Debt can prove to be detrimental in many different ways and its effects are felt by a larger number of individuals than you can imagine. Household debt in the country totaled $14.64 trillion by early 2021. These included student loans, mortgages, auto and credit card debts. That is an extreme amount of money and it is not all a result of reckless spending. Circumstances beyond your control could cause you to get into debt. It could be due to unemployment, a medical condition, or emergency expenses. If you are drowning in debt, you might assume that filing for bankruptcy is your only out.
However, based on your circumstances, bankruptcy can potentially be avoidable. While declaring bankruptcy will discharge many debts, you may discover that what you get in exchange is much more than what you bargained for as a result of legal reforms established by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005. To avert these complications, do everything possible to avoid declaring bankruptcy. This blog will explain how to do so.
Most Common Reasons Why People Go Bankrupt
The statistics on bankruptcy in the United States are startling. The percentage of individuals who are incapable of paying off their debts has risen dramatically over the years and even Congress has since handled the problem with laws that make it more difficult to be eligible for bankruptcy. Below is a list consisting of the most common reasons for bankruptcy across all states.
Medical Expenses
According to a study released by the American Journal of Public Health, medical issues such as being incapable of paying huge hospital bills or time away from work, accounted for 66.5 percent of bankruptcies in the United States. Even if they have health insurance, most people are affected by high deductibles, copays, as well as loss of jobs. Medical expenses for rare or catastrophic injuries and diseases can quickly run into the thousands of dollars, wiping out personal and retirement savings and college tuition money. Sacramento Bankruptcy Lawyer has discharged millions of dollars of medical related debt and is ready and able to assist you if you are seeking for help.
Lost Jobs
Losing income, whether it is as a result of being laid off, being terminated, or resigning, can be overwhelming. Some employees are fortunate enough to get severance benefits but many others are surprised to discover pink slips on their workstations or desks with hardly any or no warning at all.
Not setting up an emergency fund to rely on just makes things worse and paying bills with credit cards could be catastrophic. In 2019, approximately 3 out of 10 Americans, according to Bankrate's Financial Security Index Poll, did not have an emergency fund on hand to offer support during a job loss or any other financial setback.
Poor or Excess Use of Credit Cards
Some individuals can't seem to keep their spending under control. Credit card debts, installment debts, auto payments, as well as other loan installments can quickly spin out of hand, leaving the borrower barely able to settle even the smallest payment on every form of credit. When the borrower is unable to borrow money from friends or relatives or get a debt-consolidation credit in any other way, bankruptcy is often the only option.
According to statistics, the majority of debt-consolidation strategies fail for a variety of reasons and many participants simply postpone filing for bankruptcy. Even though home equity credits can be a workable approach for unsecured debts in some situations, reckless borrowers who are not able to make their payments could face foreclosure.
Separation or Divorce
Marital dissolutions put both partners under a lot of financial stress in several ways. The attorney expenses come first, which could be prohibitively expensive in some situations, accompanied by a distribution of marital property, a ruling of support payments or alimony, and lastly the continuous costs of maintaining two different households after the divorce.
Legal fees alone would be enough to push some people to file, whereas wage garnishments to settle overdue child support and alimony can make it impossible for other people to cover their payments. When one spouse fails to deliver the support stipulated in the contract, the other is often left destitute.
Also, it is common for married people to have joint debt. For example, the married couple could have taken out a joint loan on a vehicle—or opened up a credit card jointly. Upon the separation or divorced, it is common for one of the spouses to take on that liability. However, if that person defaults on that debt, your name is still liable for the debt and the defaulted creditor can now come after you for debt in full.
Unforeseen Expenses
Property loss as a result of theft or a catastrophic event, like an earthquake, a flood, or a tornado, for which the proprietor is uninsured, can push some people into bankruptcy. Most homeowners are probably unaware that some occurrences, such as disasters, require separate insurance coverage.
People who do not have insurance for this kind of disaster risk losing not just their homes, but also a majority of their belongings. Not only do they have to pay for the repair of these possessions, but they will also have to find necessities soon after these disasters happen. While not typical, persons who end up losing their clothes in such a disaster may be unable to dress properly for work, which could result in them losing their jobs.
The Consequences of Filing for Bankruptcy
In specific circumstances, the BAPCPA mandates persons filing for bankruptcy to:
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Take part in compulsory credit counseling programs
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Continue to make payments to your creditors
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Take part in compulsory financial management training
Additionally, declaring bankruptcy does not protect you against lawsuits or evictions on future debt you accumulate----or a revocation or suspension of your driving permit when you have unpaid penalties. Filers also deal with their credit score decreasing, which could prevent them from borrowing money at normal rates for approximately seven years. This could result in more debt since the only loans available have exorbitant interest rates.
How to Prevent Bankruptcy
Even though unforeseen medical expenditures or unexpected unemployment can place anyone in a tight financial spot, persons considering bankruptcy may have gotten themselves into this predicament as a consequence of reckless spending or poor saving practices. An encounter with bankruptcy could serve as a cautionary tale of the necessity for a change in lifestyle in a world where spending beyond one's means has become very common. Below are some things you can take to help, regardless of the reasons that have caused your finances to become so perilous.
