How To Avoid Bankruptcy

Bankruptcy is a legal procedure that makes it possible to advise your creditors that you do not have enough cash flow to pay the debts that are owed. Bankruptcy is an ugly word in the financial world; it is a process in which no one wins. It is a situation that, even in best case scenarios, is a decision that will haunt the debtor for a decade or more.

To understand bankruptcy let us first describe what it is and the different types of procedures that are litigated these days. Bankruptcy comes about when a person or corporation realizes that they are so far in debt that only an extreme reversal of fortune will keep them solvent. They have open accounts that are well overdue and no foreseeable income of sufficient amount, a lawyer is then employed to get the wheels in motion.

Bankruptcy Basics

There are two main types of bankruptcy, chapter 7 and chapter 13, the type you file depends on the situation. Chapter 7 bankruptcy is simpler and quicker than other types, it involves liquidating assets and distributing the proceeds among creditors. Chapter 13 focuses mainly on restructuring debt so that it can be repaid more easily allowing the debtor to retain their property. Chapters 11 and 12 bankruptcies also exist but they are for more specialized purposes.

There are many reasons to avoid bankruptcy; your credit score, your future financial status, and the possibility of having your property repossessed are just a few. The simplistic answer to avoiding bankruptcy would be to budget your money and live within your means, but stuff happens and sometimes emergencies arise or business ventures don't go as planned.

When your fiscal situation becomes critical then turning your attention toward some type of debt management program is advised. There are a wide variety of choices but debt consolidation is one of the more attractive options out there today and the advantages of debt consolidation are many.

Exploring Other Options

Consolidation companies negotiate with your creditors to arrange the lowest possible payment to satisfy both parties. Instead of paying several creditors per month the debtor provides one lump sum which the consolidation company dispenses evenly among those that are owed money.

None of your creditors wants to see you file for bankruptcy, if you default they will never see any of their money, they would much rather see some type of settlement even if it is at a reduced rate. This accounts for the increased bargaining power that debt consolidation experts can wield.

Debt settlement is an option that is chosen by many in financial dire straits but there are a few drawbacks to this solution. If possible, settlement is something that would best be performed by the debtor themselves. As most debt settlements are a reduced one time payment this may still require saving a rather large sum of money, as opposed to debt consolidation which allows you to make an easier to handle monthly payment to all your creditors at one time.

More than a few debt settlement agencies have come under fire lately due to their practices and standards which is precisely the reason that ideally it should be handled by the consumer directly. Also, the fees associated with debt settlement can be outrageous. Another advantage of debt consolidation over settlement is that the combined single installment is usually less than the outlay experienced by paying creditors individually each and every month.

Is Bankruptcy Really The Best Choice

Bankruptcy is rarely the best solution for anyone. While it can legally discharge the majority of your debts it has no effect on things such as student loans, back child support, unpaid taxes, and things like that; generally anything to do with the government is not covered, nor will it relieve any of your cosigners of their obligations to pay your debts. Some people try to sell assets on their own in an attempt to avoid bankruptcy and in some cases it is successful, although it takes a bit of dedication and perseverance at least you can save on lawyer fees.

Inform your creditors of your intentions as far as filing bankruptcy, many will be more than happy to work with you. You may even be able to talk to your banker and if you’re honest with them about your situation they may be able to at least give you some sound advice on which path to choose.

It wouldn't hurt to change your spending habits either; it's what got you into this mess to begin with. While you’re at it let a few of those credit cards see the business end of a pair of scissors. Other alternatives include credit counseling and just not paying anything at all in hopes that debts will just be charged off. None of these are very appealing options as they all have some daunting drawbacks such as a decimated credit score.

Some organizations even hype loans to pay down debt but in actuality these loans are nearly impossible to secure and if they can be gotten they are at inflated interest rates. Why? Because no one cares to extend a loan to anyone that hasn't shown the ability to manage their money.

Life After Bankruptcy

To be honest a few people have found bankruptcy to be the solution to their problems but the vast majority of those that have filed have regretted the action for literally years, about 10 years to be exact, this is the amount of time that it takes to clear your credit history of this kind of judgment. Of all the ways to avoid bankruptcy consolidation is the option that seems to give the best results with a minimum of damage.

However you choose to resolve your debt responsible money management is then necessary to assure that this financial situation does not arise again. Sort of like embarking on a monetary diet plan this will require some lifestyle changes that include establishing and maintaining a strict budget. But financial recovery is possible as evidenced by the thousands upon thousands of people that have done it already and there are many resources out there to help you find your way back into the black.