How to Prevent Bankruptcy

Though debt is commonly used for business and personal needs, it can quickly become a burden when unanticipated circumstances interfere with your payback schedule. Economic downturns, job losses, and illness can negatively impact your ability to pay off debt. Even though filing for bankruptcy may feel like the only option during such difficult times, it is important to consider your options before making this critical decision. This article will examine the difficulties associated with filing for bankruptcy and provide ways to prevent it. This will help you better protect your long-term financial stability.

What is Bankruptcy?

Bankruptcy is a legal process in which the courts offer relief to businesses or people who cannot meet their maturing obligations and an avenue of financial restructuring. Bankruptcy provides you with two primary avenues for financial restructuring:

• Debt restructuring — Under this, a repayment schedule sanctioned by the court is created. Under this plan, you can repay a portion of the loan more regularly and gradually over time, with better terms. For example, you might get a reduction in interest rates or monthly payments.

• Debt discharge — This refers to the total eradication of some unsecured obligations, such as credit card balances or hospital expenses, by the court under certain circumstances.

Bankruptcy also helps creditors get paid through an agreed payment plan or the proceeds from the sale of a debtor’s assets.

Challenges Many Face When Filing for Bankruptcy

Although declaring bankruptcy offers protection from crippling debt, there are serious drawbacks:

• Bankruptcy lowers your credit score by a large amount, up to 150 to 240 points — If you file a Chapter 7 bankruptcy, the lowered credit will remain on record for a maximum of 10 years, and 7 years if you file for a Chapter 13 bankruptcy proceeding. This record will make obtaining future credit, loans, or rental housing more difficult.

• Difficulty securing credit facilities — A bankruptcy-related lower credit score can make it more difficult to meet future borrowing-related financial objectives, like buying a home or launching a business.

• Liquidation of your assets — The form of bankruptcy filed will determine whether the court orders the liquidation of certain assets to pay creditors back. This could affect assets, including your car or even your house.

• Impact on your employability — Although it is rare, some hiring managers run credit checks, so declaring bankruptcy could hurt your chances of securing employment.

Approaches You Can Use to Avoid Filing for Bankruptcy

Although declaring bankruptcy is a viable option, it is usually reserved for extreme cases. Alternatively, you can look at the following options for debt relief.

1. Credit Card Negotiation

Consider credit card negotiations as a potential first step before considering filing for bankruptcy. Credit card companies send monthly reports that provide a thorough usage history. You should monitor these reports regularly to track your spending and spot irregularities. Since this information is crucial, you can use any of the following approaches to negotiate better repayment terms for your credit card debt:

Reach Out to Your Creditors

Contact your creditors directly to restructure your credit card debt. Starting a conversation can help you negotiate better terms for your current debt. This can entail negotiating for a lowered interest rate, no late fees, or a short-term hardship plan with smaller monthly installments.

By letting your creditors know about your financial difficulties, you allow them to understand the problem and gauge your resolve to find a solution. As a result, they could become more amenable to compromise. Some creditors have hardship plans that you could use to address your situation. You can opt for one if it is available.

Additionally, making contact shows initiative and a proactive resolution strategy for delinquency. Compared to being passive, this improves your negotiating position.

Prioritize Debt Repayment in Your Budget

Having a well-planned budget is necessary to prioritize debt payments. You can identify savings opportunities by keeping a close eye on your spending. It will free up money that you can use for debt repayment.

Setting priorities for your debt is also very important. Use strategies like the debt avalanche or snowball method to prioritize high-interest bills for quicker payback and total interest savings. Remember that not every loan has the same amount of weight.

After identifying expenditure reductions and establishing debt priorities, you can carefully direct the freed-up funds toward specific debt repayments.

However, depending on a budget may not be enough. You should think about making more money. You can accomplish this by taking on side projects, asking for a raise, or earning further training or credentials. You can immediately use the extra money you make to pay off debt faster. Gaining additional income gives you budget flexibility. It allows you to set aside more funds to reduce your debt while covering necessities.

Selling Your Assets

One way to approach the negotiations is through asset liquidation. When you sell assets, you have the funds to make a lump sum payment to the creditor. This strategy has various advantages, namely:

• The lump sum payment immediately lowers your outstanding debt, which benefits both parties by making the remaining debt easier to handle.
• Furthermore, prompt payment encourages issuers to make concessions, like lowering interest rates or waiving late penalties. These enhance your chances of paying back in the long run.

