Some Possible Alternatives to Bankruptcy (listed in alphabetical order):
Balance Transfers of Credit Card Debt
Definition: Paying off high interest credit cards or loans by putting the balances on credit cards with lower interest rates or with a zero interest rate.
Pros
If you can substantially lower the interest rate that you are paying, it should help you to pay the balance in a shorter amount of time.
Cons
It is never wise to incur additional debts when you are already struggling and new credit can encourage new debt. The 'low interest' credit card company may notify you in writing of a change to your account terms, which increases your interest rates to whatever the company says. In general, these notifications ask you to 'accept' the new terms of the contract, but if you do not accept, you are required to close the account.
What to Avoid
Avoid 'cross-default clauses' and other 'tricky' provisions that can provide nasty surprises. 'Cross-default clauses' is fine print in the contract that makes it a 'default' if you become late on anything you owe, such as a phone bill or medical bill, then the interest rate goes from the low or 0% to a very high 'default rate.'
Be certain the low interest rate doesn't apply only to new purchases.
Find out if balance transfers will be considered 'cash advances' and therefore carry a much higher interest rate.
Is there a limit on how long the low interest rate is guaranteed?
Avoid assuming that your financial status is good simply because you receive pre-approved credit offers.
What to Look for
Look for the answers to all of the questions above, in writing, before you commit.
Be certain that you can afford the monthly payment and that it will allow you to pay off your debt in a reasonable period of time.
Know whether this is a realistic option for you by doing the calculations to see how long it will take you to pay off the debt at the new interest rate based upon the amount you can afford to pay per month. Financial calculators are available on the Internet.
Budgets
Definition: A budget is simply a plan for your spending. The goal is to spend less than you make and put some money away for a rainy day. Everyone can benefit from coming up with a solid plan for their spending. The plan should include balancing the budget and anticipating periodic expenses that do not occur regularly.
Pros
Planning ahead means not being caught off guard by a periodic expense such as a car or home repair.
Having a spending plan can help you see the full financial picture and allow you to plan for the future, set goals and make priorities.
Money management classes and books can teach skills and provide useful tools to obtain financial health.
Some financial coaches may provide individual training.
Cons
Depending on the reasons for your financial problems, or the amount of your debt, budgeting and financial education may not be the solution to your problems.
A spending plan does not cover every scenario or emergency situation.
What to Avoid
Avoid high cost seminars or classes that teach budgeting. Excellent budgeting classes are taught at many colleges and non-profit organizations for reasonable or no fees.
What to Look for:
Ask local colleges for a list of their continuing education classes and seminars.
Consolidation Loans (unsecured)
Definition: An unsecured consolidation loan is a loan that pays off other debts like credit cards, but is not a loan against your home or personal property. An example would be an unsecured loan or line of credit with a bank or credit union. A consolidation loan only makes sense if the interest rates and terms are more favorable than the interest rates and terms you have now.
Pros
If the new loan has a more favorable interest rate, it will save you money.
If the new loan has both a lower interest rate and a decent length of repayment you may be able to significantly decrease your monthly payments. Use loan calculators found on the Internet to be sure.
Cons
If your credit is already in bad shape, you may not be able to get a consolidation loan with good terms.
It is never wise to incur new debt when you are struggling. When your credit card balances are paid off by the loan, the temptation may be to use the credit cards again.
Be sure the new loan payment can fit into your spending plan without using new credit to fill in the "gap".
What to Avoid
Avoid not knowing exactly what your monthly payment will be under the new loan and being sure that you will be able to afford it.
Avoid high interest rate loans and loans from companies contacting you through the mail, Internet, or by telephone.
Avoid further use of credit.
Investigate and know your lender before entering into a loan.
Avoid any loan that will not allow you to pay off the debt in a reasonable amount of time.
What to Look for
Look for answers before you sign any loan paperwork.
Read all the small print and be sure you understand all of the terms.
Look to a source you already have a relationship with such as your bank or credit union.
Be certain you can afford the monthly payment and the loan will pay off in a reasonable amount of time.
Many financial calculators are available on the Internet. Use them to compare the terms of your old credit versus this new loan.
