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Avoiding Chapter 7 bankruptcy with smart financial habits

Of all the debt carried by families in the United States, credit card debt is among the most insidious. In Kentucky and across the country, credit cards are used (and overused) as part of the daily lifestyle, but this habit can have devastating consequences. In order to avoid relying on a Chapter 7 bankruptcy filing to get back on one's financial feet, there are a number of options to handle existing debt effectively. 

The average U.S. family carries some $6,000 in credit card debt, with some households carrying considerably more. Interest on credit card purchases can be astronomical, and relying on a credit card to make ends meet only exacerbates the problem. While paying down credit card debt is far from easy, it is vital to allow for long-term savings. 

Chapter 7 not the only way to handle credit card debt

According to recent reports, Americans collectively owe more than $1 trillion in credit card debt. The average household in Kentucky carries a balance amounting to thousands of dollars, leaving some families in financial crisis. Thankfully, there are a variety of ways to handle the challenge of credit card debt, from consolidation to Chapter 7 bankruptcy. 

Credit card debt is so difficult to handle because of typically interest rates. The rate can be higher than rates for student loans, auto loans and mortgages combined. This makes it extremely difficult to pay down without some kind of plan in place. One such option is debt consolidation. 

Chapter 7 not the only option for struggling millennials

When one considers the question of debt as it pertains to young people, the first type that comes to mind is debt accrued for educational purposes. Certainly, student debt makes up a considerable chunk of the money owed by millennials here in Kentucky and elsewhere, but an uncertain economy and an increasingly tumultuous job market has led many young people to rely on credit cards to shore up the difference. Before considering a Chapter 7 bankruptcy filing, it may be helpful for millennials to gain a better understanding about how their debt works, and what it will take to pay it down. 

For roughly 40% of millennials, credit card debt comprises the largest portion of their total debt load. Surprisingly, however, roughly 25% of those polled were not even aware of how much interest they were being charged on a monthly basis. This is true of many indebted Americans, who also do not understand how much of their monthly income is put toward paying down that debt. 

When your medical bills force you into bankruptcy

If you are experiencing dire financial straits after a health care crisis left you with a mountain of medical bills, you are not the only one. In 2017, consumers in the United States spent an astonishing $3.4 trillion on medical care.

Costs for the prior year worked out to an average cost of $10,345 per person. That figure is expected to climb to $14,944 by 2023.

Preparing for holiday debt in advance of Chapter 7 filing

The holiday season is swiftly approaching, and with it comes the inevitable "holiday hangover" of credit card debt following the festivities. Millions of Americans, both here in Kentucky and elsewhere in the nation, have a tendency to overextend their credit to pay for gifts for loved ones during the holidays. This can lead to serious debt complications when the decorations have been taken down. While Chapter 7 bankruptcy is always an option to handle serious credit issues, there are also ways for Kentucky residents to approach paying down holiday debt.

Debt repayment typically falls into one of two categories: the "snowball" or "avalanche" methods. In the snowball method, a debtor begins by paying down the smallest credit card balance first, then moving on to the next-smallest. This affords a series of "quick wins," which some people find helps to motivate them to move on to larger balances. The avalanche method favors paying down the balance with the highest interest rate first, then moving sequentially down to the lowest interest rate. 

Avoiding Chapter 7 bankruptcy through "snowball" method

Americans have a debt problem; this much is clear thanks to a study by the Federal Reserve Bank that suggests collective household debt in the United States reached some $13.86 trillion in 2019. Here in Kentucky and elsewhere in the nation, households struggle to pay credit cards, medical bills, student loans, car payments and many other types of debt. However, financial experts offer a variety of options to struggling households, from debt reduction plans through to Chapter 7 bankruptcy. 

One such plan is colloquially known as the "snowball method" of debt reduction. The idea behind this method is first to sort all outstanding debt from smallest to largest balance. Mortgages are considered "good" debt and can be left out of this equation. From there, the snowball method requires that a household pays minimum payments on all but the debt with the smallest balance. 

Paying down debt ahead of Chapter 7 bankruptcy

Debt, especially high-interest debt like that accrued from credit cards, can be notoriously difficult to pay down. For some Kentucky residents, it may be helpful to create a comprehensive plan to start paying down debt. For more challenging debt situations, a more involved solution like debt reconstruction or Chapter 7 bankruptcy may be required. 

Creating and implementing a debt-reduction plan can be challenging, but many experts agree it is a necessary first step in handling large debt loads. For some people, the "snowball" method of debt reduction is a good place to start. This involves paying the smallest debts first and then moving on to higher debts, which can result in "quick wins" that encourage people to keep the plan up. 

Considering Chapter 7 to erase late-life debt

It has been estimated that some 75 percent of all consumers pass away with debt still outstanding. Credit card debt, as well as other forms of debt, do not simply disappear when the borrower dies, as these obligations then become the burden of the estate. This is why some Kentucky residents may wish to consider a Chapter 7 filing if debt remains a consistent struggle in late life, to avoid passing it on to family members. 

Generally speaking, a family member will not be required to personally pay the debts of the deceased, though in some cases they will find themselves responsible. If a spouse or other family member has co-signed for a loan, jointly owned property or is otherwise required by law to pay the debt, the debt will fall to that individual. While an authorized credit card user will not typically be held responsible, a joint cardholder will. 

Paying down credit card debt before Chapter 7

According to some studies, the average household in America carries some $5,700 in credit card debt. This type of debt, while unsecured and therefore eligible for discharge in Chapter 7 bankruptcy filings, can be one of the most difficult types of debt to retire. Thankfully, there are a variety of strategies that can be employed by Kentucky residents to pay down credit debt before considering bankruptcy. 

Balance transfer cards are one of the most popular tools for lowering credit card debt. They work by transferring debt from a high-interest card to one with lower interest. In some cases, the lower-interest card may include the option for a grace period of up to 21 months interest-free, allowing all payments to directly bring down the principal rather than being eaten up by interest charges. However, transfer fees can apply when moving balances between cards. 

Will I lose my retirement account in a bankruptcy?

While the United States economy appears to be in a fairly good state at present, there are still many Kentucky residents who are struggling with out of control debt loads.

Many of these individuals could potentially benefit from filing for bankruptcy to get their finances back in order, yet for various reasons, some still hesitate to take the plunge. One of the reasons may be that they worry that their retirement accounts and pensions will be wiped out in a bankruptcy filing. Should they be concerned?

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