Make a Budget and Cut Costs
The first step in making a change is determining how much money you plan on spending each month. Making a budget is the fastest and most straightforward method to gain control over your spending patterns.
The next stage is to look for methods to cut costs. Keep your credit cards locked away somewhere (or ask a close friend to keep them safe for you) and make all of your purchases using cash regardless of whether it's actual money, a debit card, or through a phone tied to a bank account. (It is best not to revoke your cards otherwise you will lower your loan limit and raise your credit utilization rate, both of which are unfavorable for your credit score.)
If you cannot manage to support your standard of living on an all-cash basis, then consider downsizing. This applies to both huge and small purchases, since every penny matters. Some big-ticket downsizing options include:
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Consider moving to a smaller home
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Get or use a car that is older and less expensive
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Put your motorcycle, boat, or any other recreational vehicle up for sale
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Avoid taking a vacation
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Have a garage sale for items that are not needed
On the lower end of the scale, you should cut out all expenditures except for the bare necessities of food, shelter, clothing, and mode of transport to and from your workplace. This covers all of the small luxuries we claim to be “necessary”, including:
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Dining out
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Cable television
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Alcohol
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High-speed internet
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Cigarettes
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Magazine subscriptions
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Gym memberships
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Expensive presents
Gift-giving during the holidays could also be avoided. Spend enough time with the people you care about rather than buying expensive gifts for them. This process might not be enjoyable but it probably was all that fun that got you into this situation to begin with. If this describes you, you are not alone.
Increase Your Earnings
Even if you reduce your overhead, you might not be capable of earning much money to cover your living expenditures using cash. If this is the case, then now is the time to increase your income. Getting a job is by far the most straightforward way of doing this. Get a second job when you have one already. Find a third job when you already have a second one. The same can be said about your partner or significant other.
This might sound harsh but when you're on the verge of declaring bankruptcy, you must act quickly. Try out supplementary jobs such as the ones advertised on TaskRabbit or similar sites during hard financial times.
Your attempts to make extra income may also include selling a few of the items you purchased throughout your free-spending days. What about getting a roommate? Whenever it concerns covering your bills, more than one paycheck is preferable.
If you are eligible, look into government welfare programs for food and healthcare, mortgage deferment, and other forms of support, particularly when your unemployment benefits are about to run out. It's reasonable if any of this keeps you from filing bankruptcy until you can get back on the right track.
Consider Consolidating or Settling the Debts You Owe
Debt consolidation, which involves paying off high-interest loans with a single lower-interest loan, is frequently mentioned as a way to avoid declaring bankruptcy. It could be a good technique if you are eligible for this loan but you must have the strength of character to resist backsliding. Some individuals will go on a shopping frenzy because they do not feel pushed by their incapacity to settle their debts. Debt consolidation needs to be viewed as a long-term remedy rather than a quick solution.
Debt settlement is another option. In this situation, rather than lowering the number of lenders, the debt relief organization negotiates with those lenders to decrease the sum of your debt. The concept is that when you commit to paying a part of each financial obligation now, the creditors will overlook the remainder because they may not get anything else if you don't. Both approaches have advantages and drawbacks, so weigh them carefully before deciding. And, once again, do not go back to your old habits.
Consider Enlisting the Help of a Qualified Professional
When you're in a dilemma, enlisting the help of professionals can be beneficial. However, it is easy to become a victim of unscrupulous professionals. The usual sales pitch of "give me a small fee to assist you to get out of debt" is contradictory, and those seeking a miracle cure may fall prey to "credit counseling" companies.
Before you go this way, keep in mind that the quickest and probably the most practical advice you can receive is to seal your wallet and cut back on your spending. Should you still desire more specific counsel, do thorough research to see the options you have.
A Long-Term Change
You could find yourself on the verge of bankruptcy for several reasons, some being a consequence of factors beyond your control. To achieve more stability and security, one important step is to set up an emergency fund (or increase the size of the one you already have).
Identify any habits that left you more vulnerable to financial distress than you otherwise might have been, and keep an eye on them. Some individuals not only file for bankruptcy but also end up becoming serial filers, using their bankruptcy recovery as a reason to keep spending excessively.
You have to get yourself out of debt and remain out of debt if you're committed to bringing your finances back on course. It is conceivable to escape bankruptcy along with all the troubles that accompany it for former spendthrifts who are willing to begin practicing self-control.
You could be able to utilize some of these tactics to take charge of your debts and pay them off without the intervention of the courts. When you succeed, you will prevent having bankruptcy mentioned on your credit history.
When you do want to file for bankruptcy, be sure you understand how it functions. It's critical to make an informed choice after weighing all of your possibilities. For the time being, don't be concerned about your creditworthiness. Instead, concentrate on getting debt relief. Once the debt issues have been resolved, you can focus on restoring your credit.
Find a Bankruptcy Lawyer Near Me
Bankruptcy is a delicate subject that requires extreme caution. The Sacramento Bankruptcy Lawyer is available to provide you with legal advice on all bankruptcy-related problems and help you receive all the legal counsel you need to prevent bankruptcy. Call us at 916-800-7690 if you need consultation or representation in or around Sacramento, CA, today.
