If you’re planning to file for bankruptcy, hold on and hear first what we have to say. Then, if possible, change your mind. Here’s why:
Declaring bankruptcy can have severe negative consequences in the short and long term. For example, filing for bankruptcy decreases your credit score by a hundred points or more. And that makes it more challenging to borrow money or even get a job.
Interestingly, most experts thought there would be massive bankruptcy filings when the economic fallout occurred in 2020 because of the COVID-19 pandemic. But the opposite happened.
According to the United States Courts, fillings dropped by 29.7%, from 774,940 cases in 2019 to 544,463 in 2020. That was the lowest ever since 1986.
You Don’t Have To Give In To Bankruptcy.
Regardless, that figure still shows half a million people going through financial hardship and pain, which could worsen. And that’s because fillings tend to increase gradually after an economic meltdown.
But just because you have a massive debt doesn’t mean you surrender. There are alternatives available if a mountain of debt is crushing you.
In most cases, you can get a credit counselor and develop a plan that decreases your debt gradually and avoid bankruptcy altogether. A certified and recognized credit counselor should analyze your situation and recommend a plan of action.
This guide will present you with various alternatives to bankruptcy. Go through them and choose the one that best works for your situation. If you need help, please get in touch with an expert.
Top 8 Alternatives To Bankruptcy
- Debt Settlement
Sometimes, you can negotiate with creditors to pay less (sometimes significantly less) than what you owe. Settling debts involves loan forgiveness, and a debt collector or creditors must agree to partial payment to resolve the total balance.
But for debt settlement to work, you must be in default. Creditors will refuse to forgive your debt if you’re still making your minimum monthly payments.
However, when you default and decide to file for bankruptcy, the creditors will get nothing. So they might consider striking a deal with you. Only opt for settlement of debts you’ve stopped paying to but continue to make minimum monthly payments on the ones you can afford.
However, before you proceed, think about how it will affect your future credit. That’s because if your creditors agree to settle your debt, the unpaid balance will be considered income. And that will get on your tax return report.
It will be on your report for seven years and could negatively affect your credit score.
Proceed Cautiously With Debt Settlement Companies
Be careful as you deal with for-profit debt settlement companies. Many of these companies have bad or suspicious track records. Also, don’t work with any organization that demands an up-front fee before negotiating a deal with your creditors.
By law, these companies can’t collect a charge until they’ve settled. And also when you’ve made at least one payment to your creditor.
Remember that when you have multiple creditors, the company will charge a fee for each one they’re able to settle with. But you can save money if you do it yourself.
- Debt Consolidation
Debt consolidation is another alternative to consider. If you want to do it yourself, you need access to a loan or a credit line that’ll help you pay off your debts. It could be a personal loan from a credit union or bank.
You could use a more likely option like a credit line or home equity loan that allows you to borrow against your house. In addition, it’s possible to get a zero percent balance transfer credit to help your debt consolidation. But it’s doubtful if you plan to file for bankruptcy.
We recommend meeting with a financial advisor before you consolidate. Consolidated payments save you interest and avoid making multiple monthly payments.
If you’re eligible for a credit card that gives you a lower interest rate on your balances, you could transfer your debt to the card. Then, use the grace period to pay down the principal. But before you proceed, ensure that your other cards permit you to transfer balances without penalties.
A personal loan has benefits if it gives you enough time to make fixed payments at low-interest rates compared to your credit cards.
Usually, credit lines and home equity loans charge lower interest compared to credit cards. But you have to use your home as collateral. So if you can’t make the required payments each month, you could lose your house. That’s why most financial advisors disagree with this move.
- Sell Your Assets
If your income can’t afford the debt payments, you can sell your assets. You can set up a garage sale or find a buyer to buy your assets. The more valuable your assets are, the more money you get.
If you file for Chapter 7 bankruptcy, there’s a likelihood that you’ll be required to sell most of your assets. However, if you have valuable assets, you decrease your debts enough to avoid filing for bankruptcy.