Debt Negotiation
Debt negotiation is when either you yourself or someone acting on your behalf, specializing in debt negotiation, contacts creditors in order to settle an unpaid debt for less than the amount owed. The amount a creditor will settle for can vary greatly. The settlements usually range from 40% to 70% of the balance, but there are no absolutes.
Pros
The debt is paid at a significant savings and the creditor will not pursue further action.
Cons
Debt settlement requires lump sum payment rather than payment over time. Therefore, if you cannot readily access a significant amount of money it will not be an option for you.
Most creditors will not consider settling a debt unless it is seriously delinquent (behind).
At best, creditors will list the debt as 'settled' on the credit report.
Some debt settlement companies charge high fees and give poor advice. If there are several creditors, they may require more money than the consumer has available.
What to Avoid
Avoid any person or entity engaged in debt settlement activities that claims to 'eliminate' debt without bankruptcy.
Persons or entities engaged in debt settlement activities are also usually engaged in a for profit businesses, so be sure you know exactly what you will be charged and remember you can always act for yourself in negotiating your debts with your creditors.
Some person or entities engaged in debt settlement activities have you sign a contract to pay them a percentage of what they 'save' you, which can be a huge amount.
Avoid any person or entity engaged in debt settlement activities charging high fees, you can negotiate your own debt settlement and do not have to pay for this service.
Avoid any plan that will not solve all of your debt problems.
Avoid sending money to anyone until you have everything in writing from your creditors.
Avoid person or entities engaged in debt settlement activities that tell you to stop paying debts so they can be negotiated at a future time.
What to Look for
Get everything in writing.
Investigate any person or entity engaged in debt settlement activities before you sign anything.
Look for an answer that will solve your whole situation not just satisfy one or two creditors.
Debt Management Plans
Definition: A debt management plan (often referred to as a DMP) is a plan that deals with unsecured debt (credit cards, medical bills, and unsecured loans). The consumer makes monthly payments to the agency. The payment is then divided up and sent to the consumer's unsecured creditors. With very few exceptions, the creditors give all agencies the same 'deal.' The deal is that most credit card companies agree to not charge late fees going forward as long as you stay current with your DMP, and many creditors reduce interest rates. Additionally, most creditors in a DMP agree to 're-age' your account which means that the minimum payment due will go back to the amount it was before you got behind, or lower. The creditors then return a portion of the money paid by the consumer back to the agency as payment for this service. This is called a 'fair share' payment. The DMP typically lasts about five years.
Pros
Some of the creditors reduce interest rates and stop late fees.
Some creditors will re-age accounts, which means the minimum payment amount will go back to what it was when the account was current, or even lower.
Further use of credit is prohibited or strongly discouraged in this plan.
Cons
DMP plans are for unsecured debt (debts in which you did not put up any of your personal property as collateral to secure the loan) and cannot help with car or house payments, tax debts, garnishments or pending lawsuits.
Some credit counseling agencies don't always make payments to your creditors on time, incurring late fees and interest rate increases for you.
The DMP was designed for people who have enough income to pay all their living expenses and the DMP payment, without using further credit. A DMP will not work for consumers who cannot balance their budget and have enough money to pay for a plan.
While exact figures are not available, according to the National Consumer Law Center the drop out rates for a DMP are very high.
Some agencies are aggressive and even deceptive.
While in a DMP, creditors may note on credit reports that the debt is not being paid as originally agreed or that the consumer is on a DMP.
What to Avoid
Avoid high fees by calling several agencies and comparing.
If the agency charges more than a $50 set-up fee and a $25 monthly fee, look for a better deal.
Avoid agencies that have associations or close ties to a for-profit company such as a loan company.
Avoid agencies that only deal with some unsecured creditors and not others.
Avoid agencies that are not looking at your full financial picture.
Avoid anyone who aggressively pushes debt plans or the possibility of a consolidation loan in the future.
Avoid any agency that gives commissions or a bonus to their employees for signing consumers to debt management plans.
What to Look for
Look for reasonable fees.
Open your credit card statements every month and check that payments have been made by the credit counseling agency as agreed.
All statements should be directed to your attention and not to the agency.
