Alternatives to Bankruptcy

Bankruptcy – the process of eliminating and/or repaying debts through the court system – is a beneficial option for many people. It can provide an end to the most persistent credit collectors, significantly reduce the amount of debt owed, and even protect homes from repossession. On the flip side, however, bankruptcy can also severely ruin credit. In addition to that, bankruptcy can lead to losing other meaningful possessions (such as an important computer, family memento, or car), make it hard to get a new mortgage in the future, and will likely leave you with some debt to be paid. So even though it can sometimes be a helpful option, bankruptcy is not by any means a perfect solution. Bankruptcy should serve as a last resort, only after considering the many alternatives to bankruptcy that are available. If you are currently in a financial crisis and considering bankruptcy, the alternatives discussed in this article will be a great starting point.

What Alternatives to Bankruptcy Should I Consider?

There are several major alternatives to bankruptcy to consider. The most helpful alternatives include negotiation with creditors, debt consolidation, and debt counseling.

Negotiating with creditors is a great idea for anyone who suspects they cannot pay their debts as they are and has reached a financial crisis. For most creditors, getting their money from you – even if it takes longer – is most important than anything to them. That gives the consumer a little bit of leverage if it is clear you are having true problems paying your debts and are a candidate for bankruptcy. If you are interested in negotiation with your creditors, the most important step to take is to call them, alerting them of your situation. Make it clear that you are unable to pay your debts at the time, but that you have a source of income, or something else (such as an asset) that will make you able to pay your debts in the future. Some creditors will delay the collection process, help you devise a repayment plan, or present another solution that will benefit the both of you.

Getting help from a professional agency may help you in negotiating with your creditors or finding some other sources of help. Many professional nonprofit companies, such as credit counseling agencies, provide services to consumers facing collection. These agencies have experience working with creditors, especially when it comes to negotiation. Using an agency will help ensure that your creditors do not take advantage of you and will better position you for the solution you are looking for.

Debt consolidation is a tool that allows consumers to consolidate their debts. This means that instead of owing money to several different creditors, the consumer will owe only one. One creditor (a lender, credit card company, or mortgage company) takes on the entirety of the consumer’s debt. The principal reason debt consolidation, or combining debts, is so helpful is simple – dealing with one new creditor is much easier than dealing with several. When you consolidate your debts to your new creditor, a lower interest rate and monthly payment usually result, and it becomes much easier to make payments. In addition, there will be no negative impact on your credit history.

Defaulting on your debt can also be a viable alternative to bankruptcy, for some special consumers. If you truly have no source of income to pay creditors, as well as no property that could be repossessed, you might be “judgment proof.” Being “judgment proof” essentially means that no action can be taken against you by a creditor, because you have nothing they could collect.  People who are fully unemployed or retired often qualify as “judgment proof.” For these people, bankruptcy would often be an unnecessary expense and unnecessarily damaging to their life.

So what should I do?

As someone facing a serious financial crisis, it will be important that you make a smart choice between bankruptcy and another alternative. Seriously consider the downside of bankruptcy and evaluate whether the negative impact will be worth it to you. If not, you need to exhaust all of your bankruptcy alternatives before filing a bankruptcy. Start by talking with your creditors, and negotiate any potential plans that will allow you to keep paying your bills and other debts without filing for bankruptcy. From there, work with other bankruptcy alternatives until you reach a solution that works for you. If you have trouble deciding, do not hesitate to speak with a bankruptcy lawyer or other professional that can advise you on your decision. In the end, if after careful consideration you find that bankruptcy is still the only possible option, contact a bankruptcy lawyer to explore the next steps.