How we sidestepped bankruptcy. I talk about my near bankruptcy experience.
Why do people go bankrupt? The avalanche can begin any number of ways. A few missed days at work. An unexpected medical bill. A sick child. Or maybe it all happens at once: your car blows up, your interest rate adjusts, your job gets outsourced. Then you start missing credit card payments. For some others, they are unluckier — having to deal with an unfaithful spouse, or a spouse who keeps financial secrets. Whether started by a single, small, seemingly insignificant snowflake or a stick of dynamite, every avalanche looks exactly the same when it’s headed your way.
My Near Bankruptcy Experience
For me and my spouse, life was going well — we paid our credit card minimum payments on time, until my first pregnancy. We were overjoyed when we learned the news and made the plan to get our finances in order so that we could live on one income.
Life, however, had different plans. While still in my first trimester, I began to experience complications with my condition, so I had to prematurely leave my stressful call center job. In the course of a few weeks, our income was cut in half — with only more bills to anticipate in the near future.
Our financial picture was NOT pretty. At that point, we took a good hard look at our financial situation. We had purchased our first home two years earlier (with no down payment and a fixed APR) and still had over $60,000 owed on it. Only four months earlier, we bought and financed a year-old car. We still had $26,000 left on student loans, and (gasp) over $20,000 in debt over six credit cards and lines of credit. Doing the math, we found out we had debts in excess of $115,000 including the house, and a negative net worth of nearly $50,000! Our household income was $34,000.
Of course, it didn’t take long for the credit card companies to call. And call. And call. We started avoiding the phone calls; we found that the representatives were consistently rude, inconsiderate of our situation, and difficult to communicate with.
Beware Of Those Bankruptcy Attorneys
So we turned to a bankruptcy attorney. Ours was kind, considerate and a great listener who explained our options to us. But of course, he suggested bankruptcy as our way out of our financial mess. But after doing a bit of research, we discovered a disturbing trend. All of the attorneys and organizations that were trying to “sell” bankruptcy as a solution, painted it in positive, “happy” terms: we get a clean slate, a fresh start, a second chance; and it’s simply a way to make the harassment stop. Other sources we found strongly suggested we do a deep analysis of our situation.
5 Steps We Took To Avoid Bankruptcy and To Reach Solvency
Here are the steps we took to sidestep bankruptcy. And no, you don’t have to go bankrupt!
1. Find out if bankruptcy is worth it.
You may find out that it isn’t. Analyzing our situation more carefully, we learned a few interesting things, the most important of which is that student loans cannot be wiped away. It turns out that we wouldn’t be able to get a “clean slate” on our largest single debt. The only items we could declare were our house and car. So in our case, only $20,000 of the $115,000 we owed could be “forgiven”.
While bankruptcy would definitely stop the creditors from calling, it didn’t seem worth the effort to get rid of such a small percentage of the debt, so we began looking for other options. As it turns out, there are other ways to get out of debt — to get that fresh start. They are not very easy routes, but in the long run, it ends up being the best way out.
2. We set up a strict budget.
We figured out how to budget and learned how to tell our limited amount of money what to do. We wrote about how we developed our budgeting system in this post on the Dave Ramsey Budget. We also stowed away about $1,000 as a “rainy day” or emergency fund — just in case.
3. We negotiated with our creditors.
After working on the budget (which we re-do each month for that particular month) and determining how much money we had to work with, we contacted each of our creditors to inform them of what we were doing. We also sent them letters to that effect. We told them that we’d do our very best to send them the amounts and payments that we could, and no more. At this point, we didn’t want to be a slave to our credit rating; worrying about it was just distracting us from our goal to get solvent.
4. We raised money whichever way we could.
Next, we worked as much as we could — not easy with a newborn — and sold a few things. In a year, with just simple belt-tightening, we were able to drop our total debt by $10,000. We were able to save another $4,000 by settling a debt with a credit card company. Slowly, but surely, we are able to get our debt under control.
5. We opted for a lifestyle that would help us financially.
We made certain lifestyle decisions to help us resolve our financial issues. And while we still have a heavy debt load, we are working slowly to get out of debt. We are now a military family, having enlisted for the extra monthly income, student loan repayment program, and signing bonus. We celebrate every time we pay off a debt. And every time we look into our son’s eyes, we remember why we will never use credit again.
Contributing Writer: Rachel Strong
Copyright © 2009 The Digerati Life. All Rights Reserved.
{ 20 comments… read them below or add one }
Awesome post! I feel our culture is too quick often time in pulling the trigger on bankruptcy. Often time this is because they don’t know any other options. This will help people make sure they consider alternatives before filing.
Great guest post!
Those BK Attorney’s are just looking to make a buck so they are always going to try to get you to actually file, even if there are ways out without the attorney. Bankruptcy has gotten harder to file but people still do it even when it isn’t necessary. Glad to see you clawed your way out, it gives you better sense of self then taking the easy way out.
