Alternatives to Bankruptcy

Federal and state laws offer bankruptcy as a solution for unmanageable debt, but there is a high cost associated with getting rid of financial responsibilities.

When you file for bankruptcy, your credit score will drop by 100 points or more, making it much more difficult for you to borrow money or perhaps even find employment.

The COVID-19 pandemic’s economic effects initially gave the impression that a wave of bankruptcies would be filed in 2020, yet the exact opposite happened. Case filings decreased by 29.7%, from 774,940 in 2019 to only 544,463 in 2020. The lowest level since 1986, that was.

However, half a million files still represent a lot of financial suffering, and the suffering might get worse. Following an economic downturn, bankruptcy filings frequently progressively increase. Bankruptcy filings climbed for the next two years after the Great Recession of 2008, reaching a peak of 1.5 million in 2010.

Large debt, however, need not equate to financial failure. If you’re drowning in debt, there are alternatives to bankruptcy.

In many situations, it is possible to work with a nonprofit credit counselor to come up with a plan that gradually pays off debt while avoiding the severe financial and emotional repercussions of declaring bankruptcy.

Your case can be assessed by a licensed credit counselor, who can then suggest a plan of action. If you have no other choice than to file for bankruptcy, it may be best to negotiate a debt settlement or enroll in a debt consolidation program. By doing so, you can avoid going to court and causing less harm to your credit score.

Settlement of Debt

You may be able to work out a deal with your creditors to pay less than what you owe, sometimes significantly less, whether you employ a debt settlement business or handle it yourself. In debt settlement, forgiveness is involved. To settle the complete balance, creditors or a debt collector must be open to accepting partial payment.

You must be in default for debt settlement to be effective. If you are only making the minimal payments each month, creditors won’t want to forgive any debt. Creditors may be open to negotiating if you’re in default and file for bankruptcy since they risk getting nothing if you don’t. Make minimum monthly payments on the debts you can afford while only seeking settlement for those you have stopped paying.

Think about how a debt settlement would affect your future credit before considering it. The outstanding balance is regarded as income and needs to be disclosed on your tax return if your creditors agree to wipe down the debt you owe them. The amount you fail to pay back will be recorded on your credit report for seven years and submitted to the three major credit rating organizations in the country. That might significantly lower your credit score, a crucial indicator used to determine your creditworthiness.

Dealing with for-profit debt settlement firms requires caution. Many have a shady history. Work with no company that requests payment in advance of initiating negotiations with your creditors. According to the legislation, debt settlement firms cannot be paid until a settlement has been achieved and at least one payment has been made to each creditor. They may charge a fee for each creditor they are able to settle with if you have several creditors.

Speed is a benefit of settling. You may be able to pay off your creditors in two to three years if you can set aside at least 50% of what you owe. That is the time span that debt settlement is typically linked with. Additionally, it will put an end to your bothersome collection agency calls and assist you in avoiding bankruptcy court.

You might also save money by handling it yourself, speaking to creditors, and outlining your financial situation.

Consolidating Debt

Debt consolidation is another option to bankruptcy. You need access to a credit line or loan that will let you pay off your bills in order to achieve this on your own. Although a home equity loan or credit line that allows you to borrow against your home is more likely, that might be a personal loan from a bank or credit union.

Although highly improbable if you’re considering bankruptcy, it is feasible to obtain a credit card with 0% interest on balance transfers in order to aid with debt consolidation.

Before consolidating, you should get help from a nonprofit credit counselor or a financial expert. With a unified payment, you can frequently reduce your interest costs and spare yourself the hassle of managing several payments each month.

You might transfer debt to a credit card if you are approved for one that offers to temporarily cut your interest rate on balances, and then use the grace period to make principal payments. Verify that you can transfer balances between your other cards without incurring fees before continuing.

If a personal loan gives you additional time to make set payments at a cheaper interest rate than your credit cards were charging, that is advantageous. Although you must use your property as collateral, home equity loans and credit lines typically have interest rates far lower than those of credit cards. You can lose your home if you are unable to make the necessary monthly payments. For that reason, many financial counselors advise against transferring unsecured consumer debt to a secured house loan.

Finally, you might employ a nonprofit credit counseling organization to manage your obligations by consolidating them. If you choose this option, the organization will take a single payment from you each month and manage paying your creditors. The debt is often eliminated by these programs in three to five years.

Sale of Assets

Consider selling your possessions if your income is insufficient to cover your debt payments. You can sell your Uncle Lester’s coin collection at a garage sale or locate a buyer. Of course, the more valuable your assets are, the more money you can raise to pay off your debt.

There’s a significant chance you’ll have to sell a lot of your possessions if you file for Chapter 7 bankruptcy. If you have substantial assets, you might be able to pay off your debts without declaring bankruptcy. You might put the proceeds from asset sales in an account that you can use to pay off obligations.

Selling your assets could help you keep your business out of bankruptcy if you own one. You will need to maintain assets that are necessary to run the business, so you must first develop a plan.

