No one wants to have to file for bankruptcy. When income is hard to come by and expenses get out of hand, it can feel like a bankruptcy petition is your only option. And sometimes it is. But in other cases, the right budget and credit counseling can help you manage your debt and come out on top.
Whether you file a Chapter 7 petition to liquidate your assets and wipe out your debt, or a Chapter 13 bankruptcy payment plan, bankruptcy is almost always a last resort. Individuals and families can take some extreme steps to trim the fat and avoid having to file the petition. Anytime you are facing too much debt, the best way to start is by creating a budget. This will help you get a clear picture of your financial situation, see where you can make changes, and sometimes avoid bankruptcy entirely. Here’s how to get started:
Where do you keep your bills? If you are like many modern families, some come electronically, some in the mail, and some are set up for automatic payments that you never even see. This disorganization can create problems when spending gets out of hand. Take your bank statement and credit card bills and look for anything that is a recurring expense. Make a list. Over the next month, keep copies of those statements, bills, or receipts as they come through, and check them off the list. At the end of the month, look to see what is left and request statements from the companies. Now you have what you need to start a budget.
Many families don’t know how much they owe. When the numbers get too big it is easier to ignore the penalties and fees than to figure out how to solve the problem. Take all those statements and any personal debts you have and make a new list of everyone you owe money to and how much. In another column, take note of the interest rates and the due dates to use later. Then, add everything up. It may be painful to see everything in one place, but you need to know what you owe before you can make a plan to pay it.
Once you know what you owe, see how much you have available to pay it. Add up everyone in the household’s income streams. Be sure to include:
On the expenses side, add in variable costs like groceries, clothing, entertainment, gas, and transportation costs. Then compare the two.
This is where it is a good idea to talk to a bankruptcy attorney. When you have all your numbers in one place, the attorney can help you look at your income-to-expense ratio and decide whether it is better to adjust your living expenses, negotiate with your creditors, or file for bankruptcy.
If you and your bankruptcy attorney decide it is best to avoid bankruptcy, it is time to get your expenses under control. Look at where your money is going and figure out where you can reorganize, negotiate new terms, refinance at a lower rate, or even cut altogether. Remember that going without certain luxuries is better than liquidating all your assets.
Now that you have a list of all your assets, income, and reduced expenses, it is time to figure out how you will pay back what you owe. Your bankruptcy attorney may be able to advise you about how to prioritize where you put your payments based on interest rates and repayment rules. Then pay down your high priority debts while making minimum payments on the others on your list. Your attorney may also be able to negotiate with your creditors to get you more time to pay or adjusting your monthly payment.
This is the same process that you would use in a Chapter 13 bankruptcy payment plan. If you qualify to file, it may be worth considering. While a bankruptcy does negatively affect your credit score, often the work you do to make and keep your repayment plan will increase it nearly as much. Then, once your 3 to 5 year repayment plan is over, anything left over can be forgiven. Without the bankruptcy, you could take years to finish paying off your debts and end up paying more over time.
Bankruptcy isn’t the best option for everyone. Sometimes all you need is the right budget to get your debts under control and right your financial ship. However, in some cases, simply following the steps to create a good budget won’t be enough. That’s why you should review your assets and debts with an experienced bankruptcy attorney to decide what strategy is best for you.
At John A. Steinberger & Associates, P.C., we know that creditor calls can be a headache. We are a full-service bankruptcy law firm in Southeast MI, serving debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. We meet with clients facing debt collection lawsuits to help them decide whether bankruptcy or another option is best for them. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.