A judge's gavel lying atop a petition to file for bankruptcy.

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When your bills and debts keep piling up and it feels like there's no light at the end of the tunnel, bankruptcy may seem like a reasonable solution. Filing for bankruptcy may seem like a way to improve your financial picture, but you should know it could have grave consequences, such as seriously damaging your credit score.

A Chapter 13 bankruptcy lets you reorganize your debts so they're easier to pay off. With a Chapter 7 bankruptcy, your personal assets will be liquidated to satisfy as much of your debt load as possible. From there, you'll generally get to start over with a clean debt slate (though some types of debt are not dischargeable as part of a bankruptcy filing).

There are several reasons why bankruptcy should only be a last resort. A Chapter 13 bankruptcy will remain on your credit report for seven years and present a red flag to lenders. A Chapter 7, meanwhile, will stay there for 10 years. Furthermore, the bankruptcy process can, ironically, be quite expensive, even though it's designed to help people who are struggling financially. And the process can be extremely stressful. 

In a recent research report, The Ascent found that an estimated 420,048 Americans declared bankruptcy in 2020 alone. If you're drowning in debt, here's how you can avoid following in their footsteps. 

1. Slash your spending

If you're deep in debt, cutting a few expenses may not be enough to dig you out of that hole. But if you're willing to make serious sacrifices for a year or two, you may find that your debt is payable after all. To this end, you'll need to cut major expenses in your budget. This could mean downsizing your living space or moving to a cheaper neighborhood, getting rid of a car, or cooking every meal you consume at home for the foreseeable future rather than ordering in or dining out. 

Now, these changes won't work for everyone. For some people, moving isn't feasible due to family or job-related obligations, and in some parts of the country, you absolutely need a car to function. The point, however, is that your first step in trying to avoid bankruptcy is to see how much income you're able to bank by living as frugally as possible.

2. Negotiate with creditors

The creditors you owe money to want to get paid, and if you file for bankruptcy, there's a risk they won't get their money. That's why some of your creditors may be willing to negotiate to make your debt easier to pay off. If you owe one creditor $3,000, that creditor may agree to accept $2,000 and write off the remaining $1,000. It never hurts to reach out and see what options you have.

3. Consolidate your debts to make them more affordable

If you can reduce the amount of interest you're paying on your existing debt, it could help you pay it back. And in this regard, you have some options. You could transfer your various credit card balances onto a new balance transfer card with a 0% introductory rate. Or, you could take out a low-interest personal loan, use its proceeds to pay off your different debts, and then pay that loan off in installments. Finally, if you own a home, you can look at doing a cash-out mortgage refinance. This involves borrowing more than your remaining home loan balance and using the extra money to pay off your debt. 

Of course, all of these options hinge on you having a good enough credit score to qualify for them. If your financial situation has gotten so bad you're contemplating bankruptcy, there's a good chance your credit is already shot. But if that isn't the case, it pays to explore your options. And even if your credit isn't great, you might still qualify for a personal loan for people with bad credit.

When you're consumed with debt, bankruptcy might seem like the answer. But it often creates as many problems as it solves. It could be the case that filing for bankruptcy is the right solution for you, and there's absolutely no shame in that. Before you rush into a bankruptcy filing, make sure you understand the ramifications and explore alternatives that may help you in the long run.