5 Alternatives To Declaring Bankruptcy
Bankruptcy is a form of legal action in which a government institution officially recognizes that a debtor either is unable to pay off his or her debts or is faced with a significantly diminished ability of doing so. While most cases of bankruptcy result from a filing made by the debtor, in some cases, bankruptcy can occur due to creditors filing on behalf of the debtor. In the United States, a personal bankruptcy filing can result in either a cancellation of debt or a court-ordered restructuring of debt payments. (To learn more about the different types of consumer bankruptcy, see Understanding The Differences Between Chapter 7 And Chapter 13 Bankruptcy.)
However, despite the relief that bankruptcy can produce, it is often not the best option because it essentially destroys one’s credit score, making it impossible to obtain normal loans or lines of credit for some time. Bankruptcy can also result in the confiscation of property for the purpose of paying off debts as much as possible. For these reasons, when it is possible, people with debt problems should consider all of the alternatives before filing for bankruptcy. In many cases, better options are available.
When debtors fail to pay their debts, creditors can get court-ordered judgments against them. These judgments may result in garnished wages or the seizure of property – in a manner similar to what happens as a result of bankruptcy. However, in some cases, debtors do not have wages that can be garnished or property that can be confiscated. For such people, inaction may be the best decision. However, while debt cancellation through bankruptcy makes it illegal for creditors to contact you demanding payment, debtors who decide to do nothing about their debt may be harassed by creditors for some time to come.
In some cases, creditors may not be able to adequately verify that the debts they claim you have accrued are legitimate. If you feel that this is the case for some of your debts, you may be able to remove them from your credit report. If you believe that you have suspect items on your credit report, order a copy of your credit report from each of the three major credit agencies. (The federal government requires them to provide you with one free credit report once per year upon request.) Identify the suspect items on your report and inform the credit agencies of these items. If your creditors cannot prove that these debt items are legitimate, the credit agencies must remove them from your report. (For more information on correcting a credit report error, see How To Fix A Credit Report Error.)
Personal Financial Management
In some cases, people with excessive debt are actually able to repay it. They simply need to take better care to manage their finances. For example, someone with multiple credit cards charged up to their limits can often take care of these debts by minimizing unnecessary monthly expenditures and making considerable payments toward those debts every month. Dealing with debts in this way can help to repair one’s credit score and build a sense of self-reliance and accomplishment. To get help with personal financial management, you may enlist the services of professional financial counselors. There are some non-profit organizations that provide such services for free or for low rates.
In some cases, debtors can find debt relief by negotiating directly with creditors. This is because creditors quite simply prefer something – even if it means less than what they originally expected – over nothing. This is especially true when a large amount of the debt owed consists of interest charges and extra fees on top of the principal debt. For example, if $5,000 in credit card debt turns into $10,000 because it has gone unpaid for so long, the credit card company may be willing to negotiate a debt reduction to around the value of the original debt. Creditors are particularly willing to reduce debt in this way if they fear that the creditor is utterly unable to pay the full amount owed. One way of getting creditors to agree to such terms may be to threaten to file for bankruptcy, as creditors often get nothing when creditors file for bankruptcy. Such negotiations may result in either a restructuring of monthly payments with reduced minimums or reduced interest rates or a reduction of the total amount owed in return for a single lump-sum payment.
If you cannot make the necessary payments on your debts or reach an agreement with creditors to restructure or reduce your debts, another option may be debt consolidation. Debt consolidation is when a debtor makes an agreement with a third party consolidator to combine multiple existing debts into a single account. Once the agreement is made, the consolidator pays off the other creditors and takes ownership of the debts involved. The consolidator then requires the debtor to make regular payments on this account which are intended to be lower than the current monthly payment requirements for the debts collectively. Debt consolidators make their money by prolonging the debt payment period which results in a significantly higher total amount of money paid on the debt.
The fact that debt consolidators make a profit from their services – and end up charging so much more on each account – leads many professional credit counselors to advise against debt consolidation. Debtors can often achieve a quicker and more effective solution to debt by budgeting carefully and taking on extra work. However, if this is not a possibility, debt consolidation may be the only answer. If you choose debt consolidation, make sure to investigate your debt consolidation firm carefully to verify exactly what you will be paying each month and for how long. Also look at whether or not the firm will penalize you if your financial situation changes such that you are able to pay off the full debt early.
Bankruptcy is a very serious prospect that can affect your financial life for some time to come. Before deciding to take this step, make sure that you have exhausted all of your other options. A little extra effort in this regard can have far-reaching effects.