Prevent Filing Bankruptcy & Avoid Bad Credit
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How to Prevent Bankruptcy

For some people, filing for bankruptcy is a wise financial decision that can help them handle their finances more responsibly in the future. Bankruptcy may make financial sense for those who face a sudden loss of income as a result of unexpected unemployment, an accident with huge medical bills or accumulated credit card debt. However, bankruptcy stays on your record from seven to ten years if you file for Chapter 7 or for seven years if you file for Chapter 13 and affects your credit score.

The following are tips on how to prevent bankruptcy.

1. Know your budget

The most important step is to know your budget, how much you earn and how much you spend every month. This will give you a clear idea of where you stand financially and where you need to go to avoid bankruptcy.

2. Cut back on spending

Once you know what you spend, you should start cutting back on spending. If you spend more than you earn, sooner of later your debt will be unmanageable. On the contrary, by cutting back on unnecessary spending, you will see considerable savings after a few months, which will allow you to balance your monthly budget and cover for your fixed expenses, including mortgages, car loans, credit cards and so on.

3. Make higher payments on your credit card

Generally, minimum credit card payments range between 1% and 5% of the outstanding balance. This means that half of what you pay goes towards lowering your balance. If you make higher payments on your credit card regularly, you will save yourself thousands of interest in the long run. In fact, by making only the minimum monthly payments will mathematically bring you on the verge of dealing with a mounting debt.

4. Explore debt consolidation

Before deciding to file for bankruptcy, explore the possibility to join a debt consolidation program, which allows you to transfer all your debt at a lower interest. You will make a single lower monthly payment to the settlement company, which will be disbursed to your creditors. What you need to control though, once your debt is consolidated, are your spending habits. Often, immediately after consolidating, many people go on a spending spree feeling free from the pressure of defaulting on their debt.

5. Other options

You may also explore the possibility of getting a second job to maximize your monthly income or take the advice of a financial advisor on how to refinance your mortgage. You may also set up a debt management plan with any counseling company affiliated with the National Foundation for Credit Counseling (NFCC). All these are effective alternative ways to avoid bankruptcy.

6. Credit report

Regardless of which solution best fits to your financial situation, make sure to monitor your credit report every month in order to keep track of your debt as it accumulates. If you notice anything that doesn't make sense, file an online dispute. Moreover, sites like 'Annual Credit Report' can provide you with a free credit report each year, where you can make any necessary change to make your record accurate and improve your credit score.

In short, bankruptcy involves serious consequences including bad credit record, higher insurance premiums and higher interest rates on new credit. Once you file for bankruptcy, you are classified as a bad credit risk consumer, which means that the interest rates on a loan will be higher as a result of your poor credit rating. So, it's better to try and follow any of the above steps, if not all of them, to prevent bankruptcy and its serious ramifications.