Alternatives to Bankruptcy

Once people are in serious financial difficulties they may feel that bankruptcy is their only option. There are several alternatives that may mean that individuals do not need to go bankrupt. However taking these options may have an affect on the filing of any subsequent bankruptcy petition, so it is best to take advice from a bankruptcy attorney before doing so.

Debt Counseling Service

It is important to differentiate the following options from bankruptcy scams and foreclosure scams in particular, which often involve defrauding creditors and for which there can be financial penalties and sanctions. Some unscrupulous debt counseling services can cost you a lot of money, which is unlikely to improve your situation at all. However there are other services that can assist by consolidating monthly payments as well as negotiating with creditors to try to reduce the amount you have to pay. Remember that creditors would rather see some money than none at all, which is a greater possibility if you pursue the bankruptcy route. One negative aspect of this method is that it will show up on your credit history. It is also not an option for everyone: fairly often debtors are in such a serious financial situation that they are precluded from benefiting from this service.

Credit consolidation

For some people, credit consolidation can be a highly effective means of getting themselves back on track with their finances. A debt consolidation loan is usually a mortgage secured against your home that is used to pay back all other existing debts. The benefit of this is that the interest rate is normally much lower than the unsecured credit interest rate (e.g. on a credit card) which means that it will be cheaper to pay back. The loan is usually spread over a longer period of time, meaning that the debtor's monthly outgoings are significantly decreased. It is always advisable to check the interest rate before taking out a consolidation loan – don't just assume that because payments are low the interest rates are also low.

However, there are dangers with this especially if you keep your old lines of credit and continue to use them to overspend. This will put you in even deeper debt than before as well as making you more likely to get into an irreversible situation.

Out of court settlement

It may be possible to settle your unsecured debt with your creditors by offering to pay a reduced amount. Typically, debtors begin the bankruptcy process and are then able to come to an agreement without making themselves bankrupt. This is generally better all round than bankruptcy, and creditors are happier because they will recover more of the debt. Negotiating an out of court settlement can be complex and debtors usually have the assistance of a third party to act on their behalf. This is particularly important given that poorly-negotiated settlements can have a negative effect on your credit rating.

If you can't pay your bills, don't leave your head in the sand! A bankruptcy attorney will be able to discuss your particular circumstances and advise you as to whether or not any alternatives to bankruptcy could be right for you.

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