8 steps to take before bankruptcy

By Bankrate.com

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

That doesn't mean bankruptcy is your only option, especially since the tough new law went into effect in 2005.

There's nothing that says you can't attack your money problems on two fronts instead. Try to improve your situation before you investigate the bankruptcy option. No matter which way you go, here are a few things 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. It's 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.

Howard convinced them to try a tactic that he's used himself. After the allowance system went into effect, the couple turned saving into a game for the children. They encouraged the kids to go through the paper looking for coupons and specials on the things they liked. In the store, the game was to keep the total as low as possible. And children got to keep one-fourth of the money they saved.

4. Sell assets.

"People tend to forget about this," says Elizabeth Warren, a Harvard Law School professor and co-author of "All Your Worth: The Ultimate Lifetime Money Plan." What to target: things that have cash value, but not sentimental value. Think antiques, old clothes or collectibles.

Check the closets, garage and storage locker, she says, "and find out what you can live without."

"eBay, garage sales and consignment shops can all be a source of cash," Warren says.

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