Alternatives to Bankruptcy

Several Alternatives to Bankruptcy (listed in alphabetical order):

Balance Transfers of Credit Card Debt

Credit CardDefinition: Transferring the balance from a higher interest rate credit card to a lower interest rate (or zero interest rate) credit card.

The Good

A significantly lower interest rate can help you pay off the credit card balance in a shorter period of time and save money.

The Bad

Card issuers usually charge a transfer fee of the total balance transfer amount.

Incurring additional debts when you are experiencing financial hardships is dangerous because access to new credit will often tempt you to use it.

Card issuers can raise the interest rate on new purchases made as long as they provide 45 days advance notice.

What to Look Out For

If you miss payments for more than 60 days, interest-rate increases will affect new purchases.

Determine whether balance transfers are really cash advances with a higher interest rate.

How long is the low interest rate guaranteed for?

Remember

Card issuers must offer the option of having a fixed credit limit that cannot be exceeded.  Choosing this option will prevent you from incurring over-the-limit fees.

Make sure the monthly payment is affordable and that it allows you to pay off the balance in a reasonable time period.  Card issuers are now required to tell customers how long it will take to pay off with the minimum monthly payment.



Budgets

BudgetDefinition: A budget is a simple spending plan that estimates your income and expenditures.  The purpose is to limit your expenditures to less than your income and save what is left over.

The Good

Having a budget will prepare you for expenses that do not occur on a regular basis.

A budget allows you to plan ahead and set financial goals.

Classes and books that teach money management skills can provide steps towards improving your financial condition.

The Bad

Creating a spending plan and having a budget will not always solve your financial problems.

It is impossible for a budget to cover every possible event.

What to Look Out For

Stay away from for-profit classes and seminars.  Many budgeting classes are available at local colleges and non-profits for moderate or no fees.

Remember

Check course offerings at local colleges for budgeting classes.



Consolidation Loans (unsecured)

Consolidation LoansDefinition: An unsecured consolidation loan, such as an unsecured loan or line of credit, pays off other debts but is not secured against your personal property or house.  This type of loan can be practical when its interest rates are lower than your current interest rates.

The Good

You will save money if the new loan has a lower interest rate.

Monthly payments can be dramatically reduced if the new loan has a lower interest rate and a reasonable length of repayment.  Make sure to use online loan calculators to confirm the repayment schedule.

The Bad

Those with poor credit may not even qualify for a consolidation loan.

Incurring additional debts when you are experiencing financial hardships is unwise because access to new credit will often tempt you to acquire new debt.

Make sure any new loan payments can fit into your budget without require the use of new credit.

What to Look Out For

Make sure you know the exact amount of your monthly payment under the terms of the new loan. 

Stay clear of loans with high interest rates and loans from companies that solicit you through telemarketers, direct mailings, or via the Internet.

Further credit use should be avoided.

Research your lender before entering into a loan.

Stay clear of any loan that does not permit the repayment of the debt within a reasonable time period.

Remember

Do your research before you sign any paperwork.

Read the entire contract, including the fine print, and make sure you understand every term.

Focus on financial institutions you have an existing relationship with.

Make sure the monthly payments are affordable and the loan will be repaid in a reasonable timeframe.

Financial calculators, which are available online, can be used to compare the details of your old credit versus the new loan.



Debt Negotiation

DebtDebt negotiation is the process under which you or another person acting on your behalf, usually with special training, calls on creditors in order to negotiate the settlement of debt for an amount less than the unpaid debt owed.

The Good

The debt is paid off for less than the outstanding balance and the creditor agrees not to take further action against you.

The Bad

Debt settlement often requires a single complete payment as opposed to multiple payments spread out over a period of time.  This is not possible for individuals who lack access to large amounts of money.

Most creditors will only negotiate with consumers who are 60-90 days past due on their accounts.

Your credit report will show evidence of debt settlements and your credit score may be lowered.

Companies that specialize in debt settlement can be expensive and do not always give good advice.  In situations where there are multiple creditors, they may demand more money than you have to pay them. 

What to Look Out For

Debt settlement companies usually charge high up-front fees.  Make sure you understand how you will be charged.  Many companies take as their service fees a percentage of the savings from the debt settlement.

Stay clear of companies or individuals promising to completely remove debt without bankruptcy.

Never send any money before you receive written confirmation from your creditors.

