Read these 9 Bankruptcy Alternatives Tips tips to make your life smarter, better, faster and wiser. Each tip is approved by our Editors and created by expert writers so great we call them Gurus. LifeTips is the place to go when you need to know about Bankruptcy tips and hundreds of other topics.
Using alternatives to bankruptcy, managing your debt effectively and reducing your overbearing obligations in a timely manner requires careful thought, proper planning and a personal commitment to solve your credit problems. It also requires one more thing: Money!
All the planning, management and commitment on the planet will not result in reducing your outstanding debt without the necessary funds to make your program work. Borrowing more money, even with better interest and payment terms, still leaves you with some level of debt that must be managed to your benefit. So you might want to consider turning some of your available assets, particularly non-income producing ones, into cash. This will give you the ability to pay off your outstanding obligations, whether at full value or at a discounted amount. If you have items like a stamp collection, little used or displayed antiques or paintings, a time share you seldom use, or any other assets that are not part of your current income picture, turning them into much needed cash may provide you all the resources you need to solve your credit problems without declaring bankruptcy.
Understanding what non-profit debt counseling firms are and are not is the key to the wisdom of using them as an alternative to bankruptcy. These firms are not
Many debt/credit counseling firms are
Remember, this choice is sometimes a wonderful alternative to bankruptcy. However, do not be tempted to agree to a payment plan that provides a short term solution to a long term problem and never make any agreements you know you cannot meet. Do your homework and select only an experienced and reputable firm to work on your behalf.
Depending on your situation, using a bankruptcy lawyer to work out a debt reduction or settlement agreement might be the perfect solution or the wrong option. There are two issues that dictate which choice might be best for you:
Also, always remember that, unless your brother-in-law is also an experienced bankruptcy attorney, you will incur a substantial cost should you choose to use a lawyer to negotiate your prospective
agreements. Certainly there are situations where the cost is minimal compared to the severity of your situation and the level of the debt arrangement that might be made. But if you are simply over extended for the short term, desire some immediate relief and see your debt-to-income situation improving in the near future, you may incur legal costs that you will regret later.
Is using a debt reduction or debt consolidation firm a good idea? Possibly yes and possibly no. There are two key issues to be considered.
First, how comfortable are you in dealing with your bank or credit card company? Negotiating with lenders, while fairly straightforward in most situations, can be an intimidating experience for many people who lack the confidence to deal with them. Second, should you prefer to deal with a debt relief company, you must be sure they are reputable, experienced and, most important, effective. If you feel reasonably comfortable talking to your lender(s), you should probably attempt to negotiate your own arrangements.
You are the person with the most to gain or lose in this situation. Lenders are aware that you are intimately involved and may (the operative word is “may”) respond more positively than if they are dealing with a professional firm, whose goal is really to reduce the lender's income. Conversely, if you are uncomfortable or very inexperienced in speaking with lenders, you might be better served by letting a professional attempt to restructure your debt. These people have expertise negotiating with a wide variety of lenders in many different situations. They may have a better chance of getting approval for reduced payment terms or advantageous settlement terms than you might have on your own.
For a homeowner who has fallen behind on their mortgage, they may think the only alternative to foreclosure is bankruptcy. However, banks have no real appetite to foreclose on a property due in large part to the time and expense that is involved in the process. Borrowers may seek remedies through the bankruptcy court as a way of forestalling bankruptcy but in reality, this is not their only option and in many cases, may not be their best option.
There may be opportunities for borrowers to work with their lender to avoid foreclosure without filing bankruptcy. Some of these options include:
Deed in Lieu - Some lenders will agree to accept the deed in lieu of foreclosure allowing the homeowner to avoid bankruptcy. Before accepting this option, it is important to negotiate with the lender how this will be reported on your credit report.
Forbearance - Borrowers may be able to negotiate with their lender for a forbearance agreement which would allow them to reduce or eliminate mortgage payments for a specific period of time. Generally, if these agreements are accepted, they would be for 90 days or less.
Repayment options - Lenders may be willing to add your late payments to your existing payments until you are caught up. This option is typically best when a homeowner has fallen behind due to being laid off and have returned to work.
Short sale - For a homeowner, a short sale may be a good alternative to bankruptcy. This option is used when the value of the home exceeds the outstanding mortgage amount. The mortgage lender does have to agree to accept the sale price before the transaction may be complete.
These are a few of the alternatives to bankruptcy that can help a homeowner who is facing foreclosure. Each option has advantages and disadvantages. Keep in mind there are also programs offered through lenders including programs that may be offered by the government at various times to help homeowners who are facing foreclosure.
Contrary to much of their advertising, banks and credit card companies are not your friends. But, if they believe that accepting an arrangement calling for less than regular scheduled payments or approving a settlement that gives them only 50% of the balance due is in their benefit, they will often accept your proposal. If they believe you are a candidate for a Chapter 7 bankruptcy, in which they would probably receive nothing, they may become very interested in hearing your plan for lower payments or a debt settlement as an alternative to bankruptcy. This is why it is so important to have a plan that appears to help the lender just as much as it helps you.
You have two basic options. Both should be initiated by you, not by your credit card companies. The first possibility is a debt consolidation plan. If you have four credit cards with a total balance of $22,000, you could arrange financing through another source for one loan, at better terms than your current cards provide (lower interest rate, longer payback term, etc.) Instead of being required to make ever-increasing minimum payments to four lenders, you now have only one monthly obligation that will most certainly be less than the amount you now must send every month.
Caution: This option is only available if your credit score has not declined to a level that prohibits new borrowing. If you wish to use this option, do not wait until your situation is bordering on disaster.
The second potential solution is a debt settlement. This option requires you and your credit card companies to “settle” on a percentage of your total debt that you will pay off. In return, the lenders will consider your debt “paid for less than the total amount.” Historically, credit card companies have been willing to settle for 30-50% of your total current outstanding balance. You must be aware, however, that some lenders will hold firm at a level in the 75-80% of total balance, while some may even consider a settlement in the 20-30% range. Once again, this option also assumes you have access to sufficient liquid funds to fulfill your offer in a short period of time, usually less than 10 days.
Try to set up a “debt workout” plan if your bank or mortgage company is agreeable. You might want to make it your goal to “convince” them to become agreeable to a workout plan. This is always preferable to a declaration of bankruptcy. Think about your plan first! Before you contact your mortgage lender, have an idea in mind that is reasonable – to you and to them – and be ready to explain both your situation and why they should consider your proposal. Have a proposal ready that explains how much of the scheduled mortgage payment you can make on a monthly basis, how long you think you need to stay at this level, and what you are planning to do to “fix” your current default situation in the future. If they accept and you avoid declaring bankruptcy, you, your family and your mortgage lender have a win-win situation.