How to Avoid Chapter 7 Bankruptcy
Create a budget., Earn more money., Reduce your mortgage., Lower your student loan payments., Ask your creditors to reduce your monthly payments., Meet with a credit counselor., Consolidate your debt., Funnel all extra money to debt., Use only cash...
Step-by-Step Guide
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Step 1: Create a budget.
To avoid bankruptcy, you first need to live within your means.
Create a detailed budget and live by it.
To begin, you should list all your monthly expenses, including your current debt load.
Look at the last six months and write down everything you spend money on.
Now cut inessentials.
You probably don’t want to.
However, the only way to avoid bankruptcy is to make your expenses less than your after-tax income.
You can easily cut Netflix, vacations, holiday gifts, meals out, and gym memberships.Depending on your personal situation, you could also move to a smaller house or apartment.If you’re unwilling or unable to make difficult sacrifices, then you might need to seriously consider filing for bankruptcy. -
Step 2: Earn more money.
In addition to spending less, you should commit to earning more.
You can use this extra money to pay off your debts.
Think about picking up a part-time job or working more hours at your regular job.You might be surprised at how fast money can add up.
A 10-hour-a-week job at $12 an hour is an extra $6,000 a year.
Use this opportunity to pursue an interest.
For example, you might be interested in working with children.
You can babysit on the weekends or in the evening. , If you fall behind on your mortgage payments, your lender might start the foreclosure process.
Contact them as soon as possible to discuss options for reducing your mortgage payment.
For example, a lender might agree to let you stop paying for a short amount of time.
Alternately, they might lower your interest rate or monthly payment.You might also be able to refinance your mortgage.
By refinancing, you can possibly get a lower interest rate or stretch out the loan over a longer period of time (up to 40 years).
Both options will lower your monthly payment.
For other options, contact your nearest Housing and Urban Development (HUD) office.
Housing counselors are available to help.
Although some only counsel you if you have a Federal Housing Administration (FHA) loan, others will help anyone.
Call and ask. , You typically can’t wipe out student loan debts in bankruptcy, so you’ll need to deal with these debts eventually.
You have many options for lowering your monthly payment and freeing up extra cash to contribute to your debts:
Income based payments.
Depending on your loan, you might be able to pay only a percentage of your monthly income (e.g., 10-15%).If you qualify for long enough, such as 20-25 years, your remaining debt is forgiven.
Consolidation.
You can consolidate some student loans and stretch out the repayment period for up to 30 years.
If you have a variable interest rate, you can lock in a fixed rate.
Deferment.
Your lender will let you stop making payments for a certain amount of time, usually because of economic hardship or unemployment.
Interest will not accrue during the deferment period.
Forbearance.
You can temporarily stop making payments or reduce the amount you pay.
Your lender will allow forbearance in only certain situations, such as poor health or where your payment is more than 20% of your income.Interest will continue to accrue. , Many credit card companies will help you try to avoid bankruptcy.
They have an incentive: in a Chapter 7 bankruptcy, they won’t recover any of the money you owe them.
Accordingly, you should call your creditors and explain your situation.
Ask if they can modify your payment schedule.Creditors might be willing to waive a few monthly payments or temporarily lower the amount you pay.
They might also waive fees and penalties.Explain your hardship in a way that is simple and easy to understand.
For example, you can say, “I’ve been laid off from work and don’t have the money right now” or “I was diagnosed with cancer and had to cut back on my freelance job.”Make sure you know how much you can pay each month and don’t offer to pay more. , A credit counselor can look over your finances and help you come up with a budget.
Legitimate credit counselors are non-profits.
You can find them in the following places:
Contact your credit union, university, or housing authority.
They often provide credit counseling services.Visit the bankruptcy Trustee’s website here: https://www.justice.gov/ust/list-credit-counseling-agencies-approved-pursuant-11-usc-111.
Click on your state under “Choose Option.” These credit counselors have been approved to provide counseling for those filing bankruptcy.
They may also be able to help you. , Another way to lower your monthly debt payment is to consolidate debts.
With this technique, you take out a personal loan that covers all your debts.
You then pay off each individual debt and are left with one loan which should have a lower interest rate.
You can get a personal loan from your local bank or credit union.
The interest rate will depend on your credit history.
If your credit is bad, you might want to go to a credit union first.
Instead of taking out a personal loan, you can transfer debts to a credit card using a balance transfer.
Many credit card companies offer an introductory 0% APR for 12-18 months.
You can transfer your balances for a small fee.Debt consolidation won’t work if you simply start spending back up.
It can give you temporary breathing room to use extra money to pay down your debts quickly. , Don’t spend it on inessentials that you’ve cut from your budget.
You can apply the extra money using different strategies which require you to rank your debts from most to least important:
For example, you could rank them based on highest interest rate to lowest.
Use extra money to pay down the debt with the highest interest rate first.
Alternately, you could list them based on the size of the balance.
You might want to spend extra money on your smallest debt first so that you can pay it off.
Doing so will give you a sense of accomplishment.
You can also prioritize secured loans ahead of unsecured ones.
A secured loan is one where you will lose an asset if you default.
For example, mortgages and car loans are typically secured.
If you need to file for bankruptcy, you can’t wipe out secured debts. , It’s hard to change free-spending ways overnight.
If you’re tempted to start using your credit cards, cut them up or freeze them in ice.Commit to using only cash for all daily transactions.
This way, you can stick to your budget. -
Step 3: Reduce your mortgage.
