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8 steps to take before bankruptcy

Anyone who has ever faced a financial crisis has fantasized about getting a fresh start.

But if you're in financial trouble, you've got to face the stricter bankruptcy rules that just went into effect. The main difference: It is a lot more difficult for some people to get the Chapter 7 discharge, which wipes out most debts.

Still, there's nothing that says you can't attack your money problems on two fronts. Try to improve your situation and, then if needed, investigate the bankruptcy option. No matter which way you go, here are a few things to try in the meantime to bring your debts under control:

1. Devise a battle plan. Set aside one hour and gather all of the bills.

First, look at secured debts such as your home and your car. How much are they costing each month? What are the interest rates?

Second, examine the mandatory incidentals: power, phone, groceries, insurance, etc. What do those cost?

Third, take out your credit card statements. Write down what you owe on each and the interest rate.

Finally, look at the expendables. These are the items you like, but don't need: cable, gym membership, dinners out, clothing and other optional purchases.

Now you have an idea of what your monthly expenses really are. Time to slice and dice.

Go through each category and look for ways to cut. You need a roof over your head, electricity, food, water, transportation and health insurance. Everything else is negotiable. Always pay the mortgage first and keep it current. The same with a car note.

Only you know what you "need." If exercising keeps you sane and healthy, keep the gym membership. But find another way to save. If things are so tight that you're considering bankruptcy, it's time to get radical.

2. Go on a cash diet. It's "shock therapy," says Clark Howard, host of a nationally syndicated consumer radio program.

"You go on an allowance system for yourself," Howard says. From each check, you'll take out a set amount in cash.

"And you agree in advance what that amount will be. And that allowance has to carry you to everything you have to do," says Howard, also co-author of "Get Clark Smart: The Ultimate Guide to Getting Rich from America's Money-Saving Expert." "If you're three days from a pay period and you have $3, then what's in your pantry is what you take for lunch."

Howard worked with one couple who used this method to dig out from $35,000 in debt in 18 months. They had a household income of about $90,000, and sticking with the allowance system, they put $2,200 a month toward credit card debt. "It was so empowering for them," he says. "And the allowance method can really work. You create a scarce resource."

3. Get the family involved, so you're working as a team. The couple who went on the allowance system had a big problem at the grocery store: their kids. The little ones would plead for all kinds of products, which their mom would buy. Then at the checkout, she'd pull out the plastic.


Next: You may not get any offers of help on the first call
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How debt management plans affect credit
15 signs of serious debt trouble
The basics of bankruptcy

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