The decision to file bankruptcy should be made carefully with consideration to the benefits and consequences. If you take action early enough, you may be able to prevent bankruptcy by reining in your spending and paying down your debts. If bankruptcy is inevitable, there are steps you can take to make the process run as smoothly as possible.

Preventing Bankruptcy

If you've become delinquent on one or more debt payments, it might not be too late to prevent bankruptcy. But it might take some drastic action on your part to stay solvent. One of the first things you should do is stop using credit and go on a cash budget. Send as much as possible from each paycheck to your creditors and leave yourself a small, set amount of cash for all your expenses. And stay within the budget. If necessary, you can sell some of your assets or have a garage sale. It's also usually worthwhile to negotiate with your creditors to see if you can get a lower interest rate or lower monthly payment.

Preparing for Bankruptcy

If you have seriously delinquent accounts that have gone to collections, there's a good chance you could be headed for bankruptcy. If this is the case, you should be proactive and sign up for credit counseling with an approved agency in your area (see Resources). This counseling is mandatory and must take place up to 180 days before filing for bankruptcy. During this time you should also hire an attorney, get a legal consultation or look into free legal resources, such as bankruptcy self-help books at the public library. You can also prepare yourself for bankruptcy by starting to compile and organize the paperwork related to your income and debts, if you haven't already. Get a copy of your credit report and check it for errors.

What Not to Do

There are certain steps bankruptcy trustees will not tolerate, which can lead to your bankruptcy being thrown out of court. Do not run up your credit cards to the limit prior to filing bankruptcy thinking the debt will simply be erased. Even if your case isn't dismissed, the judge can choose not to discharge those debts, or to confiscate the property purchased. In egregious cases, criminal charges can result. Similarly, don't think you can give away everything you own to friends or family either. The bankruptcy court can reverse any gift you've given in the year before filing.

Source:

MSN: 8 steps to take before bankruptcy; Bankrate.com

Lending Tree: Steps to take before filing bankruptcy

CreditCardDebt.org: Steps You Should Take Before Filing Any Chapter of Bankruptcy

More Information:

U.S. Trustee Program: List of Approved Credit Counseling Agencies

Greenway Law, LLC: What to Take Care of before Filing for Bankruptcy

Credit Loan: Reasons Your Bankruptcy Claim May Be Denied