Alternatives to Bankruptcy
Negotiate with Creditors
If you haven’t already, try negotiating with your creditors -- even if you’ve been avoiding them since the day you first became delinquent. If your creditors have not yet discharged your debts, you still have an opportunity to work out a debt settlement, which will allow you to pay significantly less than you owe in exchange for release of liability. Depending on the amount of debt you owe and the individual creditor, you may be able to negotiate a debt settlement around 60-80% less than what you currently owe. If you’re savvy, you may also be able to knock off interest, late fees and other penalties your creditors previously tacked onto your account, which can save you substantially more money. Creditors may be willing to work out a new repayment plan for your debt settlement, so you can stretch your payments over a two- to six-month period. Once you pay off your debt settlement, you are no longer liable for the debt and your creditor can never attempt to recollect on that particular debt ever again.
Develop Your Own Repayment Plan
When you file for bankruptcy under Chapter 13, you must develop a repayment plan to pay back your creditors. As an alternative to bankruptcy, you can skip the filing process and develop your own repayment plan yourself. Determine how much of your income you contribute towards your basic cost-of-living expenses -- including your mortgage, utilities, groceries and medical care -- and earmark anything leftover income for your debts. Calculate the collective amount of your combined debts and distribute your expendable income equally across each individual debt. Start making payments immediately; as you pay off your lesser debts, you can redistribute that income towards your other debts. Depending on the amount of debt you owe and your available income, it can take anywhere from six months to five years to pay off your outstanding debts -- slightly less than the average six-year repayment plan most debtors receive when they file for bankruptcy under Chapter 13.
Join a Debt Management Program
If you absolutely, positively cannot develop your own repayment plan or negotiate with your creditors, or you give it a shot and aren’t satisfied with the results, you may consider tapping a debt management agency to help you. A qualified debt management agency will review all of your outstanding debts, negotiate debt settlements on your behalf, and work with you to develop a repayment plan that works for you and your creditors. You then turn over all of your disposable income to the agency, who distributes the money to all of your creditors under your new plan. Most debt management companies also charge an entry fee (also called an “initiation” fee) for new debtors to join the program, and a nominal monthly fee to cover the costs of handling your payments, which you will need to pay in addition to your payments to your creditors.
When you choose a debt management agency, be on the lookout for companies that make promises to settling or discharging your debt for “pennies on the dollar” or similar amazing claims. There are many, many unscrupulous debt management and “counseling” services that will take your money, allow your debts to reach the point of near-discharge, pay your creditors late or charge astronomical fees for their services. Check out the Federal Trade Commission’s Credit Repair Checklist to learn more about choosing a legitimate debt management company and avoiding scams.
Raise Some Capital
As a final alternative to bankruptcy, consider selling your liquid assets to raise cash that you can use to pay back your creditors. If you considered filing for bankruptcy under Chapter 7, this may be a viable alternative -- part of the Chapter 7 requirements includes auctioning your assets for the very same reason. By selling your assets yourself, you may be able to fetch a higher price and avoid adding bankruptcy to your already-damaged credit history. Utilize online auction services like eBay, post advertisements on websites like Craigslist or try holding a yard sale for smaller, less expensive items. For antiques or high-priced goods, such as jewelry or musical instruments, visit a shop that appraises and sells the same items you are selling to get a better deal. If you still owe money on any item you plan to sell, make sure you earn enough to cover the outstanding debt before you agree to the purchase. Don’t rush the process -- give yourself up to a month to sell your unnecessary belongings to ensure you get the best price possible and that you raise enough to cover your outstanding debts.