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What are some alternatives to filing bankruptcy?

by Dorota Trzeciecka on January 1st, 2010

Before filing bankruptcy, consider the following alternatives:

  1. If you are unable to make payments to your creditors because of a temporary hardship, your first step should be to contact your creditors, explain the hardship, and attempt to work out an arrangement to make payments that you can afford, or temporarily suspend the payments, with the understanding that you will have to make up the arrearages, possibly with interest and penalties, later in the future.
  2. Debt settlement works best if you have a lump sum of money readily available. Debt settlement is an offer to settle your debt for the fraction of what you owe.  You are in a better position to negotiate, and the creditors are more willing to accept your settlement offer, if they know that you have a lump sum readily available.  Payment plan settlements are also a possibility, but will cost you more, and are more likely to result in a default, which defeats the whole purpose of a debt settlement.  If you decide to go the debt settlement route, my suggestion is that you contact a good bankruptcy attorney in your area to assist you in determining the legality of the debt, the percentage you should offer, and to explain any tax ramification resulting from debt settlement.
  3. Debt consolidation is another alternative to filing bankruptcy.  It works best with high interest rate credit card debt.  A credit counselor negotiates a lower interest rate with your credit card companies, in some cases 50% or less than what you are currently paying.  You agree to pay off the balance owing over a period of time, usually from three to five years.  As you can see, debt consolidation is not for everyone.  You have to have the ability to make the payments.  This service also costs you money — the credit counseling agency takes a percentage of your payment every month in return for collecting the payment and distributing it to your creditors.  In that sense, its role is similar to that of a Chapter 13 Trustee in bankruptcy.
  4. If there is foreclosure looming on the horizon, or if you are already in foreclosure, you want to first negotiate possible loan modifications under the currently available government programswith your mortgage servicer or with your lender.  Or, if that fails, you should explore possible work out options on your loan. 

You should keep in mind that none of these alternatives leave your credit unscathed.  They may have less of an impact on your credit than bankruptcy does, but they will be noted on your credit report, and will increase the cost of your credit in years to come.

Ms. Trzecieckahas been a licensed attorney since 1996 and is a member in good standing of the Florida Bar and a member of Miami-Dade County Bar Association.  Ms. Trzeciecka practices in the areas of consumer bankruptcy, probate administration, and alternative dispute resolutions.