What to do when you're out of financial options
More than 1.5 million Americans filed for bankruptcy in 2010. While the economy is showing some signs of life, many people aren't seeing a recovery in their personal finances.
Getting back on your feet can be a challenge, but it's not impossible, say personal financial planning experts at the Minnesota Society of Certified Public Accountants (MNCPA). While filing bankruptcy may seem like the only option left, it may not be right for everyone. Know what's right for you. Here are some guidelines from the MNCPA:
Developing a plan
You're out of money, you may have been unemployed for an extended period of time, and creditors may be knocking at your door. It may sound silly, but take a deep breath. This isn't the time to run out and take action without thinking. The decisions you make now will have a lasting impact on your financial life. You need a plan.
--Evaluate your situation. If you need emergency finances to live day-to-day, what are your options? Can you seek help from a friend or family member? If your situation is temporary, emergency loans are an option, but be sure you understand the terms of the agreement, and know your ability to repay. Make sure the lender is reputable. Sadly, there are many companies who take advantage of people when they are at their most vulnerable.
--Get advice. Who do you know who can help you sort through your options? There may be free financial counseling services available through your church or community. There are also credit repair companies who will come calling when they know you're in trouble, but again, be sure to thoroughly investigate these companies. Some are honest, some aren't.
--Understand your options When financial crisis strikes, many people assume that declaring bankruptcy is inevitable. While this may be true, it's not always the magic bullet people think it will be. Make a list of ideas where you may be able to get help. Perhaps it's a friend or family member, your church, a local nonprofit organization or even a lender. Assistance may come from the most unlikely person or organization.
--Budget. Even if you have limited financial resources right now, create a budget and work with what you've got. Determine where you can make cuts and do it. There are no sacred cows in a financial crisis. Cut that budget to the bone, and then stick to it.
--Contact your creditors. Your creditors may be willing to work with you to create manageable payments for your debt. Some lenders are offering hardship programs so check with yours. Pay what's necessary to keep your account out of collections which will further damage your credit.
Bankruptcy: Everybody else is doing it, why don't we?
It's true, a lot of people are still filing bankruptcy which makes it seem like it's not a big deal. But guess what? Bankruptcy is a big deal, and it will affect your life for many years to come. If you've exhausted every other option for solving your personal financial crisis and have been advised to file bankruptcy, understand what you're getting yourself into.
There are two different kinds of personal bankruptcy: Chapter 7 and Chapter 13. With Chapter 7 filings, most of your assets will be sold to cover your debts. In a Chapter 13 filing, you get to keep your stuff, but your debt is reorganized and you make scheduled payments until the terms of your agreement are reached. Seek advice on which type of filing would be appropriate for you.
What to expect after filing
Bankruptcy will give you a fresh start -- sort of. Your debt will be gone, but not forgotten. Expect that for several years, lenders may be reluctant to work with you. A bankruptcy may appear on your credit report for up to 10 years after filing, but start working immediately to rebuild your credit history. It won't happen overnight, but you should:
--Set and follow a budget
--Not open any new credit lines
--Pay your bills on time
--Monitor your credit report
--Don't repeat the cycle
A CPA can help
Experiencing a personal financial crisis is scary, and you may feel like you're out of options. The MNCPA says it's important to seek competent help and advice quickly so that you can find solutions and move forward. To locate a CPA, visit www.mncpa.org/referral.