High debts can come as unwanted chaos in our lives. It turns the lives of people upside down. In such situations, people with high debts tend to file for bankruptcy. Well, this option may help people to some extent, but in the long run, it can create permanent issues, thereby hampering the financial portfolio of individuals. So, it is always wise to avoid filing for bankruptcy when in debt. It should be kept as a last resort.
There are different types of bankruptcy. In this article, we will explore different ways through which a person in high debt can avoid filing for bankruptcy.
Why is filing for bankruptcy not a good option?
• You may not get rid of all our debt
People file for bankruptcy under the impression that they will get rid of their entire debt. But this is not the case entirely. Bankruptcy takes care of credit card debts and personal loans.
But certain other debt types are not handled by filing the same. Study loans, for instance, are not covered by it. So, it is advised to do one’s homework thoroughly before actually taking a loan. These situations can be avoided by making accurate financial decisions.
• Your credit score may drop
If a person ends up delaying one’s repayment of loans, then it can lead to your credit score dropping. A low credit score can create significant issues when taking other loans. If one ends up filing for bankruptcy, it is evident that you have not been paying your loan installments efficiently.
This lowers your credit score. Significant score drops exist for people who have high credit scores. But this score can be increased by applying for a mortgage or getting lower interest rates on credit cards.
• Your credit score will be blotted for years to come
Another major demerit of filing for bankruptcy is that it drops your credit score. This situation can affect your financial portfolio and create permanent issues.
It will create issues when you intend to take a loan the next time. A good credit score establishes your credibility when applying for a loan. This situation can blot one’s credit score and financial credibility to a considerable extent.
• Your job-getting fetching ability may be hampered
There are certain employers out there that run a background check on candidates that may include a credit check. So, make sure a lousy credit score does not hamper your ability to get a job. Candidates do not leave any stone unturned to ensure their credibility when looking for a job. In legal terms, an employer cannot deny employment if a candidate has filed for bankruptcy. But it can very well affect the hiring decision of the employer.
• It is expensive
Well, bankruptcy can turn out to be a costly affair. This is because the entire process of filing for it can be very troublesome. This cost varies according to different factors. These factors include hiring an attorney, filing free, or the bankruptcy type that you file.
• It is part of the public report
The fact that filing for bankruptcy goes on the public record can be a significant issue. This means anyone can look for the fact that a person has filed for bankruptcy in the public domain. So, people who have filed for the same need to beware of predators who are forever curious to know their financial situation.
How to avoid filing for bankruptcy?
First, a person should avoid getting into a situation where they are liable to take calls from creditors or file for bankruptcy. One must ensure their finances are managed meticulously to avoid such a situation. Thus, listed below are some of the ways by which this situation can be avoided.
• Curate a budget
One must start by curating a budget for oneself. It is essential to learn the art of managing money. If one does not know this trade, all the money earned will be unsuccessful. Thus, specific lifestyle changes and budget alterations can make a huge difference. Budgeting helps determine the flow of money every month. This way, one ensures that one’s expenditure aligns with one’s income.
• Generate passive income
The COVID-19 pandemic taught me the importance of having a passive income source. A side hustle that aligns with one’s likes or hobbies can generate a substantial income. There exist several different ways by which one can earn some extra cash, including freelancing.
Increasing one’s income can boost the money generated by an individual, thereby eliminating the instance of landing in debt. Other side gigs include taking up contract work.
• Cut down on your expenses
Cutting down on one’s expenses is another potent way by which one can avoid rounds to bankruptcy court. Try to buy what you need rather than what you want. If you have small loans in your pocket, pay them on time.
• Sell the things you do not need
Why keep that clutter? With the prevalence of the minimalist lifestyle, people are concerned with de-cluttering up things they do not need. One of the ways through which this can be done is by selling things that one does not need. Several websites allow people to sell their old stuff, including books, clothes, and decor.
• Ponder over creating new debt
One should be highly mindful of creating new debt. One must think twice before taking another loan when in colossal debt. Deficits can create havoc on a person’s financial situation.
So, think wisely and try to avoid taking another loan. One must be mindful of managing one’s financial portfolio. Uncalculated decisions can leave one in a tough spot.
What are the alternatives to bankruptcy?
If you have a lot of debt and cannot think about any other alternative than filing for bankruptcy, then you can get the help of the remedies mentioned below.
• Debt consolidation
As the name suggests, debt consolidation means consolidating several loans into one. A debt consolidation loan merges all other loans of yours. With this, the lender gives a considerable sum as a loan used to pay off the other loans readily.
The interest rate levied on this loan type is also less. One of the significant advantages of this loan type is that one needs to only worry about paying off one loan.
• Debt settlement
Debt settlement is a potent way for a lender to excuse the loan amount. Through this method, one does not need to apply for bankruptcy. This is an ideal situation for people or loan takers out there.
• Debt management plan
A debt management plan helps manage one’s debt efficiently. It may seem the same as a debt settlement plan, but it does have specific differences. But paying off a debt management plan takes a lot of time.
• Change your payment plans
If you are deep in student loans, then bankruptcy is not for you. Student loans are some of the few loan types that are not catered for by filing for bankruptcy. One can opt to change your payment plan to take care of this situation.
When in debt, a person tends to go all awry. But this situation can be controlled if one takes calculated steps. People file for bankruptcy when their financial situation gets totally out of hand. Before taking this step, one can gauge one’s monetary issues and bring about specific lifestyle changes to avoid filing for bankruptcy.
Having a chat with your creditors can also help. So, ensure you opt for all these options before filing for bankruptcy. So, folks out there, take the wise decision and do not file for bankruptcy when in a financial crunch.