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Personal Finance Strategy: 4 Keys to Avoiding Bankruptcy

Despite how hopeless your situation may seem, it is possible to avoid bankruptcy. Granted, when people get to this point, they usually feel like there is nothing they can do about their financial dire straits.

However, this isn’t always the case. According to A Fresh Start: 4 Reasons Bankruptcy Is Not As Bad As You Think “There are three types of bankruptcy. Chapter 7, Chapter 11 and Chapter 13 bankruptcy. But Chapter 11 only applies to Corporations. Chapter 7 bankruptcy sells off your assets and eliminates your debt completely (even if the value of your assets doesn’t cover all of your debts). If you file for Chapter 7 bankruptcy, then you will be able to get rid of your debts within 90 days. Chapter 13 bankruptcy is where you make payments on your debt.

Not everyone with debt problems is a good candidate for bankruptcy. I was recently speaking with a lawyer friend who handles a lot of bankruptcy cases. He was recently approached by a disabled gentleman who was unable to pay his bills. This gentleman’s checking account was overdrawn by a few hundred dollars, he owed a three hundred in back rent, and a few hundred more on a credit card. His biggest debt was $5,500 in medical bills.

This gentleman’s annual income was almost exactly at the Federal poverty level of $12,060 so without the medical bills he was barely squeaking by. Although my lawyer friend enjoys being able to help people eliminate their financial stress, he said this poor fellow was not a good candidate for bankruptcy because the bankruptcy is complex (and made increasingly so every year by new regulations) and costs a minimum of $1,500. So he would have to come up with $1,500 in order to eliminate roughly $6,000 worth of debt. Hardly worth the time and effort.

In addition, his major debt, medical bills are “unsecured” meaning that the hospital has no right to seize any assets in order to get paid, so there really isn’t much they can do to this guy anyway. So the hospital will probably just write off the bill. In his case, he could in all likelihood contact them and explain the situation and arrange to pay them a minimal amount, say $20/month, and they would probably accept it. And a church or social service agency would probably help him cover his other outstanding debts. So rather than filing bankruptcy you need to think outside the box.

If you’re stressed about a potential bankruptcy, here are four steps you can take to help yourself avoid bankruptcy.

1. Sell Your Extra Items

Most people have more stuff than they need. Holding a yard sale or selling stuff on Craigslist is a simple way to not only clear out the extra clutter (and thus eliminate the stress associated with clutter) but also to give you some cash to put toward your debt. While some people think that all of their assets will be sold off for a Chapter 7 bankruptcy that is not necessarily always the case. The law allows you to keep certain assets; according to The Bankruptcy Site, “In Chapter 7 bankruptcy, exemptions determine what property you get to keep, whether it be your home, car, pension, personal belongings, or other property. If property is exempt, you may keep it during and after bankruptcy. If property is nonexempt, the trustee is entitled to sell it to pay your unsecured creditors.”  In light of this, it makes sense to sell off some of your stuff if it will help you avoid bankruptcy.

2. Get a Second Job

A second job that earns you an extra $30.00 a night – think food service or retail – will earn you an extra $6,000+ in a year, if you work four shifts a week. While that second job can cause you stress, the financial stress you’re feeling right now probably outweighs the stress of a second job.

3. Ask Yourself What You Can Give Up

The U.S. News and World Report suggests that people in financial trouble ask themselves what else they could give up in order to avoid bankruptcy. Do you have a gym membership that you can give up? Cable TV? Subscriptions? Do you smoke cigarettes or drink beer? (Both very expensive habits). Could you substitute cheap or free activities rather than going out to dinner or to the movies? Can you get rid of some credit cards? After you get rid of these expenses, you’ll have more money to put toward your debt.

4. Borrow It

Is it possible to ask friends or family for a loan? You might be able to borrow enough money to pay down your debts significantly. That said, you may be borrowing trouble if you don’t think about how you’ll pay back your friends and family. If you do approach the people you know for money, be sure to consider the effect it will have on your relationships. Also be sure to have a repayment plan in place so that the people you borrow from will get their money back eventually.

Taking active steps to get out of debt can help you avoid bankruptcy if you’re willing to sacrifice. Avoiding bankruptcy might mean taking a second job or selling off some stuff. It also might mean getting rid of some extra expenses. However, whatever you do to pay off your debts and avoid bankruptcy will ultimately be worth it in the end. You’ll save your credit and your self-respect in the process.

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