Updated: May 15
Bankruptcy is a tough financial option that many Americans face every year. Sometimes, there is just no avoiding it. However, for some there are warning signs and certain choices that can help keep your finances in good standing. Here are a few strategies to use when avoiding bankruptcy.
Tips for Avoiding Bankruptcy & Financial Trouble
The simplest advice for avoiding bankruptcy is to follow common financial advice. It’s all about balancing earning and spending as well as having money for emergencies. If you are just starting out on your own or maybe have a growing family, making consistent good choices. Read through this list to see some examples of good financial practices for your personal finances.
Create, follow and maintain a household budget. Not only do you need to use a monthly budget, but you need to continually update it to fit your needs. It cannot be a static document.
Set SMART goals to achieve what you want. Reducing debt, saving for a down payment or retirement goals are all great examples of how you can apply SMART (Specific, Measurable, Achievable, Realistic, Timely).
Use credit wisely. Bankruptcy and credit card debt go hand-in-hand. If you cannot pay down the balance at the end of the month, you should not be making that purchase on a credit card.
Have an emergency fund of 3-6 months of living expenses.
Manage your expenses based on the community spending guidelines.
Don’t take on too much debt. For example, consider paying off credit cards or an auto loan before taking on a mortgage.
What happens if you are already facing bankruptcy? If you are having trouble managing debts and expenses, there may still be alternate financial options that you can take. Avoiding bankruptcy may take some serious financial discipline or reaching out for help from professionals, like a non-profit credit counseling agency.
Avoiding Bankruptcy with Credit Counseling
Credit counseling is a financial service designed to educate consumers. You will learn how to pay off your debts and how to avoid debt in the future. You will also receive an overall financial analysis. Credit counseling helps consumers who are struggling with debt to better control their finances.
During a credit counseling session, each expense, interest rate, and other costs are organized and calculated. You will learn how much you earn and spend in a month. Plus, you find out how much you spend in a specific budget category. For instance, you may spend 50% of your budget on housing related costs rather than the recommended financial community guideline is 30%. Similarly, you may learn how much debt you are truly carrying.