Bankruptcy Alternatives

We always consider alternatives to bankruptcy first. Here are some non-bankruptcy options:

  • Credit Counseling: If you have fallen past-due on credit card debt, the credit card companies will dramatically increase your interest rate and demand that you pay the entire past-due balance immediately. If you could afford to resume payments, but you just can’t pay the past-due balances, a non-profit credit counseling service can help. A legitimate credit counseling service will negotiate to get past-due balances rolled back into the loan and to get interest rates reduced to a reasonable rate. Then, they will set you up on a five-year payment plan to get the debts paid off.

  • Settlement: If you have credit card debt or medical debt and you cannot afford to make the payments, it is sometimes possible to negotiate settlements and to pay off the balances for far less than you owe. This is usually not possible until the debt is seriously past due, and payments generally need to be made in lump-sums. We can often get creditors to agree to accept settlement payments in the range of 35-40% of the current balance due. Beware of debt settlement agencies. They charge very high fees for services and are rarely effective. You can do much better yourself.

  • Do nothing: You wouldn’t expect it, but doing nothing can sometimes be a very effective too for managing debt. If you do not pay credit card debt or medical debt, you may get sued. If you are sued, the creditor will get a judgment. With a judgment the creditor can garnish wages, levy on bank accounts and attach liens to real estate. For anyone who receives social security and does not own a home, these collection powers may not be effective. Someone who is self-employed may also have this option. This is very fact-sensitive, and you should get legal advise before you decide to “do nothing.”

  • Loan Modification: For homeowners who have fallen past due and face foreclosure, it is sometimes possible to get the mortgage lender to modify the loan, taking the past-due amounts and rolling them into the loan, re-setting the interest rate to a market interest rate and starting over with a new 30-year term. This can be a great tool to save a home from foreclosure, but your income to debt ratio must be perfect in order to qualify and you are likely to pay far more interest over the term of the loan by having it set for a new 30-year term.

  • Income Contingent Repayment: Student loans can only be eliminated in bankruptcy after litigation and proof that, through hardship, the borrower will never be able to repay the student loans. This is expensive and rarely successful. Currently, the Department of Education offers several “income contingent” repayment plans that allow you to pay what your budget shows you are capable of paying, and after 20-25 years of payments, the Department of Education will forgive the remaining balance. This is not a good option, but given how few options are available for student loans, it may be the best option.

 

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