Learn what strategies to try and what to avoid if you’re struggling with debt.
Although bankruptcy is a common experience for many Americans that does not mean it is something that should be entered into lightly or treated as a sort of get-out-of-jail-free card for debt. Completing a bankruptcy proceeding will have a significant impact on your future—especially on your credit score. The bankruptcy can remain on your credit report for up to 10 years, and the credit bureaus may actually continue reporting your bankruptcy even longer than that if you apply for a high-paying job or a large insurance policy.
Though there is a down side to bankruptcy, it also has significant benefits for individuals who have become stuck in a hopeless cycle of indebtedness. Bankruptcy can certainly be a positive experience—the key is to prepare yourself for bankruptcy correctly and make use of all its benefits. Your bankruptcy attorney will help you do this.
But even before you contact a bankruptcy attorney, be aware of the following do’s and don’ts for individuals who fear a bankruptcy may be in their future:
Do…
Check and Recheck Your Debts: Medical bills are a primary source of extremely burdensome debt for many Americans. To make matters worse, research has shown that medical debts often contain errors. Procedures may be coded incorrectly or entered more than once, and insurance reimbursements may not be properly recorded by the medical provider. This makes it extremely important to check your medical debts carefully and dispute any incorrect charges right away. The same goes for all of your debts—order your credit report and check them now.
Explore Refinancing Options: Given the decline in interest rates over the past few years, many lenders are offering individuals opportunities to refinance old, high-interest debts at new, lower rates. Mortgages and student loans are prime candidates for refinancing.
Set a Budget: In order to figure out if you have any hope of ever escaping your debt at your current income and interest levels, you’ll need to work out a budget including all your payments and living expenses. Then, you’ll need to stick to that budget.
Don’t…
Take Out a 401K Loan: One common mistake individuals make when trying to avoid bankruptcy is borrowing against their retirement. This is especially problematic in the case of a tax-advantaged account like a 401K. If you fail to repay your 401K loan, you will be subject to taxes and penalties that will make you wish you had just skipped straight to filing for bankruptcy.
Pay Off Creditors One at a Time: While paying off your highest interest loans first can be a legitimate strategy towards financial freedom, beware of doing this too close to your bankruptcy filing. If you appear to have given preferential repayment to any one creditor too close to bankruptcy, the bankruptcy trustee can take back that money and distribute it among your other creditors. Bankruptcy trustees are especially likely suspect unfair preference if the repayment was made to an individual such as a family member rather than to an institutional lender.
