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Considering bankruptcy? 8 alternatives for high credit card debt
Avoid an expensive, time-sucking process with these strategies.
Bankruptcy is a last resort for good reason: It damages your credit for years and can make it tough to qualify for future loans, credit cards and jobs. And depending on the type of bankruptcy you file for — Chapter 7 or Chapter 13 — you'll either have to sell your assets or make payments on your debts.
These eight alternatives don't encompass everything you can try, but they're solid places to start when you're considering filing for bankruptcy.
1. Negotiate the debt on your own
You don't need a third party or professional company to contact your creditors for you. If you're considering bankruptcy, your first alternative should be to negotiate your debts on your own.
Your creditors may be willing to create a new payment plan, adjust interest rates or even settle for a lower total amount. And you won't need to pay a fee to a debt settlement company or credit counselor. But you will need to do a lot of leg work.
You'll need to research the policies of your creditors, and probably call each multiple times to get any results at all. You also need to save up cash for making a one-time payment if you're aiming to settle for a lower amount.
Be sure to get any changes to your debt in writing. And stick to the new agreement. If you don't uphold your end of the bargain, you may be required to abide by the original contract you signed.
2. Work with a debt settlement or relief company
If your creditors haven't budged — or you aren't confident in your negotiation skills — consider a debt settlement or debt relief company instead. For a fee, a debt relief company will work on your behalf to settle your debts.
Just watch out for scams hidden in the industry. When comparing options, get a quote and ask about fees. Legit debt relief companies are only able to charge a fee after they've settled a debt and you've made a payment.
A legit debt relief company like National Debt Relief will be up front about its costs, the timeline — two to four years in most cases — and how much you can realistically settle. On average, expect to save 30% off your original debt — after fees are taken out.
3. Meet with a credit counselor
Credit counselors are nonprofit services that help you create a budget, understand finances and manage your debt. Many are able to work with your creditors to create new, more affordable payment plans. And they're more highly regulated than debt relief companies — the US Department of Justice maintains a list of registered credit counselors by state.
The process is similar to Chapter 13 bankruptcy. In fact, filing for bankruptcy typically requires you to work with a credit counselor. So seeking one out before you file can help you avoid the lengthy legal process.
4. Take out a debt consolidation loan
Debt consolidation loans are often advertised as a quick way to deal with debt and potentially reduce payments. And it can be — provided you can qualify.
In many cases, you will need to have good credit and a low debt-to-income (DTI) ratio to make a debt consolidation loan worth it. Otherwise, you could be stuck with similarly sized payments and, if you aren't careful, may end up paying more in interest.
If you're able to qualify, a debt consolidation loan can be a solid way to pay off all your creditors at once and combine your debts into a single monthly payment. You may even save money if you get a lower average interest rate.
But unlike debt settlement and credit counseling, your total debt will remain the same. This makes it a less viable option for many people who are considering bankruptcy. If you already can't afford your debts, a debt consolidation loan won't make much of a difference.
5. Restructure or refinance your mortgage
You may be able to restructure or refinance your mortgage if you're struggling with your finances. Restructuring should be your first choice. Your lender will work with you to lower your interest rate, extend your loan term or modify your mortgage so that it's more affordable.
If you choose to refinance your mortgage, you may need to meet additional credit and income requirements that can make it difficult to qualify. Still, it's an opportunity to lower your interest rate or change the terms of your current home loan to free up your budget.
And even if you don't own your own home, it is possible to negotiate your rent with your landlord. Landlords may not always be willing to negotiate, but if you explain your financial situation and potential bankruptcy, you may be able to change your lease terms. Just be sure to get those changes in writing.
6. Sell off assets on your own
If you file for Chapter 7 bankruptcy, you'll be required to sell off a majority of your assets, including any properties, cars, jewelry and stocks — though the list isn't limited to just these items. You can get ahead of the game by doing this yourself and stockpiling.
From here, you can either pay off your bigger debts or put it away into a savings account if you choose to pursue debt settlement. It can also help ease some of your monthly payments.
If you have a second car and you're considering bankruptcy, rather than making an additional car payment each month and paying for insurance, gas and maintenance, sell this asset. You'll not only save money, but you'll also wipe one debt off your list.
7. Ask for help from friends or family
Requesting help from friends and family isn't an easy feat, but for some, it may provide an alternative to bankruptcy. If you have loved ones who are able to help, reach out. They may be able to cover some debts or work with you to find debt relief options. Be honest and up front about your struggles.
And if a loved one decides to lend you money to pay off an overdue bill, take repayment seriously. Put everything in writing and stick to the plan you agreed on — this is the best way to maintain a positive relationship.
If your friends or family are unable to help with larger bills, they may be able to ease the cost of some other expenses. Discuss potential changes to your living situation to reduce your expenses. Even something as simple as getting on a family plan for your cell phone can help both of you save money.
