There will be times in your life when you will be short of funds. You may be unemployed or have a personal disaster that has left your bank account empty and bill collectors pounding on your door. You need to find a way to get out of debt. Bankruptcy should be your last resort, and this blog post will help show you how to avoid bankruptcy.
Personal bankruptcies aren’t as prevalent as they used to be. During the pandemic, the number of bankruptcies filed in 2020 declined by nearly 30% compared to 2019. With the economic chaos created by COVID-19, more creditors are willing to work with debtors to work out a deal to make payments more affordable.
Even with a decline in the number of bankruptcy filings, there is still trouble on the horizon. Relief from loan and credit card payments will expire, and eventually, payments will come due. Those struggling to pay their bills usually accumulate a debt of $240,000 and wait an average of 22 months after the first 90-day-past-due notice before filing for bankruptcy. There also has been a substantial increase in “shadow debt,” (i.e., debt that doesn’t appear on a credit report, such as bounced checks, unpaid rent, and unpaid medical bills).
If you are wondering how to avoid bankruptcy, start by having a strategy. It’s especially important to take steps before the debt becomes too big.
Different Types of Bankruptcy
Before we can review how to avoid bankruptcy, we should describe what bankruptcy is. Bankruptcy is a legal proceeding where a judge and a court-appointed trustee review the debt and assets of an individual or business and determine how to help them pay what they owe. Bankruptcy is not a “get-out-of-debt-free” card. The court may decide that you cannot pay and therefore discharge some debt, or it may determine you can pay.
Bankruptcy is designed to help you start over by restructuring your debt so you can pay your bills. That’s why there are different types of bankruptcies:
Individuals with limited income and assets usually file for Chapter 7 bankruptcy protection. With Chapter 7, the court may dismiss unsecured debt such as credit cards but also require you to liquidate any assets that could be put toward your debts, such as cash, stocks, bonds, and property. If you don’t have any assets, the court will usually let you keep things such as household goods, tools you need for work, a car for work, and other assets. The law varies from state to state, but exemptions usually include your home, Social Security, and retirement savings.
Chapter 13 is used to structure partial repayment of your debt so you can keep some assets, such as your home. It is an option for individuals with too much income to qualify for Chapter 7. When filing for Chapter 13 protection, your debt cannot exceed $394,725 of unsecured debt or $1.184 million of secured debt as of 2021. It also requires you to create a 3-5-year payment plan.
More commonly used by businesses, Chapter 11 is a reorganization bankruptcy designed to allow you to restructure your debt so you can continue to operate. With Chapter 11, the court allows you to restructure your debt after demonstrating you have a strategy to generate the revenue needed to repay your creditors.
Why You Don’t Want to File for Bankruptcy
With ongoing stress over unpaid bills, the idea of filing for bankruptcy may seem appealing, but there are good reasons to avoid bankruptcy at all costs:
- A Chapter 7 filing stays on your credit record for 10 years, so you must rebuild your credit.
- A Chapter 13 filing goes on your credit record for seven years.
- It’s extremely difficult to qualify for loans or credit with a bankruptcy on your credit record.
- Bankruptcy may affect your ability to rent an apartment.
- A bankruptcy can affect your next job application.
Considering the negatives, think about how to avoid filing bankruptcy. You are better off if you can find a way to pay your bills. Start by reviewing what you owe. Experts say you need to owe at least $15,000 for bankruptcy to be worthwhile.
There also are debts that bankruptcy will not dismiss, such as federal student loans, alimony, child support, debts acquired up to six months before or after you file for bankruptcy, certain taxes, and debt from fraudulent loans or a DUI conviction.
How to Avoid Bankruptcy
When the mountain of debt looks like it may become an avalanche, take a deep breath, and think about ways to pay down that debt. The best strategy is to take a hard look at your debt and develop a strategy to pay it down. You might consider restructuring your debt using debt consolidation or loan refinancing to make the debt more manageable.
Start with a household budget.
Do you earn enough to pay down your debt? Are there areas where you can cut your expenses? When structuring your budget, try cutting discretionary spending but be sure to protect your four walls: shelter, food, utilities, and transportation.
Prioritize your debt.
Determine what you should pay down first. For example, tackling high-interest debt such as credit cards first will save you money. Paying down the lowest debt balance first will give you a sense of accomplishment so you can move to the next smallest debt.
Talk to your creditors.
Determine whom you might approach to restructure your payments for debts such as credit cards or auto loans. You may be able to defer student loan periods for a time so you will have money to pay down other debt.
Consider a debt settlement service.
A debt settlement is a better option than filing for bankruptcy. Work with a debt settlement service but avoid those that want a fee in advance.
How Your Credit Union Can Help with Debt Management
Credit unions such as iQ can help you manage your debt. iQ is a not-for-profit, member-owned institution, so services are designed to help members. iQ also has financial professionals ready to provide personal attention, listen to your problems, and make recommendations.
There are practical ways iQ can help as well. iQ offers balance transfers to help lower your payments. Personal loans may help you pay off some debt. We also offer mortgage refinancing.
If your debt is getting you down, take charge; start with our Financial Survival Guide. Remember, iQCU has financial advisors available to listen and help you.