What are some alternatives to bankruptcy?

There are a number of different strategies for handling debt, and there are alternatives to bankruptcy. For starters, contact your creditor(s), ask for their cooperation, and try to work out different payment arrangements or options. For example, if you are snowed under by credit card debt, get in touch with the company, explain the situation, and ask them to temporarily reduce your minimum monthly payments, waive late charges, and extend the payment period – with smaller payments at "no" interest.

Utilizing the Consumer Credit Counseling Service

A second recommendation is to turn to the Consumer Credit Counseling Service, a nationwide nonprofit organization that will work with you and your creditors to devise a more manageable repayment plan suited to your finances. A third might be to sell any of your assets that have a resale value and apply the proceeds to your debt. Any balance due can be negotiated with the creditor. If you know you do not have enough assets to sell and payoff your debt, be cautious about using this option. If you file bankruptcy shortly after disposing of your assets, the bankruptcy trustee may have concerns that these were actually fraudulent transfers.

Savings Accounts to Pay Off Debts

A fourth option is to drain savings accounts and payoff your debts. A good general practice is to leave yourself a small emergency fund so that you don’t spiral back when a financial emergency hits. You will probably save more in interest fees than you would have made in an interest bearing savings account. However, do not drain retirement accounts. Retirement accounts are generally protected in bankruptcy and there is no need to drain your future when there are other options available.

Consolidate Your Debts

Finally, you can consolidate all outstanding debts into a single loan (often through credit card balance transfers)—but read the caution about balance transfers elsewhere in these materials. This approach relieves you of being saddled with debt from multiple creditors, since you will be making payments only to one lender. It’s generally a bad idea to borrow against your home to pay off credit cards, however, you’ll be trading dischargeable credit card debt for a secured loan and could end up losing your home.

Beware of counseling services that are actually fronts for profit-making companies. A common scam is to divert the consumer into a debt consolidation program and to charge excessive administrative fees. Sometimes, the initial fees go to the “counseling” company rather than to creditors, which obviously makes the debt situation worse instead of better. As a rule of thumb, a company that is advertising extensively on TV or radio is probably making a profit at the expense of hapless consumers.