Every bankruptcy alternative should be considered prior to petitioning the court for personal or business bankruptcy. Although bankruptcy can be tempting when you are swimming in debt, it carries consequences that can haunt you for years to come.
Determining which type of bankruptcy alternative is best suited for your needs requires a bit of research. Several options are available including credit counseling, debt consolidation and debt settlement.
Credit counseling or credit assistance programs are a relatively easy and affordable bankruptcy alternative. Many people struggle with finances simply because they have never been taught how to manage their money. Unfortunately money management and budgeting are not required curriculum in learning institutions. Unless parents or mentors teach children and teens how to handle their finances, they will not have the building blocks to establish a strong financial foundation once they become adults.
With the guidance of professional credit counselors, debtors can receive financial education and learn how to better manage their money. In many instances, credit counseling services can help debtors negotiate outstanding debts with their creditors. Credit assistance programs can help debtors avoid bankruptcy through the creation of a debt management plan.
Debtors who possess credit cards might be able to transfer balances from high interest rate cards to one with a lower rate. This option is generally more difficult to achieve when the debtor's credit is seriously blemished. However, if you have developed a relationship with your bank, consider speaking to the local branch manager to discuss available options for consolidating debt.
Your banker may suggest obtaining a debt consolidation loan. There are different types of loans available for consolidating debt. Oftentimes, debtors are required to own a home and use their equity to secure a home equity loan. This bankruptcy alternative can be rather risky; particularly for debtors who are already financially-challenged.
Other bankruptcy alternatives include borrowing money from savings, retirement funds or family members. When borrowing money from relatives or friends, it is recommended to document the terms of the loan using a promissory note. This simple financial instrument can eliminate misunderstandings which can lead to family feuds. Unfortunately, nothing can severe family ties faster than providing a loan that goes unpaid.
Last, but not least, call your creditors. Explain to them that you are struggling with finances and considering filing bankruptcy. Depending on the creditor and outstanding balance, they may be able to assist you in devising an alternative repayment plan such as extending the terms or reducing the amount owed.
Filing bankruptcy should be the absolute last option. If all bankruptcy alternatives fail, consult with a bankruptcy attorney to determine if you are eligible to file and if so, which bankruptcy chapter is best suited for your situation. Personal bankruptcy includes Chapter 7 (liquidation) and Chapter 11 (repayment plan). Certain eligibility requirements must be met prior to petitioning the court and debtors are required to obtain credit counseling through an approved agency.
Learn more about bankruptcy chapters and alternatives in Simon Volkov's article Knowledge Center database.