Popular Alternatives to Bankruptcy

Many sources claim that bankruptcy is the only answer for overwhelming debt, and although it is true that sometimes the filing of a bankruptcy petition may be an adequate solution to those overburdened with financial obligations, there are alternatives to consider before bankruptcy is declared.

Bankruptcy and Credit

The biggest deterrent to a bankruptcy filing is the effect it has on credit ratings and credit scores. Consumers are well aware that credit scores impact many facets of financial life from life insurance rates to even employment possibilities. The credit score hit caused by a Chapter 7 or Chapter 13 filing can be severe and long lasting. Therefore, other debt mitigation efforts should be considered before the decision is made to file a bankruptcy petition.

Informal Negotiation

Many consumers don’t realize that sometimes a simple phone call can solve many difficulties. Since the serious recession that began in 2008, almost all major lenders have loss mitigation departments that will explain programs for interest rate reductions, lowered payments, and even loan forbearance. It is not always necessary to consult an attorney or a paralegal to begin this process, and many debtors have found some relief by directly contacting their lenders and asking for relief.

Loan Consolidation

This technique has existed for a long time, and it can still be a viable option. With many consumer credit card interest rates at almost 30 percent, it may be wise to apply for a larger loan at a lower rate. Some consumers have seen their installment payments cut in half by use of the consolidated loan process.

Student Loans

Those with overwhelming student loan debt need to realize that both federal and private loans have built in mechanisms for deferment and forbearance. Sometimes payments on these loans can be postponed for almost four years without negative credit bureau reporting. Those with high levels of student loan debt need to speak with a counselor to help guide them through the process.

Debt Modification Companies

While the Internet is full of companies that claim they can reduce consumer debt, individuals must be careful to only contract with reputable firms. That said, sometimes these firms may be able to strike very attractive deals with lenders in order to reduce debts. Due diligence is very important here, and consumers need to carefully research exactly with whom they are dealing before contracts are signed and money changes hands.

Refusal to Pay

For those with little or no assets, bankruptcy can be a waste of money. In some states like Texas, companies who gain judgments against consumers cannot garnish wages. Most states exempt wide areas of property from a forced sale, and it is true that many of those badly in debt are simply judgment-proof. This means that even if they are successfully sued, there is nothing to recover. Since the credit ratings of those with overwhelming debt are many times already damaged, there may not be much more to lose by simply not paying debt. If properly instructed, collection agencies can be forced to cease contact by mail or phone.

Bankruptcy can sometimes be an answer for those who wish to discharge certain unsecured debt without regard to potential credit damage. For others, the methods listed above should be attempted first and may provide the financial relief desired.

Paul Becker is an avid finance buff, and gets many of his smart money tips from bankruptcy alternatives sites and investment blogs.

Tags: bankruptcy attorney, bankruptcy chapter 13, bankruptcy chapter 7, bankruptcy court, bankruptcy lawyers, file bankruptcy

Category: Bankruptcy