Looking for a bankruptcy alternative to eliminate debt without all the legal ramifications? If so, this article explores several strategies which can help you rein in your finances and obtain financial freedom.
Determining the best bankruptcy alternative requires some research to understand the pros and cons of each. The Internet is one of the best places to locate this information; however, caution should be used. Unfortunately, anyone can slap up a website and offer financial advice. Before spending your hard earned money, engage in due diligence and make certain the company or individual is a reputable source.
It is important to realize bankruptcy has far-reaching effects. First, and foremost, it adversely affects your credit rating and will remain on your credit report for up to ten years. Secondly, filing bankruptcy is expensive and requires the services of a qualified bankruptcy attorney.
In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act[i] was enacted. BAPCPA requires debtors to repay a portion of their debts whenever possible. In the past, most debtors filed for Chapter 7 bankruptcy. This chapter allows debtors to liquidate assets to repay creditors. Remaining balances are discharged; providing debtors with a fresh financial start.
Today, the majority of people who file for bankruptcy are required to file for Chapter 13. This bankruptcy chapter allows debtors to keep assets such as their homes and automobiles, Chapter 13 payment plans place considerable financial constraints which can cause debtors to fail out of bankruptcy.
When this occurs, creditors can petition the court and request the case be dismissed. If bankruptcy is dismissed, debtors lose all protection from the court and creditors can commence with collection actions, including foreclosure.
Budgeting is perhaps the most under-rated, yet most effective bankruptcy alternative. Today, millions of Americans are living paycheck to paycheck. With skyrocketing unemployment rates, it can be extremely challenging to make ends meet.
Although some people do not earn enough money to cover all of their expenses, a large percentage of people facing bankruptcy are in trouble simply because they do not know where they are spending their money.
One way to track expenses is to carry a notepad and record every expense. From your morning cup of coffee to the fast food lunch, and the bag of chips to the pitch-in party, every expense should be accounted for. By tracking expenses, you can easily see where cutbacks need to be made.
In order to be successful with budgeting, you will need to review your expenses, develop a plan and engage in self-control. There are several budgeting techniques including the infamous “envelope” plan which became popular in the 1950s.
The envelope plan is relatively simple and requires little time. Simply write the name of each creditor on the front of an envelope. Determine how much you need to set aside from each paycheck to pay the bill. For instance, if you owe $2500 to a credit card company and want to pay it off within 12 months, you will need to set aside approximately $210 per month.
If you are paid on a weekly basis, place $52.50 inside the envelope. When the bill is due, you will have the funds available and will not need to struggle to come up with the full amount. The secret to success is to keep your fingers out of the envelope until you are using the funds to pay the debt.
Debt consolidation is another popular bankruptcy alternative. Most debt consolidation loans are actually home equity loans. With today’s credit crunch, it has become increasingly difficult to obtain a debt consolidation loan. If you are fortunate enough to qualify for financing, realize debt consolidation loans can place your home at risk for foreclosure.
Debt consolidation loans typically use real estate as collateral to secure the second mortgage note. Should you become delinquent on the second mortgage, lenders can commence with foreclosure proceedings even if you are current on your first mortgage.
Additionally, home equity loans are usually repaid over a period of 10 to 15 years. It is important to calculate the true cost of debt consolidation before using your home as collateral. In most cases, Borrowers pay more in interest over the long run than they would have by paying off the unsecured notes in a shorter period of time.
Debt settlement is becoming a popular bankruptcy alternative. Debt settlement should only be considered when outstanding debts total more than $25,000. Although debtors can attempt to negotiate with creditors on their own, they usually obtain better results when working with a professional debt settlement company.
Debt settlers generally charge fees based on the total amount of debt owed. There is usually a start-up fee and a monthly maintenance fee. In some cases, these fees can amount to several thousand dollars. However, debt settlement companies can negotiate debt by as much as 60-percent. Should you decide to go this route, make certain you understand the pros and cons. Obtain everything in writing and have a lawyer review the contract before signing on the dotted line.
Credit counseling is a relative simple and affordable alternative to bankruptcy. Many people struggle financially simply because they were never taught how to manage their money. Credit counselors provide financial education which can help you get back on your feet. An added benefit of credit counseling is many professional credit counseling organizations can assist with creditor negotiations.
It’s important to note BAPCPA requires individuals filing for bankruptcy to engage in credit counseling. The Department of Justice established the U.S. Trustee Program which provides a nationwide list of approved credit counseling agencies.[ii] If you are considering bankruptcy, but want to try credit counseling first, use one of the approved agencies so you won’t have to undergo credit counseling twice.
These are but a few of the bankruptcy alternatives available. In some cases, bankruptcy is the only option. However, if you can find an alternative that provides the same results you can save a lot of money in legal fees and eliminate the burden of 10 years worth of negative credit reporting.