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.