It doesn’t matter how responsible you’ve been with money. Life can take a sharp turn, and without warning, you might be unable to pay your home loan, auto loan and other bills.
Maybe you lost your job and had to accept employment with less pay. A divorce can also have a major impact on finances, and if you were injured in an auto accident or became ill, this can determine whether you’re able to work. In each situation, you may rely on credit cards to keep your head above water, and eventually, it may be difficult to keep up with minimum payments. Creditors don’t always make it easy for people who endure financial hardship, as they’re known for relentless collection calls and collection letters. With everything going on, you may decide that bankruptcy is the best route.
Yes, filing for bankruptcy can reorganize or wipe out your debts, thus getting creditors off your back and giving you a fresh start. But do-overs and second chances aren’t free. A bankruptcy will remain on your personal credit history for up to 10 years, and the process can knock as much as 250 points off your credit score.
Although bankruptcy can be the solution to your debt problems, it’s not the only solution. Here are three bankruptcy alternatives.
1. Know your rights as a borrower.
Falling behind on your credit card or loan doesn’t justify creditor abuse or harassment. Maybe you prefer not to file bankruptcy and would rather work out a plan to satisfy what you owe. However, you might contemplate filing because you’re fed up with harassment from creditors and debt collectors.
An automatic stay goes into effect once you file for bankruptcy protection, at which time, creditors have to stop all collection activity against you. This includes phone calls, letters and lawsuits. For some debtors, this is a welcome mat. Understand, however, that you don’t have to file bankruptcy simply to stop creditor harassment.
Some creditors go to extremes and use abusive tactics to collect a debt. However, certain practices are illegal, and if you don’t understand your rights as a debtor, creditors may use this to their advantage.
Creditors cannot use obscene language, make empty lawsuit threats, call your place of work, discuss your debt with a third-party, or call outside the hours of 8 a.m. and 9 p.m. Additionally, if you request proof of a debt, creditors have to provide this proof or either cease their collection attempts. If a creditor violates your rights, you can file a complaint with the Federal Trade Commission, the Better Business Bureau or contact your state Attorney General’s office.
2. Negotiate a debt settlement with creditors.
If you’re having problems paying your credit card debt, negotiating a settlement can avert a bankruptcy. Some people never think of negotiating their debts, and those who do often assume that creditors won’t compromise. This couldn’t be further from the truth. Creditors know that this may be the only chance of recouping what’s owed to them.
By negotiating your credit card balances, you’re essentially asking to settle balances for less than you owe – typically around 40% to 60% of your outstanding balance. A debt settlement can work if you’re able to make a one-time lump sum payment to settle your balance, by either taking money from your savings account or liquidating your assets. Unfortunately, some lenders do not accept payment plans with a debt settlement.
Check your finances and determine how much you are able to pay your creditors. After deciding an amount, call your creditors and ask to speak with a supervisor who handles debt negotiations. This individual will need detailed information about your personal situation. This isn’t the time to get shy or hold back. Creditors are not obligated to approve your debt settlement request, and this provision is often reserved for people who demonstrate significant hardship. Therefore, the more information you give, the better.
Don’t expect your creditor to make a decision on the spot. They’ll usually request additional information, such as bank statements or income statements, to get a better picture of your financial standing.
Make sure the creditor understands that you’re contemplating a bankruptcy. With this information, the creditor may be more willing to negotiate. If the creditor accepts your debt settlement offer, get the agreement in writing, and do not send a payment until you receive a confirmation letter from the creditor. Your creditors will probably report the debt settlement to the credit bureaus, which can have a negative impact on your credit. However, this damage is often less severe than a bankruptcy.
3. Work with a credit counseling agency.
A bankruptcy may seem logical if you’re unable to manage your bills. But given the consequences of a bankruptcy, you owe it to yourself to consider alternatives.
New bankruptcy laws require consumers to complete credit counseling before filing bankruptcy, and credit counselors typically negotiate a debt management plan (DMP) for their clients. With a DMP, the credit counseling agency manages debt on your behalf. They’ll work with your creditors to negotiate a better interest rate and terms, plus remove late fees and other penalties. From this point forward, you make one payment to the credit counseling agency each month, and the agency pays your bills with these funds.
In the end, you can reject the debt management plan and proceed with a bankruptcy. But if you accept the agency’s help and follow through with the plan, this bankruptcy alternative can pay off your debt in about five to seven years and ultimately help your credit score.