8 steps to take before bankruptcy

5. Go for consumer credit counseling.

Find a local affiliate of the National Foundation for Credit Counseling and get an appointment. Once you're there, trained credit counselors will help you look at your situation and draft a budget.

If you want, they can also take the process a step further and negotiate a payment plan with your creditors. And while a debt-management plan can have a negative impact on your credit, it's better than bankruptcy. (And if you've already gotten significantly behind on the bills, it probably won't make things any worse.)

6. Negotiate with your credit lenders.

Not yet ready to sign up for a debt-management plan? You can try to do the same thing on your own.

First, you need to gauge the status of each account. Is it open and near the limit? Or has it been closed and turned over to collections? Generally, accounts go to collections somewhere between 120 and 150 days past due, says John Ulzheimer, vice president of the After Bankruptcy Foundation, a nonprofit organization that teaches people how to recover from bankruptcy.

"If you have an excellent credit score, they will be a little more flexible," says Ulzheimer. "If you have a poor credit score, they're not going to let you go 90 days past due."

If you're behind on payments but the account hasn't gone to collections: If your account is open and you can afford to pay something, that's good. "If you can start working with the creditor -- lowering the interest rate, lowering the payment or doing away with interest temporarily -- that can give you enough time to get back on your feet," says Ulzheimer. Some companies have intervention programs allowing them to make "radical changes to your account temporarily," he says. Again, your track record, financial resources and future financial situation will make a difference.

You may not get any offers of help on the first call. Stay with it, be polite and work your way up the food chain. "It can save your credit rating," says Ulzheimer.

If your account has gone to collections: Not as good for your credit rating, but far from hopeless.

At this point, the accounts have gone from being delinquent "to being seriously delinquent," says Ulzheimer. The account has probably been closed, so now they look at you as a debtor, rather than a customer.

Having a collection on your credit report is "bad," says Ulzheimer. "But it opens up some options. Collection agencies have an incentive to collect something from your account. You have leverage to offer them some sort of settlement."

Depending on your situation, shoot for a lump-sum arrangement or a low- or no-interest payment plan. Whatever deal you work out, get all the terms, including what will be reported to the credit bureaus, in writing before you start paying, says Ulzheimer. "Whatever deal they make with you is only as good as what's on paper," he says. And if the company neglects to report your arrangement to the credit bureaus, you have paperwork to correct the error.

The bad news about this arrangement: The collection will stay on your credit report for seven years. Two things you might try:

• Ask that the collections notation show that the account was settled with a zero balance (even if you settled for dimes on the dollar). The notation will stay with you, but future lenders will see that the debt was paid in full. (That's especially important for mortgage lenders, says Ulzheimer.)

• Ask the creditor to take the notation off of your credit report. "I see this work one out of 50 times," says Ulzheimer. But "sometimes you can convince them to wipe the debt clear, clean it off the credit report, if you'll pay the full amount."

7. Get a (second or part-time) job.

"There's nothing wrong with flipping burgers," says Warren. Too many times, out-of-work professionals "engage in all-or-nothing thinking," she says. But even a little money coming in can keep a bad financial situation from getting worse.

Look for hours that give you plenty of time for job hunting and just leave it off the resume. "It brings in some cash, and that can help," Warren says.

8. Try the 30-month plan.

Got one or two debts that are causing you pain? Visit Bankrate's online amortization calculator and plug in your interest rate and a 30-month payoff period. The calculator will give you the corresponding monthly payment. That's your new monthly minimum.

For instance, say you carry a combined balance on several cards of $8,000 with interest rates of 15.99%. If you start throwing $325 at those bills, you'll be debt free in 2.5 years.

Howard admits that it works only when the debt is "moderately worrisome." But if you've only got one or two that are a problem, it works. You can also use the calculator to find other combinations you can live with, such as slightly longer terms or better rates. (Then call the creditor and try to cut a deal.)

Says Howard, "The reason I like 30 months is that people see the progress every month."

By Dana Dratch, Bankrate.com

Updated Nov. 25, 2008

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