Even though filing for bankruptcy protection is an option for just about anyone who is facing a mountain of debt problem, it should be the last option that you should ever consider.   There are many things that you can do to get yourself out of this financial mess that you have put yourself in.  Do not ever think that it is hopeless because if you can implement some of the tidbits I will be posting in the next few days, you can avoid the possibility of filing for bankruptcy.  Take control of your financial well-being and take responsibility of your life is your number 1 priority to avoid bankruptcy.

Create a reasonable budget and stick to it

Most people that find themselves in dire financial straits, myself included, tend to guesstimate how much debt they have.  This is the absolute worst thing you can do if you have limited income and you are contemplating filing for bankruptcy protection.  Even if you are making millions of dollars a year, it is still prudent to know exactly how much you are spending monthly so that you can plan for your future.  If you have unlimited income, then you have come to the wrong website.

Since most of us have limited income, you should plan all of your expenses using just your disposable income.  Do not ever use the credit cards to fund your living expenses, or to take out a line of equity on your home to buy something extravagant and unnecessary.  If you want to fight off bankruptcy, the first step you have to do is to create a budget.  A budget allows you to see visually every single debt or expense that you have.  Once you have that information, you can plan your expenses accordingly.  The purpose of a budget will also allow you to see where you are spending the most of your income, and therefore reduce various expenses and possibly safe some money for the future.  Granted, you might encounter a special expense that can put your monthly budget out of balance, but this is where your savings will fill in the void.

The primary reason to have a budget is to make sure that your income equals to or is more than your expenses.  If your expenses total more than your income, you are incurring debt.  Every month you accumulate additional debt, you are taking one step closer towards bankruptcy.  A good budget will give you a forecast of what you will be spending in the months ahead.  But also do not neglect the importance of recording your actual expenses each month.  It is important to compare the estimated versus the actual expenses monthly, so you can always update your budget for the upcoming months.  Budget is a fluid entity, it can vary from month to month.

How do I start a budget?  What should be included in the budget?

So for the next 1-3 months, gather all the statements that you will be receiving from various creditors, and record all the expenses down to the penny.  You can break down the debt and expenses that you incur into the following categories:

1. Secured debt such as mortgage and car payments
2. Unsecured debt such as credit card bills
3. Mandatory expenses such as utility bills, food and transportation
4. Other non-mandatory  expenses such as dining out and gym membership

Use either a spreadsheet, or financial planning software such as Quicken or Quickbooks, or pen and paper, record the following:

For secured and unsecured debt, record

1. Amount paid and minimum due
2. Total outstanding balance
3. APR or interest rate
4. Due date every month

For mandatory and non-mandatory expenses, record the amount spent.  This includes every single thing that you purchases with cash, credit card or debit card.  You want to record every single expense whether it be a $0.50 newspaper that you purchase every day because every expense adds up at the end of the month.  A $0.50 weekday newspaper can add up to $2.50 a week, which translates to $130 a year.  When you are doing your budget, you will see that you are spending money on certain things which can be eliminated.  And even if you cannot eliminate a particular expense, you might be able to find a way to reduce the amount of the expense.  In our newspaper example, you might be able to reduce the $130 annual expense to $50 by subscribing to the newspaper instead of purchasing it at your local newspaper stand.

Without the visual assistance of a budget, it is usually very difficult to determine where your money is going.  A budget can only help you, and not hurt you.  This is an extremely important step in your quest to stave off bankruptcy.  Bankruptcy literally begins when you lose control of your finances.  If you have a clear picture of what you are spending each and every month, then you will/should have the mentality or discipline to control your expenses.  You want to stick to the budget as closely as possible.

If  you find that your expenses exceed your income, you should look to reduce your expenses as soon as possible.  You should try to reduce your expenses in this order of importance:

1. Reduce or eliminate non-mandatory expenses

If you used to dine out every weekend, try to cut this frequency to every other week or once a month. See how much you can save and if that amount can make up the difference that you can use for other debt repayment. You can also try to eliminate your gym membership and run around your neighborhood for exercise which does not cost you any money.  Non-mandatory expenses are the easiest to reduce or eliminate in order to help you avoid bankruptcy.

2. Reduce mandatory expenses

Since these are the mandatory expenses, most of the time you will not be able to  eliminate it totally. Expenses such as food cannot be eliminated because you need food to survive.   But you can opt for more economical options such as store brand products instead of the brand name ones.   A box of store brand cereal can cost you $1-$2 less than its brand name counterpart.  Some people believe cable TV is a necessity in life, so if you believe it is for you also, you can try to lower this bill by eliminating some of the premium channels.   Don’t be short sighted and looked down upon the $5-$10 you are saving every month.  Every $5 that you can every month means an extra $60 per year.

To recap, you want to use your budget to help you control your expenses every month.  The budget should be used to reduce your mandatory and non-mandatory expenses, since they are the easiest to cut back.  And if you still find yourself in financial hardship after reducing or eliminating mandatory and non-mandatory expense, you will need to seek additional ways (please visit us for additional tips on upcoming days) to help you avoid bankruptcy.

Click here to read the next tip Avoid Bankruptcy Tip #2 – Use Only Cash

Tags: Avoid Bankruptcy, Budget, Eliminate Expense, Reduce Expense

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Posted in Avoid Bankruptcy by ssanchez 2 Comments