Bankruptcy Alternatives and Options[yoast-breadcrumb]
Bankruptcy Alternatives and Options
Filing for bankruptcy can be a super stressful decision. It may stop bill collectors and wage garnishments, but it also damages your credit for years. While bankruptcy helps many people, their are other options to consider first.
This article looks at alternatives to filing for bankruptcy under Chapter 7 or Chapter 13. We’ll discuss options like debt management plans, debt consolidation loans, negotiating with creditors, and more. Read on to learn about pros, cons, and situations where these alternatives could work for you.
If your income is low with little assets or property, you may be “judgement proof.” This means creditors can win lawsuits against you, but theres nothing for them to take. Many will give up trying to collect. So doing nothing could be an option.
This works best if your situation won’t change. But if your income rises, creditors could come after you again. And it does’nt stop interest and fees from growing on debts.
Selling valuable property like a house, car, or other assets can eliminate some debts. Use the proceeds to pay down bills and avoid bankruptcy.
This works if you have equity built up. But if your home is “underwater” with debt higher than value, a short sale could leave you with a big tax bill.
Negotiate with Creditors
Calling up creditors and negotiating is always an option. Many creditors will take less than the full amount if you pay it quickly. This can help you avoid bankruptcy.
Settlements often save 30-50% off debts. But creditors may sue if you stop paying before settling. Get any deals in writing.
Debt Management Plans
Non-profit credit counseling agencies can set up debt management plans (DMPs). You make one monthly payment to the agency, who distributes it across your debts.
DMPs can lower interest rates and waive fees. But they last 3-5 years and you must qualify based on income.
Debt Consolidation Loans
Borrowing money to pay off debts through a debt consolidation loan simplifies your finances into one payment. Options include bank loans, home equity loans, and balance transfer cards.
Consolidation can lower monthly payments and interest rates. But you must qualify and loans have fees. Defaulting can make things worse.
Borrow from Friends or Family
Asking friends or family for a loan to avoid bankruptcy can work as a last resort. Make sure to sign a contract with repayment terms and interest.
This option helps avoid bankruptcy’s impact on your credit. But failing to repay the loan can damage relationships.
Debt settlement companies negotiate with your creditors to settle debts for less than you owe. You make monthly payments to a dedicated account until enough is saved up to make settlement offers.
Settlements can resolve debts for 30-50% less than you owe. But fees are high and creditors may sue if you stop paying upfront.
When Bankruptcy Is the Best Option
If alternatives don’t work, bankruptcy may still be your best choice. Filing Chapter 7 or Chapter 13 stops collections and wipes out many debts.
Bankruptcy damages your credit, but won’t ruin it. Most people rebuild scores within 2 years. And it offers powerful protections from creditors.
Talk to a bankruptcy lawyer if debt is overwhelming. They can advise if bankruptcy makes sense for your situation.
The Pros and Cons of Bankruptcy
While bankruptcy has downsides, it also offers many benefits:
- Stops wage garnishments and property seizures
- Pauses foreclosure and repossession actions
- Wipes out credit card, medical, and personal loan debts
- Discharges most judgments against you
- Allows you to keep exempt property like your home, car, and retirement funds
Downsides of filing bankruptcy include:
- Damages your credit score for up to 10 years
- Remains on your credit report for 7-10 years
- May not discharge alimony, child support, taxes, or student loans
- Legal fees and court costs for filing
- Possible loss of property that isn’t exempt
Chapter 7 vs Chapter 13 Bankruptcy
If you decide bankruptcy is best, understand the difference between filing Chapter 7 vs Chapter 13:
Chapter 7 Bankruptcy
- Liquidation bankruptcy that wipes out eligible debt and sells non-exempt assets
- Must pass a “means test” showing low income/high expenses
- Discharges credit cards, medical bills, personal loans, most judgments
- Fast process taking 3-6 months
Chapter 13 Bankruptcy
- Debt reorganization where you repay some debt over 3-5 years
- No eligibility requirements except regular income
- Keeps property like cars and homes if you stay current on payments
- Discharges remaining unsecured debt after plan ends
Talk to a bankruptcy attorney to decide which type fits your situation best.
Alternatives Offer More Options
As you can see, their are many alternatives to explore before filing bankruptcy. Each option has pros and cons to consider.
If you don’t qualify for bankruptcy or want to avoid it, don’t give up. Speak to a credit counseling agency or financial advisor to discuss your specific situation.
While bankruptcy brings relief from debts, their are other paths to a stable financial future. Weigh all your options carefully before deciding what works best for you.