Few people are eager to file for bankruptcy, so it’s no surprise that many facing financial hardships are seeking bankruptcy alternatives. For some, there are better answers. There is no one-size-fits-all solution to financial problems, and it’s smart to explore your options before making any significant decision about your future.
In fact, for some people, the simplest solution is the right one. Before exploring options like liquidation of important assets, debt settlement or a debt consolidation loan, you may want to try negotiating with your creditors. Many people facing serious financial problems skip over this step because the stress of juggling past-due bills and the pressure from creditors and debt collectors makes it seem impossible.
Of course, there’s no guarantee that your creditors will cooperate. But, there’s usually no harm in picking up the phone and finding out. Just make sure that you know exactly what you can afford to offer them before you get on the line, and stand firm. Remember that you’re talking with someone whose job is to get as much money from you as possible in as short a period of time as possible. Before you reach out to a single creditor, figure out exactly how much money you have to work with each month and then prioritize your debts. Otherwise, you may end up committing too much money to the wrong creditor or debt collector, leaving more important accounts at risk.
Some additional bankruptcy alternatives many people consider include:
Debt Management Plans
You’ve likely heard of credit counseling as a prerequisite for bankruptcy, but credit counseling offers more than the certificate of completion that opens the door to bankruptcy. In fact, the reason Congress imposed the credit counseling requirement was to make sure that people filing bankruptcy had fully explored their options first.
A good non-profit credit counseling agency will help you assess your situation and explain your options. One option they may offer is a debt management plan. When you enter into a debt management plan, the administrator reaches out to your creditors to try to negotiate lower interest rates, lower monthly payments, and other terms that will make it easier for you to keep up with your payments. Then, those agreed payments are rolled into one monthly payment to the administrator, who distributes funds to the creditors.
Debt management plans can be helpful for people who have mostly unsecured debts like credit card debt, and who are able to make regular payments toward those debts. But, these plans have limitations, too. Not all types of debt can be included in a debt management plan, which may undermine the effectiveness of the plan. Unlike in a Chapter 13 repayment plan, a creditor can simply decline to work with the debt management administrator. And, debt management plans often knock down credit scores, since creditors will typically close accounts that are entered in a plan.
At first glance, debt settlement may seem to hold the greatest promise: settling your debts for a fraction of what you owe. It’s true that when a debt settlement plan is successful, the debtor may be able to settle debts for substantially less than the outstanding balance. But, most people who enter into debt settlement plans end up abandoning the program without settling debts.
Because debt settlement generally involves defaulting on debts and instead paying money into a settlement fund each month, the fallout is unpredictable. Creditors may continue to call, send collection notices, report delinquencies to credit bureaus, and even file lawsuits to collect the unpaid balance. If a debt is settled, the creditor may issue a 1099-C for the unpaid balance, alerting the IRS that you may owe income tax on the savings.
In short, debt settlement is riddled with pitfalls. If you are considering this option, research carefully before you commit.
Debt Consolidation Loans
For those who qualify, a debt consolidation loan can help reduce monthly payments to a manageable level while also reducing the interest rate on debt. Debt consolidation can be a good option for those who recognize the problem early and act quickly to take control. However, people in tough financial circumstances often wait too long to act, and then can’t qualify for unsecured debt consolidation loans because their credit is already suffering.
One possible solution in that situation is to take out a home equity loan or home equity line of credit (HELOC) to pay off other debts. That means one monthly payment instead of many, gives the homeowner the flexibility to include types of debt that can’t be managed through debt settlement plans or other programs, and will often lower both interest rates and the total amount due each month.
In Las Vegas, nearly half of all homes are mortgage free, and another 25% are “equity rich.” That means many homeowners have the option of taking equity out of their homes to pay off debt. But, that doesn’t always mean it’s the smart move. One downside to using home equity to consolidate debt is that it turns unsecured debt into a lien on your home.
Finding the Best Solution for You
The best solution for you will depend on a wide range of factors, including:
- Your income
- Your assets
- Your living expenses and any special circumstances
- The condition of your credit
- Your goals and priorities
Educating yourself about your options is an important first step. A session with a reputable non-profit credit counseling agency is one way to get started. Another is to consult an experienced bankruptcy attorney. At Freedom Law Firm, we offer free consultations to help people in difficult financial circumstances gather the information they need to make good decisions for the future. You can schedule yours right now by calling 702-903-1459 or filling out the contact form on this site.