Bankruptcy may seem like an easy solution to your debt woes, but it’s not without consequences. A bankruptcy ruins your credit score and makes it very difficult to get approved for a loan or a credit card in the future. If you can, you should avoid filing bankruptcy.
The best way to avoid a bankruptcy is not to get into debt trouble in the first place. Don’t overspend, especially on credit cards, and pay all of your bills on time. Also, try to build up an emergency savings fund so you have a bit of a financial cushion if you lose your job or have a medical crisis.
If you do fall behind on your debt payments, there are things you can do to avoid bankruptcy. Debt consolidation is a process by which you roll most or all of your debt into one loan that presumably has a lower interest rate and a lower monthly payment. If you have good credit, you may be able to do this on your own by transferring all your balances to one low-rate credit card or taking out a second mortgage or home equity loan. If these aren’t an option, you can work with a non-profit credit counseling firm to consolidate your debt.
Debt settlement is another option to avoid bankruptcy. In debt settlement, you negotiate with your creditors to accept less than they are owed. For example, if you have $20,000 in debt, and can pay off half of that, you may be able to get your creditors to accept $10,000. Debt settlement is not ideal, as it will hurt your credit score, but it is a better alternative than bankruptcy.
If you do wind up declaring bankruptcy, don’t go it alone. There are bankruptcy attorneys who specialize in the process.