Follow these critical steps to avoid filing chapter 7 bankruptcy and save your financial future

Filing Chapter 7 bankruptcy is like financial Armageddon. Unfortunately, most people don’t realize it until they push the button on this financial weapon-of-mass-destruction.

You’ll be left with almost nothing after a bankruptcy and will be lucky if you can get a loan for a stick of gum. Any personal loans you will be offered will be at interest rates that would even embarrass payday lenders.

I understand. Sometimes there doesn’t seem to be any way out of that financial hole. I’ve been there.

But filing Chapter 7 bankruptcy doesn’t have to be your only way out of those annoying debt collection calls and mounting bills.

Take five minutes to read through these seven steps to avoid Chapter 7 bankruptcy and save your financial life.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is what most people think of when they hear about bankruptcy but the fact is that there’s two types of debt forgiveness. Chapter 7 bankruptcy is where most of your debts are wiped clean and you lose your stuff while Chapter 13 bankruptcy means you get to keep your possessions but still have to repay some of the debt.

Qualifying for Chapter 7 bankruptcy depends on your income and your ability to repay debt. If you can afford to repay your debt under a new payment plan, the court may require you to file Chapter 13 instead.

Under Chapter 7 bankruptcy, you’ll generally lose all big-ticket assets except your home and a car. You’ll also be able to keep clothes, furniture and other household goods unless they are really high value or have a loan against them.

Most states require you to go through some kind of credit counseling before your lawyer can file your bankruptcy case. It generally takes between three to five months to work through the process.

Most student loans or back taxes aren’t wiped out in a bankruptcy so don’t think you’ll get out from under them. Credit card debt, personal loans, peer to peer loans, medical bills and some civil court judgments are usually discharged in a bankruptcy.

While getting out of all that debt may sound like a good deal, it’s not so simple.

You’ll be left with little more than your house and car. Your credit score is going to drop by 100 points or more and it can take up to a decade to get your score back to where it was. In that time, you’ll be paying thousands extra on any new loans because of your lower score.

So how can you avoid filing Chapter 7 bankruptcy?

Step-by-Step Process to Avoid Chapter 7 Bankruptcy

The time it takes to rebuild your credit score after a Chapter 7 bankruptcy is the biggest reason to avoid filing. Most people just don’t realize the extra interest they’ll end up paying in the years following a bankruptcy.

Avoiding Chapter 7 bankruptcy means a process of looking at what you have, what you owe and planning a way out!

First, you’ll need to sell what you can. Anything with a current loan on it is definitely fair game and anything else you can sell for more than a few bucks. Even if you might not get out of it what you owe, the money is still going to help you pay down debt and avoid bankruptcy.

The bonus is that taking a loss on selling your stuff may teach you to spend a little wiser in the future.

Budgeting is like a four-letter word for a lot of people but you must know where your money is going. Lay out your income and every expense for the last few months. Write every detail out including those daily triple-venti lattes from Starbucks.

If you can’t cover your expenses, you need to start cutting. No expense is off limits. You’d be surprised on how little you can live on if you just start scratching things off your budget. Cable TV is nice…but do you really need it at the expense of financial disaster?

It shouldn’t be used as a way to avoid cutting some unnecessary expenses but you might also consider increasing your budget from the income-side. Check out these five work from home strategies I use to make thousands a month.

With the money you made selling assets, you’re going to pay off debt with the highest interest rate. With any luck, this might be all you need to do. Paying down this debt might get your monthly bills down to the point where you’re at least breaking even and slowing chipping away at lower rate debt.

If you’ve still got a lot of high-rate debt, your next step is to consider a debt consolidation loan. This is an unsecured personal loan you use to pay off all other debt with higher rates. It might sound odd that you can fix your debt problem with more debt but you’re really not taking on more debt, just shifting it around.

Through peer lending sites like, you can borrow up to $35,000 to pay off credit cards and other high-rate debt. The peer loan helps to lower your monthly payment by reducing the amount of interest you pay. It also helps to boost your credit score by paying off non-revolving credit card debt.

Of course, you still have to stick to your budget. Using a debt consolidation loan to free up credit cards for more shopping will only create more problems than it solves.

Check your rate on a consolidation loan up to $35,000 – Click here for Approval in Five Minutes

If you haven’t already destroyed your credit score, you might be able to transfer credit card balances. This is really only a quick fix but might lower your interest charges enough that you can make your monthly payments.

If you are still unable to meet all your monthly debt payments, it’s time to talk directly to creditors. This is never a fun chat but it is something you can do. Call each company with which you have a loan or make monthly payments.

Be warned, they are probably going to get nasty and refuse to work with you. Let them know that you’ve tried everything else and will stop making payments unless they can lower the monthly payment. It won’t work on everyone but might get your payments down enough that you can avoid filing Chapter 7 bankruptcy.

As a very last resort, you may have to talk with a credit counseling or debt settlement company. This company is basically going to do the same thing you did talking with creditors but they know how to get results.

The problem is, they will usually require you to stop making payments on your debt for a few months before they talk to creditors. This will give them extra negotiating power but is going to destroy your credit score, the very thing you were hoping to avoid by not filing bankruptcy!

Personal Loans after Filing Chapter 7 Bankruptcy

It’s going to be extremely difficult getting any kind of credit or loans after filing bankruptcy. Even if you have a stellar FICO score above 800 before, you’re almost guaranteed to be in the sub-prime category afterwards with a 620 credit score.

The table below, from FICO, shows the effect on your credit score after filing bankruptcy. Even borrowers with a score of 780 or higher saw their FICO drop to below 560 after bankruptcy.

fico score after bankruptcy
Credit Score after Filing Bankruptcy

That means most banks and other lenders won’t give you the time of day. Worse still, it can take three years or more just to get your credit score back above the cut-off for prime loans.

You can use personal loans after chapter 7 bankruptcy but the rates will likely be above 30% annually. That’s still better than payday loans and cash advances but a tough price to pay for a loan.

Hopefully, you shouldn’t need immediate cash after filing bankruptcy. If you can wait for three- to six-months to improve your credit then you’ll get better rates on peer-to-peer loans even on bad credit. Use these to keep from relying on expensive credit card debt or short-term payday loans.

What Can You Do If You Just Can’t Avoid Bankruptcy?

I won’t lie, sometimes the personal bankruptcy process is your best and only option to starting over. Chapter 7 bankruptcy was created to keep people from falling into financial slavery or going to debtor’s prison as was the case in 18th century England.

More than half a million Americans file bankruptcy every year. There’s nothing to be ashamed of, especially if you’ve tried to put your finances back together. Understand the two types of bankruptcy and your options around the process.

Avoiding Chapter 7 Bankruptcy is Easier Said than Done

Avoiding Chapter 7 Bankruptcy doesn’t have to mean avoiding all debt. There’s a difference between debt free and just free of bad debt. It’s something even many financial experts don’t understand but is something you’ll need to master to reach your financial goals.

These steps to avoid Chapter 7 Bankruptcy will help you fight back from financial ruin but it won’t be easy. I’ve been there and it wasn’t fun. If you’ve already destroyed your credit score, it can take years to build it back to the point where interest rates start coming down. Stick to the process and avoid bankruptcy at all costs though, it’s an even worse financial path and you don’t want to walk it.

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