However, bankruptcy is not always the best choice. A bankruptcy can negatively impact your credit report for seven to ten years. This can make it more difficult for you to get credit in future years, and any credit that you do get will be on less favorable terms.
Consider whether one of the following alternatives to bankruptcy could work for you. You may be happy that you did.
Change Your Lifestyle
Losing your job or having large medical bills can be devastating. However, it usually isn’t a permanent setback. You can often find a new job or manage to pay off the bills. In the meantime, though, you may need to think about changing your lifestyle to adjust to your new circumstances.
One or more of the following changes might work for you, either permanently or temporarily:
- Sell your house and buy a less expensive one, or refinance your mortgage.
- Buy a less expensive car.
- Pay for all purchases with cash.
- Cook more meals at home using items purchased on sale or with coupons.
- Sell any items that are not necessary for your lifestyle, such as a second home, investment property, jewelry, a second car or other items that you no longer use.
Manage Your Cash Flow
You should also consider managing your cash flow to your advantage. When money is tight, you need to focus on preserving the things that are the most important to the well-being of you and your family. This means using your money in the following order:
- Food necessary to feed you and your family.
- Medical treatment.
- Mortgage or rent.
- Car payment (for the vehicle that you use to get you to work).
- Utilities that make your home livable.
If you have money left, you can use that to pay your credit card debt. Your credit card lenders may be the most persistent in trying to collect their payments, but they are the ones that you should pay last. You can certainly explain your circumstances, but in no event should you pay credit card debt ahead of other expenses necessary to your survival.
Credit Counseling
If your situation does not improve, you should consider credit counseling. The counselor will look at your debt, income and expenses, and will suggest solutions for you.
The credit counselor may:
- Help you set up a budget.
- Help you set up a debt management plan, which means that the credit counselor negotiates on your behalf with your lenders. You then make your monthly payment to the credit counselor, and the credit counselor pays your creditors. The fee for this service may vary.
- Recommend bankruptcy if the counselor feels that other solutions will not help you.
Be careful in choosing a credit counselor. There are a number of unscrupulous companies out there who are interested only in making money for themselves, not in helping you pay off your debt. This is true even if the company claims to be “non-profit.” One way to find a reputable counselor is through the website for the National Foundation for Credit Counseling.
