Alternatives to Bankruptcy

There are three main alternatives to filing bankruptcy. They are debt settlement, debt management, and a debt consolidation loan. It sounds like they are all just about the same thing, but they're actually three different ways to avoid bankruptcy.

Debt Settlement

One bankruptcy alternative is debt settlement. It can also be called debt relief or debt elimination. A debt settlement program usually requires that you have a financial hardship such as job loss, divorce, or medical problems and that you have at least $5,000 worth of unsecured debt. This basically means credit card debt, merchant credit accounts, medical bills, etc. The debt settlement works by showing that you are willing to pay your bills but can't because of a financial hardship and may have to declare bankruptcy. Since the creditors are unlikely to receive any payment if you file for bankruptcy, they will reduce the debt owed.

A bankruptcy attorney may act as your negotiator or refer you to a non-profit organization. If you use a company that offers debt settlement, be sure they are reputable; you understand what they will do for you; and how much it will cost. You should be aware that the amount of debt forgiveness negotiated, is reported as income to the IRS and you will be taxed on it.

Debt Management Plan

A debt management plan (DMP) is another way to avoid bankruptcy. A DMP can reduce your monthly payments, save on interest charges, insure your creditors are paid on time, and establish a budget. Debt management plans are sometimes called a credit counseling plans, but actually are different than getting credit counseling. The DMP agency works by coming to terms with your creditors. Your accounts are then closed and you send a monthly payment to the DMP who then pays your creditors until debts are paid. Just as with debt settlement, debt management plans show up on your credit report. The DMP should not charge you high fees. Your creditors actually pay for the service to help keep you from bankruptcy and ensure they receive some payment.

Debt Consolidation Loan

The third, and often the most preferable of the bankruptcy alternatives, is the debt consolidation loan. With a debt consolidation loan, your debts are added together and paid off by getting a second mortgage or through home refinancing. One advantage with debt consolidation loans is that they can be used to pay secured debt. (Secured debt means it is tied to some personal property.  Unsecured debt means you don't lose personal property if you don't pay it.)  If your unsecured debts are much greater than your secured debt, though, you would probably be better off with one of the other alternatives. It would not be in your best interest to exchange unsecured debt for one secured by your home if you finally have to file bankruptcy.

If most of your debt is secured debt, these alternatives may not be able to help you, and you may be forced to file bankruptcy. It would be a good idea to use a financial advisor to help you determine what would be best for you.

Legalities of Bankruptcy