It’s best to avoid bankruptcy if at all possible. The ramifications of such a filing on your credit report is a killer. And it stays with you for at least seven years. This makes it hard to get credit of any kind (mortgages, credit cards, car loans, etc.). It can also make it hard to start a business. And in Canada you cannot be the director of any corporation if in the state of bankruptcy. These are just a few reasons NOT to declare bankruptcy. So what do you do when you are in trouble?

Consolidation Loan

This is where your bank gives you a loan to pay off all (or a portion) of your high interest credit cards and similar debt. It’s an unsecured loan and usually has certain requirements tied to it, such as getting rid of some of the cards. Of course you can re-apply for cards and dig yourself another hole, but that wouldn’t be wise. This loan usually lowers your monthly payments and has no early payment penalties. This is often the first thing you should try!

Orderly Payment of Debts

This isn’t available everywhere, but where it is available, it sure helps. This is a legal agreement between you and your creditors where your interest rates are lowered, also lowering payments, protection from legal action, and where you must attend some kind of credit counseling services in order to better learn to manage your finances. It’s available in Alberta, Saskatchewan, PEI, and Nova Scotia, and may be available in some States.

A Consumer Proposal

This is one step above Orderly Payment of Debts and just below bankruptcy on the least desirable list. A consumer proposal affects your credit rating as it is administered by a trustee, and it will show on your credit report for at least three years. In most proposals you end up paying no further interest on your debts, and you pay less than the full amount owing, because your creditors would rather accept a deal where they get something, than have you file for personal bankruptcy where they will get less.

As with any problems with debt, it is obvious that a budget was not followed! The more serious of these require credit counseling and you will have to make a budget. If you are not yet at that point, have a look at my budget spreadsheet (which you can download here), and that will give you a start.

I’m also starting a basic budgeting course for anyone interesting. Enrollment will start on January 2012. So look for that post! It’ll be cheap (like $25) and will include my advanced budget spreadsheet to anyone who enrolls.

Here’s a nifty little idea that a friend e-mailed me (thanks, Helen her blog is DeeplyFelt). She says that buying prepaid grocery cards really helps with her budget, because the budget is then all in the card. Plus it prevents her from browsing all the aisles in the different grocery stores. This way her family only uses the one store, which helps them to better manage what they are buying by really sticking hard to their list and not diverging from what they have already decided is their budget.

As far as I’m aware every grocery store offers prepaid cards. You can simply buy these at the check out or at the customer service desk. And by purchasing prepaid grocery cards you are also insuring that you won’t spend your grocery money on something else, because you have to spend that card at the grocery store. It’s not good for anything else!

This concept could also work for gas cards. I know I’ve done that. I’ve even used the points from my the gas station’s special little card to purchase these prepaid cards, as well as discount cards. And many grocery stores have similar points programs. It’s kind of like a double bonus, because you use the points to buy the card, then the purchase from the prepaid card also earns you points.

Has anyone else ever tried these strategies? Or something similar?