You could direct the money you acquire through asset sales to an account dedicated explicitly to settling debts. For example, selling your assets might help you prevent a bankruptcy filing if you own a business.
Of course, you’ll need to develop a sound strategy first. You don’t have to sell assets that are required for running the business.
- Consider Credit Counselling
You can contact a credit counseling company if negotiating with creditors doesn’t pull through. These firms can help you come up with a debt management plan. And usually, these plans come with affordable monthly payments.
If your credit counselor can work with creditors to decrease your payments and interest rates, you can avoid bankruptcy. However, even if you proceed with filing bankruptcy, the law requires that you consult a credit counselor first.
You can get lists of non-profit credit counselors from the federal bankruptcy courts. We recommend contacting one before you make any final decision.
- Borrow Money From Friends And Family
If you have friends and family with stable finances, you can reach out to them and ask for help. However, you should consider this option carefully because it’s loaded with many pitfalls.
For example, if you fail to repay the loan, it could cause a rift in the relationship with your friend or family member. So we advise that you put the loan in writing, agree to pay the loan back according to the date, and stick to it.
Even though having financial problems is difficult, destroying a good relationship because of it is far worse.
- Try To Earn Extra Income
If you can find a second job or other means of making extra income, you can avoid bankruptcy. However, you should look at this alternative as a way to prevent filing for bankruptcy, not spending the money on something else.
You can find numerous ways to make extra money, especially in this digital world we live in. For example, consider using your car as Uber or Lyft, driving or shopping for Instacart, and other delivery services.
Aside from that, there are many sites out there that list part-time and freelance jobs. All you have to do is do a bit of research and find a job that works well for you.
When you land a job, make sure you have the time and energy to do it. Then, direct all the money you get to pay down your debt.
- Refinance Or Restructure Your Mortgage
If you have a house and are still paying your mortgage, it’s most likely a massive bill. However, you can restructure your mortgage to pay less and see if it can help you prevent bankruptcy. If it can, contact your creditor and see if they can help you develop a new payment plan.
Your creditors may also agree to offer you a temporary repayment plan. That way, you can rebuild your finances.
Another option is to consider refinancing your mortgage. That means applying for a new mortgage with a lower interest rate and a more extended payment period. Usually, you need a good credit score to get this new interest since a bank is offering you a new loan.
If you have private student loans, you can also refinance them. Through that, you can get private student loan relief and avoid bankruptcy.
- Make Changes To Your Budget And Lifestyle By Lowering Your Expenses
Lowering your expenses to save money is crucial in rebuilding your finances, not only avoiding bankruptcy. You must change your budget and lifestyle if you want to avoid bankruptcy.
It may seem overwhelming to create a budget, but it’s not. First, you need to determine how much money you bring in, how much money goes out, and how to make income exceed the expenses. It should be the standard process, regardless of your financial situation.
The best way to grow your budget is to lower your expenses. And you can do that by renting your room, selling your house, canceling some of your streaming subscriptions, etc.
You can start with your bank account. Go through them and find things you don’t need or things you might have forgotten you’re still paying for. For example, you may need to stop eating out, gym memberships, cable TV, etc.
Also, check your utilities, insurance, and other monthly costs and find ways to lower your payments.
Final Thoughts
If you decide to still file for bankruptcy after growing through all these points, be prepared. At least, you need to know the consequences and what that could mean for your future.
First of all, you’ll lose a significant amount of money if you file for bankruptcy. And that’s because getting a bankruptcy attorney costs several thousand dollars. If you decide to file your bankruptcy case, that too comes with substantial fees.
The average cost of a Chapter 7 bankruptcy is around $1,200. You’ll be required to take a pre-filing bankruptcy course before filing a case. That way, you can know the alternatives.
So before you decide to file for bankruptcy, get an expert’s opinion. That can save you lots of money and avoid bankruptcy.