How to Avoid Bankruptcy
Know all your options before choosing bankruptcy
Some might consider bankruptcy a broad and easy way out of debt obligations, but the truth is that a bankruptcy done wrong can drastically reduce your chances of reaching financial stability.
Technically, bankruptcy does indeed release a person from most of their debts. However, the process is not so straightforward.
Australians may voluntarily apply to become bankrupt when they have no other means to repay their debts. In this case, a trustee appointed by the Australian Financial Security Authority (AFSA) will oversee your finances. Alternatively, creditors unable to recover debts owed in excess of $5,000 can force the borrower into bankruptcy. Under this scenario, a private trustee will manage your financial affairs, often charging extremely high fees for their services. Bankruptcy typically lasts for three years. However, in some cases, the trustee may lodge an objection, in which case the bankruptcy can be extended for five additional years.
Four Steps to Avoid Being Forced into Bankruptcy
The blunt solution to paying off debts you can’t afford is to take out loans. The more desperate you are, the worse the deal will be in your favor. If extremely high interest rates and a high risk of losing assets (such as your home or your car) aren’t what you want in your future, consider applying some strategies to ward off the risk of bankruptcy altogether.
Create and follow a budget
People who don’t keep track of their money are more likely to overspend or buy luxury items on impulse. This will eventually lead to a crash, if spending is greater than income. Creating a budget basically means to list all of monthly expenses, and track the amount of each (gas, food, mortgage payments, leisure activities, etc). In the long run, developing and adhering to an accurate budget will help you avoid spending more money than your income can handle.
To get started with a budget, check out our Budget Calculator, which will assist you in breaking down all expenses on a weekly, monthly and annual basis.
2. Simplify your lifestyle
While creating a budget is a surefire method to avoid spending more than you make, the ultimate goal should be to save as much as you make. Try putting aside at least 10% of every month’s salary – spending your entire paycheck every month will leave you without a safety net in case of unexpected emergencies.
In addition, look out for expenses that you can cut. For example, instead of putting more money into a broken down car, how about taking the bus or cycling to work? Pack your lunches, socialize at home and get your exercise in the park. It’s not ideal in the short-term, but the long-term benefits are well worth the struggle.
3. Don’t use credit cards to pay off debt
Credit cards are convenient, and offer various rewards (like free air miles) for frequent use. In addition, they provide an easy way to keep track of your expenditures. In this context, they are a healthy part of the average consumer lifestyle. However, when consumers start using credit cards to buy things they actually don’t have the money for, it can cause problems that ultimately lead to bankruptcy.
Typically the debtor’s fall begins by buying a few small items on credit, on the assumption they will be able to pay it back at some hazy point in the future. After a few months of this loose spending behavior, the debtor then finds themselves deep in an ominous pit of credit card debt.
Be smart: never charge anything to your card that you won’t be able to pay back when the bill is due to be paid.
4. Negotiate your existing debt
When the debts are too high and you’re out of options, consider reaching out to your lender to negotiate and settle your debts on a more reasonable repayment schedule. Successful negotiations may lead to a reduction in your debt’s interest rates, or perhaps getting a portion of your debt written off and wiped from the books.
Lenders have an incentive to offer consumers a repayment deal they can manage, because it increases the likelihood of getting their money back. If you just file bankruptcy, these lenders will get nothing. Therefore, in most cases they are very open to negotiation.
A Logical solution to bankruptcy problems
Bankruptcy is not a magical solution that will solve all problems – expect serious consequences for several years, if you are forced to file. While some people have no choice, others who take steps to avoid bankruptcy altogether will enjoy a much healthier financial future.
Fortunately, Debt Mediators have been providing viable alternatives to bankruptcy to Australians for several years, helping more than 10,000 people to reach financial stability.
Our skilled consultants can show you how to reduce debt while avoiding high-interest bank loans. Reach out today and get started on the road to recovery.
Imagine all that can be achieved, with a simple phone call:
- Reduce total debt obligations
- Save thousands in interest payments
- When possible, avoid bankruptcy by entering a Debt Agreement
- Protect your assets while you get your finances in order
In the case where bankruptcy is your only remaining option, Debt Mediators can still help by pushing for favorable terms and helping you keep on top of what needs to be done.