Have You Considered These 10 Options Before Filing for Bankruptcy

1. Debt Settlement

You can consider debt settlement if your debts have piled up and are becoming impossible to keep up with. Debt settlement is when you get a third party to negotiate with your creditors to lower your debt. The goal is to get the creditor to forgive a portion of the total debt. If, for example, you owe Creditor A $150,000 in debt settlement, the company can negotiate with your creditor to $100,000. Debt settlement has some similarities to bankruptcy.

How it Works

When your debts have piled up, and you have some disposable income to repay the debt, but the debt is great, you contact a debt settlement company. Always do your research and read the terms and conditions and other users' reviews before working with a debt settlement company.

Then, get in touch with the company. Most companies will ask you to stop making your payments to creditors. They will open an escrow bank account where you will direct the payments. Then, once the money accrues, they will use it to negotiate and offer your creditor a lump-sum one-off payment for less than the original debt.

It does not always have to be a lump sum payment. Sometimes, the company can negotiate a lower monthly payment plan, which, when the creditor accepts, will send the payments to the creditor until the debt is fully repaid.

Note: Your creditor is not obligated to accept the offer from the debt settlement company. They might agree to the reduced amount, propose a counteroffer, or reject the offer altogether. Should they accept, the settlement amount will be paid, and the debt will be settled.

The Downsides

Debt settlement sounds pretty convenient, right? However, it does have some negative impacts. First, when the company asks you to halt making your payments to put pressure on the creditor to accept a lower amount or a lump sum, it will affect your credit score. Weigh the pros and cons, analyze your situation, and decide if this is something you would choose over filing for bankruptcy.

How Much it Costs

Like bankruptcy, there are some fees associated with debt settlement. Most debt settlement companies will charge a fee based on the total enrolled debt or the saved amount in the escrow account. Consider the FTC guidance and do your due diligence to see if there are specific insights on debt settlement in your state from the attorney general. 

Fees are a very important factor to consider when looking for a debt settlement company. Most companies will charge a fee between 15 and 25% of the enrolled debt. A percentage higher could mean thousands of dollars, so pay attention to the numbers.

Vetting the Debt Relief Company

Always read through the reviews of a debt relief company before signing a contract with them. While many have positive reviews, the negative reviews tend to reveal a lot about how the company operates. We work with at least three debt relief companies, and we understand how they operate. You can check their reviews online.

Debt settlement is a popular alternative for people who prefer not to file for bankruptcy. However, it could damage your credit score, unlike debt management.

2. Debt Management

If neither bankruptcy or debt settlement feels like the right solution for you, maybe debt management will be a good solution. In debt management, you, the debtor, will work with a company- a debt consolidation or debt counseling company to manage your debt.A debt management company does not give you access to finances, nor does it settle your debt. It only helps you lower the interest rates on your current loan when repaying your creditors through them. For example, if you have credit card debts that tend to be high interest, a debt management company can negotiate the interest rate, e.g., from 20% to 9%. They might also help waive fees associated with the loan, which will help you reduce the overall cost of the loan. The money you would've spent on the difference in the interest rate or the fee will then be channeled toward the debt. Therefore, it helps you pay off your debts faster.

How it Works

Once you find a debt management company, the counselor will ask you to provide details of your debt. They will consider your debts, determine how much you owe in total, and estimate how long it will take to pay off the debts.

Usually, the repayment time with a debt management company will be between three to five years. They will create a monthly payment depending on your debt, after which you will start making the payments. You will be making payments to the company, and they will forward the money to your creditors. Once you are done with your payments, your debt will be considered written off.

The Downside

While it seems like an easy and straightforward plan out of debt, you need to consider how much the company charges. You will be paying off your debt and an additional fee to the company. Sometimes, the company fee could be too high, and you won't be saving any money to pay off your debts. You will also be required to close your credit cards until you are done with your payments, as they guarantee you will not incur additional debt.

3. Home Co-Investment

When you file for bankruptcy, there are bankruptcy exemptions that will help you protect your assets. So, a common challenge with filing for bankruptcy is when you have a home, and your equity in the home exceeds the bankruptcy homestead exemption in your state.

Here is an example to help you understand. Let's assume you have $250,000 in home equity, and your state's homestead exemption is $50,000. That means you have $200,000 more equity above the exemption. Therefore, if you proceed to file Chapter 7, you risk losing your house. If you opt for Chapter 13 bankruptcy, then your Chapter 13 repayment plan might be too expensive. Considering your financial situation, it might be impossible to do a reverse mortgage or qualify for a HELOC. That's where home co-investment comes in.

Home co-investment is when a company invests in your home in return for a share of equity. Therefore, should you sell your home, you will get a part of the equity, and your co-investor will also get a profit from the equity.

