Bankruptcy can come with debt relief, but it can be devastating for your finances for several years! For many people, bankruptcy may seem like the only option; however, some alternatives can help avoid this big financial step. Keep reading to learn more about different ways to avoid bankruptcy, along with some causes that can lead to it.
What Usually Leads People To Bankruptcy
Before you can understand how to avoid bankruptcy, you need to know how most people get there. The most common reason for bankruptcy in the United States is medical debt, which can impact credit. Other causes include reduced income, loss of a job, too much debt, illness, divorce, and economic instability. Although you cannot avoid situations like these happening, you can do some things to help ensure the most financial stability possible if your financial situation changes. Consider taking these steps before or while you face financial hardship to avoid bankruptcy.
Keep Up With Debt Payments To Avoid Financial Crisis
No matter how many monthly payments you have for different bills, it is essential to keep up with them as much as possible, especially before facing financial difficulties. Paying your bills on time can really help create a cushion if your finances change for the worse. For example, paying more than the minimum amount due each month can provide a few months of zero required payments. This can prevent several missed payments if your finances change or, worse, a credit account going into default, which can lead to filing for bankruptcy.
Negotiate Payment Plan With Your Lenders
If you are having trouble paying your bills, you should consider negotiating a new payment plan with your creditors. In most cases, especially in situations like medical bills, lenders may be willing to work with you on the current payment plan so you can continue paying. Negotiating with your lenders can help prevent the need to file for bankruptcy because you cannot afford your debts.
Stay Away From Excessive Debt To Avoid Filing Bankruptcy
Juggling too much debt can also lead down a path toward bankruptcy, so it is essential to avoid excessive debt if possible. When you have good credit, it can be tempting to open up several credit cards or take out multiple loans. There is good debt and bad debt, and bad debt is the kind that includes excessive spending. Having multiple unnecessary forms of debt can make bankruptcy a more realistic option if you cannot pay them back. And so, to ensure that you stay away from becoming overwhelmed with loans and credit card debt, try and avoid excessive credit.
Refinance Expensive Debt Instead of Declaring Bankruptcy
Many people may become bankrupt because they cannot afford to make monthly payments on their loans or credit cards. However, refinancing may be the better option. When you refinance a credit card or loan, you borrow money through a new loan which you can then use to pay off your existing one. With this option, you will get a new payment plan and interest rates that may mean a more manageable and affordable monthly payment than your previous option.
Pursue Debt Consolidation
Debt consolidation is similar to refinancing. Instead of just focusing on one loan, with debt consolidation, you pay off multiple credit accounts. To take this on, you need to be able to take out a large enough loan to pay off multiple credit accounts—which may not be possible for everyone. A home equity loan, credit card, or installment loan can work well for debt consolidation. If you are able to consolidate debt, you can pay off multiple credit accounts while only having one monthly payment with a single interest rate.
Consider Debt Settlement
Debt settlement is the process of negotiating with your current lenders (credit card companies and loan lenders). Usually, these negotiations will result in a lump sum payment or new repayment terms. Debt settlement can be a much better alternative than bankruptcy because although it will show up on your credit report, it will not be as devastating as a bankruptcy. Debt settlement companies can help you do the negotiations if you do not want to go through the debt settlement process on your own.
Talk to a Credit Counselor for Financial Planning
Before filing for bankruptcy, it may be helpful to seek credit counseling. A certified credit counselor can help you develop a debt management plan. They can teach and equip you with all kinds of debt repayment strategies, budgets, and other financial tools. With the right strategies, you may be able to avoid a bankruptcy filing. A credit counseling agency is an excellent place to start to find someone to work with.
Increase Your Income as a Bankruptcy Alternative
More money in your budget will also be a great help when trying to pay your bills. If you already have a full-time job, consider a part-time second job to supplement your income. You can also consider a career switch, asking for a raise, or going back to school to grow your career if possible.
References:
Bankruptcy Statistics up to 2022 – What You Need to Know