Congratulations for your debt reduction success. You made the difficult decision to live and die by a budget, which is much easier said than done. Due to changes in the bankruptcy laws in recent years, the value in declaring it has declined a lot. You mention at the end of your post that you will never use credit cards again. This is an awesome pledge. At the same time, I hope you consider the difference between keeping a credit card account closed versus cutting up and never using a card. Having one credit card account open — while not physically having the card that corresponds to the account, will help you to maximize your personal finances since a barrier to the best terms for all sorts of items is not having a current credit history.
Good for you, Rachel. That’s the right way to do this.
I can relate to this because my mother was into this credit card debt thing. I pity her every time she received the bills. Now, we are also into belt tightening. But sometimes there were unavoidable circumstances that need to be attended too in spite of the tight budget. Our goal for this year is to minimize the huge debt or to get rid of debt before the year ends.
It sounds like you made the right choices, it must be hard for people that think the only answer is the attorney route it is nice to see that there are other alternatives and that it can work for people. I have always tried to be sensible with money but sometimes the unexpected happens and you need a little bit extra each month to make things work. I had to take a second job and now make money from home as well as from my main job, it is all about being smart with what you have and choosing for yourself rather than have decisions made for you.
Great tips… It’s always best to get advice from someone who’s experienced (or in your case, nearly experienced) something. I’ve been in a similar situation before, so my family & I did several lifestyle changes. In the end, after the finances were fixed, we became more happy and our lives were much simpler anyway.
comparatively nice points. A certain read.
sherin
The Money Maniac
Good Advice! I have been there and to know now what I didn’t back then is an eye opener. Bankruptcy will haunt you always, no matter what anyone says. It has been twelve years ago for me and I still have problems with it on my record. I now have good credit but it hinders my chances of being able to get credit if I need it. Seek out other options before taking that drastic step, try godebtrelief.com.
Thank you for sharing your story; I learned a lot from it. Best wishes.
Great post Rachel. One question that comes to mind. Have you figured out where it all went “wrong” in the first place so that you’ll not end up in the same situation again?
Getting your debt down by 10k in one year must have been something. Your story is nice and shows what a little resolve can do.
I also think it’s important to consider the ethical dimensions of bankruptcy. It’s like telling everyone you’re not going to pay them back – it amounts to having stole all those goods and services. It would be like the US declaring bankruptcy so that it doesn’t have to pay the rest of the world back all the money they lent to the US. That would be brutally dishonest. So consider that aspect of bankruptcy, too – it hurts everyone.
People going bankrupt sometimes reminds me of people getting divorced. Both often appear to be the easier way out, basically giving up. With a little planning and work they may be saved, well done.
I was wondering will creditors are willing to negotiate a payment plan even its been 5 years overdue? Trying to get my credit back together and thought of bankruptcy cause some of my done it. I just want to know my options and found this. Thanks for the writing.
Thanks and I guess we all have the same problems, but just being told in different ways.
Congratulations, Rachel! Your story is a terrific example of what can be accomplished with some grit and determination. Avoiding bankruptcy, living on a budget, negotiating settlements, this really is a great example of getting out of debt the hard way. Far too often, attorneys push people in the wrong direction and consumers don’t do enough homework to know better.
@PK – if you have a 5 year old debt, there are statutes of limitations in each state. Many are around 15 years, so you’re better off dealing with the debt. Also, after 5 years, your original creditor has already written off the debt and it’s likely been bought and sold by third part collections companies many times over. Your best bet is to contact the original creditor’s ‘recovery department’ to arrange for a settlement in full. If you’re not actively receiving collections calls, don’t call them until you have the money to settle in full through a single payment.
If you are receiving calls, be sure to get any payment arrangement in writing that lists the original creditor, the current agency handling the debt, the total due, and the negotiated settlement. Third party collections is a shady business to be sure, so you’ll want to take every precaution to protect yourself. This means, do NOT give them any of your bank account information, do NOT send them a personal check, and do NOT trust them. Debts this old require a little more care, and should you negotiate a settlement and pay in a lump sum, send them a cashier’s check only after you’ve received the settlement terms in writing.
To better understand how to work with collectors, you can check a post from 3/20 on my blog.
It is more likely for one to lose his or her home if he or she files for Chapter 7. The reason being that under this type of bankruptcy, one’s property is liquidated in order to repay existing debts and balances. Once all properties are sold, any extraneous balances are usually forgiven.
-DB
Even if it makes me lose a client or two, I always tell prospects that filing for bankruptcy is not the only option they have. Instead, I give them literature to read at home to help them balance and weigh their own situations.
It’s not always worth it, and sometimes, you lose when you file.
Just read your story it pretty much resembles my life at present:
– house in negative equity
– girlfriend pregnant
– struggling on 2 salaries and no idea how to cope on one so looking at debt solutions.
I’ve been looking at attorneys but so far not spoken to one and have been considering debt settlement too. Basically I just want to get our finances in one place with a low payment that we can afford when my girlfriend comes out of work.
I’ve also read Chapter 7 Bankruptcy information but think it sounds a bit extreme for where we are at and am looking for something a bit more informal.
What do you think about this debt settlement? I’m reading mixed reviews about it.