Tips for Dealing with Bankruptcy
Don’t Jump Into Bankruptcy Too Fast – Know Your Options
If you have a lot of debt and no solutions, you might feel that bankruptcy is the only option. This post covers tips for dealing with bankruptcy. Bankruptcy is a way to re-organize or erase consumer debt, which ultimately provides a fresh start and lets you rebuild your credit score. It’s a choice that most people don’t like to make. However, if creditors call your house day and night or send threatening letters, or if your income isn’t enough to pay off your debt, you might feel trapped in a never ending cycle of minimum payments. But before you make a hasty decision, you need to understand the consequences of a bankruptcy.
Filing bankruptcy can wipe the slate clean, but it also reduces your credit score by as much as 250 points. A bankruptcy stays on your credit report for up to 10 years, and after filing, it might take up to three years before you’re able to buy a house, and even longer before you can qualify for prime rates on loans and credit cards.
Bankruptcy is certainly a simpler way to deal with debt, but there are several kinds and you need to know the difference. DoanLaw.com breaks down the differences between Chapter 7, Chapter 13, and Chapter 20 combo bankruptcy filings.
Tips for Dealing with Bankruptcy – Get credit or debt counseling
Sometimes, managing your credit and debt comes down to education. And sometimes, you need to work with a professional to get your finances on the right track.
Rather than jump into a bankruptcy filing, look into credit or debt counseling. Several non-profit credit firms and law firms can help you overcome this hurdle. Many types of services are available, such as debt settlement and credit repair. The firm might negotiate a lower interest rate and payment with your creditors, which keeps your debt payments manageable and helps you pay off balances sooner. They also offer education on managing credit, budgeting and saving money. Credit or debt counseling doesn’t offer an immediate solution to debt problem, but it can slowly improve your finances and help you avoid bankruptcy.
Tips for Dealing with Bankruptcy – Refinance your mortgage loan, if possible
If your debts are high, but you haven’t defaulted on your bills yet, your credit score might be high enough to qualify for a mortgage refinance. By refinancing your mortgage loan, you may be eligible for a lower interest rate. And since a lower interest rate can reduce your monthly house payment, this frees up cash in your budget to pay off debt. Let’s say you refinance your mortgage and save $350 a month. That’s a savings of approximately $4000 a year, which can be used to pay off your debt.
Tips for Dealing with Bankruptcy – Liquidate your belongings
If you want to get rid of debt without filing bankruptcy, you have to make sacrifices. Some people get into debt because they can’t control their spending and they purchase things they can’t afford with credit cards. To undo this damage and avoid bankruptcy, liquidate your personal belongings and use any proceeds to pay off debt. Walk around your house. There are probably plenty of items you don’t use any longer. These might include electronics, furniture pieces, clothing, toys, etc. Have a massive yard sale, post these items for sale on Craigslist or unload your items on eBay. You can even take your debt elimination efforts further and sell an extra vehicle or downsize to a cheaper home.
Tips for Dealing with Bankruptcy – Borrow from a savings account
Money experts recommend never touching a retirement account unless absolutely necessary, such as after a job loss. But if you’re on the verge of bankruptcy, and you have plenty of money in your 401(k) or individual retirement account, tapping these funds as a last resort can help you avoid bankruptcy.
There are consequences to early withdrawals. You’ll have to pay a 10% penalty plus income taxes on funds taken from the account. Also, taking money from a retirement account reduces earning potential, and you’ll have less money when you’re ready to leave the workforce. Therefore, only borrow from your account when retirement is far off in the future. This way, you’ll have time to rebuild the account and recoup what you took out.
At the end of the day, getting out of debt and avoiding bankruptcy take self-restraint and a plan. You’ll have to make sacrifices, and the journey won’t always be easy. But with patience and determination you can get rid of debt and improve your finances.
There are options (many of which you list here) outside of bankruptcy – the best thing a person in debt can do is to educate themselves as to ALL their options and pick the best choice for them. I am always a little wary about people shying away from bankruptcy hurting their credit score….if bankruptcy is really the best option for them their credit score is likely already circling the drain, and their focus should be on getting their lives back on track, not their credit score.
Brock @CleverDude recently posted…Teaching Responsibility Isn’t Always Easy
Brock,
I am with you 100% on the whole credit score concept. If you are close to bankruptcy, you probably don’t need to be using credit in the first place! Who cares what your score will be for a couple of years while you put things back together??
Bankruptcy is such a big decision, you are better off doing everything, and I mean everything in your power to try to avoid it. It won’t be fun selling some stuff and living very frugally for some time, but having your credit destroyed will hurt more and for a much longer time. Plus, you get the opportunity to learn who you are when you go through the tough times as opposed to bankruptcy.
