How to Avoid Bankruptcy
Jan 20, 2009 by JimIt is a common misconception that bankruptcy is simply spending more than you make and living beyond your means. While overspending may be partially to blame, statistics show there are a number of external factors that can catch people by surprise. The top causes leading to consumer bankruptcy are:
• Medical expenses
• Unemployment
• Accidents
• Business failure
• Divorce
• Ballooning interest rates
So what can you do to be prepared for the unknown?
Start an emergency fund – Set aside money till you have saved $1,000 for a rainy day. If you use some of your emergency funds, work to replenish them before buying something you don’t need.
Set up a monthly budget – We have included many resources that will help you set up a budget. We’ve also written a couple articles to help you get a handle on preparing a budget.
Eliminate non-essentials – When my wife and I became unemployed in the same month unexpectedly, we canceled every service and subscription that we did not need. Have a garage sale and sell whatever you can. In short, simplify your life drastically. Pay down your debts. It can be done!
Build up your emergency fund – Once you start to get a handle on your finances build up your reserves to 3-6 months of your income. That way you can survive when the unforeseen comes your way.
Dealing with medical bills – My wife and I chose many years ago to use alternative, natural health care because we can afford it. However if you get stuck with large medical bills, remember that you can negotiate to lower your medical bill or get payment terms you can live with. You can also work with an advocate who can negotiate for you. Here is a list of advocates by state.
Upside down in your mortgage? – With home values declining and ARMs kicking in for many, there is no sense in trying to save your home when you owe more than it’s worth. So what are the impacts on your credit score? A foreclosure remains on your credit report for 7 years. A Chapter 7 bankruptcy which removes all your debt remains on your credit score for 10 years.
If you have significant equity in your home, consult a real estate lawyer. Dave Ramsey also has excellent helps for avoiding bankruptcy.