With now tougher bankruptcy laws, there’s no better time to start managing your debt more wisely. For most households with above average income, completely wiping out unsecured debt through the courts will no longer be an option. In addition, anyone contemplating bankruptcy will have to submit to credit counseling six months ahead of filing under the new laws. So why not jump-start the process of gaining control of your debt on your own terms.
Here’s some advice on getting started.
- Develop a game plan. The winning strategy is to match the money flowing out with money coming in. Tally up all living expenses by category to determine exactly where your money goes, such as housing, car payments, medical, gasoline, food, clothing, utilities and entertainment.
- Establish a budget and stick to it. Once you figure out where the money is going, separate your "wants" from your "needs" to recognize which areas of spending to pare back. Look for savings in each category. Set targets for food bills, new clothes, and recreation expenses. Don’t forget communications. There’s a lot of outflow in maintaining telephone lines, cell phones and cable TV. Make sure your budget is based on your current income and is accurate and realistic. Once you’ve set lower limits, keep track of your dollar outflow and challenge yourself to make the monthly goals.
- Eliminate costly debt. Rolling high-interest credit card balances into a lower-interest home equity loan or line of credit or a second mortgage can help you to begin paying them down, especially if you’re paying no more than the minimum balance each month. You can also look to consolidate existing credit card balances onto one less costly card.
- Make it a family plan. Backing away from the brink of bankruptcy should be a family affair. Turn saving into game for all your children to play when you go shopping or even around the house. Let your family know the amount of money you have to spend on food and clothing and let them figure out how to get the biggest bang out of each buck. Keep track of who saves the most and offer a little reward to keep the kids enthusiastic.
- Maximize your income. Some short-term pain can help you avoid the damage bankruptcy can do to your credit. Consider taking a second job, even one where you’re overqualified. Not only does this earn you more cash, but gives you less time to spend it. Don’t rule out selling some assets either. Cleaning out the basement, attic, closets and drawers for a garage sale can help you achieve your debt reduction goals faster.
- Enlist lenders in your turnaround plan. Lenders don’t relish the bankruptcy process any more than you do. Tell them you want to pay your bills, but you need a lower interest rate and lower monthly payments in order to get back on track.
- Seek out credit counseling. Obtaining credit counseling six months prior to filing for bankruptcy is mandatory under the new law. So why not get a head start. Credit counselors will help analyze income and expenditures and set up a debt management plan (DMP). Under a typical DMP, the borrower agrees to give up credit cards in return for debt consolidation, lower interest rates and lower monthly payments from the lender.