How to Handle Bankruptcy

Three Alternatives To Filing For Bankruptcy

Filing for personal bankruptcy is not a decision that should be taken lightly. It may seem like the best option for someone who is hopelessly in debt but it does have serious repercussions. Although it will alleviate the majority of your debts (student loans and certain forms of tax are not cleared), it severely affects your credit score and makes it incredibly difficult to borrow money in the future. Before filing for chapter 7, 11, 12 or 13 bankruptcies, you need to consider a few bankruptcy alternatives.

Judgment Proof
This is one of the most basic alternatives to bankruptcy but is seldom used. It actually involves doing nothing! If you have massive debts but an extremely small income or no money coming in at all, you could be considered ‘judgment proof’. This means that if creditors take you to court, there will be no money to take from you. In this instance, certain creditors will simply write the loan off as a bad debt rather than take you to court. Your debt is erased from your record after seven years. It is important to note that if your financial situation improves, creditors will be able to come after you for their money once again.

Debt Settlement
This is another relatively easy way to avoid bankruptcy, especially if credit card bills are the main reason why you are in such financial strife. It can be extremely stressful when you are plagued with calls and letters from angry creditors who are threatening legal action. Debt settlement involves negotiating a reduced balance that is mutually acceptable. Although it is possible to go through this process by yourself, most people are too intimidated to do so.

This is why they should consider using the services of a debt management company. However, you will need to have access to a certain amount of money (a lump sum) in order to utilize this service. It is possible to reduce the debt to 35-50% of its original sum. Debt settlement companies generally tell their clients to stop paying creditors in order to save up the required lump sum. The company then uses this money to negotiate a reduced settlement in return for an instant payment. It is important to note that the debt settlement industry is generally unregulated so be careful when choosing a company to work with.

Debt Consolidation
This is sometimes confused with debt settlement but is a completely different process. It involves taking out one large loan to cover all your debts. It is considered to be a money saving measure as the total interest rate repaid on this single loan will be considerably less than the interest owed on several loans over the same period of time. It is possible to get a reduced rate by offering collateral such as putting property up against the loan. If the loan is not repaid, the debt consolidation agency gets the property. One downside to this form of lending is that it can transform a series of unsecured loans into one secured loan, usually secured against a house. This means that debtors are risking much more in their bid to reduce debts.

There are pros and cons to all bankruptcy alternatives but they may well be a better choice than completely writing things off and starting from scratch. Carefully consider the above options before making such a life changing decision as going bankrupt.

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One Response to “Three Alternatives To Filing For Bankruptcy”

  • Linda Belcher says:

    I own a small business (an llc). We have faced severe financial difficulty over the past two years due to poor sales. I would like to find out if there are alternatives to bankruptcy for my business involving credit cards (some, however, are in personal names but all involve business debt). Can someone assist me?


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