Bankruptcy should not always be treated as a last resort. Particular example, some people put off bankruptcy as long as they possibly can, which is fine, but if in the meantime they are simply taking out further debt that is secured on their home for example, they may well discover that it would have been more sensible to file bankruptcy before taking out such a loan, because secured debt is harder to deal with under US bankruptcy law.
If you are considering bankruptcy, make sure that you hire a legal attorney because whatever chapter you choose to file under, the process can be torturous and a bankruptcy lawyer is best placed to both advise and present your financial position to the bankruptcy court in a manner that is in your best interest.
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However, before filing for bankruptcy there are a number of other avenues to explore which may have less of an impact on your future financial credibility.
Tip 1. Examine your finances in detail.
When we had financial problems, many of us kid ourselves as to how much money we have actually spent. For example that coffee that you have on your way to work everyday represents significant expense over the course of a month. Because as an individual item it appears to be not a great deal of money, we feel free to make the purchase. The problem is it's often not just a coffee. There are often a plethora of small expenses that we justify because in themselves they don't represent a huge spend.
What people need to do is make a list of all your expenses that go out of your bank account every month to arrive at your next disposable income. This then tells you how much in a month you have to spend. What you then have to do, is buy yourself a small pocket notebook and pen, and actually record every additional item of expenditure as you spend it. This can be a real pain.
But the fact that it can be a pain is the whole point. Not only does it give you an ongoing picture of your finances and how much you have spent, if you truly adopt has a habit you will find them all of the small expenses disappear. This is because you will find that you will stop buying a lot of the smaller items, simply because you can't be bothered with the effort of recording them in your notebook.
Tip 2. Swallow Your Pride
It can feel quite demeaning, but if you are in a situation which could cause serious financial repercussions, swallow your pride and ask a close friend or family member if they can bail you out in the short term. This is only viable if they can help you out without suffering financial hardship themselves, and if by helping you out they are actually solving your problem rather than simply delaying the inevitable.
Tip 3. Sell Something
Even if you are considering actual bankruptcy, this is still an important point. In bankruptcy, particularly in a chapter 7 filing is where your assets are sold to pay your creditors, it is what are called your "non-exempt" assets that are sold on your behalf by the bankruptcy trustee. Therefore, if you do decide to sell material possessions to raise cash, make sure that these are non-exempt assets.
The point here is that if you were to go bankrupt these assets will be sold anyway. If by chance the amount raised from selling some of your non-exempt assets prevents you having to file for bankruptcy, you have lost no more than you would otherwise have done if you had filed for bankruptcy, but you have the advantage of not having a bankruptcy on your credit score.
In addition, selling exempt assets would potentially put you in a worse position because most states allow you to retain certain possessions including, pensions, household furnishings and very often your car, depending on its value. Also many people think that you will lose your home. This is not necessarily the case; therefore selling it to finance debt makes little sense. To give you an example, most states have what are called homestead exemptions. Let's assume your home is worth $125,000 and your mortgage is $105,000. The equity that you have in the property is therefore $20,000. It may be that the homestead exemption in your state is $30,000, in which case you would keep your home if you subsequently filed bankruptcy. It is therefore not a good idea to sell your home to use the equity to pay your creditors. The only creditors who can take your home are those to whom you pay the mortgage.
Tip 4. Negotiate
This is really only applicable if you have a small number of creditors and they are not large institutions. This is because large institutions generally make it impossible to get to the true decision makers, and you need all your creditors to agree.
I am talking about what is called a non-bankruptcy or "workout agreement", where the debtor cuts a deal with his creditors. These can take the form of what are called composition arrangements, where you negotiate with the creditors amount less than the full value of debt, extension agreements, where the debt is paid in full but a longer time frame is negotiated or combination agreements which are a combination of the above.
Workout agreements are more useful for people who have valuable assets and therefore are in a position to pay their debts, but need more time to sell their assets to raise the money required.
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