Bankruptcy Alternative Options

Every bankruptcy alternative should be investigated before entering a personal bankruptcy petition. These can include loan modifications, deferred payments, debt consolidation, credit counseling, budgeting, home equity loans, and debt settlement.

To determine which bankruptcy alternative is best for your personal situation it can be helpful to consult with a credit counselor or financial planner. While bankruptcy can provide debt relief it can also cause long-term effects that can be difficult to overcome.

First and foremost, debtors should become educated about new bankruptcy laws governed under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. BAPCPA implemented major changes in the way consumers can obtain debt help through bankruptcy.

BAPCPA requires all debtors to repay a portion of their debts by establishing Chapter 13 payments. Debtors must also obtain credit counseling from agencies approved by the U.S. Trustee and submit a certificate of completion to the court.

Chapter 13 payment plans last between 3 and 5 years. Debtors are required to submit bi-monthly or monthly payments to the court until debts are fully paid. If debtors do not comply with payment plans their creditors can request dismissal of the bankruptcy petition. When debtors fail out of bankruptcy they lose all protection from the court and are prohibited from filing a new petition for 8 years.

Personal bankruptcy remains on credit reports for up to 10 years. Upon filing bankruptcy, debtors often witness a decline of 100 points or more off their credit score. This places debtors into a lower credit bracket which can limit their ability to obtain credit or pay substantially higher interest rates against borrowed funds.

During the bankruptcy payment plan debtors are not allowed to take on new debt without court approval. If debtors fail out of bankruptcy they will be left at the mercy of creditors and may lose all property used as collateral to secure loans, including their home.

As you can see, bankruptcy has severe consequences that can take years to recover from. Let's briefly review the most popular bankruptcy alternatives so you can determine if these options can provide similar results without the severe financial fallout.

Budgeting is one of the most affordable bankruptcy alternatives. However, it is best to engage in budgeting from the start in order to prevent bankruptcy from ever being necessary.

Budgeting involves creating a list of household expenses and income. When income exceeds expenses, debtors must find a way to reduce expenses or increase income.

Many people are unaware of where their money goes. A simple way to track expenses is to record every dime spent in a notebook for at least 30 days. Expense sheets should include mortgage payments or rent, insurance premiums, utilities, transportation costs, groceries, daycare, child support and alimony, credit card payments, loan installments, and all impulse buys. Tracking expenses is usually an eye-opening experience for most people.

The only way to slay the debt-beast is to eliminate all unnecessary expenses and develop a get out of debt plan. The Internet is a good source for locating budgeting tips, money management resources, and personal finance tools and software.

One of the most trusted sources for overcoming personal finance problems is www.MyMoney.gov. This government-sponsored website offers budgeting worksheets, calculators and checklists, along with resources for overcoming debt, retirement planning, saving and investing, managing debt and credit, applying for loans, and consumer rights.

Credit counseling is a prerequisite to obtaining bankruptcy confirmation. Therefore, consumers who are considering filing bankruptcy should obtain credit counseling from agencies approved by the U.S. Trustee. A state-by-state list of approved credit counseling agencies is presented at the U.S. Trustee Program website.

The majority of people who struggle with personal finances never learned money management skills. Credit counselors offer financial education and money-saving strategies. Many credit counseling agencies can assist debtors with creditor negotiations to reduce outstanding debt balances, obtain a reduced rate of interest, or eliminate late fees and penalties from existing debt.

Consumer credit services can also be a good option for newly married couples who want to begin their union with firm financial traction and young adults venturing out on their own. Learning how to manage money is the only way to achieve financial freedom and is the greatest gift you can give to yourself.

Credit counseling agencies can be found in nearly every metropolitan city. Many agencies base fees upon debtors' income. Low-income debtors may be entitled to no-cost services through non-profit agencies.

Debt consolidation allows consumers to consolidate all outstanding debts into one loan. This bankruptcy alternative is normally reserved for homeowners because the majority of debt consolidation loans are actually home equity loans.

A home equity loan requires debtors to take out a second mortgage using their home as collateral. This type of financing allows borrowers to pay off credit cards, unsecured debts, personal loans and student loans by refinancing all loans into one new loan.

Borrowers must have adequate credit scores and sufficient accrued home equity to qualify for home equity financing. While this option can provide debt relief, debtors must give careful consideration to using their home as collateral to secure the loan. If borrowers default on debt consolidation loans they place their home at risk for foreclosure.

While there are legitimate debt consolidation companies, debtors must conduct thorough research to ensure they are working with a reputable firm. A good source for learning about the pros and cons of debt consolidation is CreditInfoCenter.com.

Debt settlement might be a good bankruptcy alternative when debtors carry more than $10,000 in unsecured loans. However, debtors must be very cautious about entering into a contract with debt settlement companies. Many of these organizations offer promises they cannot keep and several are under investigation by the Federal Trade Commission.

Those who feel debt settlement is the best option should consider attempting to settle debts on their own. The worst that can happen is creditors refuse to negotiate. To be successful with debt settlement, debtors should be financially capable of offering lump sum cash payment. Creditors are usually willing to negotiate debts when debtors can pay at least 25-percent of outstanding balances.

Working with debt settlement companies is not cheap. Most agencies charge an upfront fee and assess a monthly service fee until debts are fully paid. This often amounts to as much as 40-percent of owed debt.

Debts that are written off are reported to credit bureaus and will reflect poorly on debtors' credit reports for several years. When debtors engage in debt settlement practices they must engage in credit repair strategies to repair FICO scores.

Lenders will sometimes offer borrowers the option to defer payments or enter into loan modifications. These options are often used to help borrowers who hold mortgage loans, but can also be used with personal, student, automobile, and business loans.

Mortgage loan modification can help qualified borrowers avoid foreclosure. Banks can reduce interest rates or principal balances to provide borrowers with a lower monthly payment. Borrowers must undergo a trial period before permanent modification occurs.

Borrowers must do everything possible to comply with modified terms because if they default on the loan they could quickly lose their home. Property owners may want to obtain housing counseling through the Department of Housing and Urban Development to determine if mortgage modification is the best option.

Deferred payments refer to having loan installments deferred to a later date. This option is best suited for borrowers facing temporary financial setbacks, but may provide adequate relief so that debtors can avoid bankruptcy.

Personal bankruptcy can cause severe financial consequences. Nearly every facet of life revolves around having good credit. Those with bad credit find it next to impossible to secure bank accounts, credit cards, mortgage loans, car loans, and most types of credit. If they do qualify for credit they pay substantially higher interest. It is imperative to be proactive about improving and protecting personal credit.

There are instances when bankruptcy is the only viable option. With hard work and a commitment to resolve personal finance issues you can overcome the financial trauma. However, in most cases debtors can find debt solutions through bankruptcy alternatives.