The best thing about home co-investment is you get access to the equity in your home without incurring debt. If this sounds interesting, you should first see if your home is eligible. Use this link to check for eligibility. Input your details, see if your home is eligible, and how much you can unlock. If you qualify and are considering proceeding with this option, read further about home co-investment. Understand the advantages and disadvantages and how much it costs. Is there a lien on your house? How long do you have to share the equity with your co-investor, and how much equity will you be sharing?

4. Debt Consolidation Loan

Among the eleven alternatives available is a debt consolidation loan. It is a loan that will combine all your debt into one debt. Consolidating the loan into one means you will be making one payment instead of different payments at once.

If you have five credit cards and owe $10,000 on each, that is $50,000 in debt. If your payment is $500 a month, that's an average 18% interest rate. When you consolidate your debt, the interest rate reduces. Assuming your rate decreases to 15%, you will be making a payment of $475 a month now. It also makes it more efficient because you only have one loan to manage. Therefore, you cannot lose track of payments, which could accrue additional fees.

Note: Your credit and how much debt you are looking to combine will determine your eligibility to consolidate your debt. On the brighter side, you don't need to worry about your credit score. Unlike debt settlement, debt consolidation doesn't hurt.

5. Borrow/Withdraw From Your Retirement Account

You might want to consider the option to borrow or withdraw money from your retirement account. Though it may not be the best, it is still an option to consider. Withdraw the money and use it to pay off your debt. However, note that 401k and most other retirement accounts are protected under bankruptcy. Use our 401k early withdrawal calculator to see if borrowing from your 401k is a smart move. The calculator will also help you decide if this will help you lose money by paying off debt and avoiding bankruptcy.

6. Increase Your Income

Instead of filing for bankruptcy, you can work on increasing your income. You could take extra shifts at work, work a second job, find a part-time job, or monetize your hobby. Then, use the extra income to pay off your debts faster. You could consider freelancing, babysitting, house-sitting, or working at a local restaurant or store. Not sure increasing your income is possible? Here is a free side hustle calculator to see if it is possible.

7. Borrow Your Family or Friends

You can decide to borrow money from your family or friends to overcome your current financial hardship. Genuine friends and families might be compassionate and wouldn't want to see you go through financial struggles when they can help. Even better, the money often won't come with interest or rollover fees, which makes it cheaper.

8. Reduce Your Expenses

How do you spend your money? Check into your spending habits, and do an audit of your lifestyle. You could be wasting money on items you don't need or subscriptions you don't need, money that you could channel to your debts. Do you need Hulu, Netflix, or Apple TV subscriptions altogether? You could cancel two and work with one.

Slowly analyze your spending habits and see what you can improve. For the subscriptions you need and intend to keep, ensure you are getting the best deals. For example, consider a different and more affordable phone service provider. It could seem ignorable, but reducing

9. Mortgage Refinancing

Although it is not a very popular option for many, mortgage refinancing is a good idea. Under mortgage refinancing, the common option is rate-and-term refinance, where you replace your existing mortgage with a new one. The new one has a lower interest rate. Cash-out refinance is also common. It allows you to tap into your home equity and refinance a new loan amount higher than your current mortgage balance.

Here is how it works. You own a home. Then, as the homeowner, you apply for a new mortgage loan that will replace your initial loan. Let's assume the mortgage is worth $600,000 and you owe $450,000, your equity is $150,000. You can refinance your mortgage for $550,000 and get $100,000 in cash. You will have more money and will have saved more in terms of your mortgage interest.

But there is a setback. Your new loan is $550,000, which is higher than the initial loan, and your monthly payment will be higher. Therefore, if you had 20 more years left to repay the initial 30-year mortgage, you would be back to a 30-year repayment duration.

Try mortgage refinancing, although, currently, with the 2024 mortgage rates, it could be a risky option. You could lose money with mortgage refinancing if you lock in a 7% interest when your home loan interest is below 3%.

10. Do Nothing

If you have exhausted all options and still don't want to file for bankruptcy, then you can consider doing nothing. It is not a good option, and it is one we do not recommend, but what is the worst that could happen? Ignoring your debt and assuming it does not exist will make everything worse. Your creditors will likely sue for unpaid debts.

If they sue you, try negotiating with your creditor. Let them know about your financial situation, and try negotiating a new payment plan. Some judges may be lenient on you depending on your case, especially if you have a valid reason. However, if the judge rules in favor of your creditor, here is what might happen. The debt collector can attempt to recover the debt in a few ways. They can try:

·        Wage garnishment

·        Garnishment of a bank account

·        Lien on property

·        Continued normal collection

Though doing nothing is an option, avoid it.

Winding Up

Financial hardship can be stressful and inconvenient, but there is always a way out. If bankruptcy does not seem right for you, you have eleven other options available to you. Which of the above alternatives meets your needs? Compare the above alternatives using our bankruptcy alternatives calculator.