Alternatives to Bankruptcy

by Tanya Davis

People who feel as if they are drowning in debt often feel that bankruptcy is their only option. There is nothing wrong with bankruptcy, if that is the only option you have. But if you choose to file, it will remain a black mark on your credit record for seven to ten years. It may be possible to get out from under all that debt without filing bankruptcy. To avoid it, consider whether you have a way to:

Reduce expenditures
Increase your income, such as through a second job
Negotiate interest rates or other terms with the lenders and/or credit card companies
Sell off assets

Let’s look at these options more closely.

Reducing Expenditures It may seem like there is no way to lower your budget; however most people find lots of ways they are spending carelessly. First, create a realistic budget for your monthly living costs. Include your mortgage, car payment, groceries, gas, and utilities. Leave out all your other debt, for now. After you have calculated that, compare it with your budget. Is it possible to pay off all your debts (at their current interest rates) in three years? If so, it is likely that you do not need to file bankruptcy. Instead, find a way to stick to your budget and begin paying off the highest interest loan or bank card first.

Increase Income If there is no way to reduce spending, another alternative is to increase family income. One family member might take on a second job, either full or part-time. It might even be worthwhile to look for a new, better-paying position than the one you already have.

Negotiating with Creditors Often, it is possible to work out an arrangement with the creditors. They may be willing to:

Extend the total life of the loan
Lower your interest rate
Agree to an out-of-court settlement

If you have income, this negotiation makes sense; it may give you the time needed to create a new budget structure. But negotiating with creditors can be difficult because they are often hard-nosed. If you find that it is too stressful to work with them on your own, consider asking a third party to assist you. This could be an independent mediator, a credit counselor, or an attorney. It is important to negotiate properly, because a poor agreement can end up hurting your credit rating – maybe even more than a bankruptcy. A debt counselor may be able to point out ways to work out the debt that you have not considered. To find qualified, approved debt counselors in your area, go to the website of the United States Trustee, at www.usdoj.gov/ust, and click “Credit Counseling and Debtor Education.”

Selling off Assets

If you own valuable jewelry, several vehicles, vacation property, or other assets, it might be worthwhile to consider selling some or all of them to pay off the debt load. However, IRAs and 401ks are not good assets to use for paying off a heavy debt load. There are two reasons for this. The first reason is that after you have spent your savings, it may be hard to create a new retirement savings account -- leaving the future somewhat questionable. Secondly, using retirement savings can trigger income tax payments or penalties because of early withdrawal.

After exploring all the options, you may still opt to declare bankruptcy. This should not be viewed as financial failure; instead, it is a way to get out from under the pressure and obligation of debt. It is a way to start over and, with competent counseling, it can be a way to create a new way of life.