Alternatives to Declaring Bankruptcy

Americans are carrying a heavier debt than ever before. According to the Federal Reserve, 1.6 million people declared bankruptcy last year while consumer debt was up 4.5 percent. When a family can barely make the minimum payments on their credit cards or is living from paycheck to paycheck, an unexpected financial challenge can quickly bring them to their knees. Unemployment, illness, divorce or other unexpected economic setbacks can drive even the most financially sound budget over the edge.

At such times bankruptcy is often considered, and sometimes it's the right choice. But are there other options? Yes!

Option 1

Consolidating all your outstanding debt into one loan might be your answer. Some credit card companies let you transfer outstanding balances from other cards and offer low or no interest for the first few months. If your credit is good and your debt is mostly in the form of charge cards, this may work for you. However, be aware that when the promotion is over, some interest rates will jump as high as 24%. However, if you continue to open new accounts and transfer balances, this will end up lowering your overall credit score.

Option 2

A home equity loan or refinancing an existing mortgage can also be an option. Mortgage rates are still low in comparison with many other types of loans, and some lenders will let you borrow up to 100% of the value of your property. Keep in mind, though, if your financial problems continue, your home is now at risk.

You're a good candidate for credit counseling if:

  • You can't pay the minimums on your credit cards.
  • You're consistently late paying one or more of your regular bills.
  • Creditors and collection agencies are hounding you.
  • Your efforts to work out reasonable repayment plans with your creditors have failed.

Before signing up for a credit-counseling program, investigate the company and keep an eye out for the following:

Big up-front fees - credit counseling companies usually charge a fee of about ten dollars. If you're paying too much more, be concerned.

Non-accredited - credit-counseling services should be affiliated with either the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.

Untimely payments - some agencies will pocket the first month's payment as their fee. Find out when and how much the agency will pay to your creditors each month and monitor those payments. It's your credit history at stake.

Too good to be true - legitimate credit counselors will not be able to make debts disappear or promise that by using their services it won't effect your credit report. They can help you lower your interest and pay off your debts, but it still may affect your credit history.

Option 3 - Personal Credit Negotiations

By tackling creditors yourself, you can often negotiate better terms for your loans such as, reduced interest rates, lower monthly payments, waived late fees, or extended payment time. Simply call your creditors, explain your situation and ask them what they can do for you. Being assertive and proactive at the first signs of economic trouble can help you avoid financial insolvency. The sooner your credit is under control, the sooner your life can get back to normal.

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