Alternatives to Bankruptcy

Most people would like to avoid bankruptcy if they can. Sometimes alternatives are worth trying, but it pays to know the risks. A good bankruptcy lawyer never pushes someone into bankruptcy but, instead, lays out the options and lets the individual decide. Here's a bit of information about commonly-tried bankruptcy alternatives.

1. Debt consolidation: If you are able to get a loan to consolidate unsecured debt into another loan, it can make a difference if the new loan has a lower interest rate or longer re-payment term. This solution is one that makes sense for people who can almost pay all their debts, but are struggling a bit and want better repayment terms. One must understand the risks if unsecured debt is transformed to secured debt on your home as part of the consolidation. If something goes wrong with the new loan, the future consequences will be more severe, i.e., your home will be in jeopardy.

2. Debt settlement: Once a debt goes into extended default, it can often be settled for less than the face amount-often much less. If a debt is deeply in default and has been purchased by a debt buyer, it is realistic to attempt to settle such a debt for between 30 to 60 percent of face value (sometimes less, sometimes more). However, there are a few traps for the unwary. Once debts have traveled into lengthy default, they have usually ballooned to a much larger face amount (due to interest and fees) than they were when you stopped making charges. So, 50 percent of a future amount may sometimes look a lot like 100 percent of a current debt balance, but it depends on the circumstances and time periods involved. There are also important tax consequences to debt forgiveness. Moreover, in trying this approach, one needs to be ready to deal with the sometimes annoying contacts from debt collectors for an extended time period. However, debt settlement can sometimes make sense for people who have (or can save) enough cash to make realistic offers to debt buyers. This is something that you can usually do yourself. Beware of companies who specialize in this work: most are scammers.

3. Simply not paying debts: Some people simply ignore their unsecured debts. Oddly, this can be a workable strategy sometimes-for people who are not working, have no assets, and are living off an exempt stream of income. State court lawsuits will result, and travel to court will be necessary, but if your only income is, say, social security the state court judge will likely continue the payment hearing and not require any immediate payment from you at all. This is not a workable solution for people who have jobs because of wage garnishment procedures.

Bankruptcy-both Chapter 7 and Chapter 13-have their own pros and cons. There is plenty of reliable information on both of those topics on this site.