How to Avoid Bankruptcy

People avoid bankruptcy with a few basic moves: cut expenses, increase income, and build a plan to repay what they owe.

Common strategies include:

• A bare-bones budget that cuts nonessential spending

• Extra income from a side job or selling unused items

• A debt payoff strategy, such as the snowball or avalanche method

• Debt consolidation through a new loan

• Credit counseling and a debt management plan

• Debt settlement through a company such as Freedom Debt Relief

Sometimes, even if you have a steady paycheck, a good income, and a well-organized life, it’s possible to still get into financial difficulties with too much debt. If your credit card debt has reached an unmanageable level, don't blame yourself, and don't feel bad. Just review your options for debt relief.

There are several ways to get debt relief and avoid bankruptcy. 

Bankruptcy

One debt solution that's available to all Americans is bankruptcy protection. You have the right to declare bankruptcy if your debts are unmanageable. Most individuals file Chapter 7 or Chapter 13 bankruptcy.

If you qualify for Chapter 7, you could walk away from your unsecured debts in a few months. If you earn too much to qualify for Chapter 7, you could choose Chapter 13. In that case, you'll likely be on a five-year payment plan (three years if your income is lower).

Bankruptcy could be the right choice if you:

• Have debts that are unmanageable, that would cause you severe financial hardship, and that you do not believe you are able to repay

• Want to stop debt collectors from attempting to collect on your debts

• Want to pay less than the total amount of debt that you owe.

There are also a few good reasons to avoid bankruptcy:

• Bankruptcy stays on your credit report for seven to 10 years.

• In a Chapter 7 bankruptcy, you could be forced to sell some of the things you own.

• In a Chapter 13 bankruptcy, you'll have to pay all of your disposable income against your debts for several years. Many people don't complete this plan.

• Bankruptcy is a public record.

• You don't get any say in how your debts are handled. The bankruptcy court makes the decisions.

Other debt relief options are available if bankruptcy isn't the right fit.

Cut Your Expenses

A lower monthly budget frees up money for your debts. Start with a simple list of your fixed expenses, such as rent or a mortgage payment, and variable expenses, such as groceries and entertainment. From there, review each category for costs to trim, such as unused subscriptions, dining out, or a car payment that's higher than necessary. Even small monthly cuts add up over a full year.

Increase Your Income

Extra income, even a modest amount, speeds up debt repayment. Consider a part-time job, freelance work, or gig work such as rideshare driving or pet sitting, that fits around your schedule. Unused items around your home could be another source of quick cash toward your balances.

Try a Debt Payoff Strategy

Two common strategies could help you repay multiple debts. The snowball method targets the smallest balance first, then moves to the next smallest balance once the first is cleared. This approach builds momentum through early progress. 

The avalanche method targets the balance with the highest interest rate first, which typically saves more money in interest over time. Both strategies work alongside minimum payments on every other balance.

Debt Management Plans (DMPs)

A credit counseling agency sets up and manages a debt management plan (DMP). Credit counseling agencies, also known as consumer credit counseling, are nonprofit groups that offer money management services. A DMP could help you deal with overdue credit card debt and other unsecured debts.

If you sign up for credit counseling and a DMP, you'll make a monthly payment to the agency, which will then distribute the money to your creditors. Your counselor will help you design a budget. They'll also ask your creditors to lower your interest rate and waive some fees.

Debt management plans are for people who have a good income but need help getting their finances under control. The plan is designed to fully repay your unsecured debt within three to five years. 

The credit counseling agency will ask you to close your credit card accounts. Closed credit card accounts could negatively affect your credit standing. Your score could improve over time if you make your payments on time and avoid new credit card debt.

Not everyone completes their debt management plans. If debt collectors are already calling, or if you have had a serious financial setback like loss of job or income, a debt management program might not help you.

Handle Secured Debt, Like a Mortgage or Car Loan

Debt relief programs generally work with unsecured debt, such as credit cards and personal loans, not secured debt like a mortgage or car loan. If a mortgage payment feels unmanageable, a few options exist outside of bankruptcy. 

• A loan modification changes the terms of the existing mortgage, such as the interest rate or the length of the loan. 

• A short sale allows the home to sell for less than the amount owed, with lender approval. 

• A deed in lieu of foreclosure allows the homeowner to return the home to the lender in exchange for release from the remaining mortgage debt. 

The U.S. Department of Housing and Urban Development (HUD) offers HUD-approved housing counselors who work with homeowners on mortgage relief options at no cost.

Debt Settlement Programs

Debt settlement is when your creditors agree to accept less than the amount you owe as payment in full. You may be able to settle debts on your own if you negotiate with your creditors. The process could be stressful. If you don't want to negotiate your own debts, you might prefer to work with a professional debt settlement company like Freedom Debt Relief.

Here's how debt settlement works when you enroll in a program:

1. Unsecured debts, such as credit cards, personal loans, and private student loans, are candidates for debt settlement.

2. Any debt you include in your program becomes an enrolled debt.

3. Debt Counselors help you review your budget and make a plan for how much you could contribute toward your debts each month.

4. You'll make a monthly deposit into a dedicated account. It's an FDIC-insured account at a bank. You always own and control the money in the account. Over time, the money builds up in your account.

5. Once you have enough in your account, Freedom Debt Relief negotiates settlement offers with your creditors. Freedom Debt Relief asks your creditors to accept less than the amount you owe.

6. You may choose to approve or reject the settlement offers from each creditor. Freedom Debt Relief handles the negotiations with creditors, but it's ultimately up to you to decide.

7. If you approve of the agreement, Freedom Debt Relief pays your creditor from your dedicated account.

8. The debt settlement fee is also paid from your dedicated account. A debt settlement company can't charge you a fee until it successfully negotiates a settlement, you approve it, and at least one payment is made toward it.

Most people complete a debt settlement program in about two to four years. This could be faster than a debt management plan or a Chapter 13 bankruptcy. Actual time to complete a program varies based on individual circumstances and program terms.

Debt settlement may negatively impact your credit.

If you feel like you're drowning in debt, you're not alone. Many Americans have fallen behind on debts or taken on more credit card debt than they can comfortably afford. If that's you, reach for a life raft. There are several good ways to get debt relief and avoid bankruptcy. Talk to Freedom Debt Relief to learn more.

How Melissa Avoided Bankruptcy

Here's the true story of an actual Freedom Debt Relief customer who used our debt settlement program to get rid of debt, avoid bankruptcy, and move on with her life.

Melissa N. was a homeowner and mother with a great job that paid well. The now-retired Fayetteville, North Carolina, resident explains that her debt built up over time, with an “I want it now” mentality, instead of “Do I need it now?” For many years, she used credit cards to purchase items she wanted. 

“It wasn't something that happened overnight,” she says of her mounting debt. “It was progressive.”

She tried to remedy the situation on her own by making bigger monthly payments, taking out a home equity loan, and doing balance transfers. 

“I thought, being an educated woman with a bachelor's degree in engineering, that I should be able to get out of this.” None of the steps she took changed the underlying pattern of debt.

When she made the first call to Freedom Debt Relief, she talked with a representative who explained the debt settlement program in detail. Melissa says she felt “confident that the program was what I needed.”

Melissa felt she wanted to avoid bankruptcy. She also felt responsible for her debt and wanted an option that helped her repay her creditors.

“You feel like you're drowning,” says Melissa of her spiraling debt. “Freedom Debt Relief was that life jacket.”

“It was the best decision I ever made,” she adds. Her only regret? “I didn't do it sooner.”