Steps to Take Before Bankruptcy

by Kay Lynn

Even though the economy seems to be in a slow recovery, there is still a lot of debt and bankruptcy.  People and businesses that have trying to hang on are finally reaching the end of their ropes.

If it wasn’t you, it most likely has happened to a family member, friend or acquaintance.  One court has seen filings double from 2007 and it’s not over yet.  There are steps you should take before taking this legal action.

Understand Your Current Situation

Gather all your bills and total the monthly obligation of all.  Designate which ones are required for living such as power, food, and housing.

Then identify expenses that are optional such as dining out, cable and gym memberships.  The last category would be debt including loans and credit card bills.  Don’t forget irregular bills such as property taxes and home insurance.

Create a Plan to Decrease Expenses and Increase Income

Go through each category of expenses and figure out what can be trimmed or eliminated.  Be ruthless.  You can always sign up for cable when times are better.  Instead of exercising at a gym, make do at home.

Negotiate with credit lenders if the account hasn’t already gone to collections.  They might be willing to work with you on interest rate cuts or lowering minimum payments during the crunch time.

Make sure to include selling assets in the plan.  Is a second car essential?  Check your garage, closets and shelves for items of value that you can sell and generate some income.

Get a second job to generate more income.  Who knows you might find delivering pizza can generate cash and inspire a blogging career?

Work the Plan

Follow the new budget and make all payments on time.  Get all the family on-board so they don’t sabotage your efforts.  Kids are amazingly resilient and supportive when included in the family’s need for saving and cutting expenses.

Apply all extra income to debt payments after taking care of basic needs.  Reevaluate and see if you can get through the crisis or whether it’s time to seek counseling.

Trained financial counselors can help you figure out if the debt can be overcome or not.  Sometimes all these steps can’t prevent bankruptcy, but it should never be the first solution.  Once you have exhausted all of your other options, you may consider talking to a San Diego bankruptcy attorney for professional help.

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{ 4 comments… read them below or add one }

Lisa @ Cents To Save May 4, 2011 at 3:13 am

Unfortunately, my best friend just filed for bankruptcy. They lost their house and had to downsize. It is a very sad and difficult time for them.

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Jerry May 6, 2011 at 3:07 pm

If you are going through bankruptcy that is due to overspending and not living below your means it will lead to the same thing over and over again. Your only insurance against this is to evaluate your spending habits and making some serious changes.

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Kay Lynn May 7, 2011 at 8:47 am

Jerry, that is a good point. Unfortunately, a lot of bankruptcies occur because of medical debt or business failure.

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Adam Gottlieb @ The Frugal Entrepreneur May 10, 2011 at 12:39 am

Very timely topic. I would add that before any of the steps mentioned above, people should make sure that they fully understand what bankruptcy entails. There are for example, different ways to file (ie Chapter 7, Chapter 11, Chapter 13) and the outcome of the process is different for each one. Moreover, in some cases certain personal assets may be exempt from liquidation. Finally, make sure you learn how bankruptcy affects your credit profile and what steps you will need to take to rebuld it.

Bottom line: it pays to do your research *beforehand* as part of your preparation for bankruptcy.

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