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What is bankruptcy?

Bankruptcy is a federal court process where you get the chance to eliminate or reorganize your debts through discharge (which can mean the sale of assets), or by following a repayment plan that will often last 5 years. Consumers typically file either Chapter 7 or Chapter 13 personal bankruptcy depending upon your financial situation.

How much
debt settlement
can save you

Why should you avoid bankruptcy

Watch out for the 6 reasons of avoiding bankruptcy.

 
Your credit is badly hit
Chapter 7 and 13 bnankruptcy have a negative effect on your credit. It can bring down credit score by around 200-250 points. Moreover, the negative entry stays on credit report for 7-10 years depending on the type of bankruptcy you file, thereby making it difficult to qualify for new loans and credit for the next 1 to 5 years. It may only remain on your credit report for 7 to 10 years, but you will find the question "Have you ever filed for bankruptcy" and "If so, when" on many types of financial forms throughout your adult life.
Not all debts can be eliminated
It's a myth that bankruptcy can get rid of all of your debts. Back taxes, student loans, child support, alimony/spousal support, student loans (other than the most extreme circumstances) and a few other debts cannot be gotten rid of through filling chapter 7 or . Therefore if you are looking to get rid of these kinds of debts, you should avoid bankruptcy. You can look to budget around debts that cannot be discharged and negotiate other bills in a debt settlement or an alternative payment plan with your creditors.
 
Property may be affected
There are certain assets that can be protected and other assets that you may not be allowed to keep under a Chapter 7 bankruptcy plan. Depending on your situation and your state's laws you could end up losing items that may otherwise have been avoided.
Adverse effect on your financial future
Bankruptcy has an adverse effect on your financial situation. For instance, it can influence the status of your security clearance if you don't inform your employer about your bankruptcy and why you've filed for it, and can also limit future job opportunities depending on the field of work you are in.
 
You may not qualify for new credit
Getting approval for new loans/credit is tough after you've filed bankruptcy. It'll take anywhere from 2 to 5 years for you to qualify for a secured loan (such as mortgage). Unsecured loans are hard to qualify for if you file chapter 13 for the entire 3 to 5 year repayment plan.
Not all retirement plans are protected
While many retirement accounts are protected from creditors in a bankruptcy, not all are.

Steps to avoid filing bankruptcy

 

Even when you are overburdened with debt, there are ways to avoid filing bankruptcy. Here are the steps to do it.

1) Increase your income and savings

Yes, if you can control your savings, then increasing income helps a lot to tackle your debts. You can increase your income in various ways:

  • Negotiate for a raise
    Talk to your manager and discuss what additional responsibilities you can take to raise your salary. You Can also work additional hours to get extra pay. However, make sure you health permits to take on extra responsibilities.
  • Get a part-time job
    Grab the opportunity to pursue your hobby and earn extra bucks without affecting your present job. If you have to look after your children, choose the work from options. You can also babysit along with looking after your own baby and earn extra dollars.
  • Downsize your lifestyle cost
    Often we ignore certain expenses which we can avoid. For example, you can cancel your gym membership, cut your cable, etc. that you rarely use.
  • Make your home clutter free
    You may wonder how it can help you in saving money? It will. Look for items you no longer require and sell those items. It will serve dual purpose. Your home will become clutter free and you will earn extra bucks. Every cent helps when you are struggling to get out of debt.

2) Look for alternative options to become debt free

Check out the 5 alternative ways to avoid bankruptcy.

  • Debt settlement

    This is a legitimate option, especially when you cannot keep up with the minimum payments on your debts. A debt settlement (or debt reduction) program is where your creditors cut down your debt amount by 40-60% of what you owe.

    What you need to do is, negotiate with creditors or collection agencies in order to reduce your debt amount. You can get help from professional settlement services. Check out how to get help settling your debts. You can also settle debts on your own. Check out how to settle your debts yourself and avoid bankruptcy as a way to get out of debt.

