Alternatives to Bankruptcy

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Alternatives to Bankruptcy

Budgeting, belt-tightening and maybe new or supplemental employment form the basis of a successful effort to avoid bankruptcy. Begin with a budget—simply a list of all of your current income and expenses. Be sure to prioritize all your expenses, listing those that are essential, like food and utility bills, as well as the highest-priority debt payments, e.g., secured loans (e.g., your mortgage and car payments).

Have some money to pay debts

It’s easier said than done, but if you’ve decided to avoid bankruptcy, you’ll obviously need some money left over each month to pay your debts after you’ve paid all your basic living expenses. That means finding ways to increase your income (e.g., delivering pizzas or newspapers) and/or reduce your spending on all but the necessities. With a plan to bring in more money and cut costs, you’ll be in a position to fashion a new budget—a specific, written agreement with yourself or your family. The new budget will include a workable monthly dollar amount that you can allocate to paying your creditors. Those payments will be the rope that allows you to start climbing out of the hole that debt has dug for you.

Contact your creditors

But the process is slow. Meanwhile, your creditors need to hear from you, so contact them and explain the situation. You will have more flexibility and time to deal with unsecured loans such as credit cards and medical bills. In fact, the card companies and medical providers may pleasantly surprise you with their willingness to work with you in setting up a realistic payment plan that may waive late fees. After all, lawsuits are expensive—the option of last resort to most creditors. That’s why there are private as well as federal programs that mortgage loan servicers participate in that can provide you with temporary relief. For more details, search for "Foreclosure Avoidance Counselors" at hud.gov. Student loan agencies, meanwhile, offer reduced payment options and forbearance programs while you work your way out of a squeeze.

Credit counseling agencies and debt negotiation

You’ve probably heard radio ads for credit counseling agencies or debt negotiation firms. Be aware that not all of these organizations are created equal, and there have been rampant scams involving "debt negotiators" that charge excessive fees or just take the consumer’s money and do nothing. With that warning, however, consumers should know that the right credit counseling service can indeed provide information, guidance, and in some situations, debt management solutions. In fact, credit counseling from an approved agency is now a requirement for filing for bankruptcy.

Credit counseling services can be delivered online at reasonable cost and include basic education in money management and budgeting, as well as debt counseling. Perhaps the most valuable service offered by some credit counseling services is the debt management plan. As part of this customized plan, the counseling agency will negotiate an affordable monthly payment at a lower interest rate with credit card companies, for example. The consumer will make a single monthly payment to the agency, which then makes the agreed-upon payments to individual creditors.

A good credit counseling agency will be a non-profit operation, so the cost of their service is low or even nothing. Instead, the bulk of reputable credit counseling agency funding comes from the very creditors with whom the agency has negotiated. After all, it’s in a creditor’s interest to accept a lower payment on better terms from you, rather than having you eliminate the whole debt in bankruptcy.

For more information

Search for "credit counseling" at justice.gov. The US Bankruptcy Trustee’s Website is located there, and you can find a list of approved credit counseling agencies by state. You can also check the National Foundation for Credit Counseling at www.nfcc.org.