Alternatives to Bankruptcy
Debt Consolidation and Debt Settlement can Help Avoid Bankruptcy
Although bankruptcy provides debt relief, there are negative consequences such as a negative bankruptcy entry in the credit report for up to ten years and bankruptcy lawyer expenses. Because of this, it is a good idea to consider alternatives bankruptcy such as debt consolidation, debt relief programs, or even do nothing at all.
Debt Consolidation Loan
If financial difficulties are being caused by high interest rates, it may be possible to lower finance charges by refinancing existing high interest loans and high interest credit card balances to a lower rate with a debt consolidation loan.
Refinancing high interest loans to a debt consolidation loan is a good option for those who have not yet missed a payment and have maintained a good FICO score and credit report. Along with the drop in interest rate, a consolidation loan can also lengthen the loan, which lowers the monthly payment. The combination of a lower interest rate and an extended loan term can lead to a substantially lower monthly payment.
Debt Relief Programs
There are debt relief firms that offer consumer credit counseling or debt management services designed to help borrowers come up with a plan to payoff loans and help avoid bankruptcy. The Consumer Credit Counseling Service (CCCS) is a well known consumer nonprofit organization that helps borrowers create a viable repayment plan with help from their lenders.
There are other firms which specialize in debt settlement that will even attempt to negotiate a settlement with creditors for a fraction of the original debt. Consumers should use caution in choosing a debt settlement firm, since some fail to deliver on their promises of settling debt for less than full value.
A cheaper alternative to using a debt relief firm is to have the borrower directly negotiate debt settlements or request reduced interest rates with creditors. In some cases, creditors and collection agencies with delinquent accounts send offers of debt settlement by mail, and therefore there is no need to use a debt relief firm as a middleman.
Do Nothing
If the borrower has little income and assets, doing nothing may be the optimal choice. The borrower lets the debt's statue of limitations expire within a few years, thus making it no longer legally collectible. In addition, the borrower's lack of income and assets would make it unprofitable for the creditor to sue the borrower for repayment of the debt. In other words, the borrower is "judgment proof." What will happen is that the creditor will write off the debt. In seven years, the debt will fall off the credit report. Other than the occasional phone call from a collection agency regarding a debt that is not legally collectible, the end result is the same as chapter 7 with no legally binding debt remaining.
The statue of limitations ranges from three to six years, depending on the state. As long as the borrower avoids actions that restarts the statue of limitations clock, such as a loan payment, the debt should eventually cease to be a legal obligation of the borrower. While waiting for the statue of limitations to expire, the borrower should be prepared for a barrage of collection agency calls and threats to sue for recovery even though the borrower has little in income and assets.
For many people, the alternatives listed above may not be enough to recover from the mountain of debt. Those who have no hope of ever seeing the debt disappear due to too little income may need to file for bankruptcy.
References:
Dash, Eric. "Credit Card Companies Take What They Can Get." New York Times, January 2, 2009.
Streitfeld, David. "Debt Settlers Offer Promises but Little Help." New York Times, April 19, 2009.
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