8. Make hard budgeting decisions
As a last effort, consider extreme cuts to your expenses. While it may not be possible if you've already gotten your budget to the bare minimum, cutting out cell phone use or multiple streaming services can make a difference.
It's not ideal — and it's tough. But if you need to, adjusting your normal diet, finding some unnecessary expenses to cut out and limiting your spending to the absolute minimum can help you avoid bankruptcy.
Or use a mix of these alternatives
No alternative is a one-size-fits-all solution. When it comes to getting help with your debt, using a variety of tactics can bring the best results.
If you cut a few bills, sign up for credit counseling, negotiate some debts on your own and work with a debt relief company for others, you may increase your chances of success — and avoid filing for bankruptcy.
While you're working on tackling your debt, keep an eye out for companies and people banned from debt relief. Unfortunately, there are quite a few scams in the debt relief industry. Do your research and ensure every company or person you speak to is legit before giving them money or personal information.
What happens if I do nothing?
For some people with low incomes and no assets, a "do nothing" approach could work. Your credit score will still take a huge hit from late payments and default, and you could open yourself up to lawsuits.
But if you don't own a home, have a limited income or government benefits and don't have much money in your bank account, you could be considered judgment proof. This means that a creditor won't be able to sue you and take away basic essentials you need to live your life.
However, if you aren't on Social Security, unemployment benefits or other public assistance, your creditor may still be able to garnish wages. If you want to try the "do nothing" approach, you should still consult with a credit counselor or lawyer for information on how avoiding your debts could impact your finances.
Alternatives to watch out for
There are some other alternatives that might pop up, but they aren't necessarily good options when you're looking to avoid bankruptcy.
- Balance transfer credit cards. A balance transfer credit card allows you to transfer your debts onto a card, usually with a 0% APR for the first 12 to 18 months. However, these are difficult to qualify for if you have bad credit, high debts and low income. Many people seeking debt relief or considering bankruptcy are unlikely to meet the eligibility requirements set by credit card companies.
- Home equity loans. Home equity loans and lines of credit can be used to pay off creditors. But many experts warn against paying off an unsecured debt, like a credit card, with a secured debt. Anything that uses your home as collateral is especially risky. If you aren't able to make your payments, you risk losing your home to foreclosure — even if it's your primary residence.
- 401(k) loans. 401(k) loans allow you to borrow money from a company-sponsored retirement account. They typically have lower interest rates, and you won't have your credit checked when you borrow. But there are many fees involved, especially if you switch jobs, and it can make bankrolling your retirement much more difficult.
What to watch out for when filing for bankruptcy
Filing for bankruptcy is an expensive process — whether you file by yourself or work with a lawyer. The legal language can be confusing at the best of times, and determining what type of bankruptcy best suits you requires plenty of forethought — and paperwork.
You'll still need to undergo credit counseling when you file, so taking that first step yourself won't hurt. Selling off assets is also required if you choose to file for Chapter 7. And you're required to continue to pay off your debts under a new payment schedule if you file for Chapter 13.
Your best course of action if you do decide bankruptcy is the right choice is to work with an attorney. On average, expect to pay anywhere from $1,000 to $1,750 for a bankruptcy attorney, according to NOLO. This expense is in addition to filing fees and bankruptcy counseling courses. If you do choose to go it on your own, there are a number of court fees involved depending on the services you need.
Using one or more alternatives to bankruptcy can help you get your finances in shape and avoid a 10-year hit to your credit score. But to make the most of these alternatives, explore your debt relief options to learn about what you can do to handle your debt.
Frequently asked questions
Our answers to some common questions about debt relief and bankruptcy.
Will bankruptcy clear all my debt?
Filing for Chapter 7 can eliminate many unsecured debts, but it won't clear every debt you have. Some student loans and secured loans — like a mortgage or an auto loan — may still need to be paid. If you opt for Chapter 13, you'll continue to make payments on your debts with an adjusted payment schedule.
What happens if I have my debt settled?
If you choose to work with a debt relief or debt settlement company, you may be able to have some of your debt negotiated. But any amount of forgiven debt will count as income, which means you may owe taxes on it. A legit debt relief company should go over the risks and expenses with you before you start a settlement program.
- Bankruptcy Court Miscellaneous Fee Schedule, US Courts, December 1, 2020, https://www.uscourts.gov/services-forms/fees/bankruptcy-court-miscellaneous-fee-schedule
"Chapter 7 Bankruptcy: What Will It Cost and Will It Wipe out My Debts?," NOLO, https://www.nolo.com/legal-encyclopedia/chapter-7-bankruptcy-survey-article.html
Companies and People Banned from Debt Relief, US Federal Trade Commission, https://www.ftc.gov/enforcement/cases-proceedings/banned-mortgage-relief-debt-relief-companies-people
List of Credit Counseling Agencies by State, US Department of Justice, January 29, 2021
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