Bankruptcy is often seen
as a fresh start, allowing consumers to wipe out debt and have a clean slate.
While U.S. bankruptcy laws are designed to provide debt relief for those who
are struggling with bills they can't pay, not every person and not every type
of debt qualifies. For example, your income and assets may disqualify you from
bankruptcy. You'll remain responsible for certain types of debt, including federal
student loans, alimony, and child support, even after a successful bankruptcy
filing.
What's more, bankruptcy
carries dire consequences that will follow you for years. A bankruptcy can
remain on your credit report for up to 10 years. This black mark can make it
difficult to qualify for mortgages, car loans, and other types of financing.
Depending on your location and industry, it can even affect your chances for
employment.
Fortunately, you may be
able to get out from under staggering debt with one of these alternatives to
bankruptcy. Although many people who are in debt ignore the problem in the hopes
it will resolve itself, facing the issue head-on is the first step to a
brighter financial future.
Trimming unnecessary
expenditures frees up funds to pay off debt. Try cutting cable, switching to a
less expensive cell phone plan, and eliminating app and website subscriptions.
If you don't already track
your spending, start doing so to find the holes in your budget. You may be
surprised how much you spend on take-out food, coffee, entertainment, and other
items. Start bringing lunch to work or check out movies from the library
instead of purchasing rentals. These small changes can really add up over time.
Certified credit
counselors can help you make a plan to manage debt through educational
materials and workshops, money management information, and budgeting
assistance. They may also negotiate with creditors on your behalf to reduce or
remove late fees, interest rates and penalties, or to settle your debt for a
portion of what you owe.
Some agencies charge
exorbitant fees and do little to help their clients get out of debt. To help
consumers avoid unscrupulous firms, the U.S. Department of
Justice maintains
a list of approved credit counseling agencies. You can search this database by
location to find a reputable firm in your area.
Although a credit
counseling agency can negotiate with creditors on your behalf, you can also
take this step independently. First, list all your income sources and monthly
expenses to determine how much you can pay toward your debt. Then, call each
creditor and explain your situation, particularly if you are unable to make
payments because of job loss, medical issues or other extenuating
circumstances.
Have a specific request in
mind before making each phone call. For example, you may want to request a
waiver of late fees, several months of skipped payments, temporary or permanent
payment reduction, or loan modification to lengthen the term or lower the
interest rate. Keep in mind, however, that creditors are under no obligation to
offer these benefits.
If you've fallen far
behind on your debt payments, creditors may agree to accept a settlement for a
percentage of the total amount due. Doing so can save a credit card company
money compared to hiring a collections agency, suing you for the balance and
pursuing a judgment.
For example, if you have
$20,000 in credit card debt, the creditor may accept $10,000 and agree to write
off the rest of the debt. This saves you from mounting interest, late fees, and
penalties that would ensue if you continued to miss monthly payments.
Debt settlement is usually
an option only if you have home equity, assets, or savings you can use to make
an offer. In addition, your credit report will show that you settled the
account for less than agreed, which can negatively impact your credit score.
The IRS considers the forgiven balance income, which means you will have to pay
income taxes on the full amount. In the example above, your taxable income for
the year would increase by $10,000.
If you have several
high-interest credit cards and loans, you may be able to save money each month
by combining them into one loan with a lower monthly payment. This strategy,
known as debt consolidation, can take on several
forms depending on your situation. Some of the most common types of debt consolidation
include the following:
Debt consolidation may allow you to retain access to
credit while limiting damage to your credit score. However, make sure to
carefully review the terms and conditions of a debt consolidation loan before
signing on the dotted line. For example, a loan that lowers your monthly
payment by extending the length of the loan may result in paying more overall
interest over the life of the loan.
If you own a home or a vehicle, U.S. News and World
Report suggests
refinancing your mortgage or auto loan and using the extra money toward your
credit card debt. Your lender may agree to restructuring your payments,
offering a lower interest rate, or extending your payment term in order to
lower your monthly payments. For those with assets, this strategy can
accelerate repayment of high-interest debt and provide budgetary breathing
room.
If none of these options work for your situation,
then remember to consult a bankruptcy attorney to help you take stock of your
situation and figure out the best plan of action.
For more information on alternatives to bankruptcy,
consult the team at CreditRepair.com. We can help you review your credit report
and help you repair your credit so you can improve your financial situation.
Call us for a free credit evaluation today.
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