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Take action in debt management to avoid bankruptcy

Bankruptcy conjures all sorts of frightening imagery – red stamps and repossessed houses. If you are heading for financial disaster, there are some steps you can take to avoid declaring bankruptcy.

First, let’s look at the technical definition – bankruptcy is usually a voluntary appeal to the government. The Bankruptcy Act 1966 provides assistance to those faced with debts they are unable to pay. Declaring bankruptcy allows reprieve from your debts, meaning creditors cannot take legal action against you, until you earn above a certain threshold (in which case, you begin to pay off the debt once more).

Nut out a plan

When you become overwhelmed by debt, before declaring bankruptcy, devise a plan. Gather all your bills and create a debt inventory of all that is owed. Then, divide these bills into the following categories:

  • Secured debts, such as mortgages, loans or car repayments.
  • Mandatory incidentals, such as power, groceries and insurance.
  • Credit card statements.
  • Expendables, such as clothing, gym memberships or other optional purchases.

Now, look at ways you can cull the cost in each category. Items within the first two categories will be the most difficult to limit but there are ways, such as buying home-brand groceries instead of more expensive brands.

Allocate your income

Look at how much incoming cash you have to work with – then, allocate funds to pay off debt, while providing yourself with an ‘allowance’ to cover living costs. Maintain an ironclad budget and ensure incoming money is divvied out to the sources of debt before you get a chance to spend.

If possible, let family know of your debt problem so that everyone is working towards the same end goal – limiting purchases and saving money.

Sell assets

Consider your assets – whether they be as large as property or as small as clothing. Explore whether selling these assets could create an injection of cash.

An alternative means

Rather than declaring bankruptcy, consider entering into a debt agreement with a creditor. Insolvency and Trustee Service Australia (ITSA) states that “the debt agreement system is only to be used where the debtor is insolvent, i.e. unable to pay their debts as and when they fall due”.

Effectively, a debt agreement is a proposal from the debtor to the creditor of an alternate method of payment, such as periodic payments or a lump sum payment less than the total amount of debt. These are then either accepted or rejected by the creditor.

To avoid the pitfalls of financial ruin, don’t delay what you could do today. Approach your finances with a meticulous and objective eye to identify how you can solve your debt problem and dodge bankruptcy. By taking action, you could save yourself from the future pain of declaring bankruptcy.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Tuesday, August 17, 2010

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