Jon @ Money Smart Guides recently posted…How To Save On Taxes The Way The Wealthy Do
Jon,
I’ve never been there, so it is hard for me to comments. But I think I agree with you – it’s better to do everything in your power to try and cut back where possible to avoid bankruptcy.
Great tips! It is very informative.It is true there are some options in dealing with bankruptcy so you should not declare bankruptcy too fast.
Thanks Samantha.
yes its nice to know your limits and ask for experts for advice.
Yes, it is good to listen to experts if you can really trust them!
Deciding to file for bankruptcy is never an easy choice. It may be the hardest choice you have ever have to make.
I hope this is one choice I never have to consider!
Credit counseling might be a good idea for us actually. We’re considering filing for bankruptcy, but we know that’s not the best option. Maybe if we liquidate some assets we have like what you mentioned, we could maybe avoid filing. If not, we’ll prepare for the worst.
Davey,
Good luck with the decision, I know it is not an easy one.
It’s tough when uncontrolled spending leads you to the choice. It’s easy to get discouraged or feel regret, but moving forward, reaching out for emotional support, and making a plan to work your way out of danger as soon as you can will help you get through. Thanks for the article!
Bankruptcy is not a fun thing to go through. Luckily I’m not having to deal with it myself, but a friend of mine is. One of the things he did that you mentioned here was that he liquidated his assets. I know that helped him out quite a bit, but he is still in the negatives. One thing I didn’t see listed was getting legal help. Do you think my friend should look at getting the help of a bankruptcy attorney?
Thanks for sharing these tips on getting through bankruptcy! It really can be hard for people to get through bankruptcy, especially if they don’t have any help from people who know about it. Hiring someone who can offer guidance is probably the best way for someone to build their credit back up after declaring bankruptcy.
Filing for bankruptcy is definitely a big deal, and it can be a really scary thing to file for. That is why I think that it is a really good idea to get professional help when it comes to things like this. Professionals can help you learn about the best thing for you to do. Bankruptcy definitely isn’t always the only option. I would love to be able to learn more about bankruptcy and when to file for it.
I agree Lilly – this is one time where if you dig the hole this deep, it is best to check with an expert as long as the cost isn’t too high.
Thank you so much for this advice. I have a mountain of debt right now, and I can’t afford to pay it off because I am up to my eyes in car payments and house payments. I got a little bit overzealous about how much money I was making a couple of years back. I think the only choice that I have left is to liquidate some of my things.
Edmond,
Good luck selling stuff to come up with some much needed cash :-). A lot of time, this can be better than declaring bankruptcy.
Thanks for the useful tips on getting credit or debt counseling before declaring bankruptcy. I feel like this will benefit my husband and I in the long run before making the final decision to file bankrupcy. I’ll definitely keep this in mind in the future.
Glad to help Sara!
I didn’t know that bankruptcy could lower your score by over 250 points. My Dad went through bankruptcy when I was a kid and I remember him being stressed out a lot. Thankfully, he was able to navigate through his credit problems and end up doing great. For many, however, it’s important to weigh your options heavily before making a choice. Thanks for the informative post!
As the article explained, sometimes debt and credit consolidation “comes down to education.” Finances can be difficult to navigate, especially if they are your own, but having an specialist counsel you on your credit could make a difference. This is something I hadn’t thought of, but it may be of use to my brother. He has been struggling with credit debt lately, and I think this advice about “education” could help him turn his finances around.
I can see your point of how important it is to get an expert credit counselor to consult with before you file for bankruptcy. It is almost a knee jerk reaction to file for bankruptcy and absolve yourself of debts. However, you never know what the future holds, therefore, it is best to hold your “get out of jail free” card as long as you can, before using it.
I completely agree Bryan!
We avoided bankruptcy by borrowing money from my father’s 401K. The money has since been paid back. We are so thankful that it was there to borrow from in the first place, and to be back on our feet again!
Excellent tips for dealing with bankruptcy. Credit counseling is perfect for putting you in the correct mindset for climbing out of the hole you are in. Thanks so much for sharing!
I always thought credit was something that you couldn’t change, but I am glad to hear that professionals can help get it back on track. With a high credit score, like you say, more beneficial options open up, as well, like refinancing loans. The savings are quite high too: $4000 a year can be the difference between declaring bankruptcy and getting back on the right track. Great article.
The advice to get credit and debt counseling before jumping into filing for bankruptcy is really smart. It makes sense to look at all your options and see if your debt can be managed before making that decision. It’s also a good reminder to liquidate your belongings as much as possible.