6 Smart Ways to Prevent Bankruptcy
If you own a failing business that is drowning in debt and could no longer pay its staff, filing for bankruptcy is often your last option. It can eliminate your debt or help you only repay a portion of what you owe. However, bankruptcy not only leads to bad credit. It also stays on your credit profile for a minimum of seven years, severely hurting your chances of getting approved for future financing. We go over some ways to prevent bankruptcy in this article.
Bankruptcy and Bad Credit
Bankruptcy is a legal procedure that allows you to eliminate or reorganize your debt under a bankruptcy court supervision. It helps you settle your debts with your lenders and creditors for less than what they actually owe.
Although filing for bankruptcy can relieve burdensome debts, it doesn’t necessarily give you a fresh start. Sometimes it can mean losing your valuable properties and a portion of your income for debt repayment. It also doesn’t exempt you from the burdens that come with unpaid debts and fines, such as lawsuits, eviction and suspension of driver’s license.
If your bad credit-inducing financial problems, like taking too much credit card debts with high interest and frequently paying your debts late are a train ride, filing for bankruptcy is the final stop on the line.
The damage that bankruptcy does to your credit profile is severe, causing a drop of around 200 points or more. This is more damaging if you have a good credit score of around 700 or more because it could take you from a good score to a downright bad one.
Types of Bankruptcy
A bankruptcy record stays on your credit profile for several years, depending on the kind of bankruptcy that you file:
Chapter 7: You can quickly discharge your debts by surrendering your assets, which are then used to compensate creditors. It stays on your credit report for 10 years from the date of filing, regardless if your debts regardless if it’s discharged or dismissed.
Chapter 11: Exclusively meant for businesses, Chapter 11 bankruptcy restructures and reorganizes your debts and assets by allowing you to repay your creditors over time through a court-approved repayment plan. Instead of selling your assets to pay off your debts, you negotiate with creditors to change the terms of your loans. Like Chapter 7 bankruptcy, it will remain on your credit report for up to 10 years from the filing date.
Chapter 13: It allows you to repay all your debts through a court-approved repayment plan that cannot last longer than five years. You may your repayments through the court and then the court pays the creditors. In order to qualify for Chapter 13, you must have a maximum of $394,725 in unsecured debt and $1,184,200 in secured debts. Chapter 13 bankruptcy remains on your credit report for ten years from the date filed. If discharged, however, it will be erased from your records seven years after filing.
How to Prevent Bankruptcy
Because of the many inconveniences that a bankruptcy record on your credit profile can cause, it’s the last option you would want to consider if you are drowning in debt. Also, it’s best to seek alternative solutions to your mounting financial woes better finally declaring bankruptcy. Here are a few ways you can do to pay off your debts:
1. Sell some of your assets
Take a look around your home or business office for valuable properties that have a monetary value. Do you own a car, condo, rental property and other real estate properties that have a large amount of monetary value? Find a buyer and negotiate for a good price for these assets. Do you have fancy pieces of furniture, paintings, jewellery, clothes, collector items and electronic gadgets that may be worth a lot of money? Sell them on eBay, Amazon, MyDeal and other online marketplaces and use the profit to pay off debts.
Losing these assets and investments may put a damper on your financial security and a comfortable lifestyle, but it’s better to take the temporary discomfort and adjust to your new life than living miserable for a long time. If you don’t let go of some properties, it may be too late to catch up on your debts and avoid further actions from your creditors.
2. Maximize your income
If your startup business or entrepreneurial project is the cause of your financial problems and looming bankruptcy, get a new job to earn an extra income. Get a side hustle if you already have a job. If you have a regular job and a side hustle, get the third one. Clean houses or raise livestock if you can. Become a tutor, a virtual assistant or freelance coder or graphic artist if you have the skill. Offer your nanny, tradie or dog-walking service to your neighbours or friends if the opportunity arises.
You can also increase your income by taking in a new roommate or renting a part of your house or property. If you drive a new car, you can become an Uber or a Lyft driver. If your car doesn’t meet the requirements for ridesharing service, you can deliver food and other items through app-based delivery. Alternatively, you can have your vehicle rented or used it for an advertising medium.
The point here is that, if you want to make an extra income to pay off your debts fast, there are plenty of ways to do so. All it takes is just your extra time, energy, and willpower to get the jobs done.
3. Minimize your expenses
While you’re trying to maximize your income and raise funds to pay off your debts, do something about your financial lifestyle. Cut your spending with strategic budgeting and modest living. If you don’t know where to start, use the 60-40 Budgeting Rule, where you assign 60% of your takehome income to debt repayment and the 40% to your living expenses and essentials. You may also need to eliminate leisure and creative pursuits that take a chunk of your monthly expenses, including salon and gym memberships, out-of-town vacations and frequent trips to the bar or cinema.
If you run a business, cut down operating cost by using efficient machinery and equipment and laying off some employees.
All these temporary inconveniences can save you a lot of money in the long run, which you then can add to your debt repayment funds.
4. Borrow money from family and friends
Although generally, it’s not advisable to borrow money from friends and family members to avoid relationship strains, struggling on a major financial problem like a looming bankruptcy is an exception to the rule.
Don’t hesitate to ask for financial assistance if you need to. Before you approach them for help, calculate how much money you’re able to raise on your own then calculate how much you need from them. Do not also forget to present a plan on how you can repay the money you owe from them, especially once your financial situation improves.
5. Get a bad credit debt consolidation loan
A bad credit loan is a type of financing designed for people with bad credit profile or insufficient credit history. You can use the funds from this loan to consolidate your debt.
With a bad credit debt consolidation financing, you can merge all your existing debts, including credit card debts and secured car loan, into one single loan. Afterwards, you will pay for one periodical repayment over a period of two to seven years. While all types of bad credit loan typically have higher interest rates than standard loans, you can save money if the interest rate of your bad credit debt consolidation loan is lower than your other debts.
6. Get a professional help
A consumer credit counsellor can provide you with sound advice and negotiate with creditors on your behalf for a lower debt repayment and interest rates. They can also work with your creditors to design a debt management plan to repay your debts over a specified period.
This is the reason why those who plan to file for bankruptcy are required to seek credit counselling first. However, always be wary of unscrupulous credit counsellors who charge too much for their service. You might end up struggling more with your finances than actually making progress.
Loans For People With Bad Credit Offers financing for people who need to consolidate their debt or avoid bankruptcy. Call us on 1300 769 384 or fill out our Bad Credit Loan Pre-Approval form to get your finance sorted today.
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