Bankruptcy is a tool that individuals and businesses utilize to take control over their debt. This is done by either discharging the debt or restructuring it into a payment arrangement with creditors. While no one wants to go through bankruptcy and the associated credit hassles, many times there is just no other solution.
Sometimes, bankruptcy can be avoided just by following a few specific financial tips.
1. Get Organized
The most important aspect is to find out what you really earn and figure out where exactly that money is being spent. Organizing your finances is the first task. So, collect all your receipts, statements, and pay stubs that you can find. Put together a spreadsheet that shows every penny you spend per month.
2. Live Within Your Means
Again, track your spending habits. After you pay your bills each month, how much do you have left over? This is a figure that most of us grossly underestimate because we forget about the costs that eat away at our income. How much do you spend on cell phones, gas, heating/air conditioning, groceries, eating out, entertainment, and your daily cup of coffee? These, believe it or not, can add up to hundreds of untracked dollars monthly.
3. Put Your Budget to Work
Here are four expense categories that you should have in your budget:
- Fixed Expenses. These include Mortgage, rent, property taxes, home/vehicle/medical insurance, and all utilities. Your entire household budget each month should not exceed 32% of your net income. Your maximum rent expense should not exceed 25% of your income and your maximum mortgage should not exceed 30% of your income.
- Incidental Expenses. These include repairs to your home/vehicle, cost of gas, groceries, pet supplies, child care, spending money, clothing, and medical and personal care.
- Debt Repayment. Include payments on student loans, car loans, and lines of credit. Your total Debt Service Ratio should not exceed 40% of your net worth.
- Savings. Include your retirement savings, education savings, emergencies, and medical costs.
4. Compromise and Cut Unnecessary Expenses
In order to avoid bankruptcy, you have to commit to cutting expenses.
- Entertainment. This includes dining out, attending movies, and memberships to clubs and/or gyms.
- Clothing. Choose alternatives to ‘brand’ names.
- Groceries, meals, and snacks. Find alternatives to our daily coffee habit, take your lunch to work each day, and see how you can cut your grocery bill each month.
- Transportation. Look into refinancing your car or get a less expensive one. Public transportation or car pooling can also save you money each month.
- Rent/mortgage. Look into possibly downsizing or getting a roommate or check into refinancing your home if possible.
5. Pay Down Your Debt
Make a payment schedule that chips away at what you owe. Only paying the minimum only prolongs the repayment period and can add thousands of dollars to the total cost. Contact your credit card companies and request they lower your interest rate. Consolidate your credit cards. This can be done by transferring the balance of your credit cards onto the card with the lowest interest rate. And then, cut up your old cards!
6. Get Expert Bankruptcy Advice
Contact us and we can guide you in the right direction on your options and give you any advice you may need!