When things go from bad to worse financially, people may look into bankruptcy protection as their only way out. That doesn’t mean anyone actually wants to file for bankruptcy; while it may help relieve debt, there are consequences. And of course, the very idea of it doesn’t help anyone’s self-image.
First, you should know that you’re not alone.
More people than you realize are just managing to make ends meet, when some unexpected event or expense lays more debt on them than they can handle. They want to do the right thing, and get back on their feet. But since they don’t understand the options and their ramifications, they often feel frozen in place.
Depending on your situation, there may be alternatives to bankruptcy. There are also options if you go the bankruptcy route: Chapter 7 and Chapter 13.
The first alternative to bankruptcy: Debt Settlement
Debt Settlement is a process of appealing to each of the companies you owe money to, in seeking to reduce the amount owed. If you are in default, in other words, not even making minimum payments, the creditor may be willing to accept a percentage of the amount owed instead of the risking not getting paid at all. Both parties must then agree on payment terms for the reduced amount.
While it’s technically possible for an individual to work out their own debt settlements, it can be difficult to schedule and balance the various obligations with limited income and assets. It’s also easy to make mistakes if you don’t understand ‘how the game is played,’ or the potential impact on your credit and taxes.
That’s why most people work with an attorney or a credit counselor to negotiate debt settlement arrangements on their behalf. That professional will start with a review of all your obligations, income, assets and other circumstances. It’s important to be honest and thorough in your responses, so that the person helping you has the complete picture. After a successful settlement the letters and calls from collection agencies should stop, and you should be able to get out of debt within a few years.
The next alternative: Debt Consolidation
The idea behind Debt Consolidation is to use a credit line or loan to pay off all your other debts. The advantage is, you then have just one financial obligation to satisfy, rather than several. Acquiring a low-interest credit card can also work in some cases. The challenge is getting approved for those financial products despite current financial difficulties.
Like with Debt Settlement, it’s smart to work with a legal or financial professional to examine all the options and find the right approach for the maximum reduction of interest payments. Tax issues may also come into play.
Other risks include putting your house at risk if you’ve secured a home equity line of credit, and then can’t make the payments.
A final alternative: Sale of Your Assets
Depending on the assets you hold, this approach could work either by itself or in concert with one of the other alternatives to bankruptcy. While selling your home may be a last resort, once again it’s best to get the advice of a professional who can provide guidance and ensure that a proposed debt solution doesn’t turn out to be worse than the original problem.