible to find solutions that are less drastic. However, be prepared for harsh changes. If you are considering bankruptcy as a last resort, it may be time for an appraisal of your lifestyle choices.

  1. Budget assessment. Identify basic expenditures that are must-haves, such as groceries, mortgage payments and required utilities like heat and power. Add your debt and compare this total against your income. Are you living outside of your means?
  1. Make a choice. You have the choice to file bankruptcy or change your lifestyle. Keep in mind that if you file bankruptcy, you will still have a court-ordered upheaval in your life and fewer ways to control how you rebuild your financial worth.
  1. Damage control. Look hard at ways you can economize or raise quick cash. Can you move to a smaller home? Use one car? Work more or get a better-paying job? Put the kids in public schools? Ask yourself if it is time to strip your household budget of luxuries like cable TV and dining out. Sell valuables like family jewelry, furs and antiques. Liquidate expensive hobby supplies on eBay or Craigslist. Weigh using equity from your home or cashing in your life insurance.
  1. DIY Consolidation. Some families opt for a single, low-interest loan as a do-it-yourself consolidation program. If you can raise enough cash in short order to secure this kind of loan you can use it to pay off several other loans at once, such as high-interest credit cards. Due to your existing debt you will pay a high interest rate, but you can still save money over the long term.
  1. Debt settlement. Settlement is a process where you or someone who represents you arranges reduced payment terms directly with creditors. Many unsecured creditors will make arrangements that allow you to pay off an amount that is considerably less than the total. Your credit report will reflect debt settlements, but these carry less impact than bankruptcy.
  1. Debt negotiation. Professional services that act as liaisons between creditors and debtors perform debt negotiation. These organizations settle your debt amounts for you and create a trust for the total amount due. You make monthly payments into this trust until your balance is paid. For this convenience, however, you can pay thousands of dollars in interest and service fees.
  1. Learn from your mistakes. Living frugally can be a harsh reality, but the cost savings outweigh the inconvenience. Get used to paying cash, and save for big-ticket items until you can purchase them outright. Create a realistic budget and stick to it. Don’t let the bank make money on your mistakes. It may be hard to adjust to self-restraint, but long-term peace of mind is its own reward.

If you are considering bankruptcy as a financial solution, these links may be useful resources.

U.S. Court Bankruptcy Resources: This website is the U.S. Court’s federal resource page for individuals considering bankruptcy or already in bankruptcy. Links to credit counseling services, debt negotiation services, filing fee information and bankruptcy filing forms are available.

Debt Collector Violations: If you are struggling with debt, you are familiar with collection agencies. You have rights; if you believe they are being violated, learn about the steps you can take.

Chapter This online assessment tool is widely used by credit counselors and debt negotiation firms. Find out if you qualify for a Chapter 7 petition.

CreditInfo Center: Comprehensive explanations of debt negotiations, debt settlements and tips and tricks for getting your debt under control are all found at this site.