Credit Counseling

Consider calling a nonprofit credit counseling organization like InCharge Debt Solutions if bargaining with your creditors proves unsuccessful. Credit counselors can frequently assist you in creating a debt management strategy with manageable monthly payments.

A bankruptcy case might be avoided if the credit counselor can negotiate lower interest rates and payments with your creditors. The law compels you to speak with a credit counselor before filing for bankruptcy, regardless of your decision. You should think about consulting a nonprofit counselor before filing for bankruptcy as federal bankruptcy courts maintain listings of them.

Borrow money from family and friends

You might be able to borrow money from trusted friends or family members who are in good financial standing. This should be the last resort before filing for bankruptcy because it is fraught with dangers, the biggest of which is that if you don’t make your loan payments on time, it might trigger the breakup of a close friendship or family member.

If you choose this course of action, treat it like a bank loan. To prevent bankruptcy, sit down and calculate your debts, income, and expenses. Depending on this, you’ll know how much to ask your friend or relative for.

Put it 0n paper, establish a repayment schedule, and follow it. Even if having financial difficulties is difficult, it can be even worse to ruin a good relationship because of them.

Locate a Source of Additional Income

You might be able to produce enough income to stay out of bankruptcy by getting a second job or finding other sources of income. Consider this a last resort to prevent bankruptcy, similar to borrowing from family and friends, rather than a means to increase your income.

There are numerous ways to earn additional money, especially in the world of digital apps that we currently live in. Jobs providing delivery and shopping services can be found almost anywhere, even in more remote regions, including driving for Uber or Lyft, shopping for Instacart, or both. Remember that the majority of these positions demand a smartphone, a car, and a spotless driving record.

Just search “freelance jobs” on any of the several websites that feature freelance and part-time work, and you’ll be on your way.

Don’t ignore conventional approaches, though. Local jobs are listed in your local newspaper or that free weekly that you ordinarily toss, especially those involving childcare, pet-sitting, strolling, and, yes, delivering newspapers. If you want to accomplish those things but don’t want to be reliant on an app, it’s also a fantastic location to promote. The advertisement will cost money, but not as much as you may anticipate.

Whatever you decide to do, be sure you have the time and energy to do it, and dedicate all of your earnings to paying off debt and preventing bankruptcy.

Refinance or Restructure Your Mortgage

That’s probably a substantial expense if you own a home and are still making mortgage payments. If reorganizing your mortgage to pay less may help you stay out of bankruptcy, speak with your lender and ask if they’d be open to helping you create a new payment schedule. They might also consent to a short-term repayment schedule as you work to mend your financial situation.

Consider applying for a new mortgage with a cheaper interest rate and a longer pay period to refinance your existing one. Since a bank is providing you with a fresh loan, this option often requires good credit.

Less Spending Making Budget and Lifestyle Changes

No matter what you decide to do to fix your finances, cutting back on costs and making lifestyle and budget changes to save money that may be used to pay your payments is a smart idea regardless of whether you choose to avoid bankruptcy.

Making a budget may seem daunting, but it just requires calculating how much money you have coming in, how much money you have going out, and how to make revenue surpass expenses. Regardless of your financial status, it should be regular operating procedure.

Reduced spending is one of the simplest things you can do to increase the amount of money in your budget that will go toward paying your necessary payments. It could involve major decisions like selling your home or finding a paid roommate, or it could involve little decisions like canceling a few of your streaming subscriptions.

Examine your monthly bank statements to see what you spent on unnecessary expenses like eating out, cable TV, gym memberships, and other items you may not even be aware you were paying for. Find ways to save money on insurance, utilities, and other monthly expenses as well.

To prevent filing for bankruptcy, everything of your spending should go toward paying down your debt.

If you can’t avoid bankruptcy, here’s what to expect

If filing for bankruptcy is your only option after weighing all of your options, be ready. Understand the repercussions and the details.

You’ll pay a hefty sum of money to file for bankruptcy. A bankruptcy lawyer may set you back several thousand dollars. Your chances of success are significantly decreased if you prepare and file your own bankruptcy case because there are usually many moving pieces and significant filing costs.

A Chapter 7 bankruptcy typically costs $1,250, according to the National Bankruptcy Forum.

Before filing for bankruptcy, you must complete a pre-filing bankruptcy course so that you are informed of your options.

The good news is that you have a decent probability of success if you file for Chapter 7 bankruptcy. Annual discharge rates for Chapter 7 files are approximately 95%. 44% of debts were discharged for individuals filing Chapter 13 cases, but that’s not necessarily a bad thing. The judge assumed the filer could pay off their debts with the assets they possessed in the circumstances where they weren’t.

Chapters 7, 9, 11, 12, 13, and 15 are the six official categories of bankruptcy, however, Chapter 7 (liquidation) and Chapter 13 (personal reorganization) account for 99% of cases filed.

The remaining four—Chapter 11 (for company reorganization), Chapter 9 (for municipalities), Chapter 12 (for farmers), and Chapter 15 (for cross-border transactions)—account for the remaining 1%.