Double check that you are not being charged late fees or increased interest rates.
Call their customer service department immediately if any problems occur.
Make your payments at the same time every month as agreed with the agency.
Doing Nothing
Definition: Doing nothing means just that, you do nothing about your existing debts, even though you can’t pay them.
Pros
If you do not own property or desire to own property in the future, if you have no need for credit, if you have no property that you want to protect, then doing nothing may be an option for you.
You avoid paying legal fees and doing paperwork.
Cons
Most negative credit items can remain on your credit report for 7 years.
Bad credit can make it difficult to get a low interest vehicle loan and may even affect your ability to obtain certain jobs.
Getting a mortgage at a low interest rate will be highly unlikely with a low credit score.
Laws vary from state to state, but a judgment generally becomes a lien against any land or home in your name and sometimes allows the judgment-holder to take action against your personal property, including the garnishment of your wages.
Emotional stress, particularly depression, can be a result of past due bills and creditor calls. Do not ignore the effects that stress may be having on you and your family.
What to Avoid
Avoid allowing problems to get worse by doing nothing.
Avoid pretending you don’t need help. Do not lie to yourself, or avoid thinking about your financial situation.
What to Look for
Be informed of all possible consequences of your failure to take any action. Research all your alternatives before choosing a plan of action.
Home Equity Loan
Definition: A home equity loan is a loan that is secured by your home. Such loans may be in addition to other loans you have against your home, or, if you own your home free and clear of debt. There are two basic types of equity loans. Standard loans refer to loans that give you a lump sum amount at the beginning of the loan. They are repaid over a specific period of time, and, at the end of that time, your balance is zero. They are generally at a fixed interest rate and are sometimes called “second mortgages.” The other type of home equity loan is a credit line. Most credit lines have a variable or adjustable interest rate, and they operate similarly to a credit card. The amount you are authorized to borrow is like the limit on a credit card. You can borrow as much or as little of that amount as you wish during the “draw period.” Credit line loans often have “interest only” payments that are very low. But if you are paying interest only, then at the end of the loan period the amount owed will be the total amount of the funds you borrowed, unless you have paid additional payments toward the principle. There are big differences between these two types of loans. The home equity credit line is so much riskier than the standard loan that lenders are required by the Federal Truth in Lending Act to give applicants an information booklet entitled “When your home is on the line, what you should know about home equity lines of credit.” This should be read carefully to understand the risks involved with line of credit loan.
Pros
In most cases, interest payments for your home equity mortgage on your primary residence are tax deductible.
It may be easier to get a home equity loan because the repayment of the loan is secured by your home.
The payments may be low because the debt extends over a long term, or because your payment may be interest only for a period of time, after which your payments may increase greatly.
Loans that are secured by property usually have a lower interest rate than unsecured loans.
A credit line loan allows you to draw upon it when the need arises without going through a loan approval process.
Cons
If you pay only the required payment on your equity line each month at the end of the loan you can end up owing an amount close to the original amount of the loan.
Any closing costs for the home equity loan that are added to the loan amount will cost more in interest paid, and it will take you longer to repay the loan.
Your credit score will be affected due to the added debt.
If the value of your home goes down, you may end up owing more on your home than what you can get if you sell it.
A credit line loan often has an adjustable interest rate that can increase your payments greatly over the term of the loan.
The home equity credit line is very similar to having a credit card with an enormous limit. Therefore credit line loans make it very easy to overspend or use credit for things better saved for.
Transferring your credit card debt and car payments to a home equity line may lower your monthly payment, but the debt is now secured by your home.
Qualifying for a certain loan amount does not necessarily mean that you can afford it.
If you are not able to repay the home equity loan for any reason such that you fall behind in your payments, you risk losing your home.
What to Avoid
Avoid lenders who want you to make a quick decision.
Avoid loans with high late fees, annual fees, and prepayment penalties.
Avoid borrowing more than your home is worth or more than you need. Some aggressive lenders get a “padded” appraisal for the amount they need in order to make the loan. Be aware that such appraisals are not a true reflection of the price for which you could sell your home.
Avoid agreeing to loan insurance without first consulting a qualified insurance agent who may be able to obtain the same coverage for less and not have it tied to your home loan.
