Personal bankruptcy filings are up year-over-year. Continuing inflation, persistent talk of a recession and layoffs in certain sectors are leaving some Americans feeling like bankruptcy is the only path to a financial reset. But it’s not that simple. While bankruptcy may be the right solution for some people, it’s not the best choice for everyone who wants to eliminate debt. It’s a serious legal process that has long-lasting effects on credit. Plus, it doesn’t always eliminate all problem debt. Fortunately, it’s not the only choice. Whether it’s your first time filing or you are considering filing again, let’s learn about alternatives to bankruptcy.
Credit Counseling
Credit Counseling should be the first step for anyone who wants to eliminate debt. Nonprofit agencies offer this free service. Certified credit counselors work with people to evaluate their full financial outlook, including income, expenses and debts. Then the counselor and client work together to create a budget based on this information.
This process is often quite eye-opening, and in some cases, clients can see a way to make progress on paying off their debt just by practicing better money management. Other clients may be offered the option of a debt management plan, which is a way to repay credit card debt in full, with certain concessions from creditors.
Be sure to work with a nonprofit credit counseling agency affiliated with the NFCC and/or FCAA. You should never be asked to pay for credit counseling.
Debt Management Plans
Credit counseling agencies offer debt management plans (DMP) to clients who are struggling to make progress paying down credit card. These plans consolidate multiple credit card payments into one monthly payment, eliminate late and over-limit fees and most importantly, lower interest rates significantly. This allows clients to make progress toward paying off the principal debt in full, much more quickly than they could on their own.
Credit counseling and debt management plans go hand-in-hand. Completing a credit counseling session is the first step in finding out if a debt management plan is the right fit for your unique situation.
Debt Consolidation
A debt consolidation loan is another alternative to bankruptcy. These loans allow you to pay off multiple high-interest credit cards and make just one monthly payment on the loan. It can be an effective solution, but there are some limitations and cautions. First and foremost, you’ll need to have good credit to obtain a reasonable interest rate on a debt consolidation loan. Additionally, you’ll need to have the discipline to pay off the credit cards, and then maintain those zero balances. If you start charging on the cards again, you’ll just add additional debt and defeat the purpose of the consolidation.
Debt Settlement
The appealing promise of debt settlement is the opportunity to pay less than the total amount you owe to your creditors. However, the reality of the process is quite complex and can leave you with worse credit than you start with.
Debt settlement companies are for-profit entities. They tend to charge high fees and because one of their negotiating tactics is encouraging their clients to stop making payments to their creditors, your credit score can take a serious tumble before you get to the point where your debt is finally paid off. Here’s a deeper dive into the realities of debt settlement.
Temporary Hardship Plans
Certain creditors offer temporary hardship plans to customers who are struggling to pay their bills. These plans typically involve the creditors lowering interest rates and waiving any additional fees; sometimes they may even suspend payments for a month or more. The idea of these plans is to allow customer to make a dent in larger balances by having more of the payment go toward the principal.
Temporary hardship plans are just that: temporary. Although they may offer a few months of breathing room, they’re not likely to make a measurable difference in your overall financial outlook or give you long-term peace of mind. But they can give you time to research all your options and determine if you want to pursue declaring bankruptcy.
