Filing for bankruptcy is often viewed as a quick and easy way to get out of debt. While it will make many debts go away, U.S. residents may find that what they get in return may be more than they bargained for, thanks to legal changes enacted in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). To escape these hassles, do everything you can to avoid filing for bankruptcy. This article will show you how.
Consequences of Declaring Bankruptcy
In certain situations the BAPCPA requires those filing for bankruptcy to:
- Attend mandatory credit counseling
- Make ongoing payments to creditors
- Attend mandatory financial-management education
What's more, filing for bankruptcy doesn’t necessarily exempt you from lawsuits, eviction, or a suspension of your driver’s license if you have unpaid fines. 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.
Preventing Medical Bankruptcy
How to Avoid Filing for Bankruptcy
While unexpected medical bills or sudden unemployment can force almost anyone into an uncomfortable financial situation, people facing bankruptcy may also been in this situation as a direct result of poor spending and saving habits. In a society where living beyond your means is all too prevalent, a brush with bankruptcy can be a sharp reminder of the need for a lifestyle change. Here are some steps that can help no matter why your finances have become so precarious.
Make a budget and cut spending
The first stage of 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.
The next step is to find ways to reduce your spending. Lock your credit cards in a drawer (or give them to a trusted friend for safekeeping) and pay in cash—whether the actual green or through a debit card or smartphone linked to a cash account—for all purchases. (It's better not to cancel your cards because you'll reduce your credit limit and instantly increase your credit utilization ratio, which is bad for your credit rating.)
If you can’t afford to sustain your lifestyle on an all-cash existence, then downsize it. This includes both the big and small stuff because every penny counts. The following are some big-ticket ways to downsize:
- Move to a smaller house
- 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 we pretend are necessities, such as:
- Cable television
- 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, not money on them. These steps may not be much 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.
Once you’ve minimized your overhead, 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. This may sound draconian, but if you are at the point of contemplating bankruptcy, you need to act forcefully. In bad economic times, look for side gigs such as those available through TaskRabbit and similar websites.
Your efforts to earn more money can also involve selling some of the stuff you bought during your free-spending days. And how about taking in a roommate? Two paychecks are better than one when it comes to covering your expenses.
If you qualify, investigate government help for food assistance and medical care, mortgage forbearance, and other aid, especially if your unemployment insurance is running out. Should any of this keep you out of bankruptcy while you get back on your feet, it's worth doing it.
Investigate consolidating or settling debts
Debt consolidation, in which high-interest debts are paid off with one lower-interest loan, is often referenced as a tool to avoid bankruptcy. If you can qualify for such a loan, it can be a good strategy, but you need the fortitude to avoid backsliding. When some people no longer feel pressured by their inability to pay their debts, they go on a spending spree. Debt consolidation should be a long-term solution, not a temporary fix.
Debt settlement is also a possibility. In this case, instead of reducing the number of your creditors, the debt relief company reduces the amount of your debt through negotiation with those creditors. The idea is that if you agree to pay a portion of each debt off now, they will forgive the rest of it on the theory that otherwise they may never get anything. These two strategies have their strengths and weaknesses, so consider them carefully before choosing one. And again, no returning to bad habits.
Consider using the right kind of professional help
When you are in trouble, looking to experts for a helping hand can be a good idea. That said, it is also possible to fall prey to unscrupulous operators. The basic sales pitch of “pay me a fee to help you escape your debts” does seem a bit counterintuitive, and those desperate for a quick fix can be victimized by “credit counseling” firms.
Before you take this route, consider that the simplest—and perhaps most practical—counseling that you can get is the suggestion to close your wallet and curb your spending. If you feel that more specific advice is still needed, research your choices thoroughly.
A Permanent Change
You can find yourself close to bankruptcy for many reasons, not all of which are your fault—as Americans living through the pandemic have discovered. Use your period of recovery to figure out which steps you can take to protect yourself in the future. One key step: building up an emergency fund (or a larger fund than you previously had) to gain more security in the future.
Look hard at any behaviors that made you more susceptible to financial disaster than you could have been and watch them carefully. Some people not only go through bankruptcy but go on to become serial bankruptcy filers, who use recovery from bankruptcy as an excuse to resume excess spending.
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.