How Do the Consequences of Bankruptcy Alternatives Compare?

Let’s talk about avoiding bankruptcy and what you can expect will happen in each situation. Some options are more favorable than others and once you have explored all of your options for getting out of debt, you may find bankruptcy to be your best fit after all.

1. Make More Money

This is a no brainer actually. When you’re looking to get out of debt and avoid bankruptcy, the best thing you can do is make more money. I know, it’s easier said than done, but have you really explored creative out-of-the-box ways to raise your monthly income? Here are some of my suggestions that have helped past clients:

Rent a room to create rental income;
Get a second job;
Ask for a raise at your current job;
Put the kids to work and if the are working, STOP PAYING THEIR EXPENSES;
Have a yard sale, or sell items you no longer use on Craigslist;
Start a side business repairing or repurposing items for resale

2. Cut Expenses

There are only two sides to the budget ledger; income and expenses. Another best strategy is to not only increase your income, but cut expenses too. Any money left over can then go to paying off debts and avoiding bankruptcy. Here are some often overlooked ways to cut expenses:

Transportation: Cut transportation expenses by taking public transportation to work. You would be surprised to notice your stress will go down with public transportation. If you plan to drive, be sure your car is well-maintained and paid off. Maybe you need to downsize and get a cheaper car that is paid for to cut out the car payments.

Insurance: Home and auto insurance costs can be cut by examining the amount and type of insurance policies you have. If your car is older, consider cutting out any physical damage coverage (comprehensive/collision) and maintain liability only. Liability limits on insurance policies only need be enough to protect your assets. So, if your car and home have no equity, then you don’t need a high limit insurance policy. Also, shop around for insurance.

Utilities: Turn off the lights and air conditioning. Cut that cell phone bill, or cut the land line. Call each company to reduce services that will reduce your bills, or cut them completely.

Groceries: Take up couponing only where it makes sense by buying your shampoo, soap, toothpaste, dish and laundry items on coupon. Paper products are another great household item to buy on coupon. Cut your grocery bill by planning your weekly meals before shopping and consider other meals that you can use similar ingredients for. Cooking at home can not only save money because it’s cheaper than dining out, it can also help you live healthier.

The consequences of tightening the budget by increasing income and reducing expenses are that it’s a long-term lifestyle commitment that could take longer than five (5) years to pay off all your debts. Even after maximizing this strategy and applying all your disposable income toward debt, it may not be enough and you may still be faced with bankruptcy. However, I still believe that knowing your numbers is an important step in financial transformation and eliminating debt no matter which direction taken.

3. Debt Settlement

If you’re behind on paying credit cards, they can be negotiated; sometimes for pennies on the dollar. This can seem like a money saving strategy, but can leave your credit score in shambles in the wake. First, you’ll need a hefty savings account so that when you strike a deal, you can pay a lump sum to settle the debt. Be sure to get any settlement in writing and ask them to remove the trade line from your credit report. You may not get credit clean-up, but it doesn’t hurt to ask either. This can be an effective debt elimination method if you only have one or two debts to work with. Any more than that and a bankruptcy case would be a cheaper, better, faster way to get out of multiple debts at once.

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Bankruptcy and Child Support

No matter how tight money gets, taking care of your children is always a top priority. If you’ve found yourself in more debt than you can handle and are responsible for child support as well, you may wonder what filing bankruptcy will mean for your situation. Will the support payments be included in the bankruptcy? Or will they be reduced? I can help you walk through all of these important questions. One thing to be aware of is that child support cannot be discharged through any type of bankruptcy.

Chapter 7

While filing any chapter of bankruptcy will begin the automatic stay and you can then stop making payments on unsecured debts, you will still need to stay up to date on your payments (as well as secured debt payments, if you want to keep your property.) Bankruptcy of any type will not stop your child support, and it will also not affect any court proceedings to establish or modify your support. All priority debts, such as child support, must be paid in full, on time each month, and if you fail to make your payments, you could be sued. Filing a Chapter 7 could result in some of your non-exempt property being taken and sold to repay creditors, but we’ll use the many available exemptions to protect as many of your assets as possible. If the court does take some of your property, the trustee will decide which creditors receive payment and how much. Child support is usually the top priority.

Chapter 13

One of the benefits of choosing a Chapter 13 bankruptcy is that you can include any child support arrearages into your repayment plan as a priority debt. We’ll design your plan to include your full child support payments with the missed payments spread out over the course of your 3-5 year plan. Making your child support payments may reduce the overall debt you’ll pay off in a Chapter 13. Priority debts are paid first, with any remaining disposable income going toward other lower priority or unsecured debts. In some cases, where there is little disposable income remaining, unsecured debts aren’t paid at all before they are discharged.

It’s imperative that you stay current on your Chapter 13 repayment plan; otherwise, your creditors could file for a “relief from the automatic stay.” If this is approved by the court, you would need to begin making full debt payments immediately. You’ll need to stay current on child support payments until the end of the debt period, or your bankruptcy discharge could be delayed.

Making a Plan

Of course you want to make sure your children are provided for and are willing to make whatever sacrifices necessary to make that happen. If you need to file bankruptcy, the court will look at your overall financial situation, which could result in a modification of your child support payments. You may also be able to free up enough room in your budget through the discharge of bankruptcy to make your payments easier to handle. No matter your situation, we can work together to make a plan that works for you.

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