Filing for bankruptcy may be a smart financial decision, depending on the circumstances. If your business fails or you lose your job or you have a sudden sickness or an accident accompanied by overwhelming medical bills or you simply overspent and you cannot afford paying for your credit cards, filing for bankruptcy is a solution. However, you should keep in mind that if you do file for bankruptcy, you will have to build your credit from scratch, which can be a tedious task.
Here are some useful tips on how to survive a bankruptcy filing:
a) Seek for alternative financial solutions before bankruptcy filing
Before selecting the option of filing for bankruptcy, try to negotiate with your creditors to see if there is any possible way to lower your monthly payments on your debt or make a new arrangement at a lower interest rate. You may also explore the possibility of getting a second job, even if it doesn’t totally fit in your career profile. Alternatively, you may consult a financial advisor for advice on how to refinance your mortgage or seek for advice from non-profit credit counseling groups, preferably affiliated with the National Foundation for Credit Counseling (NFCC), to set up a debt-management plan. No matter what alternative financial solution you will seek for, keep in mind that if you own assets, creditors can sue you and take them.
b) Have a spending plan
Make a conservative spending plan to keep track of your monthly expenses. By saving money on unnecessary spending, you are very likely to spend significantly less after a few months that you implement this strategy. Eventually, you will be able to balance your monthly income and expenses as much as possible to be able to cover your fixed expenses such as your mortgage, car loan, credit cards etc. This is a good strategy to avoid filing for bankruptcy provided you do not have a huge debt or you are unable to get out of debt the last five years.
c) Monitor your credit report
Monitor your credit on a monthly basis. Equifax (www.equifax.com), Experian (www.experian.com) and TransUnion (www.transunion.com), all can send out monthly credit reports where you can analytically see how your debt accumulates in detail. You need to go over these reports very carefully and if you find anything that doesn’t look correct, file an online dispute. Remember that filing for bankruptcy can dramatically affect your credit score. Therefore, every little omission counts. Moreover, you could get a free credit report every year from AnnualCreditReport (annualcreditreport.com), in which you can make any necessary change to make your credit report as accurate as possible, thus improving your credit score.
d) Don’t take filing for bankruptcy lightly
There are serious ramifications when you file for bankruptcy. Although your life is not ruined and you are allowed to get credit again, the bankruptcy filing will be showing on your credit report for a period of ten years. This will affect your credit report and will classify you as a bad credit risk consumer. Consequently, the interest rates on a business loan or a mortgage you may ask in the period of ten years will be higher than it would have been had you not filed for bankruptcy because of poor credit rating.
Besides, there are also the emotional consequences of filing for bankruptcy. Many people who file for bankruptcy often relate the loss of money to the loss of self-esteem. This can create a variety of negative emotions, including embarrassment, shame, disrespect, but mostly loss of confidence.
Overall, filing for bankruptcy can be an alternative if you really cannot manage your debt. However, you should be ready to deal with negative emotions, but also with more practical implications including higher interest rates on new credit cards and loans, higher insurance premiums, and bad credit record. If you don’t get discourage and you follow above steps, you may be able to avoid a bankruptcy filing.