Bankruptcy Alternatives
Section 2 of "The Chapter 7 Bankruptcy Process":
Investigate Alternatives
Filing for Chapter 7 relief is a last resort, not a quick, easy fix. Although your situation may feel hopeless, there are effective bankruptcy alternatives and strategies for debt management that should be thoroughly investigated.
Chapter 7 has a lasting, long-term effect on a person's creditworthiness. It remains on a person's credit record for up to ten years.
After a Chapter 7 petition is filed, a person's credit score, commonly referred to as a FICO score, may initially drop as much as 200 points. Obtaining loans or other credit at reasonable rates will be very difficult, if not impossible.
For these reasons alone, the following bankruptcy alternatives should be considered:
Create a Budget
Creating a budget is a simple way to explore bankruptcy alternatives. A well-prepared budget can help point out unnecessary expenses. To create a budget, track every expense, no matter how minor, for one to two months. At the end of this time period, take some time to analyze the results.
If expenses are greater than income, identify expenses that can be eliminated or reduced. In addition, think of ways to bring in additional income, such as asking your current employer for a raise or taking on a second job.
After making changes on paper, use the budget as a guide to make changes in daily life.
Negotiate with Lenders
If you are experiencing a temporary setback, such as a layoff or medical illness, and normally pay bills on time, negotiating with creditors is an effective bankruptcy alternative. Many creditors are willing to lower monthly payments or extend payment time, as long as they are notified of the situation and reassured that you will be able to meet the terms of the new credit arrangement.
Debt Consolidation
Although debt consolidation is another way to avoid bankruptcy, it should be carefully considered. When debt is consolidated, credit card balances and other loans are combined into one bill. Many times the creditor will require the person receiving a consolidated loan to use his or her house or other assets as collateral. This may jeopardize your ability to keep your house or other assets if a bankruptcy petition is filed at a later date.
Credit Counseling
Reputable creditor counseling organizations offer free money management advice and budgeting assistance. After reviewing your situation, a good credit counselor can provide specific bankruptcy alternatives for your individual situation. Although credit counseling can be provided online or by phone, the best type of credit counseling is in person.
Unfortunately, not all credit counseling organizations are legitimate. Before using the services of a credit counselor, check them out with your state Attorney General, local consumer protection agency, and Better Business Bureau.
Some credit counseling organizations offer debt management plans (also known as "DMP"s) to their clients. In a DMP, the credit counseling organization often negotiates better terms, such as interest rates and fees, with the client's creditors. The client deposits monthly payments with the credit counseling organization, who then disburses the funds to creditors based on a predetermined schedule.
The new bankruptcy laws also require pre-bankruptcy credit counseling from a government-approved organization. This requirement is discussed in more detail in Section 3 of this article.
Other Bankruptcy Alternatives
A debt negotiation program is another type of bankruptcy alternative. Do not confuse debt management plans (discussed above) with debt negotiation programs. Most debt negotiation programs charge substantial fees and do not deliver on their promises.
If you are considering using a debt negotiation program, proceed with caution. Check them out with your state Attorney General, local consumer protection agency, and Better Business Bureau.
How to avoid bankruptcy? As you can see, there are several different steps that you can take in an effort to avoid this process.