What to Look for
Apply to at least 3 different lenders and get a good faith estimate quote from each for the cost of getting the loan. Compare the three quotes and ask questions. Get a qualified professional that is not associated with the lender to explain all of the terms to you.
Have the lender explain adjustable rates, how they work, and what your payment will be at the maximum rate.
If you chose a home equity line of credit, make sure your budget allows you to pay far more than the “interest only” payment.
Remember you have three days to change your mind after signing loan papers involving the refinance of your primary residence.
Make sure you understand how a “balloon feature” works, whether it is right for your situation and what your options will be when the balance comes due.
Shop and compare interest rates.
Find out if there is a minimum amount you are required to borrow under a credit line loan.
Refinance Your Home
Definition: Refinancing Your Home means getting a new mortgage to pay off your current mortgage and borrowing more money to pay off debts. It allows you to pay off credit card debts, auto loans or other bills by adding what you owe into the new home mortgage to get an overall lower monthly payment.
Pros
Although your mortgage payment might go up, your total monthly debt payments will decrease.
The credit card debts, automobile loans or other bills that you roll in to the mortgage will have a lower interest rate.
The interest you pay on the mortgage debt is, in most cases, tax deductible.
Cons
If you are behind on your mortgage payments, you may not be approved for the loan, or you will pay a higher interest rate than you would if you were current with your payments.
Without realizing it, you may end up with a mortgage payment you cannot afford.
If you are unable to make the payments, you could lose your home to foreclosure.
You may use up the equity in your home and have little or no profit if you choose to sell it.
You may end up owing more on your home than you can get if you sell it, especially when real estate commissions are taken into account.
This option is generally available only to those who have a good payment history on their current mortgage.
What to Avoid
Call three different lenders including the one that has your current mortgage. Some companies offer low-cost refinancing for existing customers.
From each of the lenders, request a “Good Faith Estimate,” which is an estimate of the cost of getting the loan. Compare the three quotes and question anything you do not fully understand.
Have the lender explain adjustable rates and fixed rates, how they work, and what your payment will be at the maximum rate.
A fixed-rate mortgage may be easier to budget for than an adjustable rate mortgage. Ask your lender for copies of the closing papers before the day you are to sign them.
Hire a real estate lawyer or other professional that is not associated with the lender to explain to you anything that you do not completely understand.
What to Look for
The National Consumer Law Center warns you to “be suspicious of anyone that contacts you first” such as Internet, telephone or mail solicitations.
Avoid paying high closing costs to get the loan.
Avoid Adjustable Rate Mortgages that have high Margins. The payment may be low now (or fixed for 2 to 3 years) but will go up in the future. Make sure you know what the maximum monthly payment could be and that you can afford it.
Avoid borrowing more than you need. Rolling credit card debts into your home mortgage isn't always a good idea. Seeing your credit card balances at zero can be a temptation, especially if the underlying problem that created the credit card has not been fixed.
Retirement Funds
Definition: Taking money, either in the form of a withdrawal or a loan, from your retirement savings such as an IRA, 401k, 403b, whole life insurance or other retirement savings plan in order to pay debt.
Pros
You are using money of your own to pay off debt as opposed to getting further into debt.
Cons
You will incur penalties for early withdrawal from most forms of retirement savings. This usually means that you will owe taxes for the year in which you withdraw funds.
If you take a loan rather than a withdrawal, your company will deduct the payments for this loan from your paycheck and this may leave you with too little money, causing you to increase your debt.
If you cannot repay a retirement loan, it is then considered a withdrawal, with the same tax penalties associated with an early withdrawal.
Any funds taken now and not repaid will reduce your retirement savings.
What to Avoid
Avoid leaving yourself with too little money in your paycheck due to retirement loan repayments.
Avoid incurring tax penalties since these are new debts you will have to pay.
Avoid taking this step unless you know all of the consequences and are certain that this step will take care of all of your debt problems.
What to Look for
Look for a source of retirement savings that you can liquidate without incurring tax penalties for early withdrawal.
To learn more about Bankruptcy options, go to the Bankruptcy page.
