Battling bankruptcy and credit score scorching during a downturn

In a previous article, we advised you of steps you could take to preserve your credit score, avoid bankruptcy, and evade financial ruin in the event of an economic downturn. However, perhaps you have tried some of these techniques, and you're still struggling. This is the time to take your debt management and credit score preservation plans to the next level.

If you are laid off, or your debt mounts to the point that you can't manage it, consider what you can do to save your credit score and avoid bankruptcy. If you were laid off, you can apply for unemployment, which will provide you with some income cushion at this turbulent time. You should also draw on your savings, if you have any left. Now is the time to make only the minimum payments on your debts. Interest will continue to accrue on the remaining payments, but you are in day-to-day financial survival mode now, not long-term financial planning mode.

Strongly consider temp work, contract work, or even, taking on a job outside of your professional track. You will find a suitable new job eventually, and if your primary income source disappears, you will need to find a way to replace it – and fast. If you have any table-waiting skills left over from your high school or college days, now is the time to put them to good use. You can also find tele-sales or advertising sales positions for which you are a viable job candidate, even with little experience. These positions generally pay you commission, allowing you to conceivably earn more money than you would in a similar entry-level position.

Maybe you are considering using money in your 401K or CD to pay off your debts. It is very important to understand that there could be great risks associated with this option, and there are many factors to consider. First, you will face severe tax penalties if you withdraw money from your 401K, and you could crush your retirement goals. If you empty a CD before it is mature, you will lose interest paid on the money for that year. Carefully consider everything that can impact your finances now and in the future including your age, amount of debt, income level, how much money is in your 401K and how much you would have to withdraw. It is crucial to discuss these factors with a financial planner before using this option to pay off your debt. Or, a certified credit counselor at Advantage CCS may be able to offer you other alternatives to pay down your debt without touching your retirement savings.

When your student loans are pulverizing your budget, you might consider putting them into forbearance or deferment. According to the Federal Student Aid Web site, deferment is the process of putting off loan payment because of financial difficulty. Subsidized loans that are deferred do not accrue interest while they are in deferment. You can also put your loans into forbearance; these loans continue to collect interest. You can download forms with which to apply for forbearance or deferment at www.ed.gov. The government warns against stopping payments completely without forbearance or deferment. This is called a loan default, and will wreak serious havoc on your credit score.

You might have to downsize your living expenses significantly. If you're struggling to get your mortgage payments in on time – or can't seem to scrape together enough money to pay them at all – you might want to take on a tenant or two. Advertise your room(s) for rent on free sites such as CraigsList.com, and draw up a lease contract. Free sample leases can be downloaded from state landlord-tenant law Web sites. It is absolutely essential that you screen your tenants carefully, and check their credit scores before renting your house to anyone. The wrong tenant could destroy your home, hurt your family, or cause your own credit score to plummet if he or she habitually skips out on rent payments or has a dishonest character.

You might have to sell your house, or, barring that, put your mortgage in foreclosure. You might have to move, too. Brazen Careerist blogger Penelope Trunk recounts her experiences after the post-9/11 economic slowdown. She was living in New York, and she bade Manhattan farewell to settle in a midwestern suburb. If you're in Queens or Brooklyn, consider Rochester County, NY – or a cheaper, different location altogether, like Pittsburgh, Pennsylvania.

You might qualify for government assistance. Depending upon your income level and family size, you might quality for food stamps or Temporary Assistance for Needy Families (TANF) benefits. Because President Bill Clinton and the US Congress reformed the welfare system structure in 1996, some of these benefits now come with a work requirement. Check with your state or county welfare department for additional details.

You might have to declare bankruptcy, if your debt is unmanageable, and debt management plans have proved to be ineffective for you. Bankruptcy is an absolute last resort, as it can have serious, long-term consequences on your credit score and financial future. Advantage CCS provides pre-filing bankruptcy education and counseling – and, so, if you must file, consult Advantage CCS first.

We wish you the best of luck, as well as good credit and sound debt management, this year and every year.