For many, debt is a way of life. Unfortunately, uncontrollable circumstances like illness, job loss, and challenging economic times can make the debt overwhelming to pay. If you find yourself in a situation where you can’t pay creditors, the first thing you are likely to think about is declaring bankruptcy. However, bankruptcy is not always an ideal option because it can have devastating effects on your credit score and cause property loss.
Given these severe consequences of declaring bankruptcy, it should be your last resort. There are several alternatives to declaring bankruptcy that you can exploit, although they are time-consuming and require commitment. And if these alternatives don’t work, you can declare bankruptcy, knowing you explored all the other options first.
What is Bankruptcy?
Bankruptcy is a legal proceeding that allows persons or businesses overwhelmed by debt repayment to obtain financial relief from debt collectors and creditors while simultaneously providing creditors with an opportunity of debt repayment. California statutes offer legal rights to this proceeding, but the cases are handled in a federal court.
Bankruptcy takes two forms known as chapters as per the U.S. bankruptcy code. And although filing for bankruptcy under any of the chapters allows you to put your finances in order, it will be on your record for a long time, which could affect your future borrowing. The papers are public, so anyone who needs to see them can have quick access. Because of the consequences, you must explore alternative debt relief options discussed below.
Credit Card Negotiation
If you are wallowing in credit cards or other types of debts, you may want to consider bankruptcy. However, to avoid the consequences of the legal process, you might want to explore the alternatives. Bankruptcy alternatives require a lot of commitment because it means a lifestyle change. Credit card negotiation is an alternative that involves accountability and taking charge of your financial life.
When it comes to this alternative, you must obtain your annual credit card report and then find an attorney to explain your financial situation. With knowledge of your financial situation, you can consider any of the following approaches to get out of debt:
Sale of Assets
Many people make a mistake by failing to take action after realizing they cannot pay the debt. Don’t put yourself in positions like those because if you fall behind your payments, you will find it challenging to catch up, and this might force your creditors to take action. Instead, sell some of your assets and use the money to clear your debts. This might be difficult for you because it means changing your lifestyle and living without some of the things you were used to, like electronics, jewelry, and furniture, but resourceful in preventing bankruptcy.
If you are struggling with mortgage repayment because it’s too high, you can sell your house or consider moving to a cheaper home. You can also sell your expensive car and buy a cheaper one. Although doing these might be inconveniencing or downgrading, they can prevent bankruptcy and protect your credit score.
Pay your Way Out of the Debt
When you are trying to have access to money to clear the debt, you should pay your way out of the debt by cutting your budget’s unnecessary expenses and putting the money in debt payment.
However, if you are already operating on a small budget where you can’t cut off any expenses, you must find ways of increasing your income. You can work overtime, or if your schedule allows, get a second job. Although doing all these is challenging, the situation will change your take on many issues. This might help you become more productive in business or employment, thus increasing your access to money for repaying debt.
Request for Help from Creditors
Sometimes you might be willing to repay the debt, but you cannot service the debt due to financial difficulties. You should reach out to your creditors and explain to them your financial situation. You can request them to lower the interest rates or monthly payments to continue paying the debt.
Creditors will prefer payment of some of the debt instead of not being paid at all. They will work with you to develop a plan that is reasonable to you and one that enables you to clear their debt. Find out if your creditor has hardship plans for situations like these. In case one is available, you can opt for it, but you should ensure that the program’s interest rates are lower than the current interest rates. Otherwise, you could end up with a higher minimum payment.
You can also go for consumer credit counseling. However, before considering this option, ensure the counselor has experience working with creditors to lower monthly payments or interest rates. The new bankruptcy law requires you to seek credit counseling before declaring bankruptcy, so you should try it as an alternative to filing for bankruptcy.
The counselor will work with the creditors to formulate a debt management program to clear your debt within three to five years. Initially, the plan seems impossible, but after evaluating the budget, you can find unnecessary costs that could help you continue with debt repayment.
Seek Financial Help From Family and Friends
Borrowing money from friends and family is the last thing you want. However embarrassing it is to do this, the move can help you avoid bankruptcy. Before starting to borrow money, calculate the amount you need to prevent insolvency, then consider how much you can contribute. If the amount you have raised isn’t enough, ask your friends and family to make up for the difference.
When borrowing the money, make sure you have a repayment plan once you are financially stable.
Secure a Personal Loan
You can secure a personal loan to finance your debt management program. Low-rate personal loans can help pay your credit card debts and other loans, but you must be careful with them because they might backfire.
It’s advisable to have a bankruptcy attorney by your side when negotiating with debtors to ensure you get the best deal. The stages that must be followed during negotiation include:
- Understanding the debt’s extent — Before reaching out to your credit card company, evaluate the amount you owe them. If you are a multiple credit cardholder, you should request bank statements for all the cards and estimate the amount plus the interest you owe for each card. For each credit card, align it with the amount you owe to simplify the call.
- Explore the available options — Credit card debt can be overwhelming, so you need to evaluate all the available settlement options and pick the most appropriate. One of the methods of settlement you can explore is the hardship program. The plan is best for you if you are in a temporary financial situation like illness or job loss. The credit company will be willing to lower your rates and minimum payments to make it easy to repay the debt.
You could also opt for debt management, where a nongovernmental organization provides debt management plans. Your credit counselor should develop a fair plan where you are expected to deposit a particular amount of money with an organization who then pays your creditor as agreed.
A workout agreement is also possible. You should request the credit card firm to lower interest rates or scrap fees as per the deal. By doing so, the company reduces your debt and encourages you to pay the remaining amount in a short duration.
Besides, there is another settlement plan called the lump sum payment. You will need a large sum of money for this settlement because the creditors agree to lower the debt amount in exchange for a lump-sum payment.
