Although bankruptcy provides debt relief, there are negative consequences such as a negative bankruptcy entry in the credit report for up to ten years and bankruptcy lawyer expenses. Because of this, it is a good idea to consider alternatives bankruptcy such as debt consolidation, debt relief programs, or even do nothing at all.
Debt Consolidation Loan
If financial difficulties are being caused by high interest rates, it may be possible to lower finance charges by refinancing existing high interest loans and high interest credit card balances to a lower rate with a debt consolidation loan.
Refinancing high interest loans to a debt consolidation loan is a good option for those who have not yet missed a payment and have maintained a good FICO score and credit report. Along with the drop in interest rate, a consolidation loan can also lengthen the loan, which lowers the monthly payment. The combination of a lower interest rate and an extended loan term can lead to a substantially lower monthly payment.
Debt Relief Programs
There are debt relief firms that offer consumer credit counseling or debt management services designed to help borrowers come up with a plan to payoff loans and help avoid bankruptcy. The Consumer Credit Counseling Service (CCCS) is a well known consumer nonprofit organization that helps borrowers create a viable repayment plan with help from their lenders.
There are other firms which specialize in debt settlement that will even attempt to negotiate a settlement with creditors for a fraction of the original debt. Consumers should use caution in choosing a debt settlement firm, since some fail to deliver on their promises of settling debt for less than full value.
A cheaper alternative to using a debt relief firm is to have the borrower directly negotiate debt settlements or request reduced interest rates with creditors. In some cases, creditors and collection agencies with delinquent accounts send offers of debt settlement by mail, and therefore there is no need to use a debt relief firm as a middleman.
If the borrower has little income and assets, doing nothing may be the optimal choice. The borrower lets the debt’s statue of limitations expire within a few years, thus making it no longer legally collectible. In addition, the borrower’s lack of income and assets would make it unprofitable for the creditor to sue the borrower for repayment of the debt. In other words, the borrower is “judgment proof.” What will happen is that the creditor will write off the debt. In seven years, the debt will fall off the credit report. Other than the occasional phone call from a collection agency regarding a debt that is not legally collectible, the end result is the same as chapter 7 with no legally binding debt remaining.
The statue of limitations ranges from three to six years, depending on the state. As long as the borrower avoids actions that restarts the statue of limitations clock, such as a loan payment, the debt should eventually cease to be a legal obligation of the borrower. While waiting for the statue of limitations to expire, the borrower should be prepared for a barrage of collection agency calls and threats to sue for recovery even though the borrower has little in income and assets.
For many people, the alternatives listed above may not be enough to recover from the mountain of debt. Those who have no hope of ever seeing the debt disappear due to too little income may need to file for bankruptcy.
Ways to Avoid Bankruptcy
The new bankruptcy laws passed in 2005 placed restrictions on individuals seeking to file under Chapter 7 of the U.S. Bankruptcy Code. In essence, an individual who is in a financial position to repay even a portion of his or her debt must file under Chapter 13 rather than under Chapter 7. As a consequence, more consumers are seeking ways to avoid filing for debt relief altogether.
Even those for whom Chapter 7 is still an option (i.e., people who can “pass” the bankruptcy means test), filing for debt relief may not be the ideal choice.
Bankruptcy can be a complex and stressful process.
Filing is a matter of public record in which all of one’s financial dealings will be exposed.
Chapter 7 amounts to giving up all of one’s nonexempt property to be liquidated for the payment of debts.
Chapter 13 is a more drawn-out process (three to five years) during which one’s financial life is strictly supervised by the bankruptcy trustee.
A bankruptcy can remain on one’s credit record for up to 10 years.
Having a bankruptcy in the past may impact one’s job prospects in certain fields.
Negotiate with Creditors as an Alternative
It is possible to avoid filing for debt relief by negotiating one’s own debt settlement plan with creditors over the telephone. Doing so may take time and patience, but the outcome could be more favorable payment terms, including reduced interest rates or a forgiveness of part of the debt. Anyone negotiating with creditors should:
Collect and carefully review all paperwork related to the debts ahead of time.
Have in mind a reasonable proposal for repaying the debts.
Tell the creditors up front the reason for the call, and ask to speak to a supervisor or department manager.
Be professional and polite.
Keep careful records of the telephone calls, including the name of anyone spoken to, the date and time of the call, and the substance of the discussion.
Avoid taking on any additional debt until the existing debts are paid off.
Use Debt Consolidation to Avoid Bankruptcy
The goal of debt consolidation is to reduce all of one’s debts to one payment, and then pay off that debt. Debt consolidation can be accomplished a couple of different ways. One may choose a do-it-yourself method which might involve, for example, taking out a second mortgage on one’s home in order to pay off other debts.
The second mortgage would be a form of debt consolidation loan. Again, it is critical to avoid taking on any new debts until the loan is repaid.
Another alternative to bankruptcy is the use of a debt consolidation service. According to Stephen P. Parsons, author of The ABCs of Debt, debt consolidation services may take on the task of negotiating agreements on the consumer’s behalf by which creditors agree to take partial payments in full satisfaction of the debts, or agree to give the consumer additional time to make payments on the debts.
According to Parsons, the debt consolidation service may take an assignment of the consumer’s wages and make payments to the creditors directly on behalf of the consumer. The agreement between the consumer and the debt consolidation service may involve the consumer giving up all credit and debit cards and agreeing not to incur any new debt without the company’s approval.