5 Simple Ways to Avoid Bankruptcy

There are many measures to determine if you qualify for bankruptcy. With the implementation of the changes in 2005 there are asset limitations, debt limitations, and income limitations. If you qualify for bankruptcy under all the new tests you may want to consider if you should file just because you can.

Bankruptcy will have a significant impact on your credit. Credit is used for many things beyond just borrowing money. Employers, future spouses, business partners, and even law enforcement agencies look at your credit. A bankruptcy on your credit report could have a number of negative connotations for people that use it to evaluate you.

When considering filing bankruptcy most people are looking to get out from under an unsupportable amount of debt. The monthly costs and the creditor calls make it hard to function. There is significant stress associated with a high debt load. This debt has usually become unsupportable due to some life circumstances, which leads to even more stress. Whether this was a loss of income, the loss of a spouse, large medical debt from an illness or accident, or some other unforeseeable life event the result is the same–More monthly expense than income.

Before you file bankruptcy, pause and look at where you would like to be at the end. What debt will you keep? Where will you live? What car will you have? What will your income and expenses look like after discharge? Assuming that post discharge you will be able to afford to live, what extra money will you have? This amount is what we have to work with when trying to avoid bankruptcy. If you can take that extra few hundred or few thousand dollars and use it over three years to satisfy your current creditors, then you may be able to avoid bankruptcy. If, however, there is too much debt or not enough money left over, then bankruptcy will likely be the only option.

The best way to avoid bankruptcy is to bring these two numbers, the extra income and the amount of debt to be serviced, into a ratio that is manageable. The following five techniques are designed to make that happen.

1. Credit Counseling: This is a service that will work with your creditors to establish a payment plan outside of a judicial process. It will impact your credit. Many lenders will not extend you new credit until you have satisfied old creditors under the payment plan established between you and your existing creditors. However, the collection calls will stop, interest rates will likely be lower and late fees will stop compounding. These services typically charge fees for their services. These fees will almost always be substantially less than the compounding interest and penalties.

2. Loan Modification: A leading cause of bankruptcy is mortgage payments that have adjusted beyond the ability for borrowers to pay. This causes a cascade of defaults on other debts and ultimately bankruptcy. A bankruptcy will not change the terms of a first mortgage on your home. You will have two choices. Keep the house and the existing mortgage payment, or you can turn the house over to the bank and move out. Many people are able to avoid bankruptcy if they can get the payment on their house lowered to a more affordable level. This process is referred to as loan modification. Loan modification can be frustrating and complicated. There are services that will work with you and your mortgage company to negotiate a more affordable interest rate and loan term. Your mortgage company also likely has a department staffed with people trained to help you. It is usually in your mortgage companies best interest to keep you in the home with an affordable payment rather than foreclose.

3. Direct Negotiation for Settlement: Every single one of your unsecured creditors will likely receive nothing if you file bankruptcy. This reality will cause them to be willing to settle now for less than you owe. This amount will likely be a small fraction of the debt. Credit cards have been known to settle for 20-30% of the amount owed. If you can negotiate with all of your creditors and have a source for the money to pay them off, you will likely be able to avoid bankruptcy entirely. The important phrase to remember here is, “I want to pay less”. If the amounts the creditors are offering are not affordable, your fall back option of bankruptcy is always available. Do not give up based on this first number they offer.

4. Do Nothing: Many elderly people who live on a fixed income and have large hospital bills maybe better off doing nothing. Bankruptcy can be expensive and if the medical issues are likely to recur this is a short term solution to a long term problem. There is very little that a collection company will realistically do to affect your daily life. Learn to screen your calls and ignore them. Use the money you save on the bankruptcy to spoil your grandkids.

5. Payment Plan(s): If you do not qualify for a chapter 7 bankruptcy and will end up with a payment plan from Chapter 13, consider just working out a payment plan for the next 5 years directly with your creditors. You will avoid a bankruptcy and have the same net affect. Remember to get these plans in writing from your creditors, and then be sure to honor you terms. In all likelihood your credit will be turned around inside of 2 years.

If you can use these options to get your debt and income ratios into an affordable place, then you will be able to avoid a bankruptcy and this can be a very good thing.

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