Filing for bankruptcy is a serious decision – one that stays on your credit report for the next seven to ten years. It will affect your ability to take out loans, rent an apartment, and make any large purchases. Bankruptcy can also provide tremendous relief to families who find themselves deep in debt. If you’re drowning in debt, but aren’t yet ready to file, we’ve listed some common alternatives.
Cut Your Expenses
This seems obvious, but you may be surprised at what you can live on. Do you own a home? It might make sense to refinance or even sell it and use the proceeds to pay your debts. Do you have more than one car? Sell all of the cars you can live without. What about family heirlooms? They’re tough to part with but may be very valuable. Remember to examine the little expenses – they can add up to big savings. Cancel your cable subscription, switch to a cheaper cell phone plan, and buy groceries and cook rather than eating out. Skip Starbucks and brew coffee at home and drink tap water rather than bottled. Clip coupons and shop sales for what you need. Tightening your belt may give you enough income to repay your debts.
As a practical matter, we find that many of our clients here in New Jersey, have loans on their homes and cars. Selling with large amounts of debt proves difficult, which is why bankruptcy becomes an attractive option: it allows consumers to get out from under loans they can no longer afford by surrendering property to the bank and walking away.
Work With Your Creditors
If you have too much debt to repay through cutting your expenses, you should contact your creditors directly. It’s better for both them and you to deal with your debt out of court. They may be willing to work out a payment plan, adjust your interest rate, or settle with you for less than you owe. The process can be difficult, so be prepared to put in some serious hours on the phone, but settling with your creditors is less expensive and less damaging to your credit than having them sue you or filing for bankruptcy.
Be aware that debt settlement carries with it serious tax consequences. Don’t trade credit card debts for IRS debts.
Work with a credit-counseling agency
Struggling to deal with your creditors? You’re not the only one. If you are uncomfortable negotiating with creditors or if you’ve been unsuccessful doing it yourself, check out the Department of Justice website for a list of approved credit-counseling agencies. These nonprofit agencies can help you deal with your creditors. You’ll work with the agency and your creditors to create a payment plan for the next several years to pay off your debt.
While this process is better for your credit rating, it’s also riskier than filing for bankruptcy. In bankruptcy, the automatic stay protects you from legal actions and repossessions by creditors. If you miss a payment, the court stands between you and your creditors. With a plan created through a credit-counseling agency, you don’t have that protection. If you miss a payment, your creditors can take you to court. You’ll also probably have to pay the full amount of your debt, while in bankruptcy you would only pay a fraction of it.
The bottom line is that bankruptcy forces your creditors to work with you. Absent a court order, they may not be as willing to cut your debts.
The simplest option for dealing with your debts outside of bankruptcy may be to simply do nothing. If you have little or no income and few or no assets of value, you may be considered “judgment proof.” If you have nothing with which to repay creditors, their legal judgments against you for what you owe are meaningless. They may decide to write off your debt after a few years, whether you pay anything or not. Of course, if your circumstances change and you gain the ability to repay some or all of your debt, your creditors may still decide to pursue you.
With this option you’ll still have to deal with the stress of creditor harassment.
If none of these options works for you, you may decide to file for bankruptcy protection under Chapter 7 or Chapter 13. Your credit will take a temporary hit, but you won’t have to worry about creditors repossessing your property or suing you. The court will help you work out a payment plan and your remaining debts will be discharged at the end of five years.
If you can’t keep up with a Chapter 13 repayment plan, you may decide to file for chapter 7 bankruptcy, a process that wipes out all of your credit card debt, medical bills, and other unsecured debts. For more on chapter 7 bankruptcy, see this post.
Which is Right for You?
If you’re struggling with debt, the first thing you should do is organize all of your financial paperwork so you know exactly how much you owe and how much you have. You may be able to work out a way to pay your debts on your own. If not, contact a credit-counseling agency and get an expert opinion on the state of your finances and the best way to deal with your debt. Finally, if you think bankruptcy is the option that fits you best, talk to an experienced attorney who can help you through the process.
A good bankruptcy law firm will never try to pressure you into bankruptcy.