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5 Ways to Avoid Filing for Bankruptcy

The B Word. We know what it is but don't like to say it, and we hope we never have to go through it. The mere thought of bankruptcy sends shivers down our spines and makes our bank accounts quiver in fear. It has its reputation as the ultimate nadir of personal finance.

Bankruptcy, according to finance guru Dave Ramsey, is often considered one of the top five life-altering negative events a person can experience, with divorce, severe illness, disability and the loss of a loved one. Ramsey says that bankruptcy "leaves deep wounds both to the psyche and the credit report" (Take the bankruptcy quiz: Are you headed for disaster?)

Bankruptcies in the United States were abundant last year, with more than 1.4 million chapter 7, 11, 12 and 13 filings through the end of 2011, according to data from the United States Courts. The reasons individuals or businesses file for bankruptcy varies from person to person, but one thing's certain--going bankrupt means that one must declare complete legal insolvency. When you're in over your head and can't pay back your debts, it may seem like there's no other alternative.

But like anything in money and life, myths abound. Going bankrupt doesn't always mean that a person was irresponsible with their money and seeks a bailout. And if you're in financial trouble, filing for Chapter 7 doesn't have to be your first, or your last choice. There are a few preventive measures and last-ditch moves you can take to avoid bankruptcy and get back in the black ... hopefully, for good.

1. Settle/negotiate your debts. Commonly, Chapter 7 bankruptcy is a liquidation--a wiping clean or erasing of your debt. It can be dangerous for individuals because it can mean relinquishing your assets or property. If you're on the brink of filing for Chapter 7, it is possible to hold onto your money and still pay back your creditors by settling your debts instead.

Debt consolidation is an arrangement with lenders to repay your debts without losing any of your assets. In this case, the person thinking of bankruptcy consolidates their debts into a single loan with one monthly payment, and at a lower interest rate.

Debt settlement is similar--like debt consolidation, it means that a person must negotiate some kind of deal with creditors. If it's likely they'll get their money back, most lenders will work with you to devise a reduced payment plan schedule. This may include waiving your current payments if you agree to make larger payments down the road to make up for the delay. Reducing you debt in this way is often looked at in terms of the snowball approach, paying smaller bills first and working your way up, or the avalanche method, paying down larger debt and decreasing payments as you go.

The chance to pay down your debt keeps you in control of your finances and away from having to file for bankruptcy.

2. Sell your property. In a Chapter 7 case--total bankruptcy--your property is put up for review by a trustee, who makes the decision on what to sell or liquidate so your claim can be settled. You can avoid this altogether by being proactive and selling some of your belongings before bankruptcy becomes an option.

If you're in debt, consider what you can afford to part with. Do you have a second car, a collection of antiques, or other valuables? Many people consult with an appraiser so they can determine the value of their property. This doesn't mean you need to clear out your home, but taking to CraigsList, eBay, or a public auction may earn you some much-needed funds.

Even if this approach only raises a minimal amount of cash needed to pay off some debt, it's much better than being forced to surrender your property in a bankruptcy filing.

3. Borrow money from family or friends. It takes a lot of pride-swallowing to ask a parent, sibling or trusted friend for financial help. Many personal relationships have been tainted over money, but if you're this close to going bankrupt, don't be ashamed to make the approach--just make sure that it will be worth your time and their money. Make a budget and see how much money you'll need to raise to avoid bankruptcy; figure out what you've been able to afford, and you'll know how much more to ask for.

Asking your family for money when you're in danger of going bankrupt involves the utmost trust. Ask yourself: Are they 100 percent on board to help you? Will their financial generosity really help to solve your problems, or will it be a "Band-aid" approach to delaying your pending bankruptcy? Most of all, have you considered how you'll pay back not only your creditors, but your family, in time?

4. Restructure your mortgage. If you're paying off your home, another method is to restructure or refinance your mortgage. By arranging a new mortgage payment plan, you may be able to save some money to put toward paying down your debt. It's worth it if you can avoid bankruptcy or getting your home foreclosed.

There are two basic ways changing up your mortgage can aid you in averting a bankruptcy filing. First is to negotiate an agreement with your housing lender to reconfigure your mortgage under a new payment plan. See if you can devise a new or temporary payment schedule under the same terms of your original mortgage. A second approach is to refinance your mortgage altogether, which may include applying for a lower, adjustable interest rate stretched out over a longer period of time. The money you save on the front end can be useful in paying off your remaining debt and staving off the threat of bankruptcy.

5. Make real sacrifices. Sometimes the most surefire way to save money is to simply cut back. If you're teetering close to the edge of a Chapter 7, reassess your budget and get rid of unnecessary expenses. Are you in over your head on your credit cards? Can you do without eating out or going to the movies? Canceling that gym membership or cable bill, albeit temporarily, can free up a lot of money.

Distinguishing your wants and needs--say, those frequent shopping trips to the mall vs. paying your electricity--is all part of learning how to save money and reduce your debt. Start living within your means and spending less than you earn, and the savings will add up.

If you find that going it alone doesn't work, one alternative is to consult with a credit counselor or personal finance consultant to get your finances back on track. In this case, your No. 1 priority is rearranging your budget so bankruptcy isn't even an option.

Trying out some of these suggestions could go a long way in helping you avoid bankruptcy.You may find that following one, all or a combination thereof makes all the difference that you need. It will be difficult; there's no quick fix or easy solution to digging out of debt. But like starting a new diet or fitness plan, it requires discipline and a completely new lifestyle approach to the way you handle your finances, and make your money work for you, not your creditors, in the long run.

Paul Sisolak writes for www.GoBankingRates.com, which provides readers informative personal finance and investing content, as well as the best interest rates on financial services nationwide.



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