Tips to Prevent Bankruptcy – Part 2

bankruptcy

In this blog post, I started to address a few of the ways that an individual can avoid having to file for bankruptcy. Bankruptcy should truly be viewed as a last resort; the long term consequences of filing for bankruptcy can be paralyzing. In this blog post, I will cover a few more basic tips to keep your finances healthy, and avoid traveling down the (usually avoidable) path to bankruptcy.

 

Start an Emergency Fund

While this may not be possible if you are already deeply in debt, it is a great preventative measure. This emergency fund should be several months worth of salary that you save over time. In the event that a person disaster takes place (loss of a job or medical emergency), you will be able to continue to function financially for a few months and avoid immediate thoughts of bankruptcy.

 

Work To Rid Yourself of High Interest/Unsecured Debt

If a majority of your debt is on credit cards, it is likely that a large portion of the money you owe carries a very high interest rate, and is what we call unsecured debt. (Unsecured debt is debt that does not pertain to an asset or specific property – ie: a car, house, etc.) If possible, refinance your secured debt to rid yourself of the unsecured debt. Work with your lenders to refinance your mortgage and get a cash out to pay off the unsecured, volatile debt. The refinancing will allow you to take on debt at a lower, more manageable interest rate.

 

Maximize Your Income

If you have already worked to minimize your spending across the board, and it is not feeling like it is manageable, it may be time to take on a second job. If you have a capable spouse who is currently not working, they should also begin to seek employment. Any increased income that can be had will help make your situation a little better.

The reality is that the process of preventing bankruptcy is never an easy one, unfortunately you may be looking at making a lot of decisions that do not align with your current lifestyle. But, if you are actively thinking about bankruptcy, that does mean that your finances are in trouble, and a personal sacrifices now will ultimately make your life easier down the road.

 

For more resources, see these articles: Investopedia, Quciken, USNews

 

Tips to Prevent Bankruptcy – Part 1

credit squeeze

Some individuals’ personal finances become so overwhelming that they look to bankruptcy as a quick fix. But the reality is that bankruptcy should be an absolute last resort. Filing for bankruptcy leaves the filer with an abysmal credit rating, which will make borrowing money virtually impossible for at least a decade. Those who file for bankruptcy are also subject to mandatory credit counseling, and are likely to be forced to make continuous and ongoing payments to various creditors.

There are a few situations where bankruptcy is virtually unavoidable. A long period of unexpected unemployment or a severe medical emergency can quickly clean out a savings account and leave few viable options for financial survival. However, most cases of bankruptcy are caused by unsustainable spending habits and a lack of savings. The majority of those cases can be avoided with just a few lifestyle adjustments.

 

Reduction of Spending

The easiest way to start cutting what you spend is to first determine where your money actually goes. Create a budget using an online service like Mint.com to really get a handle on exactly what your spending is each month.  Once you see exactly how you are spending your money, you can find areas where spending can be reduced.

 

Start by destroying credit cards, and using cash to make purchases. This will make your spending feel more “real”. If cash only is impossible, then your next step may be to downsize your current living expenses.  The goal of all of the reduction is to live within your means. If that means moving into a less expensive home or buying used cars instead of new cars, then those are measures that should be taken.

 

Contact Creditors/Lenders/Service Providers Before Payments Are Late

If you are already making the minimum payments on your bills, but are still struggling to keep up with the payments, contact the lenders. It’s important to determine if a late payment  could be made without penalty or if the bill’s deadline could be extended.

 

If you are working with a large amount of credit card debt, and seriously considering filing for bankruptcy because of it, speak to the creditors about your options. A lower interest rate or repayment plan may be available. Creditors do not want to lose all of the money that was loaned out, so they will be more inclined to work out a scenario where your payments are more manageable.

There is still much more to learn. Be sure to check back next month for more tips to Prevent Bankruptcy.

For resources and more information, see these two sites: here & here