How to Avoid Bankrtupcy:
In today’s economy, you may be finding that simply treading water in the budget no longer works. Any little, or not so little, wave—a missed direct deposit, a mortgage adjustment, or even a 10-cent hike in gas prices—can threaten to sink your economic boat. Sometimes, bankruptcy seems like the only way out and the only way to make the phone stop ringing.
But maybe you have heard the statistics—that most marriages end over money fights and money problems, even after bankruptcy gives you a “clean start”. Maybe you have heard the oft-overlooked facts like student loans and child support payments are not bankrupt-able. You may simply not trust the attorneys that want to handle your case and are in need of different options.
There are many options available—of differing levels of difficulty—when you are looking how to avoid bankruptcy. They may not all be fun, or be as easy as the attorney makes bankruptcy sound, but you may be able to avoid that “last resort”.
Credit Counselling Services
One of the most popular—and the most advertised—methods of avoiding bankruptcy today is signing up with a credit counselling service. There are many for-profit and non-profit agencies that claim to be able to lower monthly payments, lower interest rates, and “get your life back.” These companies usually assign a counsellor to your case who will handle contacting your creditors and negotiating on your behalf. This counsellor is also the person you would deal with directly regarding all of your debts. In turn, your creditors are supposed to only communicate with your counsellor, stopping the harassing phone calls. Instead of writing five, six, ten, or fifty separate checks each month, you send a single payment to the credit counselling service and they make the negotiated payments to your creditors on your behalf.
However, if you decide to work with one of these companies, do your homework before signing up; the Better Business Bureau website is full of credit counselling services that have not done their job.
Before you sign up and send your first payment, get absolutely everything you can in writing. “Everything” includes your responsibilities, their responsibilities, how much of your monthly payment will go to bills and how much to overhead, and what will happen if either party does not live up to these requirements. Before you send your first payment to the counselling service, contact all your creditors and make sure that they’ve signed off on the deal. Some counselling services may say that they have contacted and gotten the needed approval from your creditors when Visa knows nothing about it and MasterCard refused to deal with them.
Even after you have all your information confirmed and in writing, make sure to check your credit statements every month to make sure that the credit counselling service is living up to their end of the bargain. There are many examples of people paying thousands of dollars to a service when none of it was being sent out to pay debt.
Debt Reduction and Debt Management Services
Debt reduction and management services are companies (both for- and non-profit) that are similar to credit counselling services, but there are a few major differences.
Like credit counselling, you make payments to the service rather than your creditors. The service puts your payment (minus the obligatory administrative fees) into a trust or a bank account while waiting for a large enough amount to negotiate a settlement with your creditors. The thinking is that when the “bank” gets large enough, the companies will be more eager to settle for pennies on the dollar, cutting what you owe in half or more.
While you make your monthly payments to the service, Visa, American Express, MasterCard, and Discover are not getting that money because they do not want the small settlement amount in the bank at that time. Meanwhile, you would most likely still be getting calls, you debt will be sold from collection company to collection company (despite what they may tell you, yes, credit agencies do sell debt), interest will continue to accrue, and you may be sued while you are making monthly payments to the service. The thinking behind this is if the creditors do not think they will be getting any money, they will be more apt to settle for a low amount.
Credit counselling, debt reduction, and debt management systems show up on your credit report and can harm your chance of getting a loan, if you decide to use credit again after getting out of debt. Many mortgage companies view the uses of these services as if you had declared bankruptcy.
The “Old Fashioned Way”
This is your great-grandparents’ way of getting out of debt—the few times your great-grandparents even went into debt. It is difficult, it is slow, and it may end up being harder on your credit report than bankruptcy and the services mentioned above.
The first thing to do is get on a written budget. Every month sit down and tell your money what to do—and stick with it. If you are married, both spouses need to agree on this budget, as well. Your budget should list the essentials first—food, power, water, heat, gasoline, insurance (health, home), house payment, and car payment in that order. After the essentials, if anything else is due in that month (new tags for the car, a haircut, new shoes for the kids, etc.) should be listed and budgeted. After the essentials are paid, every other penny that doesn’t have a name should go to paying off your smallest debt.
After the budget tells you how much money you should have to work at the end of that month, contact each of your creditors to put it in their records how much you will be sending that month. Have multiple yard sales—sell as many things as you can, including cars, to not only get some extra cash but also get out of car loans. Stop going out to eat. Shop at consignment and second-hand stores. Get a part-time job. Do everything you can to increase your income while shrinking your budget. Put every extra cent you can toward the smallest debt while making minimum payments to your other debts, if possible.
Call your creditors and see if you can negotiate a better interest rate and a settlement, if you can. Let them know what you are doing and that you are working on getting them paid off. Speak with the highest phone associate you can, and ask to speak with supervisors (i.e. the person in the cubicle next to them) and call back as many times as necessary to get what you want.
No matter what method you choose, don’t let the collectors get to you! Do not completely stress out if you cannot make a payment—and don’t let your creditors scare you into paying the credit card with your rent money! Eating is much more important than your credit score, and keeping a roof over your children’s heads is immensely more important than any number.
One of the most common deciding factors people cite when filing bankruptcy is in order to make the calls stop. After you have chosen not to file bankruptcy, you need to know the Fair Debt Collections Act. According to this federal law, credit collectors cannot:
- Discuss your debt with a third party such as friends, family, children, co-workers, etc., other than your attorney or spouse,
- Call you at any such place or time which is known to be inconvenient to you (they usually do not call on holidays, but let them know on the phone and in writing if you sleep odd hours or if there are any days of the week they cannot call),
- Harass, oppress, or abuse in connection with the collection of a debt,
- Threaten to do anything they do not intend to do (i.e. lawsuit, garnishment, etc.). The only creditor that can take your house to pay your debt is your mortgage holder.
If the creditors break any of these laws (which every single one of them does every single day), they can be fined for your damages plus $1,000 for EACH violation (be sure to record your conversations—and let them know you’re recording conversations—and save all your correspondence). Depending on the company that has your debt, this may be one of the best ways to completely pay off your debt in months!
If you want to stop all communication, you can send a cease and desist letter, and legally they cannot contact you at all. Be careful with this, however, because this may increase the chances they will sue you.
Real debt management is only about 20% numbers and is 80% behaviour. Getting out of debt—no matter what method you use—will take time and effort, and is not a “quick fix.” The most important thing is to make sure you are not in the same situation in a year or two.
To make sure history does not repeat, look carefully at your spending habits and see where your money is going. Are you still paying off the hamburger you put on your credit card six months ago? By this time, you could have purchased the entire cow! Once the underlying behaviour is identified and isolated, it can be changed, and bankruptcy can be taken off the table for good.
Thank you to R.M Strong for this "How to Avoid Bankruptcy" article.
