It’s hard to get through life without using credit, but too much debt can be a drain on both your finances and your well-being. Filing for bankruptcy is likely the best way to reduce your bills quickly, but there are other ways to get the job done.
Filing for Bankruptcy
In a Chapter 7 bankruptcy, you can discharge (wipe out) most unsecured debt, like credit cards and medical bills. You can also retain obligations you’d like to keep, such as car loans and mortgages.
The trade off with a Chapter 7 bankruptcy is that you might lose luxury items that aren’t protected (exempt), such as a boat, collection, or expensive electronics. Most people can keep everything that they own, however, because most states will allow you to retain your furnishings, clothing, a modest car, your qualified retirement account, and some home equity.
If you don’t qualify for Chapter 7 bankruptcy, you’ll want to consider a Chapter 13 filing. In this type of bankruptcy, you enter into a repayment plan with your creditors for three to five years. Although it isn’t necessarily a quick way to get out of debt, it can effectively stop collection efforts and help you get your finances in order. A knowledgeable bankruptcy attorney can assess your particular circumstances and help you decide which bankruptcy type is right for you.
(Learn more in Choosing the Right Type of Bankruptcy: Chapter 7 or 13.)
Making a Plan
Not everyone wants to file for bankruptcy, however. If you fall into this category, you’ll likely want to start by trimming unnecessary expenses. After eliminating all obligations that you can, the next step, if possible, is to increase your income.
Here are a few ideas:
- work overtime
- sell things you don’t need
- get a side job
- get a roommate, and
- watch for “found money,” such as a bonus, tax refund, or inheritance.
After you identify your necessary expenses and pull together all possible income, you’ll want to pay your bills in a methodical manner. Using one of these bill payment methods should speed up your progress:
- Snowball method. List debts from smallest to largest balance (ignoring the interest rate). Pay the minimum payments on everything but the smallest debt. When the first gets paid off, use all of what you were paying on the smallest debt to pay on the next debt in line, and so on.
- Laddering method. Pay as much as you can toward the debt with the highest interest rate and maintain minimum payments on everything else. Again, when one debt is paid, you’ll use those funds to pay toward the debt with the next highest interest rate.
For some people, debt consolidation can be a good option. You’ll take out one personal loan and use it to pay off multiple debts to give you a more affordable monthly payment. You’ll want to be careful with interest rates and repayment terms. The good thing about debt consolidation is that you get a fixed payment and fixed term. At the end of the repayment period, the balance is paid off.
Working With a Credit Counseling Agency
Sometimes you need professional help to get your debt under control. Credit counseling agencies can help you prepare a budget, make a plan, and negotiate with your creditors. You’ll want to be cautious when choosing a credit counselor, however. Make sure that you are dealing with a reputable organization, such as the National Foundation for Credit Counseling or the Financial Counseling Association of America. Credit counseling plans can take a few years to complete, but at least you’ll know that you’re making progress toward getting rid of your debt.
Questions for Your Attorney
- Do I qualify to file for Chapter 7 bankruptcy?
- How much would my Chapter 13 payment be?
- Would going with a credit counseling agency be a better option?