Strategies to avoid bankruptcy
If all of this bankruptcy talk has you thinking twice about calling up a bankruptcy lawyer, good! Rather than giving up on your repayment quest, it is better to take steps to avoid bankruptcy from the start.
Here are a few strategies you can use to get creditors off your back and get on track for full repayment of your debts:
- Follow the debt avalanche method – The debt avalanche is the fastest way to pay off your debt, and a close cousin of the debt snowball method popularized by Dave Ramsey. The basis of this strategy is to focus all efforts on high interest debt first, and then work toward paying off lower interest debt.
- Settle with your creditors – Call up credit card companies and ask about a debt settlement. In this case, you can make a one-time lump payment to wipe out your debt for good. Creditors may accept an amount lower than your total outstanding balance, so this can save you money. While it may harm your credit, it is far better than a bankruptcy.
- Resolve outstanding collections – If you have anything in collections, try to get them paid or settled. The sooner they are resolved, the sooner the debt collector will be off your back and your credit score can start recovering.
- Keep a long-term focus – Bankruptcy offers a short-term benefit (less debt), but that comes with a long-term cost (lower credit score). Focusing on your long-term credit and financial help will help guide you to the best credit-related decisions.
There are some cases where bankruptcy is the best choice, but those situations are rare and should not be taken lightly. Don’t listen to a scammy lawyer or debt settlement company that pushes you to make a decision that is bad for you but good for them. Put your own needs first and only listen to those who have your best interest in mind.
Bankruptcy is a last resort
Bankruptcy is not simply an easy way out of paying your debts. It is a serious financial decision with long-term costs and ramifications. It could prevent you from buying a new home with a mortgage, qualifying for an auto loan, and leads to higher interest rates for loans when you do qualify.
If you are considering bankruptcy, seriously weigh the pros and cons for your unique personal finance situation. Once you get the bankruptcy train rolling, it is very hard to put on the brakes and the damage to your credit may already be done. Only file if you are absolutely sure it is the right decision for you.
In many cases, bankruptcy is not the right choice. The 100+ point drop in your credit may cost you a lot more over the next decade and beyond than the hassles of debt collections and payoffs today. Keep that in mind as you map out your financial plan with a focus on your long-term financial health.