Tips to pay down debt and avoid bankruptcy

There's good news: Unemployment is starting to slowly drop, and in some parts of the country, so have the record number of home foreclosures. But, bad news remains: Americans are still hurting from one of the greatest economic downturns in the nation's history.

As a result, more Americans than ever, including those in the middle class, are experiencing financial hardship, with many living paycheck to paycheck. In fact, an estimated 1.5 million Americans declared bankruptcy in 2010, up 9 percent from 2009. Since 2008, a total of more than 4 million Americans declared bankruptcy.

If you're struggling to pay your bills, or if you've been hit with an unexpected major expense, such as a large medical bill, it's critical to act quickly to avoid bankruptcy, according to FindLaw.com, the nation's leading online source of legal information. From cutting all unnecessary expenses to negotiating with creditors, the sooner you act, the better your chances to avoid bankruptcy, which can cripple your ability to obtain credit in the future, or even hinder future career opportunities.

Here are some tips from FindLaw.com on what you can do to avoid bankruptcy, and what to do if you find yourself with no other options:

1. Pay off existing debt.
Pay off existing debt as quickly as possible so you can get to a place where you can live within your means (not spending more than you bring home in income, after taxes). You may want to seek the help of a credit counselor to create a plan to cut your debt and reduce your spending. Cut non-essentials such as cable, landline phone service and other subscriptions. Sell assets such as furniture, electronics and other items on free websites such as Craigslist and eBay to earn some extra cash to pay for the most critical expenses in your life - food, shelter and medical insurance. If you think your job may be at risk, now is the time to stockpile cash to pay for essentials.

2. Get another job.
Take a part-time job to raise additional cash, or find a new full-time job that offers a higher salary and/or better benefits than your current job, including discounts on essentials or better health and dental insurance benefits.

3. Carefully consider going into debt.
Realize that going into debt is a choice, not a necessity. Instead of taking out student loans to pay for college, you can work while going to school or save enough before enrolling to pay for a semester of tuition. You could rent instead of buying a home. Take public transportation instead of leasing or financing a car. College students should give this careful consideration. The average college graduate enters the workforce with more than $24,000 in student loan debt, according to The Project on Student Debt. Entering the workplace with massive debt is not only stressful, but could also prevent you from taking career chances because you must bring in a paycheck to make student loan payments.

4. Don't cut medical insurance.
Even before the Great Recession, a major medical expense was cited in more than half of bankruptcy cases as the leading reason for the filer's financial trouble, according to a Harvard study. Because many households live paycheck to paycheck, it's often an unexpected event, such as a sudden illness or injury, that sends a household spiraling toward bankruptcy.

5. Be upfront with your creditors.
Let creditors know if you've lost your job or are struggling to pay your debts. They may be open to restructuring your debt payments. And, many credit card companies and banks have specific programs to help people experiencing financial hardships to pay off their debts.

6. Consider debt settlement or consolidation.
Some households, out of desperation, may turn to a third-party debt consolidation or settlement firm to help them deal with creditors. What a debt settlement or consolidation firms does is take charge of your debt, for you, for a fee, which can be expensive. Then, each month, you pay the debt consolidation firm, which takes its fee first and then pays your creditors with the rest. In debt settlement, the firm withholds payments to your creditors in order to force your creditors to settle for an amount less than your total debt. Because many debt consolidation and settlement firms are unregulated, consumers must be very careful in selecting a reputable firm, as this industry is notorious for scammers. To find a debt management firm, contact the National Foundation for Credit Counseling, which can connect you with a NFCC member firm.

7. Filing for bankruptcy.
Don't turn to bankruptcy until you've exhausted all of your possible options. But if it's absolutely necessary, FindLaw.com recommends that you hire a lawyer who specializes in this field to see if you are eligible to declare bankruptcy, based on the latest changes in the law passed by Congress in 2005. The new law was passed to prevent people from taking advantage of the bankruptcy system. It requires credit counseling, and more documentation, and places greater responsibility on the attorney in representing the person declaring bankruptcy. In working with a credit counselor and an attorney, you'll determine which type of bankruptcy - Chapter 7 bankruptcy (liquidation) or Chapter 13 bankruptcy (reorganization of your debts) - is the best option for you.

8. Understand the consequences.
Realize that if you do file for bankruptcy, you may lose your house and many other possessions. In addition, there are certain debts that will continue to follow you regardless of whether you declare bankruptcy, such as student loans and child support payments. Bankruptcy is not to be taken lightly. It will remain on your credit reports for up to 10 years, making it more difficult for you to qualify for car loans, a mortgage and other forms of credit in the future.