- Understanding the risk — In every negotiation, there are adverse effects. Therefore, it’s critical to analyze each settlement and understand its threat for the right decision. Once you have done this, it’s time to call the credit card company to explain your situation and what you want. During the negotiation with relevant parties, jot down the details if you need to prove the contract exists in the future.
Instead of declaring bankruptcy, you can speak to your lender and have them modify the loan’s initial terms in a process called loan modification. Generally, a loan should be repaid within the agreed period. However, any changes made to the original agreement are considered a modification. The most common loan modifications include a change in the principle, reduction in penalty fees, lowering monthly payments, and adjusting float rates.
Many people have been filing for bankruptcy in the past because of limited alternatives. However, in recent days, with methods like debt consolidation, bankruptcy will be your last resort. If many creditors or debt collectors are on your neck, making your debts overwhelming, you can opt for debt consolidation loans to help you pay off all your creditors. That way, you are left with only one loan to repay.
The advantage of these debt consolidation loans is that you don’t need collateral to access them. In case a lender extends a loan without collateral and you are unable to pay, you should opt for settlement.
Creditors or lenders are open to negotiations if you are facing financial hardship due to job loss so that you can continue with payment. Make sure you talk to your creditor to understand their payment demands and available options.
Although debt consolidation has its pros, it has some downsides too. Negotiations are prolonged, and you may be required to stop payment of credit card debts or loans but for saving and not other uses. Although the procedure is efficacy in debt repayment, you could end up being sued for due credit.
When dealing with overwhelming debt, the last thing that should come to your mind is bankruptcy. It affects your future borrowing ability by lowering your credit score, so you should explore alternatives like a short sale.
A short sale is a situation where you and the creditor agree to put up for sale your property at a price lower than the mortgage amount. The proceeds of the short sale should then go to the creditor as debt repayment. By doing so, you avoid a foreclosure on your property, and it’s convenient for any creditors and the banks.
Both a short sale and declaring bankruptcy affect your future borrowing ability. However, a short sale doesn’t affect your credit score as much as bankruptcy does. Not everyone with overwhelming debt is eligible for a short sale. You must meet the following criteria:
- Your inability to service debt is due to financial problems.
- An eligible buyer is making an offer to purchase your property
- Your creditor or bank must consent to the short sale offer.
- The market value of the property is lower than the amount of debt due to the lender.
- You are unable to settle the amount you owe your creditor.
A short sale is not a simple affair that can be undertaken by anybody. For a successful short sale, ensure you retain the services of a profound bankruptcy attorney for legal guidance.
Deed in Place of a Foreclosure
Instead of opting for foreclosure after you’ve been unable to pay the debt, you can convey your rights and interests from a property to the creditor or lender. The objective of a deed in lieu is to clear the outstanding amount of debt to prevent a foreclosure. The move is beneficial to all the parties, and for you as a borrower, it means once the lender accepts a deed in place of a foreclosure, you will be relieved of the burden of the debt payment.
What you are afraid of when it comes to foreclosures is the shame that comes with it. Although a deed in lieu and foreclosure will both affect your credit score, with a deed, it’s easier to recover from the damage done by a deed in lieu than that of a foreclosure. A deed in lieu saves the creditors time and cost of false possession of the property.
An agreement is deemed a deed in place of foreclosure if the debt is acquired for the property being transferred. During the settlement, the total consideration should match the market value of the property. Besides, the lender and the borrower should enter into the deal voluntarily. The lender can only sign the agreement after receiving written consent from you as the borrower, indicating that you are willing to enter into a settlement. Written permission from the borrower proves that the lender didn’t pressure you into signing the deal.
Note that if the debt is more than the property’s market value, you should not enter in a deed in lieu. The creditor might not have a problem with this because they will acquire the property through a foreclosure.
Similarly, you won’t be relieved of your mortgage obligations by signing a deed in lieu because it merely transfers the property title. You could end up being held accountable for the property sale.
Remember that a forgiven debt is deemed as income by taxing authorities. This means you could end up paying taxes on the debts unless you file the appropriate forms like Form 1099-C issued by the creditor as proof of debt forgiveness with the relevant tax authorities. The process is not an easy one, so you should consider retaining a bankruptcy attorney’s services.
When is Bankruptcy your Last Resort?
Filing for bankruptcy gives you a fresh financial start and an opportunity to put your finances in order when debt repayment becomes a problem due to financial difficulties.
Suppose your income is inadequate to propose to the creditor, and you don’t have assets that a trustee could seize. In that case, declaring bankruptcy will be your only option. The alternatives to bankruptcy described above do not always work. If you have tried any of them to prevent insolvency, but it fails to work, you should consult with a bankruptcy attorney to begin the process of filing bankruptcy.
Although it might not seem like a good idea to file for bankruptcy, it prevents calls from debt collectors or creditors, wage garnishment, and lawsuits. Most of the people who declare bankruptcy already have a bad credit score. Although bankruptcy will harm your credit score, you improve your credit score by paying off your debt.
The most common ways of declaring bankruptcy is through Chapter 7 and Chapter 13. Chapter 7, bankruptcy is for individuals or businesses with few or no assets. With this form of bankruptcy, you can dispose of all unsecured assets to clear the debt.
On the other hand, Chapter 13 bankruptcy allows you to develop a repayment plan instead of selling your property. However, you must have a consistent income.
Find a Proficient San Diego Bankruptcy Attorney Near Me
If debt repayment has proved challenging because of financial hardship, declaring bankruptcy is not your only option. Contact the San Diego Bankruptcy Attorney at 619-488-6168 to begin exploring ways on how to prevent bankruptcy. Our attorney will help you understand the situation you are in and the options you have other than declaring bankruptcy.