Even when debt is totally unmanageable, there are options and strategies that may help debtors avoid filing bankruptcy.
The simple truth is that bankruptcy is not always the best choice for everyone. This may come as a surprise considering our law firm’s practice is devoted entirely to bankruptcy, but we are not in the business of selling bad decisions. We think it is important to honestly present all of your options, including the ones that may help you avoid bankruptcy altogether.
- Make a budget and eliminate discretionary spending
- Negotiate lower monthly payments
- Debt settlement
- Debt consolidation
- Sell personal property
- Borrow money from friends or family
This one probably seems most obvious but sometimes people are surprised by how much money can be saved (or applied toward debt) when they eliminate or reduce discretionary expenses like entertainment subscriptions, dining out, and other recurring purchases. A recent survey found that the average participant spent $237.33 per month on digital services and subscriptions. The savings from canceling any unnecessary or unused subscriptions might be enough to avoid filing bankruptcy.
This strategy may be less obvious because many people are unaware that creditors often are willing to lower interest rates or monthly payments to help a debtor avoid bankruptcy. Of course this is not altruism, the creditors want to get paid and most understand that it is better to extend the life of the debt by accommodating the debtor’s circumstances rather than seeing the debt discharged in bankruptcy potentially without any repayment. Some financial institutions (credit cards and banks) may even offer specialized hardship programs. However, these programs should be researched carefully before enrollment to confirm they provide the desired benefits. The last thing you want is to enroll in a program that actually increases your minimum monthly payments.
Debtors who are uncomfortable with direct negotiations can hire a bankruptcy attorney to negotiate on their behalf. There are also companies that can help with debt negotiation, though this is a different process from debt consolidation or settlement—both of which we will discuss below. For anyone considering hiring someone to help negotiate with creditors, it may be most cost effective to choose a bankruptcy attorney. The prospect of potential bankruptcy is often the motivating factor for the creditor and if the negotiation is unsuccessful and bankruptcy becomes necessary, the attorney should be able to apply what he or she knows about your situation to help you file.
Debt settlement is less straightforward than it sounds. Sometimes debt settlement actually can worsen your financial situation. This is because it usually requires a lump sum payment and this can limit your ability to pay future monthly payments if not all debts are settled. Because of this, debts already charged off or in collection should be prioritized. Beware of debt settlement companies, too. Many charge significant fees that diminish the value of the debt settlement or require too much time when you do not have time to spare.
Debt consolidation combines many debts into one monthly payment. By doing this, it may reduce your monthly obligation and enable you to pay off your debts without bankruptcy. There also are a few ways to achieve “consolidation” including balance transfers to a credit card with a low introductory APR and refinancing (or other personal loans). These alternatives do depend on credit score and may not be available to everyone. There are companies that specialize in debt consolidation. Like everything else, these companies should be carefully researched and vetted.
It may seem like the options keep getting progressively worse. People rarely want to sell their personal property. It can be a big hassle and it can be embarrassing. It also may complicate an eventual bankruptcy because any property sold in contemplation of bankruptcy must be sold for fair market value. If property is instead sold for the “best offer,” a trustee could seek the difference from the debtor who later files bankruptcy.
We rank this option last but its viability varies greatly depending from debtor to debtor. The most obvious risk here is that it can hurt personal relationships if a debtor is unable to repay any money loaned by friends or family. But there is also a risk that if these loans are repaid prior to filing bankruptcy that the trustee may consider the repayment a prohibited “insider payment” and require the friend or family member to reimburse the repayment amount to the bankruptcy estate. Basically this is to prevent debtors from prioritizing friends and family members over other creditors.