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Apr 19

Drowning In Financial Despair? How To Avoid Bankruptcy (And When To File)

Reading Time: 3 mins

You’ve been living on a bare-bones budget, scrimping, saving, eating ramen noodles to pay down your debt… and still, the creditors are banging down your door.

Filing for bankruptcy can send you into a spiral of despair, forcing you to ask questions like

Where did I go wrong? What did I do to deserve this? Am I a failure?

If you’re facing bankruptcy or wondering how you can avoid filing, you are not alone. Many families are faced with this reality every year. If you’re afraid of drowning in debt, let knowledge be your life raft.

Let’s explore what it means to file for bankruptcy, how to avoid it, and when to know it’s time to file.


What Does It Mean To File For Bankruptcy?

When you file for bankruptcy, you are essentially declaring an inability to pay your debts. The government created these laws as a last resort option to tackle insurmountable debt, but choosing this path is by no means an easy way out.

When you declare bankruptcy, any lenders and debt collectors on your tail are legally required to stop calling, writing, or suing you for any outstanding money you may owe. It’s a lengthy procedure that will turn your world upside down but essentially leave you with a clean (albeit, potentially bare) slate afterward.

Filing for bankruptcy gives you the opportunity to wipe a portion of your debts. Depending on the proceedings and the type of bankruptcy your lawyer recommends you pursue, you may have some assets liquidated or be assigned a repayment plan. Keep in mind that not all debts are wiped; you will likely still be required to pay child support, outstanding student loan balance, and more.


How Can I Avoid Bankruptcy?

Many who are considering filing bankruptcy feel panicked, like they’re crushed by their debt and there’s no way out. But what people fail to realize is that bankruptcy isn’t here to ruin your life but bring you out of your financial despair, albeit it has some repercussions, but they’re things you can recover from in time. Nonetheless, if you can avoid bankruptcy, that’s, of course, the option you want to go for. In order to do that, you’re going to have to avoid building up large amounts of debt. Let’s discuss how to do just that.


1. Stick To A Strict Budget

If you’re looking to avoid bankruptcy, make sure all spending is accounted for. Create a budget and stick to it. Don’t splurge on nights out, make your morning coffee at home, and cancel your streaming services.

There are budgeting websites like Mint that will automatically synch to your bank accounts and categorize spending so you can monitor where your money is going.


2. Prioritize The Essentials

Be sure the essentials are taken care of before you spend money on anything else, including paying your debt down. Does your family have food, water, shelter, and medicine? Prioritize those areas before you consider an extraneous purchase or begin to tackle a credit card bill.


3. Find A Financial Counselor

Consider investing some money into a session with a financial coach. A professional will create a custom plan to minimize your debt so you can begin to pay down what you owe and avoid bankruptcy. At the very least, a fresh pair of eyes can add some much-needed perspective to your situation.


4. Live Without Unnecessary Luxuries

As mentioned above, prioritize the essentials and live within your means. Vacations, jewelry, cars, and new clothes will have to wait. Take your budget seriously and live without unnecessary luxuries (for now!) to pay off debt and avoid bankruptcy in the future.


How Do I Know It’s Time To Declare Bankruptcy?

If you have exhausted all of these ideas and still find yourself swimming in debt, you may consider consulting with a lawyer and filing for bankruptcy. While it’s important to pay down your debt, it’s equally important to know when to stop fighting and consult a lawyer. Sometimes bankruptcy is the best option to grant you a fresh start.

It’s a little know fact, but even frugal guru Dave Ramsey filed for bankruptcy in the 1980s. He bounced back to build a $200 million net worth and has dedicated his life to helping others live debt-free.

Even though filing for bankruptcy can feel scary and isolating, you are not alone. Just like Ramsey and many others before you, you have the power to get past this phase of your life and build a better you.


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