Sometimes bankruptcy is the only avenue open for financial relief, but the signs of total financial collapse may occur months or years before filing becomes necessary. Unfortunately, it's not uncommon for people who need to file for bankruptcy to ignore their finances because of the public perception and stigma associated with bankruptcy.
An interesting article from the American Bankruptcy Institute suggests that the press once labeled debtors who needed to file for bankruptcy as lazy or as thieves. Although those unfortunate labels aren't common today, the thought of eventual bankruptcy does push many families to ignore financial problems until bankruptcy is the only way out.
Proactive Debt Reduction Tactics
"U.S. News & World Report" offers several suggestions on early steps that families, couples, or individuals may take to try and reduce the need to file. For example, the article suggests that settling or negotiating debts may offer the chance to keep certain possessions rather than having them liquidated through Chapter 7 bankruptcy.
The two primary ways for such negotiation is through debt consolidation, which might come in the form of a new loan, or through debt settlement where a creditor allows the debtor to pay less than is owed to satisfy the debt in full. Although settlements may create some havoc on a debtor's credit score, bankruptcy would generate a much bigger crater on a credit report.
Taking the Initiative to Sell
One of the biggest mistakes families make is that they wait too long to take action. Perhaps the family breadwinner was recently the victim of corporate downsizing. Maybe a family member's medical bills got to be too much to handle after a hospital stay or major surgery. According to an article by CNN, medical bills are the number one cause of bankruptcies in the United States.
However, huge, unpaid medical bills aren't an automatic ticket to bankruptcy court. Sometimes the financial hole might be too deep to dig out of without the help of bankruptcy, but before the hospital starts calling to threaten legal action, making the tough decision to sell a vehicle, a collection of antiques, or other assets could avert financial disaster down the road.
Investopedia offers a helpful list of minor luxuries you might want to give up while you're trying to get a handle on large debts:
- Cable television
- Cell phones (or a land line)
- Eating out
- Membership to a gym
- Subscriptions to magazines
Tip: If you take the route of selling property, possessions, or assets, make sure you consult with an appraiser who's a member of the National Association of Appraisers (NAA) or the National Association of Real Estate Appraisers (NAREA). Don't get hasty and unload your collection of vintage toys until you're sure of their value.
Don't Hide from Creditors
The mortgage company, the bank, and credit card companies don't want to chase down their debtors only to find that they'll need to write-off bad debt due to bankruptcy. Conversations with creditors won't feel like a walk in the park, but warding off bankruptcy or even a lawsuit is a much better way to approach debts than hiding your head in the sand until the debts become too big to ignore.
Many credit card companies offer hardship programs that may reduce payments and interest, or which may even suspend payments for a short time. For example, Discover Card encourages people to contact customer service when someone experiences a problem like illness, an accident, or loss of a job. Most creditors have similar hardship options.
Tip: Check the fine print of any hardship program. You'll want to confirm the new terms actually feature a lower payment or better rates.
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