If you don’t have any income coming in to pay off unmanageable debt, it might be time to consider wiping it out in bankruptcy. If you qualify, you’ll be able to get rid of credit card balances, personal loans, and medical bills within a matter of months. It’s important to realize, however, that filing for bankruptcy will impact your credit score for seven to ten years, so you’ll likely want to explore other options first.
(To learn about bankruptcy fees, read Chapter 7 Bankruptcy: How Much Does It Cost?)
Evaluating Your Finances
If you’re making an income, you’ll want to begin by figuring out where your money goes each month. You can start by gathering bank account and credit card statements and pulling your credit report to find forgotten delinquent debt. (You’re entitled to a free credit report each year at www.annualcreditreport.com.)
After you determine how much you owe, you’ll want to list your expenses. You can take advantage of the budgeting tools offered by some banks. They’ll let you see how much you’re spending at a glance. Also, you won’t want to overlook your credit card usage, especially if you use credit to cover necessities.
Can You Cut Expenses?
Next, you’ll want to evaluate whether you can make a dent in your bills in a reasonable amount of time. Here are some tips to consider.
- Create a debt priority list. Make sure to list things that must get paid. Then, you can make thoughtful choices about how to spend any remaining funds. For instance, do you need a new outfit or can you make do with what’s in your closet? Or perhaps you’d be able to find a deal in a consignment store or thrift shop. You’ll probably be able to come up with other ways to simplify, downsize, substitute, or maybe even forego expenditures altogether. Ultimately, you’ll want to divert as much money as you can toward your debt.
- Stop using credit cards. If you continue to use your credit cards, you’ll probably never pay them off and will, in fact, increase your debt—especially if you use credit to make up the shortfall in your budget each month. By some calculations, you could end up paying $20 for a $5 cup of coffee (or $200 for that $50 pair of shoes) when you figure in the interest. If you’re deep in debt you’ll need to put aside the credit.
Can You Find More Income?
If you’ve stretched your budget to its limit and still need more funds, consider looking for ways to increase your income. Here are a few ideas:
- Take advantage of overtime or extra holiday pay if your employer offers it.
- Get a second job.
- Use your bonus or tax refund to pay off a credit card.
- Start a business that requires little or no upfront costs.
- Offer consulting services or freelance in your field.
- Sell furniture, housewares, collectibles, jewelry, art, or even clothing that you don’t need.
Attacking Your Debt
If it looks like you’ll be able to tackle your debt on your own, you’ll need a system. Although many debt-reduction plans exist, one of the most popular—and easiest to follow—is the “snowball” method. Here’s how it works:
- Rank your accounts according to their balances.
- Timely pay at least the minimum amount due on all your accounts to avoid unnecessary late fees.
- Pay extra on the account with the lowest balance, adding as much as you can to the minimum payment, and, when you’ve paid it off, apply the amount you’d typically have paid toward it to the account with the next lowest balance.
- Continue this pattern until you pay all the accounts in full.
(For more tips, check out Options for Dealing With Overwhelming Debt.)
Consider Credit Counseling
Some people find that they need guidance and encouragement to get out of debt. The non-profit Consumer Credit Counseling Service (CCCS) offers free advice and classes on budgeting and other personal finance topics. CCCS also offers a debt management plan that will consolidate qualifying accounts into one payment each month for a small fee.
When to File for Bankruptcy
It might be that you don’t have enough money to put together a debt repayment plan. If it’s not feasible to salvage your finances, consider the following:
- Are you judgment proof? If you don’t have income now and won’t in the foreseeable future, and you don’t have any property that a creditor can take, you might be “judgment proof.” If you are, it’s unlikely that you’ll need to file for bankruptcy. Your creditors won’t be able to take action against you. (Learn more by reading What It Means to Be Judgment Proof: Your Creditors Can't Collect From You.)
- Consult with a bankruptcy attorney. Sometimes your best course is to file for bankruptcy. A bankruptcy lawyer can evaluate your financial position and advise you whether Chapter 7 bankruptcy or Chapter 13 bankruptcy will best meet your needs. Most offer a low cost or free initial consultation.
Questions for Your Attorney
- How long will it take me to pay off my credit cards?
- Will I be able to keep my retirement savings or the equity in my home if I file for bankruptcy?
- If I file bankruptcy, will I qualify for credit in the future?