However, use this approach cautiously. Ensure the item you plan to sell brings in enough money to make a meaningful dent in your debt. Selling a valuable item for a small fraction of its value is not wise. Take into account the asset's possible future worth as well. Even though it would be tempting to feel better off with less debt immediately, it is necessary to consider whether the long-term costs outweigh the advantages.

Furthermore, before turning to asset sales, try all other avenues, like budgeting or debt consolidation loans.

2. Seek Financial Assistance from Family and Friends

Borrowing from friends or family is a good alternative to filing bankruptcy. If you borrow from family members responsibly, you can steer clear of the consequences of filing. Because the amounts borrowed are usually less than the debts discharged in bankruptcy, the repayment schedule is easier to manage. Furthermore, payback conditions are more flexible than bankruptcy. Working out longer payback terms or reduced interest rates with family members could be possible.

Ideally, when you secure loans from family members, you do so with no or very little interest, unlike high-rate credit cards or consolidation loans. Over time, this results in significant cost savings. By avoiding excessive interest rates, you can put more money toward principal payments. This can expedite the payoff of your debt and get you closer to financial stability.

You must determine the precise amount required to avoid bankruptcy. Limiting your borrowing to what you need will help you avoid bankruptcy.

But there are disadvantages. Financial hardships and stress related to loan repayment could strain your relationships. Thus, you should maintain open lines of communication with your new creditors to avoid these issues. Formalize agreements with a written contract outlining the terms to protect the lender and yourself.

3. Seeking a Personal Loan

Personal loans provide the money upfront to settle obligations, making payments easier with just one monthly payment. But if you are already having trouble making ends meet, they pile on extra debt, which makes it harder to manage. If you are considering enrolling in a debt management program because you are already struggling financially, obtaining a solid credit score and consistent income are prerequisites for obtaining a favorable interest rate on a personal loan.

Using a personal loan to pay off current obligations without addressing the underlying financial issues could start a borrowing cycle, eventually accumulating even more debt. That is why you should seek guidance before securing one. Consult a debt counselor before considering a personal loan. These experts can assess your financial status, including the potential effects of taking out a new personal loan. They will help you develop a customized debt management plan that meets your requirements.

Counselors can also offer advice on excellent financial practices, giving you the tools you need to make wise financial decisions. Moreover, they provide continuing assistance to guarantee that you adhere to your debt payback schedule. This advice helps prevent you from reverting to unfavorable spending patterns that could force you into bankruptcy.

4. Debt Consolidation

Debt consolidation can be a helpful strategy. It combines several payments into a single, affordable monthly fee. Debt consolidation allows you to consolidate your high-interest loans into one loan and streamlines your repayment process. Since the interest rate on your consolidated loan is typically lower than the interest rates on your separate debts, you will pay less interest overall and have more money available to pay off the principal amount. Consolidation makes managing your debt easier by giving you a single point of contact (the new lender) and a clear repayment schedule. This makes it simpler to stay on track and prevent missing payments.

The most popular type of debt consolidation loan is unsecured. It does not require collateral in the form of a house or car. However, having a good credit score and consistent income are prerequisites for being eligible for an advantageous interest rate on unsecured loans.

If your credit score is low, it is best to opt for a secured debt consolidation loan. This type of loan uses an asset as collateral. There is a considerable risk of losing the collateral if you default on the loan. However, the lender can offer a lower interest rate since the loan has collateral attached.

Although debt consolidation offers advantages, it also has drawbacks, particularly:

• Difficulties with qualifying — Securing a debt consolidation loan with a good interest rate can be difficult. Prerequisites often include a stable income and a strong credit score, which can be challenging for people who are already struggling financially.

• Unreported costs — Origination fees, balance transfer fees, and other expenses are frequently associated with debt consolidation loans. You should consider these fees carefully because they can raise your overall debt load.

• Possible debt trap — Consolidation only combines debt. It does not eliminate it. You can easily find yourself in a similar scenario again if you do not address the underlying financial behaviors that caused you to go into debt in the first place.

