Avoid Bankruptcy

Whether because of uncontrollable circumstances or financial incompetence, falling into major debt is dangerous. A bankruptcy stays with an individual for as long as 10 years after the fact and the effects reach every part of finances. No form of bankruptcy removes all debts, and all forms will make it hard to regain credit. In most cases, an alternative to bankruptcy should be chosen of bankruptcy.

It is an extremely strenuous, lengthy and in some cases costly undertaking. The two most common forms are chapter 7 and chapter 13. Chapter 7 is more widely used that chapter 13, and should be only a last resort. It can be avoided with debt management.

Chapter 7

• Eliminates the majority of debts
• Debtor loses most assets
• Stops Creditor’s actions
• A ‘fresh start’ is granted

Chapter 13

• Helps to organize finances
• Creates repayment plan
• All debts must still be paid
• All assets are maintained
• Stops Creditor’s actions

Debt Management

The only alternative to bankruptcy that can truly be effective to those avoiding bankruptcy is Debt Management. There are several techniques to use when managing debt. In essence, they make up the processes that are Chapter 13 bankruptcy, but the court is not involved. Debt management is not easy, which is why so many resort to bankruptcy. However, organizing and planning the future of one’s finances is the only way make a recovery. There is no effortless method of avoiding bankruptcy.

Debt Settlements

Especially common with credit card debts, debt settlements are a great way to begin eliminated debt. This can be accomplished simply by calling one’s credit card company and asking for a settlement. Credit card companies often accept settlements form individuals in danger of bankruptcy, because if that occurs they may never regain their debt. This is because when bankruptcy occurs, the creditors of unsecured debts are last in line to receive payment. If a settlement is not allowed by the credit card companies, or any of the creditors of other unsecured debts, a reduction in interest rates may be available.

Debt Organization

After attempting to reduce one’s debts by means of settlements or interest rate reductions, the next step is to sort all debts. They should be prioritized by the severity of the interest rate. Those debts with the highest interest rates need to be paid off first. Those with the lowest rates can wait. The method within this is to pay the highest monthly payment on the highest interest rate debt, and the lowest on all others. In this manner, money is saved with low payments of low interest, and spent to remove the high payment of the high interest. Once the highest is paid off, the cycle continues to the debt with the next highest interest. This process is to be continued until all are paid. It is not quick or easy, but it is the single most effective system.

Debt Consolidation

Once the organization is complete, if an individual feels that the number of debts to different creditors on their list is too large, debt consolidation may be considered. In most cases, this consists of taking out a mortgage on one’s home and using the money to pay off a number of debts. The debts that should be paid off are those at the top of the priority list. With this, a debtor can consolidate all monthly payments into a single larger payment, creating less to keep track of.