Let’s talk about avoiding bankruptcy and what you can expect will happen in each situation. Some options are more favorable than others and once you have explored all of your options for getting out of debt, you may find bankruptcy to be your best fit after all.
1. Make More Money
This is a no brainer actually. When you’re looking to get out of debt and avoid bankruptcy, the best thing you can do is make more money. I know, it’s easier said than done, but have you really explored creative out-of-the-box ways to raise your monthly income? Here are some of my suggestions that have helped past clients:
- Rent a room to create rental income;
- Get a second job;
- Ask for a raise at your current job;
- Put the kids to work and if the are working, STOP PAYING THEIR EXPENSES;
- Have a yard sale, or sell items you no longer use on Craigslist;
- Start a side business repairing or repurposing items for resale
2. Cut Expenses
There are only two sides to the budget ledger; income and expenses. Another best strategy is to not only increase your income, but cut expenses too. Any money left over can then go to paying off debts and avoiding bankruptcy. Here are some often overlooked ways to cut expenses:
- Transportation: Cut transportation expenses by taking public transportation to work. You would be surprised to notice your stress will go down with public transportation. If you plan to drive, be sure your car is well-maintained and paid off. Maybe you need to downsize and get a cheaper car that is paid for to cut out the car payments.
- Insurance: Home and auto insurance costs can be cut by examining the amount and type of insurance policies you have. If your car is older, consider cutting out any physical damage coverage (comprehensive/collision) and maintain liability only. Liability limits on insurance policies only need be enough to protect your assets. So, if your car and home have no equity, then you don’t need a high limit insurance policy. Also, shop around for insurance.
- Utilities: Turn off the lights and air conditioning. Cut that cell phone bill, or cut the land line. Call each company to reduce services that will reduce your bills, or cut them completely.
- Groceries: Take up couponing only where it makes sense by buying your shampoo, soap, toothpaste, dish and laundry items on coupon. Paper products are another great household item to buy on coupon. Cut your grocery bill by planning your weekly meals before shopping and consider other meals that you can use similar ingredients for. Cooking at home can not only save money because it’s cheaper than dining out, it can also help you live healthier.
The consequences of tightening the budget by increasing income and reducing expenses are that it’s a long-term lifestyle commitment that could take longer than five (5) years to pay off all your debts. Even after maximizing this strategy and applying all your disposable income toward debt, it may not be enough and you may still be faced with bankruptcy. However, I still believe that knowing your numbers is an important step in financial transformation and eliminating debt no matter which direction taken.
3. Debt Settlement
If you’re behind on paying credit cards, they can be negotiated; sometimes for pennies on the dollar. This can seem like a money saving strategy, but can leave your credit score in shambles in the wake. First, you’ll need a hefty savings account so that when you strike a deal, you can pay a lump sum to settle the debt. Be sure to get any settlement in writing and ask them to remove the trade line from your credit report. You may not get credit clean-up, but it doesn’t hurt to ask either. This can be an effective debt elimination method if you only have one or two debts to work with. Any more than that and a bankruptcy case would be a cheaper, better, faster way to get out of multiple debts at once.
The consequences of debt settlement are that not only will you be repaying the debt, your credit may remain negatively affected as a result.