  • Debt consolidation program

    If you wish to avoid bankruptcy and make monthly bill payments at reduced interest rates, then debt consolidation (or bill consolidation) program may be your right choice.

    A debt consolidation program is where you consolidate your bills into one easy monthly payment by taking out a lower interest loan to pay off your debts. It makes sense to choose debt consolidation in order to avoid bankruptcy when you still have good credit and a dependable income.

  • Debt management

    This is where a credit counseling agency or a debt management firm helps you reduce your interest rates and penalties. You then make your monthly payments to the credit counseling company and comfortably manage your bills to get debt free in a predictable and faster time frame.

  • Payday loan consolidation

    If you're struggling with payday loans and wish to avoid bankruptcy, then payday loan consolidation is what you may choose. This is where you consolidate and replace multiple payday loans into an affordable monthly payment.

  • Do it yourself plan

    The Do it yourself (DIY) plan is where you try getting out of debt on your own without going for professional debt help services. To make your DIY plan effective, you will need to negotiate with your creditors and come up with a monthly payment you can afford to pay. You'll have to plan a budget to manage your daily expenses in addition to paying off your debts. This option provides you flexibilities missing from a chapter 13 repayment plan.

    The Do it yourself (DIY) plan is where you try getting out of debt on your own without going for professional debt help services. To make your DIY plan effective, you will need to negotiate with your creditors and come up with a monthly payment you can afford to pay. You'll have to plan a budget to manage your daily expenses in addition to paying off your debts. This option provides you flexibilities missing from a chapter 13 repayment plan.

9 Useful tips to avoid bankruptcy

Here are a few useful tips to avoid bankruptcy and manage your financial situation efficiently.

  1. Analyze your income, expenses, savings, debts, investments, etc. to make an accurate estimate of your financial situation.
  2. Follow a proper budget to know the areas where you can save money and avoid getting entangled with debt problems.
  3. Reduce your spending and practice a frugal lifestyle to save more every month.
  4. Increase your income and use the amount to repay your existing debts.
  5. Get short-term help from your family and friends who can afford to lend you money for a short-term.
  6. Negotiate with your creditors to make a realistic deal; request them to reduce a portion of the debt amount or give you more time to repay the debt.
  7. Sell assets you don’t need and use sale proceedings to repay debt. You'll need to sell your non-exempt properties when you'll file Chapter 7 bankruptcy. You can avoid filing bankruptcy by just selling your assets and saving your credit score.
  8. Take out a debit card instead of a credit card. This is because there is less chance of incurring debts when you use a debit card. You can only spend up to the amount available on account. So, there is no possibility of overspending or becoming bankrupt.
  9. Quit bad financial habits; gambling can make you bankrupt in a single day. So, exercise self-control and restrict all your impulses to hit the nearest casino.

When should you avoid bankruptcy?

Here are some more situations when you should look for options to avoid bankruptcy.

  • Even if it’s a bit difficult but you have the ability to consolidate or settle your unsecured debts.
  • You want to protect your credit score from getting a major hit.
  • You want to protect your creditworthiness of taking out a loan with favorable terms and conditions in the near future.
  • You want to maintain a goodwill with the credit card companies from where you’ve taken out cards.
  • You have good assets that you have a chance of losing through bankruptcy.
  • You have inherited certain asset which you have a chance of losing through bankruptcy court.
  • You want to avoid any legal hassle.

FAQ:

Q: Can filing bankruptcy solve back tax problem

Ans: You have to fulfill certain eligibility criteria to discharge your tax debt by filing a Chapter 7 bankruptcy. However, if you’re filing a Chapter 13 bankruptcy, then your tax debts will get discharged if it’s a nonpriority debt; but in case of priority debt, you have to pay it in full.

Q: How to avoid bankruptcy and repay student loan debt

Ans:

You have to qualify the brunner test if you want to get discharge from your student loan debt. However, there are certain options to avoid bankruptcy. To repay your federal student loans, you can opt for income-driven plans or request for deferment or forbearance to repay your student loans with ease.