6/20/2012 7:38 PM ET|
5 ways to avoid bankruptcy
If your balance sheet is in the red, declaring bankruptcy may seem like your only option. Try these 5 strategies first to help get out of debt.
Bankruptcy. We know what it is but don't like to say it, and we hope we never have to go through it. The mere thought of bankruptcy sends shivers down our spines. For many, it is the ultimate nadir of personal finance.
Bankruptcy, according to financial guru Dave Ramsey, is often considered one of the top five life-altering negative events a person can experience, along with divorce, severe illness, disability and the loss of a loved one. Ramsey says that bankruptcy "leaves deep wounds both to the psyche and the credit report."
Bankruptcies in the United States were abundant last year, with more than 1.4 million Chapter 7, 11, 12 and 13 filings through the end of 2011, according to data from the U.S. Courts. As it is with anything in life and money, myths about bankruptcy abound. A person who declares bankruptcy isn't necessarily irresponsible with his money, or in search of an easy bailout. The reasons individuals or businesses file for bankruptcy vary, but one thing is certain: Going bankrupt means legally declaring insolvency.
When you're in over your head and can't pay back your debts, it may seem like there's no alternative. But filing for Chapter 7 doesn't have to be your only choice. There are a few preventive measures and last-ditch moves you can take to avoid bankruptcy and get back in the black -- hopefully, for good.
1. Settle/negotiate your debts. Commonly, Chapter 7 bankruptcy is a liquidation -- a wiping clean or erasing -- of your debt. But it can also mean relinquishing many of your assets or property. If you're on the brink of filing for Chapter 7, it is possible to hold on to your property and still pay back your creditors by settling your debts instead.
Debt consolidation is an arrangement with lenders to repay your debts without losing any of your assets. In this case, you would consolidate your debts into a single loan with one monthly payment at a lower interest rate. (Should you consolidate your debt? Find out with MSN Money's calculator.)
Debt settlement works similarly. Like debt consolidation, it means that you must negotiate some kind of deal with creditors. If it's likely they'll get their money back, most lenders will work with you to devise a reduced-payment plan schedule. This may include waiving your current payments if you agree to make larger payments down the road to make up for the delay. Reducing credit card debt can be approached in either of two ways: the snowball method, where you pay smaller bills first and work your way up; or the avalanche method, where you pay down larger debt so that your payments decrease as you go.
The chance to pay down your debt keeps you in control of your finances and away from having to file for bankruptcy.
2. Sell your property. In a Chapter 7 case -- total bankruptcy -- your property is put up for review by a trustee, who decides what to sell or liquidate in order to settle your claim. You can avoid this completely by being proactive and selling some of your belongings before bankruptcy is on the table.
If you're in debt, consider what you can afford to part with. Do you have a second car, a collection of antiques or other valuables? You might want to consult an appraiser to determine the value of your property. This doesn't mean you need to clear out your home, but taking to Craigslist, eBay or a public auction may earn you some much-needed funds.
Even if this approach raises only a small amount of the cash needed to pay off some debt, it may be better than being forced to surrender your property in a bankruptcy filing.
More from U.S. News & World Report:
VIDEO ON MSN MONEY
2) Search "Money as Debt"
3) Watch the 47 minute documentary to find out why BK is an inevitable part of the system.
Extra credit: Watch the two "sequels": "Money as Debt II - Promises Unleashed" and "Money as Debt III - Evolution Beyond Money"
"I'm trying to free your mind, Neo. But I can only show you the door. You're the one that has to walk through it." -- Morpheus (The Matrix)
"Choice is an illusion created between those with power and those without." -- The Merovingian (The Matrix - Reloaded)
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