What is Bankruptcy? (And How to Avoid It!)
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If you’re struggling with your finances, you might be wondering, “what is bankruptcy?”
It was just a few months ago, that I thought we were completely bankrupt. I felt hopeless, and even though I wasn’t 100% sure what bankruptcy was, I convinced myself that this was it!
What is Bankruptcy?
Although bankruptcy can be presented as a “clean slate” or “fresh start”, it should not be approached lightly. Bankruptcy is extremely stressful and can affect your mental health, marriage, and even your physical wellness!
Bankruptcy should be the last thing that you do, after you have tried everything!
Overall, there are two types of bankruptcy.
- One type of bankruptcy is considered complete liquidation of your assets and is called Chapter 7 bankruptcy. In Chapter 7 bankruptcy, your assets can be sold to repay debts.
- The second main type of bankruptcy is called Chapter 13 bankruptcy and is a reorganization of your debt. In this case, you undergo more of a “payment plan” scenario.
I personally believe that with a little help, serious budgeting, and some creative side hustle action, you can reorganize debt YOURSELF and stay out of bankruptcy court.
Keep reading for tips on how to avoid bankruptcy!
What is Chapter 7 Bankruptcy?
- Chapter 7 Bankruptcy is an elimination of all of your debts.
- The whole process takes four to six months.
- Costs around $300 in fees.
- Requires one trip to court.
- This type of bankruptcy may be right for you, if your debt to income ratio is in no way manageable by reorganization of your debt (as in Chapter 13).
What is Chapter 13 Bankruptcy?
- Chapter 13 Bankruptcy is a reorganization of all of your debts.
- The whole process takes 3 to 5 years.
- There are debt limits.
- You must have a steady income.
- This type of bankruptcy may be right for you, if you have a great income but just need help reorganizing your debts into a new payment plan.
Can I File Bankruptcy on Student Loans?
Student loans cannot be discharged in bankruptcy! This is extremely significant, especially for someone that has the majority of their debt tied up in student loans.
- You are unable to discharge student loan debt, tax debt, and child support debt in Bankruptcy.
- If the majority of your debt is in those categories, bankruptcy might not be a great option for you!
What the WHAT? After finding this out, I was like, “Okay, so that’s like ALL (or most) of our debt. Bankruptcy is obviously not going to help me.”
This scared me even more.. I felt like our only option was bankruptcy, but what’s the point if I’m still going to have my student loans?
Should we just give up, and move into a box? Close down our business and sell everything?!
At this point, it was time to get seriously mad at debt!
I realized that 99% of my fear, stress, and anxiety was because we had absolutely no plan.
Unfortunately, I didn’t exactly spring into action and fix everything overnight.
I spent quite a few months, just barely getting by and hoping it would all just go away. That wasn’t going to work though. People were depending on me to get my **** together!
I decided that the first step to overcoming the complete feeling of financial overwhelm was to create a plan.
Yes, planning! It seems so simple, but sitting down with my husband and actually hashing out how we were going to dig our way out of this financial mess, brought me out of my funk.
Related: How to Have a Budget Meeting
How to Avoid Bankruptcy!
Why are you considering bankruptcy? Is it because you are feeling hopeless? Are you in a complete mess and don’t see a way out?
Sometimes, you just need someone objective to look at your budget, and your debt. To walk with you, and help you construct a plan.
If you have read the above, and you want to avoid bankruptcy, there are a few steps you can take to make a plan and get out of debt.
Step 1: Set yourself up, so that you never feel this way again.
- Cut up all of your credit cards
- Vow to never go in to debt again
Step 2: Learn to Budget
- Learn how to tell your money where to go each month.
- You can head here to learn how to budget for beginners, and also make sure you grab my free budget printables to help you get started!
Once you rock at budgeting, you will notice you are able to:
- Save for emergencies
- Stay caught up on your bills
- Get ahead on your bills
- Start paying off debt like a pro!
Step 3: Save up for a Small Emergency
- We follow Dave Ramsey’s recommendations of saving a small $1000 starter emergency fund while we are working on paying off debt.
- This way you can cover small emergencies like new tires, or a new car battery without reaching for a credit card.
Step 4: Make Sure to Replenish Your Emergency Fund
- Make sure you replenish your emergency fund when you have to use it!
- If you don’t have that buffer, you will be tempted to go back in to debt at the first sign of financial struggle.
Step 5: Develop a PLAN to Pay Off Debt Fast
- Now that you know how to budget, and cover small emergencies, it’s time to tackle the debt.
- Don’t look at the entire amount owed! This will cause you to become completely overwhelmed.
- Break down your BIG debt payoff goal into small, manageable chunks.
- I help you do just that in my Debt Payoff Roadmap Workbook.
Step 6: Invest and Change Your Future
- Once you are debt free, your work is not quite done.
- Continue to be intentional with your money.
- Invest in your future so your kids never know the overwhelm of financial struggle.
You can do this! I’m your BIGGEST CHEERLEADER! I want you to succeed with money, and I never want you to feel hopeless, EVER again.
P.S. Grab my free budget printables here, and join my email list for weekly frugal living tips and debt payoff motivation.