It doesn't take a rocket scientist to realize that it's better to fix your debts on your own, if possible, than it is to go bankrupt. If you can maintain a good credit score by eliminating debt on your own, that is obviously a great alternative to bankruptcy.
But how do you do it?
To pay off your debts on your own, you first need to determine how much money you can afford to use to pay off your debts each month.
A list of what you spend your money on each month is called a budget, and you can read all about it, and even download a budget worksheet, on our personal budgeting page.
Once you have your budget in writing, you can decide what expenses you can cut to free up more cash to eliminate debt.
Here are some other tips to avoid bankruptcy by paying off your debts on your own:
Pay more than the minimum
When you get your credit card statement each month, don't just pay the minimum amount required: pay more! If you are only paying the minimum each month, your payment is going mostly towards interest, so very little of the principal is being repaid. Always try to pay more than the minimum
Pay off your highest interest rate debts first
Make a list of all of your credit cards and the interest rate on those cards. Then, pay off your highest interest rate debts first. For example, if you have an extra $100 this month for debt repayment, use it towards your 29% interest department store credit card, not towards your 10% low interest bank credit card.
Use low interest cards to pay off high interest cards
A variation on the "pay off your higher interest debts first" strategy is to transfer some or all of your balance from a high interest card to a low interest card or line of credit. If you have a 10% interest line of credit at the bank, or a low interest credit card, take a cash advance at 10% and use it to repay your 18% regular rate credit card. That way, more of your payments are going towards principal, and less to interest.
Borrow from the "bank of Mom"
Instead of borrowing from the bank, consider asking friends and family for a loan. If your parents have good credit, they may be able to borrow at a lower rate than you are paying on your debts. Use their good credit to repay your higher interest debts, and then you make the payments on your parents' new loan.
Get a home equity loan
If you own a home that has equity, consider a home equity debt consolidation loan. By borrowing against the value of your home, you get the best possible interest rate, and then you use that money to repay your higher interest rate debts.
Renegotiate terms with your creditors
If you can't make your payments and your only alternative may be to file personal bankruptcy, call your creditors and ask them to lower your interest rate, or to give you better payment terms. This strategy may backfire (if they decide to raise your rates because they think you are now a higher risk), but if your only alternative is bankruptcy, there is no harm in asking.
By following these steps you may be able to reduce your debt on your own, and avoid bankruptcy. It takes discipline and planning, but you can do it! If you think you need professional help, check out our pages on Credit Counseling and Chapter
13 Wage Earner Plans.