Are you on the brink of financial ruin? Learning how to avoid bankruptcy is vital because it can reduce your credit score by as much as 200 points. Also, a bankruptcy will stay on your credit for at least seven years.
To avoid bankruptcy, create a sound financial plan. Assess your finances, and cut your expenses.
After, work with your loan providers to get a forbearance or a lower payment. If you’re struggling with business debt, you can avoid company bankruptcy by borrowing additional money or trimming operations.
This article will explain how to avoid bankruptcy and overextending finances. Read further to know more.
Assess Your Finances
Conduct a full assessment of your assets and income. First, determine if you can make payments in the coming months.
Then, list all of your monthly income, including unemployment income. Record your net income as well. Your net income is the amount deposited into your account after deductions (i.e. taxes).
After, add up all expenses in the form of bills, mortgage payments, groceries, etc. Subtract your expenses from your net income. The leftover amount will go toward your debt obligations.
Add all minimum monthly payment debt obligations. Subtract this number from the monthly income.
Develop a Plan
If your debt and expenses exceed your income, strategize for the future. Will you make more money in the coming months? If so, include additional income opportunities in your calculations.
If there are no job prospects on the horizon, look for other moneymaking ventures. Ask yourself two key questions:
- Can you sell anything around the home?
- Can I make extra money from a part-time job or a freelance gig?
You can find many online jobs that will require diverse skills. Further, more companies are offering outsourcing and freelance jobs instead of traditional work opportunities.
Besides additional work, look for ways to save money. If you need clothes in the future, shop at thrift stores. You can reduce your grocery budget each month. Plus, you can look for the best deals wherever possible.
Your local grocery store may provide coupons. You can also search online for digital coupons.
Work with Your Lenders
Officials encourage struggling homeowners to work with their lenders to get relief. If you’re swimming in debt, contact your lenders to work out a payment plan. In many cases, loan providers may put a freeze on your payment schedules.
In response to the covid crisis, many mortgage companies have created relief programs for qualified borrowers. If you have a mortgage, ask your loan carrier if you can apply for a forbearance.
Forbearance means the lender will either suspend or reduce payments. If you get a payment suspension, you can resume payments at a later date, allowing you to improve your financial situation in the meantime.
Refinancing your mortgage is another option. You can refinance your mortgage to get a lower interest rate or payment.
You can come to an arrangement with other lenders that provide:
- Car loans
- Credit cards
- Student loans
- Business loans
In some cases, business loans may be too much of a debt burden. If you’re considering an SBA loan bankruptcy, for example, this option could make sense depending on what type of business entity you have.
If you still feel lost, contact a credit counseling agency for further guidance. A counselor can assess your finances and help you craft a viable path forward.
They can help you create a sound debt management plan (DMP). They can even negotiate a lower interest rate or balance on your behalf.
Seek Help From Your State Government
Unfortunately, the federal government has no mortgage relief program for homeowners who don’t have a government-backed mortgage. However, you may find relief from state or local governments.
Some utility providers are offering relief for struggling customers. For instance, states like California are offering payment-assistance services for utility bills.
Borrowing money can be tricky, as you don’t want to add more debt during this difficult time. If you must borrow money, you can take out a line of credit if you have equity in your home.
In some cases, you could borrow up to 85% of your home’s value. You can use the money to pay off debts and other obligations.
Borrowing from Family and Friends
If you don’t feel comfortable borrowing from institutions, family and friends can help you. They may also give you money as a gift.
If you need to borrow money, you’ll be in a better position dealing with people you know. However, note the agreement in writing. Also, outline the payment plan and the loan terms.
Tap Into Your Savings
You can withdraw money from your retirement account, but you could face a penalty or a higher tax bill. If you withdraw money from an IRA before 59, you could face a 10% penalty on the amount withdrawn.
Consider the IRA option if you must pay short-term expenses. Moreover, use any savings that you have.
How to Avoid Bankruptcy the Right Way
If you want to know how to avoid bankruptcy, try to save money wherever you can. You can reduce your grocery or entertainment budget. Cutting expenses can get you through hard times, especially if you foresee a better future in the coming months.
You can also contact your lenders to work out a short-term or long-term payment plan. For additional help, contact your state government to see if local relief programs are available.
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