Alternatives to Bankruptcy

Debt is something that has plagued America for years. Today the debt is 1.98 trillion dollars! The majority of households today are in $18,000 debt. Many people get out debt by filing bankruptcy because they are not aware of other options available to them. Each week 3,500 people file for bankruptcy. It seems to be the easy way out. There are some debts that will not be resolved they include back taxes, child support, alimony and student loans. The truth of the matter is bankruptcy is a complicated legal battle that will ruin your credit for many years afterward.

In some cases bankruptcy may be the best option, however in the majority of times this is not true. There are so many other options available to you so that you can get out of debt and recover with a good credit score. The fight to get rid of debt is not an easy one. Whichever route you choose to go will take time, patience and devotion. We have explored many various routes and in this newsletter and cover the advantages and disadvantages to each. Remember only you can decide what is best for your individual situation. Before making any decision make sure you review all of your options and speak with a professional.

Negotiate with your creditors

Depending on your specific situation, sometimes the best route is to negotiate with your creditors. Prior to filing for bankruptcy it is always to your advantage to try to work out a payment plan. Creditors are likely to work with you because it is to their advantage. You must be open and honest with them. If possible it is usually best to contact them first to set up a payment plan. It is always best to contact them before missing a payment. You can explain your situation to them and offer them a certain payment every month.

There are some debts that are not usually negotiable. These debts include child support, income tax, and mortgage payments. Other accounts like credit cards and unsecured debts are usually very negotiable. The creditors would rather work out a payment plan than turn the account over to a collection agency.

Different ways to negotiate with your creditors
• Interest only payments
• Making no payments for a set amount of time
• Making reduced payments for a set amount of time
• Offering a lump sum or settlement

If creditors will not accept your proposals
• Send your proposal in writing including your situation, debts and income.
• Ask them to reconsider your proposal.
• Advise them if other creditors have accepted your proposal.
• If it does go to court make sure you bring all documents that prove you have attempted to make good on the debt.
Stick with it and be persistent.

Do Nothing

It sounds like a dream come true but sometimes the best approach is simply to do nothing. If you always intend on living very simply meaning you have minimal income and no properties, it is sometimes to your advantage to do nothing. You may be considered “judgment proof”. Judgment proof is when you have nothing to offer. In other words, if you are sued you have nothing that can be legally taken. A creditor cannot take away essential items from you like clothing.

If you never intend on making enough money to own property then this may be a very good option for you. In most cases the creditors will not sue you due to the fact there is nothing to collect. They will usually just write off the debt, which allows them to use it as a business loss for tax purposes. The debt eventually becomes uncollectible.

Settling with creditors

Settlement is a term that is used to define paying back part of what you owe. Some creditors will not settle on a debt, but collection agencies will. Once your account is sold to a collection agency there is a settlement that is offered. The advantage to settling is that you get rid of the debt at a reduced amount. The disadvantage is that the creditor will report it as settled. A settled debt on your credit report is better than an unpaid debt but still not a satisfactory rating.

Tips for settling on a debt
• Always be honest but at the same time elaborate on any hardships.
• Be honest about your other alternatives including bankruptcy.
• Never tell them where you bank or work. The reason is if ever sued you have just done half their job. If asked state “no comment”.
• Always send a cashier’s check instead of a personal check to avoid revealing the name of your bank.
• Keep in mind that although a lawyer will be able to help you through the process of settling, they cost money. Legal fees may eat up any money that you are saving by settling.
• When the collection agency agrees to settle try to get in writing that they will report “satisfied in full” on the credit report.
• You may, in some cases, owe income tax on the debt settled since it is considered income.

Credit Counseling

Many people do not even view credit counseling as an option. The reason for this is because of the bad companies that are out there. In recent years there have been a few published reports of scams by these companies. It is very unfortunate for many people in debt. There are hundreds of credit counseling companies that are reputable companies that get no press about the good they do for people. However, the companies that have taken advantage of people make front-page news. So before deciding to take this alternative to bankruptcy you must do your homework. Always check out the company with the Better Business Bureau. Also check with your state attorney general’s office to make sure there are no pending investigations against them.

Credit counseling has helped many people in recent years resolve debt and save thousands of dollars in interest. Credit counseling is simply a third party that works with creditors to reduce your interest rates and eliminate or reduce your penalties and fees. There are many myths about credit counseling that I would like to take a moment to clear up. For instance some companies claim they can negotiate lower interest rates than others. This is completely false and no company should ever advertise that. All companies are given the same rates by creditors. So if a reputable company is advertising that, chances are you are most likely looking at a debt settlement company, and that is a whole different alternative. Another myth that is out there is they will cut your payments in half. This is not true in all cases. As a matter of fact it is true in very few cases. The thing that the credit counseling companies do is reduce your interest payments so in essence you will save a lot of money in interest in the long run. Remember one of the reasons to choose credit counseling is because you want to keep your credit score good and pay back all your debt in full.

Credit counseling is a great alternative to bankruptcy due to the fact that it does not affect your credit report in a negative way. You are paying your debt in full just at a reduced interest rate.

Signs that you need to consult a credit counseling agency.

• Your debt is rising and your income is not.
• You are using one credit card to pay another.
• You have numerous credit cards.
• You have maxed out most cards.
• You are not able to make payments each month.
• You have lost track of how much you owe on each card.
• Your phone rings constantly with creditors you owe money to.
• You use your credit card for small purchases.
• You use your savings to pay everyday bills.

Questions to ask before signing up with a credit counseling company.

• The price for your services.
• What is the next step if I cannot afford this?
• How does your plan work?
• How will I know my creditors have received payment?
• Is my information secure?
• Will I receive up to date information from my creditors?

Home Equity Loan

Another option is to take out a home equity loan to pay off credit card debt. There are advantages and disadvantages to doing this. This is very risky and must be done only if you have a plan in hand and a secure job. Not many people recommend taking this alternative to pay off debt. A home equity loan is when you borrow money using your home as a collateral.

Tips for taking equity out of home

1. Find out the values of homes in your areas.
2. Make sure your credit score is good and all information on your report is accurate.
3. Make sure the lender you decide to go through is reputable.

The Credit Counseling Foundation
3350 NW 53 Street, Ft Lauderdale,
Florida 33309
Phone: 1-800-790-3882
Fax: 954-590-1221
Privacy Statement

Money Basics | Debt Problems | Credit Reporting | Consumer Rights | Budgeting Tools| Glossary