Filing for bankruptcy is often viewed as a quick and easy way to get out of debt. While it will make some of your debts go away, U.S. residents may find that what you get in return may be more than you bargained for, thanks to legal changes enacted in 2005. To avoid these hassles, do everything that you can to avoid filing for bankruptcy. This article will show you how.
Consequences of Declaring Bankruptcy
The new bankruptcy laws in the U.S. may require those filing for bankruptcy to:
- Attend mandatory credit counseling.
- Make ongoing payments to creditors.
- Attend mandatory financial-management education. (Read Changing The Face Of Bankruptcy to learn more about the 2005 law.)
Filers also end up with a poor credit rating, which can result in the inability to borrow money at standard rates for up to 10 years. This may lead to greater debt because the only loans you can get come with a high interest rate.
Filing for bankruptcy doesn't exempt you from certain lawsuits, eviction or a suspension of your driver's license if you have unpaid fines.
Strategies to Avoid Filing
While unexpected medical bills or sudden employment can force almost anyone into an uncomfortable financial situation, more often than not, people facing bankruptcy are in that position as a direct result of poor spending habits coupled with poor savings habits. In a society where living beyond one's means has become the norm, a brush with bankruptcy can be a sharp reminder of the need for a lifestyle change. (Are you one missed paycheck away from disaster? Read Are You Living Too Close To The Edge? to find out.)
The first stage of that change is to figure out how much money you spend each month. Putting together a budget is the quickest and easiest way to get a handle on your spending habits. (Six Months To A Better Budget can help you get started.)
The next step is to curb your spending. Cut up your credit cards immediately, and pay in cash for all purchases. If you can't afford to sustain your lifestyle on an all-cash existence, the next stage of your effort should be to downsize your lifestyle. (For more on the advantages of paying cash, read Nine Reasons To Say "No" To Credit.)
This includes both the big stuff and the small stuff because every penny counts. The following are some big-ticket things you can downsize on:
- Move to a smaller house. (Read Downsize Your Home To Downsize Expenses for more on the advantages of going smaller.)
- Drive an older, less-expensive car.
- Sell your boat, motorcycle or recreational vehicle.
- Skip going on vacation.
At the small end of the spectrum, you need to eliminate all spending beyond the absolute basics of food, clothing, shelter and transportation to and from work. That includes all the little luxuries that we now pretend are necessities, such as:
- visits to the spa
- cable television
- cellular telephones
- dining out
- high-speed internet
- gym memberships
- magazine subscriptions
Gift giving at the holidays can be eliminated too. Spend time with the ones you love instead of spending money. No, these steps are not a lot of fun, but all that spending on fun is what put you in this situation in the first place. (If this sounds like you, you're not alone. See Stop Keeping Up With The Joneses - They're Broke to read about the modern trappings of success.)
When the topic of spending reductions comes up, debt consolidation is often referenced as a tool to avoid bankruptcy. On the surface, it's a great idea, but the reality is often quite the contrary. Immediately after consolidating, many individuals no longer feel pressured by their inability to pay their debts, so they go on a spending spree. Thus, for many people, debt consolidation is just a temporary fix, not a long-term solution. (Digging Out Of Personal Debt provides additional insight into why good intentions can put consumers in an even bigger hole than before.)
Once you've minimized your expenses, you may still not earn enough money to pay for your living expenses in cash. If that's the case, it's time to maximize your revenue. The most obvious way to do this is to get a job. If you already have a job, take a second job. If you have a second job, take a third job. The same applies to your spouse or significant other.
Nobody said that getting yourself out of debt and back on sound financial footing would be fun or easy, but if you're contemplating bankruptcy, you are in trouble and you need to do something about it. (Read Increase Your Disposable Income for more ideas on how to boost your earnings.)
Your efforts to earn more money can also involve selling some of the stuff you bought during your free-spending days. (Read In A Cash Crunch? Hold A Yard Sale for tips on how to lighten your load for a heavier wallet.)
You can also alter your living arrangements and increase your income by taking in a roommate. Two paychecks are better than one when it comes to covering your expenses.
When you are in trouble, turning to experts for a helping hand can be a good idea, but those in need are also likely to fall prey to unscrupulous operators. The basic sales pitch of "pay me a fee to help you escape your debts" is fairly ludicrous, but those desperate for a quick fix give this fact no heed and are often victimized by "credit counseling" firms. Before you take this route, consider that the simplest, and perhaps most useful, counseling that you can get is the suggestion to close your wallet and curb your spending. (If you are considering professional help, pay attention to the tips in How To Find A Credit Counselor.)
A Permanent Change
The world is full of serial bankruptcy filers who use recovery from bankruptcy as an excuse to spend again. Don't follow this example; once you've got yourself back on solid ground, build up an emergency fund to make sure you never get in trouble again. (Read Build Yourself An Emergency Fund to get started.)
If you are serious about getting your finances on the right track, you need to get out of debt and stay out of debt. For former overspenders willing to start exercising a lot of self-control, it is possible to avoid bankruptcy and all the additional problems that come with it.
Read Downshift To Simplify Your Life for insight into how you can create a sustainable lifestyle that won't break your budget.