Let’s talk about how to avoid bankruptcy and what you can expect to happen in each situation. Some options are more favorable than others, and once you’ve explored all of your options for getting out of debt, bankruptcy may be the best option after all.

1. Make more money

Actually, this is a no-brainer. When looking to get out of debt and avoid bankruptcy, the best thing to do is earn more money. I know, easier said than done, but have you really explored creative and innovative ways to increase your monthly income? Here are some of my suggestions that have helped past clients:

  • Rent a room to generate rental income;

  • Get a second job;

  • Apply for a raise at your current job;

  • Put the children to work and if they are working, STOP PAYING THEIR EXPENSES;

  • Have a garage sale or sell items you no longer use on Craigslist;

  • Start a side business repairing or reusing items for resale

2. Reduce expenses

There are only two sides to the budget ledger; income and expenses. Another better strategy is to not only increase your income, but also reduce expenses. Any money that is left over can be used to pay off debts and avoid bankruptcy. Here are some often overlooked ways to cut expenses:

  • Transportation: Reduce transportation expenses by taking public transportation to work. You would be surprised to note that your stress will decrease with public transportation. If you plan to drive, make sure your car is well maintained and paid for. Maybe you need to downsize and get a cheaper paying car to cut your car payments.

  • Insurance: Home and auto insurance costs can be lowered by looking at the number and type of insurance policies you have. If your car is older, consider eliminating any physical damage coverage (comprehensive / collision) and keep liability only. The liability limits of insurance policies should only be sufficient to protect your assets. So if your car and home are out of equity, then you don’t need a high-limit insurance policy. Also, look for insurance.

  • Utilities: Turn off lights and air conditioning. Cut the cell phone bill or cut the landline. Call each company to reduce the services that will reduce your bills or reduce them completely.

  • Groceries: Accept coupons only where it makes sense by purchasing your shampoo, soap, toothpaste, dishes, and laundry items on the coupon. Paper products are another great household item to buy with a coupon. Lower your grocery bill by planning your weekly meals before you shop and consider other meals for which you can use similar ingredients. Cooking at home can not only save you money because it is cheaper than dining out, but it can also help you live healthier.

The consequences of adjusting the budget by increasing income and reducing expenses are that it is a long-term lifestyle commitment that could take more than five (5) years to pay off all of your debts. Even after maximizing this strategy and applying all of your disposable income to debt, it may not be enough and you may still face bankruptcy. However, I still believe that knowing your numbers is an important step in financial transformation and debt elimination no matter which direction you take.

3. Debt payment

If you are behind on credit cards, they can be negotiated; sometimes for pennies on the dollar. This may seem like a money-saving strategy, but it can leave your credit score in shambles. First, you will need a sizeable savings account so that when you settle, you can pay a lump sum to pay off the debt. Make sure you get any agreements in writing and ask them to remove the business line from your credit report. You may not get a credit cleanup, but it doesn’t hurt to ask for one, either. This can be an effective debt elimination method if you only have one or two debts to work with. More than that and a bankruptcy case would be a cheaper, better, and faster way to get out of multiple debts at once.

The consequences of debt settlement are that not only will you pay off the debt, but your credit can be adversely affected as a result.