How To Avoid Bankruptcy and Spare Your Credit

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Debt can be damaging in many ways, and it affects more people than you might think. Often, circumstances outside your control can cause you to fall into debt. This may include job loss, long-term disability, or medical bills.

Household debt in the U.S.—including mortgages, auto and student loans, and credit cards—had reached a total of $14.64 trillion at the end of March 2021. That’s a lot of money, and it’s not all because of just overspending.

You may feel that bankruptcy is the only way to go if you're faced with a large amount of debt. But it may not be necessary, depending on your situation. Bankruptcy can have a devastating effect on your credit score. It can stay on your credit report for up to 10 years. Here are some ways you can avoid bankruptcy to keep your credit score intact.

Increase Your Income

Increasing your monthly income could give you extra money to put toward your debt. If you can, pick up extra hours at work, apply for a part-time job, or start a side hustle to bring in extra cash.

Alternatively, you can sell any spare items, such as furniture or jewelry, and use the money to pay down your debt balances. The sooner you take action, the better. If you wait until you're behind on payments, it may be too late to catch up and avoid further action from your creditors.

Reduce Your Spending

Spending less money may allow you to dedicate more of it to paying down your debt. You may be able to free up money in your budget by cutting cable, canceling your gym membership, or skipping takeout for dinner. This could help you pay off your debts over time to avoid filing bankruptcy.


If you can afford to pay back your debts, you may qualify for Chapter 13 bankruptcy. This type of bankruptcy is more of a repayment plan that allows you to repay your debt over a three- to five-year period.

Review your budget—and consider switching to a new one—to find areas where you can spend less and pay more money toward your debt.

Negotiate With Creditors

Many creditors are willing to work with you, but you have to communicate with them proactively. Let your creditors know you are having financial difficulty and want to avoid bankruptcy. Express willingness to pay off the debt, and ask if they can help make it easier by lowering your monthly payment or interest rate—or even both. Many credit card companies and banks have hardship or payment assistance programs intended for this type of situation.

Seek Consumer Credit Counseling

If you're feeling overwhelmed, getting help from a professional consumer credit counseling agency may bring some clarity to your finances. A credit counselor can review your finances to help you figure out a budget, and may potentially work out a debt management plan with your creditors.


You'll have to get credit counseling before you can file bankruptcy, so it's worth strongly considering it as a bankruptcy alternative.

Under a debt management plan, you work to repay your debts in three to five years. First, the credit counselor negotiates with your creditors to get you a lower monthly payment. Then, each month, you send a single lump-sum payment to the credit counseling agency, which then distributes your payments to your creditors.

Settle Your Debt

Debt settlement isn't the ideal solution, but you may consider it if you're on the brink of bankruptcy. Settling a debt means you pay the creditor a percentage of the total amount due to satisfy the debt. Once you reach a settlement agreement, be prepared to pay the settlement amount in a lump-sum payment.

While there are debt-relief companies that can settle debts for you—for a fee—you can do this on your own. Start by focusing on debts that already are charged-off or in collections. On top of that, your credit score could be impacted if the debt-relief company encourages you to intentionally fall behind on payments so it can negotiate a settlement.


Don't settle any debt on which your payments are current. Continue making the minimum payments on all debts to keep them in good standing. It may take time to pay them off, but you’ll maintain your credit score.

Apply for a Home Equity Loan

You may be able to take out a home equity loan or refinance the mortgage if you own your home and have positive equity—the value of your home is greater than your remaining mortgage. You can use the money to pay off all your non-mortgage debts. Banks might be willing to work with you even if your credit score has been negatively impacted by debt problems if your stated intent is to pay off existing debts.

This may prove to be a viable option when interest rates are low and there's been a surge in home prices. But be sure to consult with a qualified financial professional to make sure this is your best alternative.

The Bottom Line

To avoid bankruptcy, consider ways you can make more money and spend less, while talking to your creditors and working with a credit counselor. You may be able to use several of these strategies to gain control of your debt and pay it off without getting assistance from the courts. If you're successful, you'll avoid having bankruptcy listed on your credit report, while also being free from your debt.

If you do ultimately decide to file bankruptcy, take the time to learn exactly how it works. It's important to make an informed decision after considering all your options. Don't worry about your credit score in the short-term. Instead, focus on getting relief from your debt. You can work on rebuilding your credit once your debt troubles are behind you.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Federal Reserve Bank of New York. "Quarterly Report on Household Debt and Credit 2021: Q1."

  2. myFICO. "What Are the Different Types of Bankruptcy and How Is Each Considered by My FICO Score?"

  3. myFICO. "What Are the Different Types of Bankruptcy and How Is Each Considered by My FICO Score?"

  4. United States Courts. "Credit Counseling and Debtor Education Courses."

  5. InCharge Debt Solutions. "What Happens After I Enroll in the Debt Management Program."

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