-
Step 4: Lower your student loan payments.
-
Step 5: Ask your creditors to reduce your monthly payments.
-
Step 6: Meet with a credit counselor.
-
Step 7: Consolidate your debt.
-
Step 8: Funnel all extra money to debt.
-
Step 9: Use only cash for transactions.
Detailed Guide
To avoid bankruptcy, you first need to live within your means.
Create a detailed budget and live by it.
To begin, you should list all your monthly expenses, including your current debt load.
Look at the last six months and write down everything you spend money on.
Now cut inessentials.
You probably don’t want to.
However, the only way to avoid bankruptcy is to make your expenses less than your after-tax income.
You can easily cut Netflix, vacations, holiday gifts, meals out, and gym memberships.Depending on your personal situation, you could also move to a smaller house or apartment.If you’re unwilling or unable to make difficult sacrifices, then you might need to seriously consider filing for bankruptcy.
In addition to spending less, you should commit to earning more.
You can use this extra money to pay off your debts.
Think about picking up a part-time job or working more hours at your regular job.You might be surprised at how fast money can add up.
A 10-hour-a-week job at $12 an hour is an extra $6,000 a year.
Use this opportunity to pursue an interest.
For example, you might be interested in working with children.
You can babysit on the weekends or in the evening. , If you fall behind on your mortgage payments, your lender might start the foreclosure process.
Contact them as soon as possible to discuss options for reducing your mortgage payment.
For example, a lender might agree to let you stop paying for a short amount of time.
Alternately, they might lower your interest rate or monthly payment.You might also be able to refinance your mortgage.
By refinancing, you can possibly get a lower interest rate or stretch out the loan over a longer period of time (up to 40 years).
Both options will lower your monthly payment.
For other options, contact your nearest Housing and Urban Development (HUD) office.
Housing counselors are available to help.
Although some only counsel you if you have a Federal Housing Administration (FHA) loan, others will help anyone.
Call and ask. , You typically can’t wipe out student loan debts in bankruptcy, so you’ll need to deal with these debts eventually.
You have many options for lowering your monthly payment and freeing up extra cash to contribute to your debts:
Income based payments.
Depending on your loan, you might be able to pay only a percentage of your monthly income (e.g., 10-15%).If you qualify for long enough, such as 20-25 years, your remaining debt is forgiven.
Consolidation.
You can consolidate some student loans and stretch out the repayment period for up to 30 years.
If you have a variable interest rate, you can lock in a fixed rate.
Deferment.
Your lender will let you stop making payments for a certain amount of time, usually because of economic hardship or unemployment.
Interest will not accrue during the deferment period.
Forbearance.
You can temporarily stop making payments or reduce the amount you pay.
Your lender will allow forbearance in only certain situations, such as poor health or where your payment is more than 20% of your income.Interest will continue to accrue. , Many credit card companies will help you try to avoid bankruptcy.
They have an incentive: in a Chapter 7 bankruptcy, they won’t recover any of the money you owe them.
Accordingly, you should call your creditors and explain your situation.
Ask if they can modify your payment schedule.Creditors might be willing to waive a few monthly payments or temporarily lower the amount you pay.
They might also waive fees and penalties.Explain your hardship in a way that is simple and easy to understand.
For example, you can say, “I’ve been laid off from work and don’t have the money right now” or “I was diagnosed with cancer and had to cut back on my freelance job.”Make sure you know how much you can pay each month and don’t offer to pay more. , A credit counselor can look over your finances and help you come up with a budget.
Legitimate credit counselors are non-profits.
You can find them in the following places:
Contact your credit union, university, or housing authority.
They often provide credit counseling services.Visit the bankruptcy Trustee’s website here: https://www.justice.gov/ust/list-credit-counseling-agencies-approved-pursuant-11-usc-111.
Click on your state under “Choose Option.” These credit counselors have been approved to provide counseling for those filing bankruptcy.
They may also be able to help you. , Another way to lower your monthly debt payment is to consolidate debts.
With this technique, you take out a personal loan that covers all your debts.
You then pay off each individual debt and are left with one loan which should have a lower interest rate.
You can get a personal loan from your local bank or credit union.
The interest rate will depend on your credit history.
If your credit is bad, you might want to go to a credit union first.
Instead of taking out a personal loan, you can transfer debts to a credit card using a balance transfer.
Many credit card companies offer an introductory 0% APR for 12-18 months.
You can transfer your balances for a small fee.Debt consolidation won’t work if you simply start spending back up.
It can give you temporary breathing room to use extra money to pay down your debts quickly. , Don’t spend it on inessentials that you’ve cut from your budget.
You can apply the extra money using different strategies which require you to rank your debts from most to least important:
For example, you could rank them based on highest interest rate to lowest.
Use extra money to pay down the debt with the highest interest rate first.
Alternately, you could list them based on the size of the balance.
You might want to spend extra money on your smallest debt first so that you can pay it off.
Doing so will give you a sense of accomplishment.
You can also prioritize secured loans ahead of unsecured ones.
A secured loan is one where you will lose an asset if you default.
For example, mortgages and car loans are typically secured.
If you need to file for bankruptcy, you can’t wipe out secured debts. , It’s hard to change free-spending ways overnight.
If you’re tempted to start using your credit cards, cut them up or freeze them in ice.Commit to using only cash for all daily transactions.
This way, you can stick to your budget.
About the Author
Janet Ramos
Professional writer focused on creating easy-to-follow crafts tutorials.
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