Stay clear of any debt settlement plan that does not meet all of your needs.

Stay clear of any individuals or companies that advise you to quit paying your debts so they can be negotiated in the future.

Remember

Everything must be in writing.

Prior to signing anything, do your research on the prospective debt settlement company or individual.

Search for a solution that meets your needs with every creditor.



Debt Management Plans

Definition: A debt management plan (DMP) is a process for paying personal unsecured debt.  Under a DMP, the consumer makes monthly payments to a third party, who then divides the payments and sends payments to the unsecured creditors.  A DMP usually lasts three to five years.

The Good

Creditors often reduce interest rate charges or waive fees for consumers participating in a DMP.

A DMP can help you pay down the full amount owed in a period of three to five years.

The Bad

DMPs can only be used for unsecured debt and cannot be used for secured loans, such as car payments, mortgages, etc.

DMPs are for individuals with sufficient income to pay necessary living expenses, the monthly DMP payment, without having to use credit.  DMPS are not for individuals who spend more than they make.

The dropout rates for DMPs are high because most participants are unable to stick with the structured payment program for the duration of the plan, which can be up to five years.

What to Look Out For

Shop around and compare fees.

Stay clear of entities that have a close relationship with for-profit companies.

Stay clear of entities that only deal with selected unsecured creditors.

Remember

Search for fees that are fair.

Check your credit card statements to verify that payments are being made as promised.

Make sure that the statements are addressed to your name.

Verify that you have not been charged for any late fees and that your interest rates have not increased.

Payments should be made on the same due date every month.



Doing Nothing

Doing NothingDefinition: Doing nothing means that you are making no efforts to deal with your financial situation.

The Good

Doing nothing is appropriate only for those who do not own property or wish to own property, and have no need for credit.

The Bad

Negative entries on your credit report will stay there for 7 years.

Many employers now check credit reports when hiring new employees or when considering a promotion.

A low credit score will likely prevent you from obtaining a low interest automobile loan or mortgage.

If a creditor obtains a judgment against you and depending on applicable state law, a lien may be established against any real property under your name and the judgment creditor may have the right to garnish your wages or go after your personal property.

Constant worries over your financial situation can develop into deeper emotional problems, including depression and anxiety, which affect not only you but everyone in your family.

What to Look Out For

By doing nothing your problems will get worse.

Seek out help with your financial circumstances.

Remember

Always be aware of the consequences that result from your actions or inactions.  



Home Equity Loan

Home Equity LoanDefinition: A home equity loan is a second loan (after your mortgage) that you take out on your house using the equity in your home as collateral.  There are two kinds of equity loans, a standard home equity loan and a home equity line of credit.  The home equity loan provides the borrower with a one-time lump sum that must be repaid at a fixed interest rate over a fixed term, usually 10-15 years.  The home equity line of credit (HELOC) is a revolving line of credit with a variable interest rate.  With a HELOC, the borrower is approved for a specific loan amount and withdraws money when needed, paying interest on the amount withdrawn.  HELOCs can be riskier than standard home equity loans, because they often: have low introductory rates that spike after a month or two, allow access to the money for only a set period before repayment must begin, and charge a substantial fee that must be paid at the end of the loan.

The Good

Your credit score and history do not have a significant effect on your ability to obtain a home equity loan because your home is the collateral for the loan.

In most instances, interest payments are tax-deductible.

Secured loans often have a lower interest rate compared with loans that are not secured.

Having a line of credit allows you to access money when you need it without undergoing a strenuous loan or mortgage approval process.

The Bad

Paying only the minimum amount each month towards your home equity loan will leave you still owing the full principal loan amount at the end of the loan term.

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.

If your home declines in value, you could get stuck owing money on your home equity loan, even after you sell your home.

A variable interest rate can increase payments dramatically over the loan term.

A HELOC is similar to a credit card in that you only pay interest on the amount you’ve withdrawn, however, the availability of new credit may entice you to incur new debt for things that you want but don’t need.

Unlike credit card debt or unsecured loans, home equity loans are secured against your home, which means that if you default the lender could foreclose against your home.

It is generally easier to qualify for a home equity loan, but you can easily end up owing money on the loan after closing costs, and other fees and charges.

What to Look Out For

Stay clear of lenders with high-pressure sales tactics who want to close the deal as soon as possible.

