Alternatives to Bankruptcy – What are Other Options?
There are alternatives to bankruptcy. However, most are effective only when the total debt is small compared to the excess monthly income you have available to pay it down. Also, you need to calculate how long it will take to pay off all your debt at the stated interest rate and the payment you can afford. Following are some of the common methods.
- Negotiate with your creditors: On your own, or through a debt counseling service, you try to negotiate better terms including a lower interest rate, reduction in the balance, or full satisfaction of the debt in return for a lump sum payment.
- Advantages: Avoids bankruptcy. Makes debts manageable.
- Disadvantages: Success depends upon the willingness of creditors to work with you. There is no way to force creditors to enter into an agreement. If only one creditor does not want to play nice, it may mess up the whole plan. Your credit score will still be negatively impacted since the debts are reported as “not paid in full. “ Also under the tax law, any debt forgiven by the lender is income to you. Unless you qualify under one of the tax law exceptions, there may be income taxes to pay. And that’s another headache.
- Refinance: If you are credit–worthy, you can take out a separate lower–interest rate loan to pay off all of your higher–interest debts.
- Advantages: Lower monthly payments.
- Disadvantages: You will usually need to give some collateral in exchange for the loan, such as your house or car, and you can lose it if you fail to make payments. We often see debtors who had unsecured debt they could have discharged in a simple bankruptcy, now facing loss of a home in foreclosure because they rolled the debt into a loan secured against a house. Also remember that you will pay many, many times more interest over the course of a thirty year loan for a loan that originally could have been paid off in say five or ten years.
- Do nothing: This might be an option for you if you have no wages or assets that would interest your creditors, such as a bank account, investments, house, or car.
- Advantages: Since you do not have any assets or anything your creditors would want or be able to seize, you are “judgment proof” and your creditors may not bother to sue you. They may end up writing off the debt as a loss.
- Disadvantages: You credit will be impacted negatively, and you will still get phone calls from collectors. Also if a creditor decides to sue and get a judgment anyway, the judgment may be uncollectible but in many jurisdictions it remains viable for twenty years. When you want to “resurface” and rejoin society, these are problems you will have to deal with.