As the housing and unemployment crisises continue to take their toll upon the American family, it’s no surprise that more and more people are turning to bankruptcy protection as a means of getting out from under snowballing debts. More than 1.4 million people filed bankruptcy in the U.S. last year, and even more are expected to in 2011.
Although it can provide a way for consumers to discharge crippling medical, credit card and other debts, bankruptcy has some pretty harsh consequences. For starters, it sits on the consumer’s credit record for almost a decade, negatively impacting consumers’ chances of getting a car or home loan and receiving favorable terms on loans that they can get.
On average, borrowers with a bankruptcy on their credit history get loans at interest rates that are several points higher than those of borrowers who have a clean credit history. Also, while bankruptcy alone can’t bar you from a job, if it dings your credit history bad enough it can be a detriment in getting employed by employers who check credit histories as part of their background check process. Also, if you’re not careful in calculating your exemptions in a Chapter 7 bankruptcy, you could end up losing property you thought you could keep.
The bottom line is that bankruptcy is a last resort and shouldn’t be entered into lightly. There are several alternatives to bankruptcy anyone considering this measure should be aware of and take advantage of if these options are applicable to their situation. Prior to any bankruptcy filing, the law requires that individual filers meet with a credit counselor at their own expense. During this meeting, the counselor will likely discuss options with the individual such as:
Debt consolidation: High minimum payments on multiple debts may eat away at individual’s monthly income, and their ability to retire debt in a timely fashion. By consolidating debts, consumers can get the amount of money they must spend on debt service each month down to a more manageable level, and could also possibly obtain a more attractive interest rate.
Out of court settlement: Many creditors will accept an out of court settlement on debts for amounts far less than the amount of the debt. Creditors do this because the cost of pursuing debts in court from people who likely don’t have the money to pay it anyway often exceeds the amount of the debt. You can negotiate a debt settlement on your own, or hire firms devoted to this type of work to handle it for you.
A debt settlement program may help you resolve your debts, but it will likely have a negative impact on your credit history and rating. This impact will not be as severe however as a bankruptcy.
Negotiate: In the current climate of mass defaults, creditors are willing to cut deals in order to collect some of what they’re owed. Contact your credit card company and other debtors and see if they’re willing to make concessions on minimum monthly payments and interest rates. You might be surprised by what you hear.
Just pay it: The truth is that you incurred the debts you’re being dunned for, and it’s your responsibility to pay them. With the help of a credit counselor, or a money manager, you may be able to learn how to reduce your monthly expenses enough to where you can cover your debts without having to go through bankruptcy. Eliminating unnecessary entertainment and other expenses for 6 to 24 months may help you knock down your debt and develop better money management habits.
While many people get into financial trouble through no fault of their own, many others find themselves facing bankruptcy because they lived beyond their means. Doing basic money management drills such as setting a budget and taking advantage of coupons and various other money saving options can help you get back on your financial feet.
Of course, there are some cases when bankruptcy is the only feasible alternative. If you must declare bankruptcy, be smart. Get your documentation together, inventory your assets and your liabilities and hire a competent bankruptcy attorney. A botched bankruptcy can leave you in as bad or worse shape than you were in before you filed. Getting it right is imperative if you plan to get your finances back in order.
Bankruptcy doesn’t wave a magic wand and make your debts disappear. It’s a stress-fraught and time-consuming process that can sometimes be more trouble than it’s worth. If you can take advantage of a bankruptcy alternative to avoid filing for Chapter 7 or Chapter 9 bankruptcy, it is highly advisable that you do so to avoid the legal fees, paperwork and long term consequences of this last ditch proceeding.