Stay clear of loans with high fees and other transaction costs.

Be wary of loans that have a balloon payment, which is a large extra payment that may be charged at the end of the loan period.

Lending institutions can freeze or downgrade your HELOC even if you haven’t missed a payment.

Borrow only as much as you need.  People who borrow more than their houses were worth (and even those who don’t) can easily find themselves unable to pay off the debt.

Know that some lenders get padded appraisals that inflate home values that do not reflect the true market price of your home. 

Consult an independent insurance agent before signing up for loan insurance.

Remember

When applying for a home equity loan, shop around and look for the plan that best meets your needs.  Read the agreement carefully and read all the terms and conditions, including the annual percentage rate and other costs, including closing costs and other fees and charges.

Have the lender answer your questions, particularly how adjustable rates work and how much your monthly payment would be at the maximum rate.

Make sure your spending plan permits you to pay a monthly amount far greater than the interest-only payment.

After signing an agreement to refinance an owner-occupied property, you have three days to cancel the contract.

Shop around to find the best interest rate for your needs.

If you take out a HELOC, determine whether you must borrow a minimum amount.



Refinance Your Home

Refinance Your HomeDefinition: Refinancing your home means replacing your existing mortgage with a new mortgage to get a lower monthly payment.  The new mortgage can be used to pay off debts such as credit card balances, automobile loans or other bills.

The Good

The amount of monthly debt payments will be lower than what you paid under your previous mortgage.

Balances with higher interest accounts can be consolidated into the new mortgage at a better interest rate.

Generally, interest paid on mortgage debt is tax-deductible.

The Bad

Borrowers who are delinquent on existing mortgage payments may not qualify for refinancing.  Even if they do qualify, those borrowers will have to pay an interest rate that is higher than the one they would pay if they were making payments on time.

Refinancing can lead to monthly payments that exceed your budget.  Further, it may use up any available equity, which means that if you sell your home you will have little or no proceeds from the sale and may even owe money after commissions and other costs are taken into account.

If you fail to make payments, your lender can foreclose against your home.

What to Look Out For

Contact multiple lenders, including your existing mortgage lender to find out if existing customers get a discount on refinancing.

Ask each lender for a Good Faith Estimate, which is required by the Real Estate Settlement Procedures Act.  This estimate must include an itemized list of fees and costs, including loan fees, fees to be paid in advance, reserves, government charges and additional charges.

Have the lender answer your questions, particularly how adjustable rates work and how much your payment would be at the maximum rate.

Adjustable rate mortgages are more difficult to budget for than a fixed-rate mortgage.

Review closing papers well in advance and consider hiring an independent lawyer who specializes in real estate to answer any questions you have.

Remember

Stay clear of companies that solicit you through telemarketers, direct mailings, or via the Internet.

Stay away from loans that require the payment of high closing costs.

Adjustable Rate Mortgages seem attractive because of a low initial interest rate during the adjustment period, but they increase when interest rates rise, which can dramatically increase your monthly payment.  Find out how much the maximum monthly payment will be and whether those payments are affordable under your spending plan.

Only borrow as much as you need.  Refinancing your mortgage is not guaranteed to solve you financial problems and can lead to new ones when the underlying cause is overspending.



Retirement Funds

Ritirement FundDefinition:  Using money, either as a withdrawal or loan, from your retirement savings to pay debt.

The Good

Paying off debt with your own money is preferable to sinking deeper into debt.

The Bad

Early withdrawal penalties when you remove the principal (or earnings) from a retirement savings account.

When you take a loan instead of a withdrawal, your employer will deduct loan payments from your paycheck.  If you have insufficient money for your budget, you will have to borrow money, which will increase your debt.

A retirement loan that is not repaid will be subject to the same tax penalties as an early withdrawal.

What to Look Out For

Make sure your paycheck is sufficient to make loan repayments and pay for your expenditures under your spending plan.

Try to avoid tax penalties, which are essentially new debt obligations that must be paid.

Using your retirement savings to pay debt is not preferable unless you are sure it will solve all of your debt problems without creating new ones.

Remember

If you must use your retirement savings, your goal is to do so without incurring tax penalties.



To learn more about Bankruptcy options, go to the Bankruptcy page.

If you need to find a bankruptcy attorney, visit the National Association of Consumer Bankruptcy Attorneys or the Bankruptcy Attorneys Directory.