Debt can be destructive in many ways and affects more people than you might expect. Often, circumstances beyond your control can lead you into debt. These circumstances may include job loss, long-term disability, or medical bills.
Household debt in the United States—including mortgages, auto loans, student loans, and credit cards—reached a total of $14.64 trillion by the end of March 2021. That’s a staggering amount, and not all of it is due to overspending alone.
You may feel that bankruptcy is the only option if you are facing a large amount of debt. However, that may not be necessary depending on your situation. Bankruptcy can have a devastating impact on your credit score. It can remain on your credit report for up to 10 years. Here are some ways you can avoid bankruptcy to keep your credit score intact.
Increase Your Income
Increasing your monthly income can give you more money to pay off your debts. If you can, increase your work hours, apply for a part-time job, or start a side business to earn extra cash.
Alternatively, you can sell any excess items you have, such as furniture or jewelry, using the money to pay down your debt balance. The sooner you take action, the better. If you wait until you’re behind on payments, it may be too late to catch up and avoid further actions from creditors.
Reduce Spending
Cutting expenses may allow you to allocate more money to pay off your debts. You may be able to save money in your budget by cutting cable, canceling a gym membership, or skipping restaurant meals. This could help you pay off your debts over time to avoid filing for bankruptcy.
Note: If you can afford to pay off your debts, you may qualify for Chapter 13 bankruptcy. This type of bankruptcy is more of a repayment plan that allows you to pay back your debts over a period of three to five years.
Review your budget—consider switching to a new budget—to find areas where you can spend less and put more money toward your debts.
Negotiate with Creditors
Many creditors are willing to work with you, but you need to reach out to them proactively. Let your creditors know that you are experiencing financial difficulties and want to avoid bankruptcy. Express your willingness to repay the debt and ask if they can help make it easier by lowering the monthly payment or interest rate—or both. Many credit card companies and banks have hardship or payment assistance programs designed for situations like this.
Seek Consumer Credit Counseling
If you’re feeling overwhelmed, getting help from a professional credit counseling agency may help clarify your financial situation. A credit counselor can review your finances to help you budget better and may be able to create a debt management plan with your creditors.
Note: You should get credit counseling before filing for bankruptcy, so you should seriously consider this as an alternative to bankruptcy.
As part of a debt management plan, you will be working to pay off your debts over three to five years. First, the credit counselor negotiates with your creditors for a lower monthly payment. Then, each month, you send a single consolidated payment to the credit counseling agency, which in turn distributes the payments to your creditors.
Debt Settlement
Debt settlement is not the ideal solution, but you may consider it if you are on the brink of bankruptcy. Debt settlement means paying a creditor a percentage of the total amount owed to settle the debt. Once you reach a settlement agreement, be prepared to pay the agreed amount in one lump sum.
On
Despite the existence of debt settlement companies that can negotiate debts on your behalf – for a fee – you can do it yourself. Start by focusing on debts that have already been settled or collected. Additionally, your credit score may be negatively affected if a debt settlement company encourages you to deliberately fall behind on payments so they can negotiate a settlement.
Note: Do not settle any debt for which you are making regular monthly payments. Continue making the minimum payments on all debts to keep them in good standing. It may take time to pay them off, but you will maintain your credit score.
Apply for a Mortgage Loan
You may be able to obtain a mortgage loan or refinance your mortgage if you own your home and have positive equity – where the value of your home is greater than the remaining mortgage balance. You can use the money to pay off all your non-mortgage debts. Banks may be willing to work with you even if your credit score has been negatively affected due to debt issues if your stated intention is to pay off current debts.
This option can be worthwhile when interest rates are low and there has been an increase in home values. But be sure to consult a qualified financial advisor to ensure this is the best alternative for you.
Conclusion
To avoid bankruptcy, consider ways to increase your income and reduce expenses, in addition to communicating with your creditors and working with a credit counselor. You may be able to use several strategies to manage and pay off your debts without the need for court assistance. If successful, you will avoid having bankruptcy listed on your credit report, as well as eliminate your debts.
If you ultimately decide to file for bankruptcy, educate yourself on how it works thoroughly. It is important to make an informed decision after considering all your options. Don’t worry about your credit score in the short term. Instead, focus on gaining relief from your debts. You can work on rebuilding your credit once you’ve resolved your debt issues.
Source: https://www.thebalancemoney.com/five-ways-to-avoid-bankruptcy-960626
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