No Other Way Out?
With employment the highest in twenty five years and cut backs in hours for those still employed debt payments are getting harder to make and bankruptcy lawyers are one of the few professions busier than ever. Some consumers buried in debt quickly conclude personal bankruptcy is the only way out. To file bankruptcy is never an easy decision and should not be made without completely investigating then ruling out each and every alternative.
Four Alternatives to Filing Bankruptcy:
A homeowner with equity and relatively good credit can consider refinancing their existing home mortgage to cash out part of the equity or take out a second mortgage loan to refinance their credit card, charge card and other consumer debt accounts. This debt strategy will allow a debtor to get rid of several monthly bills by replacing them with one smaller easier to pay mortgage payment. The interest rate finance charge on their new mortgage loan will be substantially smaller than the rates charged on existing consumer debt. This is because the mortgage loan has the borrower's home as security in case of default whereas credit cards are unsecured loans backed only with the borrowers promise to pay.
Another refinancing strategy involves transferring high interest rate to low or zero interest rate credit cards. Simply taking advantage of introductory six or twelve month zero interest rate credit card offers then transferring balances to them allows a debtor pay off the balance within the introductory zero interest rate period without finance charges adding significantly to the balance each month. This strategy requires the borrower to have the ability to pay off the balance within the introductory period or else retroactive interest rate charges may apply.
A refinancing strategy should be deployed before missed and late payments show up on credit reports. Credit card and consumer debt refinancing with mortgage loans or balance transfers must be considered before debt problems have degraded a borrower's credit score significantly. So if debts are starting to cause problems to the point of someone looking into how to file for bankruptcy it could be too late but must be considered because refinancing will cause minimal harm to credit. Both refinancing strategies assume credit purchases have stopped.
Debt Management Programs
If a debtor gets to the point where tying to refinance their unsecured debt with existing credit facilities is impossible professional help is available. Unsecured debt can essentially be turned over to a professional that will help to organize a client's budget so that bills can be paid and living expenses covered. The plan includes budgeting, debt consolidation, and credit counseling. A representative of the debt management company will work with the client's creditors to lower interest rates, waive late and penalty fees and schedule the client's debt to be paid out over a three to five year period. The client pays once per month to the debt management company then the debt management company disperses the funds to the client's creditors. If the debtor contemplating bankruptcy is employed and has an income but can't keep up with current debt payments debt management plans are a good alternative to filing chapter 13 bankruptcy.
With chapter 7 bankruptcy all of the bankruptcy filer's debts are discharged and most of the time unsecured creditors write off nearly all of the outstanding balance owed to them. Therefore credit card companies and other unsecured finance companies are more than willing to write off a portion of the debt rather than all of the outstanding debt if they think their customer is likely to file for bankruptcy. This allows law firms to offer debt settlement options to clients that are under financial hardship and need debt relief. Substantial amounts of unsecured debt can be written off with this strategy. However, creditors generally insist on being paid the balance of what is owed to them upon reaching a settlement agreement. Debt settlements are always reported to the credit bureaus by creditors but should not have as damaging effect as personal bankruptcy.
Some debt settlement companies offer monthly payment plans. However, this can be an arduous process during the months when payments go to the settlement company rather than to creditors to pay fees and to accumulate funds in a settlement account. During these months creditors are not getting paid and are unhappy. Debt collectors and garnishments are risks doing this. Also, credit reports are damaged severely as payments get skipped for months.
There are significant concessions from creditors that debtors themselves can achieve. It may not be possible for debtors to get creditors to agree to major write-offs of account balances without the help of a law firm however interest rate reductions, late and penalty fee forgiveness and extended payment plans are certainly possible by negotiating directly with an authorized agent of the creditor to whom the debt is owed. It is not unheard of to get finance charges waived entirely during the future payment schedule. If creditors are advised that a financial hardship exists and account adjustments are needed debtors can be successful in getting their creditors to work with them directly and make the necessary account adjustments so they can get paid rather than face their customer in bankruptcy court. A good faith effort to pay something on the account during the negotiating process is very helpful.
Alternatives to personal bankruptcy are typically far less destructive to someone's financial future than years of emotional and financial cost that follow bankruptcy.
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