Bankruptcy is often seen as a fresh start, allowing consumers to wipe out debt and have a clean slate. While U.S. bankruptcy laws are designed to provide debt relief for those who are struggling with bills they can’t pay, not every person and not every type of debt qualifies. For example, your income and assets may disqualify you from bankruptcy. You’ll remain responsible for certain types of debt, including federal student loans, alimony, and child support, even after a successful bankruptcy filing.
What’s more, bankruptcy carries dire consequences that will follow you for years. A bankruptcy can remain on your credit report for up to 10 years. This black mark can make it difficult to qualify for mortgages, car loans, and other types of financing. Depending on your location and industry, it can even affect your chances for employment.
Fortunately, you may be able to get out from under staggering debt with one of these alternatives to bankruptcy. Although many people who are in debt ignore the problem in the hopes it will resolve itself, facing the issue head-on is the first step to a brighter financial future.
Reducing Expenses
Trimming unnecessary expenditures frees up funds to pay off debt. Try cutting cable, switching to a less expensive cell phone plan, and eliminating app and website subscriptions.
If you don’t already track your spending, start doing so to find the holes in your budget. You may be surprised how much you spend on take-out food, coffee, entertainment, and other items. Start bringing lunch to work or check out movies from the library instead of purchasing rentals. These small changes can really add up over time.
Credit Counseling and Debt Education
Certified credit counselors can help you make a plan to manage debt through educational materials and workshops, money management information, and budgeting assistance. They may also negotiate with creditors on your behalf to reduce or remove late fees, interest rates and penalties, or to settle your debt for a portion of what you owe.
Some agencies charge exorbitant fees and do little to help their clients get out of debt. To help consumers avoid unscrupulous firms, the U.S. Department of Justice maintains a list of approved credit counseling agencies. You can search this database by location to find a reputable firm in your area.
Negotiating with Creditors
Although a credit counseling agency can negotiate with creditors on your behalf, you can also take this step independently. First, list all your income sources and monthly expenses to determine how much you can pay toward your debt. Then, call each creditor and explain your situation, particularly if you are unable to make payments because of job loss, medical issues or other extenuating circumstances.
Have a specific request in mind before making each phone call. For example, you may want to request a waiver of late fees, several months of skipped payments, temporary or permanent payment reduction, or loan modification to lengthen the term or lower the interest rate. Keep in mind, however, that creditors are under no obligation to offer these benefits.
Debt Settlement
If you’ve fallen far behind on your debt payments, creditors may agree to accept a settlement for a percentage of the total amount due. Doing so can save a credit card company money compared to hiring a collections agency, suing you for the balance and pursuing a judgment.
For example, if you have $20,000 in credit card debt, the creditor may accept $10,000 and agree to write off the rest of the debt. This saves you from mounting interest, late fees, and penalties that would ensue if you continued to miss monthly payments.
Debt settlement is usually an option only if you have home equity, assets, or savings you can use to make an offer. In addition, your credit report will show that you settled the account for less than agreed, which can negatively impact your credit score. The IRS considers the forgiven balance income, which means you will have to pay income taxes on the full amount. In the example above, your taxable income for the year would increase by $10,000.
Debt Consolidation
If you have several high-interest credit cards and loans, you may be able to save money each month by combining them into one loan with a lower monthly payment. This strategy, known as debt consolidation, can take on several forms depending on your situation. Some of the most common types of debt consolidation include the following:
- Using a home equity loan or line of credit to consolidate debt. This is risky, however, because you can lose your home if you do not make payments on the consolidation loan as agreed.
- Using a credit card with a 0% interest balance transfer. This option may only be available to applicants with good credit. The low rate usually expires within 12 to 24 months, so ideally you should pay the balance in full before the APR rises to the normal rate.
- Taking out a personal loan for the amount of your debt. Your credit score will need to be good enough to qualify for this type of loan, or you can apply with a cosigner who has good credit.
Debt consolidation may allow you to retain access to credit while limiting damage to your credit score. However, make sure to carefully review the terms and conditions of a debt consolidation loan before signing on the dotted line. For example, a loan that lowers your monthly payment by extending the length of the loan may result in paying more overall interest over the life of the loan.
Refinance Home or Auto Loans
If you own a home or a vehicle, U.S. News and World Report suggests refinancing your mortgage or auto loan and using the extra money toward your credit card debt. Your lender may agree to restructuring your payments, offering a lower interest rate, or extending your payment term in order to lower your monthly payments. For those with assets, this strategy can accelerate repayment of high-interest debt and provide budgetary breathing room.
If none of these options work for your situation, then remember to consult a bankruptcy attorney to help you take stock of your situation and figure out the best plan of action.
For more information on alternatives to bankruptcy, consult the team at CreditRepair.com. We can help you review your credit report and help you repair your credit so you can improve your financial situation. Call us for a free credit evaluation today.
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