While most debtors want to pay back their debts and not file bankruptcy if they don't have to, there are some common bankruptcy avoidance tactics which simply don't work.
Let's take a look at a few:
- Extreme Frugality. Attempting to nickel and dime yourself to financial health is not a long-term strategy for avoiding bankruptcy. Studies have found that debtors who attempt to engage in long-term extreme frugality usually are unable to maintain that type of lifestyle over the long-term. The reality is that the cost of goods and services are increasing. If you're attempting to avoid bankruptcy and pay off debts over the long-term then you're probably going to experience diminishing returns on your efforts as inflation rises and interest makes your debt loan even larger.
- Borrowing From Retirement. Borrowing money from your 401(k) is not a bankruptcy avoidance strategy that usually works. What may start out as a loan eventually turns into a withdrawal which includes heavy penalty fees if you're under 59 ½ years old. Debtors trying to avoid bankruptcy by using their retirement savings to pay off debts usually are unable to repay all debts and end up with a new problem -- depleted retirement savings along with a large tax bill.
- Exhausting your savings. Debtors trying to avoid bankruptcy by using their savings to pay off debt are setting themselves up for more financial trouble in the near future. While paying off tax debt or other nondischargeable debt with savings may be a smart strategy under certain circumstances, using your savings to pay off credit card debt , medical bills and other unsecured debt may actually take you closer to bankruptcy as opposed to farther away. Without a well funded savings account, debtors are more likely to run into financial troubles when they face a financial emergency requiring a huge influx of cash.