Alternatives to Bankruptcy

It is always important in making any decision to weigh the alternatives.  There are few alternatives to consider before deciding on filing bankruptcy.

CREDIT COUNSELING.  A good credit counseling agency might be able to help you analyze and review your income and expenses to determine a possible solution to your financial crisis.  Most credit counseling agencies are non-profit businesses.  You should also make sure that the agency is approved by the United States Trustee Program.  A list of approved agencies is on the United States Trustee’s website at www.usdoj.gov/ust.  After a thorough review of your income and expenses, they could provide suggestions on how to reduce various expenses to help you take back control of your finances.  Credit counselors can also create a debt management plan for you.  This plan sets forth a detailed plan of action on the repayment of debts.  If you agree to the debt management plan, you will send a monthly payment to the counseling agency and they will distribute it to the creditors.  However, for most individuals contemplating bankruptcy, it is usually too late for credit counseling to make any difference.

DEBT SETTLEMENT OR DEBT NOTGIATION.  Beware! These are for-profit businesses.  Debt settlement companies are very different than credit counseling agencies.  You should be very careful about using these debt settlement companies.  At first glance, they might seem similar because you still make monthly payments to the debt settlement companies.  However, they do not make any regular payments to the creditors.  In most situations, they have not even contacted your creditors.  The debt settlement companies will hold the funds in an account for you until the company believes it has enough in your account to make a settlement offer to the creditors for less than the full amount owed.  Debt settlement companies often make unrealistic promises and provide a false guarantee that they can settle the debts.  Individuals in a debt settlement program are not protected by the automatic stay of the bankruptcy laws, and, therefore, creditors can continue to pursue collection efforts and the debtors debts continue to incur late fees and interest.  There are also tax implications to settling a debt.

MORTGAGE LOAN WORKOUT OPTIONS.  If a debtors financial problems are caused mostly by the mortgage, an alternative to bankruptcy is to obtain a workout agreement with the mortgage lender.  This will allow you to save your home and reduce your monthly expenses so that you can gain control of your financial situation.  There are various possibilities such as such a reinstatement agreement, forbearance plan or a loan modification.

CONSOLIDATION LOANS.  This is a loan from a financial institution used to combine all your credit card debts into one lump-sum loan.  In order for you to get a consolidation loan your credit score must still be good and you must usually have some equity in your home.  The banks are usually only willing to make the consolidation loan if they can tie the loan to the equity of your home.  Effectively, this converts all of your unsecured credit card into a secured debt tied to your home.  This is very important to understand and should be a decision made carefully.  By exchanging the credit card debt for a loan secured by your home, you now risk the loss of your home if you cannot make the payments.  One benefit of this alternative is reducing the number of checks you need to write each month – now you only have to write one check for the consolidation loan instead of writing 10 checks to 10 different creditors.  The drawback of a consolidation loan is that it does not reduce the total amount owed to creditors, and, in fact, usually increase the aggregate amount paid over the life of the loan.