How and Why to Avoid Bankruptcy


Before determining how to avoid bankruptcy, one must ask why to avoid bankruptcy.

What are you doing for the next, oh, 7–10 years? If you file for bankruptcy, what you’ll be doing is having a big fat blemish on your credit record, making it near impossible to get a loan from someone who isn’t in the kneecapping game. The credit you do get—or rather, if you get—in the future will come with usury-level interest. As a byproduct, you’ll also get tons of junk mail offers to buy stuff. Furthermore, filing for bankruptcy isn’t free. While you can do the paperwork yourself, you might want to trust it to a lawyer. Lawyers cost a lot of money, so this is clearly not the optimal route.

So how do you prevent bankruptcy? Below are a few ways to crawl out from under your debt without going Chapter 11.

  1. Cut Waste to Prevent Bankruptcy

    This may sound obvious, but for business owners who find themselves considering bankruptcy, it’s not necessarily clear. It’s time to tighten the belt, as they say, so check the books and see exactly where you’re hemorrhaging cash. Chances are there are redundancies, luxuries, or non-essentials in your spending. Stem the flow of cash.

  2. Determine the Cause

    What happened that got you into this mess? Identify exactly what the issue is that caused the numbers to go red. If it’s a behavior pattern that can be changed, you should change it. If it was an unpreventable freak occurrence, be on the lookout for the things that can be prevented. Understand that most disasters in business have a cause that was visible for those who were looking in the right place.

  3. Talk to Creditors

    It’s not fun. I can’t be more clear about that—it’s really not fun. But you need to explain the situation to your creditors and see if a payment plan can be reached or if there’s any amount of the debt that can be forgiven. Negotiate to put yourself in the best position to succeed. Remember that a bird in the hand is worth two in the bush. The folks you owe might believe that and prefer to accept what you currently have as opposed to what you might one day acquire.

  4. Prioritize

    Who is charging the most in interest? Pay that one off first. It’s likely a credit card, as those companies thrive on jacking up rates. The sooner you get out from under the interest, you can focus on chipping away at the principal and the sooner you’ll be free from debt. If you’re able to consolidate loans, do so. You’re likely to get a more favorable interest rate, and the fewer checks you have to scratch out each month, the better your chances of avoiding default on a neglected account.

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Tags: Financing