Bankruptcy should never be the first thing you turn to when clearing debts.
Yes, it is a viable option that can leave you debt-free, but you should always see this as the last thing to try.
A bankruptcy will stay on your credit report for six years and be a permanent public record.
It may also require you to sell your assets and give up some of your belongings.
You should actively look to avoid this however possible.
One way of doing so is by budgeting.
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What is budgeting?
Budgeting refers to the idea of creating a budget.
This is a set amount of money that you spend every month, with different aspects of your life designated certain allocations.
It’s based on how much money you earn, and how much you owe.
The idea is to try and reduce your expenses to repay as much of your debts as possible.
Let’s look at an example.
Imagine you have $10,000 of debts to pay, and your household has a monthly income of $3,000.
You’re unable to keep up with debt repayments as you keep spending too much money.
This is where you create a budget!
Firstly, take all your essential bills into account.
Next, add any other recurring essential payments.
Now, you can see how much money is leftover.
From here, you should cut down on your non-essential purchases to spend less money, meaning you save more.
These savings can then contribute to your debt payments.
Imagine spending $5 a day on coffee, which works out at around $150 a month.
Make coffee at home, and you can eliminate this expense, giving you an extra $150 to go towards your debts every month!
What’s the advantage of using a budget?
The big advantage is that you can save money and pay off your debts without resorting to extreme measures.
This way, you can be debt-free without filing for bankruptcy and damaging your credit score.
In fact, budgeting helps you keep up with all your bills and repayments, meaning you actually strengthen your credit rating!
As a secondary advantage, you can pay off your debts and save more money.
This allows you to save up for big purchases, reducing the need to borrow money.
Therefore, you stop yourself from drifting back into debt once your current ones are clear.
What’s the best way to use a budget?
Using a budget is most effective when you take your debts and calculate how much money you’d need to pay each month to clear the debts in a specific period.
Taking the previous example, $10,000 over 12 months is $833 per month.
If you can find that money in your budget, you could clear your debts within a year.
Or, halve the monthly payments and be debt-free within two years.
Book a consultation for budgeting advice!
We are more than happy to help with any of your debt problems.
Book a consultation with us today, and we can guide you through the budgeting process to help you pay off your debts.
Give us a call or fill in our online evaluation form to get started.
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