• Spending temptations — Debt consolidation can make payments more manageable and free up cash flow each month. However, controlling the desire to spend the additional money is necessary. Concentrate on paying off debt quickly to optimize the advantages of debt consolidation.

• Prolonged payback periods — Depending on the loan terms, consolidation could lengthen the total repayment duration, even though it simplifies it. If you do not manage your money well, you can end up paying more interest in the long term.

5. Short Sale

A short sale is a viable option for you instead of bankruptcy. When a homeowner's mortgage balance exceeds the value of their home, a short sale provides them with a calculated alternative in the event of foreclosure. In collaboration with your lender, you can work out a deal whereby the lender forgives the remaining debt, and you sell the property for less than the mortgage balance. By doing this, you can avoid the adverse effects of foreclosure, like harm to your credit score and trouble finding new housing.

Conversely, filing for bankruptcy removes debt, resulting in borrowing restrictions and a negative credit score over time. A profitable short sale offers a better option and gives you a new lease on life.

In contrast to a forced foreclosure sale, a short sale involves negotiation between the homeowner, lender, and buyer, giving them some control over the outcome.

Only some qualify for a short sale. Eligibility is based on meeting specific requirements, namely:

• The value of your house must be lower than your debt.
• You must provide evidence of your financial hardships to avoid defaulting on your mortgage.
• You are unable to keep up or are behind on payments.
• Your house needs to be buyer-friendly and in good condition.

Short sales also come with some challenges. Your lender makes the ultimate decision after evaluating the circumstances and likelihood of a sale. It can be challenging to secure your lender's consent, mainly if the difference between the sale price and the amount owed on your mortgage is significant. They could be reluctant to waive the outstanding balance. Furthermore, obtaining lender approval is time-consuming and can take several months.

6. Deed in Lieu of Foreclosure

A deed in lieu of foreclosure (deed-in-lieu) is also an alternative to foreclosure. This arrangement involves you and your lender foregoing official foreclosure procedures. Through a deed, you freely transfer ownership of the property to the lender. In exchange, you could receive financial relief if the lender agrees to waive part or all of the outstanding mortgage obligation.

You should realize that a deed-in-lieu can still seriously harm your credit score, even though it may not be as bad as foreclosure.

There are a few reasons why you should consider this option, namely:

• Potentially reduced effect on credit score — Although filing for bankruptcy will negatively affect your credit score, opting for a deed-in-lieu may have a less severe impact. While the negative consequences of a deed-in-lieu could disappear after four years, bankruptcy usually stays on your credit report for seven to ten years.
• Fast resolution of the situation — Choosing a deed-in-lieu rather than the drawn-out bankruptcy court process will help you get out of debt more quickly. Sometimes, the process takes only a few months to complete.

• Avoiding foreclosure — By choosing a deed-in-lieu, you can spare yourself the emotional toll of court appearances and proceedings and escape foreclosure's tense and public legal process.

• Possible debt relief — Following the transfer of the property, the lender could cancel all or a portion of the outstanding mortgage debt. This can offer much financial relief, as opposed to bankruptcy, which leaves secured debts, like mortgages, unpaid.

However, this option is not without its disadvantages. Some of the notable challenges you risk facing include the following:

• The process’s success depends on the lender — The lender ultimately decides whether to accept the deed and waive any obligations.
• Emotional stress — Giving up your house, particularly when facing foreclosure, can be difficult.
• Tax implications — The IRS could view forgiven debt from a deed-in-lieu as taxable income. This will create a tax burden.

Find a Knowledgeable and Experienced Bankruptcy Attorney Near Me

Although dealing with money problems might be difficult, there is a way to regain control using any of the abovementioned alternatives. However, you must seek professional advice if you struggle with a large debt load. In addition to debt counselors, you should consult a bankruptcy lawyer. Based on their experience, they can provide a more thorough analysis.

Our Los Angeles Bankruptcy Attorney team assesses financial circumstances to determine the ideal solution for our clients. When filing for bankruptcy, we assist you in making the best decision and, if needed, provide strong legal representation. If you are not sure if filing for bankruptcy is the best option for your situation, our knowledgeable attorneys can help. Contact us at 424-285-5525 to discuss your alternatives and begin your journey toward financial security immediately.