The writing is on the wall: the debt collectors won’t stop calling the house. Your credit cards are getting declined. The bank sent you a notice that you’ve missed a payment…again. These are all the tell-tale signs that you’ve spiraled into debt, and now, the possibility of bankruptcy is staring you square in the face.
This is a terrifying and heart-wrenching scenario for anyone to be in. Often times, many people believe that bankruptcy is the only solution that they have available. While bankruptcy can wipe away much of your debt (but potentially not all of it), you’re not going to be able to keep everything that’s precious to you. Your car, your home, family heirlooms like jewelry, savings accounts…it’s all potentially up for grabs when you declare bankruptcy. Worse, declaring bankruptcy can absolutely decimate your credit score, and will remain on your credit report for at least the next 7 to 10 years.
I’m not saying that you shouldn’t consider bankruptcy if you are, indeed, drowning in debt, but I am saying that you need to consider every potential solution, before you declare either Chapter 7 or Chapter 13, and outline some options you should look into in the following paragraphs.
Renegotiate Your Debts
If it’s blatantly obvious that you can’t afford to pay off your debts under the current terms and conditions, the first thing you should do is contact those you owe money to, and look at renegotiating terms. For example: if you’re struggling to pay the minimum on your auto loan, contact the lender and see if they will accept a lower minimum payment. This in term will mean that it will take you longer to pay off your debts in full, but it’s manageable, and for your creditors, some money is better than no money.
Before you reach out to those you owe money to, gather the last few months of bills, receipts, and bank statements that you have. You’ll need to be able to validate why you’re struggling to pay your debts, and these documents will serve as evidence to back up your claims. It will also help your creditors calculate a new minimum payment, and establish new terms, that you will be able to successfully meet.
Take Out a Personal Loan
If you’re facing bankruptcy, and most of it is because you keep accumulating more debt from interest rates spread amongst multiple creditors, then you should definitely consider taking out a personal loan to compile your debts into one location.
By using this method, multiple outstanding balances, and various interest rates and APRs, become a single monthly payment to keep track of, which is much easier to manage. Not only that, but instead of accumulating interest payments from credit cards when you don’t pay the full balance, which is a common cause of heavy debt, you only have your minimum payment to worry about under a personal loan.
Finally, your credit score has no doubt taken a beating from accumulated late and missed payments, if you’re coming close to bankruptcy. It can take a long time to recover from a hit like that, but a personal loan affords you the opportunity to start rebuilding your credit, so long as you make your minimum payments, each and every month.
Use Home Equity to Pay Off Some Debt
I know this may not seem intrinsic, but if you’re at risk for losing some of the items that you value the most, you may need to consider accepting a little more risk, in order to save everything. The risk I’m referring to is by using your home equity, or the value that your home currently has, to pay off debts.
Home equity allows you to access a large amount of money, relatively quickly. However, if you miss payments or default on your loan, you risk losing your home. When you use home equity loans, lenders will examine the current value of your home, based on current market conditions. They’ll then see how much equity (or true ownership) you have in your home.
For example: if you took out a $300,000 loan to purchase your house, and you’ve paid $150,000 back on your loan, you have $150,000, or 50%, equity in your home. Based on other factors, such as your credit score, lenders may be willing to lend you anywhere from 80 to 90% of the equity you have in your home (in the above example, that would be between $120,000 to $135,000).
Transfer your Debts to Your Credit Cards
This is not an option I would ever personally endorse, and that’s why I’ve saved it for last. But, if none of the options above work for you, and you’re fortunate enough that none of your debt is stemming from credit card use, then you may want to consider transferring your debts to your credit card.
The reason I’m hesitant to even suggest this as an option is because it will very likely solve your immediate problem, and avoid having to declare bankruptcy, but it will almost assuredly lead to more problems down the line. You might be in a scenario where your debt is one massive balance, that you simply cannot afford. So long as the credit limit on your card is high enough, you can indeed transfer this debt in full, or a potion, to your card, satisfying your obligation.
However, once that debt is on your credit cards, if you don’t pay it off in full, you’re going to start accumulating interest, so long as a balance remains. This is incredibly dangerous, because if you don’t pay off the debt you’ve transferred quickly, then you’ll risk accumulating more debt than you had to begin with.
What’s Best for You
I hope that this has at least got you thinking about how you can avoid bankruptcy. In the end, you still may not be able to avoid declaring either Chapter 7 or Chapter 13, but at least you’ve exhausted every other option first. Like I said in the beginning – bankruptcy is incredibly traumatic for most families, and it can haunt people for many years after everything is settled. If you can at all, take every possible route you can to steer clear of it.