Best Alternatives When Your Bank Denies a Consolidation Loan

If the bank has said “no” to a consolidation loan and the debts are unmanageable, bankruptcy may seem like the next step. Is that where the buck stops, or is there a less painful path to relief?

Sure, bankruptcy is an option. But sometimes bankruptcy is not the only way to get relief, or even the best fit, whether it’s for personal credit cards or business debts gone sour.

Every alternative has pros and cons and risks to evaluate, and avoiding bankruptcy may sound like a good thing. But if you end up in a worse position for breaking a new agreement, will you end up with anything to show for it?

Alternatives That Are Commonly Available to Individuals and Business Owners

Below is a look at some of these alternatives, as well as the advantages of having a lawyer to help you choose the best path for you to follow.

A workout refers to a debtor negotiating in good faith with creditors outside court, trying to come to an agreement to resolve the debts. Often it works by creating a composition, where the creditor accepts partial repayment, or an extension, where the debtor gets more time, or both.

A workout has the advantage of being very flexible. There are really no limits on the terms of the workout itself, with the one requirement that all the parties agree. That means that they can take on many forms.

The second benefit of a workout is speed. Bankruptcy’s rules on notice and reporting and possible challenges slow things down. But if there are only a few major creditors, a workout can be quick.

In addition to being flexible and quick, a workout is also relatively cheap. There are not always professional or filing fees required. And the money that would otherwise be spent on a Chapter 11 can instead help persuade creditors to work with the debtor.

The fourth benefit to a workout is privacy. Once a bankruptcy is filed, it is a public record. For individuals it could damage relationships with employers, friends or family. For businesses, current or potential clients, partners, employees or the whole community could be impacted. With a workout, the negotiations stay between the debtor and the creditors.

A workout is not for everyone. Because everyone has to agree, workouts only work in limited cases. They are a good fit when:

• There are relatively few large creditors.

Another factor that makes a workout an effective tool is that the debtor still has a good working relationship with its creditors.

Another condition that makes a workout more effective is when the debtor company and its obligations are relatively straightforward.

An assignment for the benefit of creditors (ABC) is a way to liquidate a business under state law. It is an alternative to a Chapter 7 bankruptcy, often providing a faster, and less expensive, method for closing a business down.

During an assignment for the benefit of creditors, the debtor business transfers all of its assets voluntarily to a neutral third party called an assignee. The assignee sells the assets, and pays the creditors with the proceeds.

An ABC is not for everyone. If the debtor is planning to stay in business, an ABC doesn’t make sense. But if the company and owner are ready to shut down, an assignment for the benefit of creditors can make for a less expensive and more private exit strategy.

A forbearance agreement is for a debtor that expects to be able to pay back a debt in full down the road but just needs to buy a little time now. The lender agrees to delay, reduce or stop payments for a limited period.

The catch with a forbearance agreement? Interest will still accrue, and you will still owe it. And the lender will not foreclose or accelerate the loan during that time, but in exchange, if you default, you will agree not to challenge collection.

If you breach a forbearance agreement, the lender may want to add a “deed in lieu of foreclosure.” That’s when you agree in advance to sign over title to a property in exchange for release from the debt. So the lender would have the right to take your house or business if you failed to pay or broke the deal.

A debt consolidation loan is when you get one new loan or credit line to pay off several debts, like auto and student loans and credit card balances.

The up side of consolidating with a consolidation loan is two fold. First, you may be able to lock in a lower interest rate than what you are paying with your existing loans, so you spend less long term. And second, you will have just one due date each month instead of a bunch of individual payments on each loan.

However, it’s important to note that a lower interest rate isn’t guaranteed, and there may also be fees associated with the loan. Additionally, if you miss any payments, it could actually make your financial situation worse. Ultimately, loan consolidation is only an option if you have good credit and a steady source of extra income.

Debt settlement is when you try to renegotiate your debts yourself or through a debt settlement company or lawyer. Usually, the goal is to persuade your creditors to forgive or settle part of your debt, and you walk away paying back less than you owe.

It’s easier said than done. To get your creditors to accept less, you usually need to be in default or delinquent. Creditors don’t usually agree to release or forgive debt until after you stop paying them minimums. Other down sides exist.

One downside is fees. For-profit debt settlement companies charge for their services, and some are very shady.

The second drawback of settling a debt is that when you do, the amount forgiven may be taxed as ordinary income.

A third downside is your credit score may drop.

A debt management program (a.k.a. debt management plan) is set up with a nonprofit credit counseling agency or attorney. Payments are consolidated into one, which goes to repaying high-interest, unsecured debts, typically over 3 to 5 years.

Through a debt management program, a credit counseling agency reviews your finances and seeks reductions in the rates the creditors charge. If the creditors agree, the debtor pays the agency a fixed monthly sum, and the agency pays the creditors.

A debt management program is a debt consolidation program, just one where you don’t end up with a new loan. The upside is you don’t risk falling into more debt, the downside is you must close your credit cards and may not be able to get a home or car loan while you’re enrolled in the program.

Bankruptcy Lawyer

One role of a bankruptcy lawyer is to convince creditors they should accept the debtor’s proposal to pay less. But why would creditors accept a proposal by the debtor’s lawyer that they would not accept from the debtor? Sometimes creditors refuse to work with debtors on a payment reduction, but are willing to negotiate with the debtor’s lawyer. The fear of a bankruptcy filing can make creditors’ reduced payments look like a less-scary alternative.

A bankruptcy lawyer? But I don’t want to file! You may not have to. A lawyer who knows the law can steer you to the best solution.

Many people dread facing the reality of their debts and so avoid getting help, which leads to complications down the road.

Of course, it is very understandable. No one wants to face the music. But the sooner you meet with a lawyer the better your terms, and the more likely it is you can avoid bankruptcy altogether.