Facing the burden of enormous amounts of debt can cause stress and anxiety about the future. If you’re hiding from creditors, have been threatened with repossession or litigation, and are unsure of how you will get a handle on your debt, it’s time to start thinking about bankruptcy. However, before you file for bankruptcy, it’s important that you seek financial counseling to explore all of your options, including any viable alternatives to bankruptcy. Here’s what you should know about alternatives to bankruptcy.

Debt Consolidation

One of the best and most effective alternatives to bankruptcy is debt consolidation. Debt consolidation is the process of consolidating multiple debts into one single debt and taking out a loan to pay off that single debt. 

Debt consolidation can be helpful because it allows you to manage all of your debts in a single payment, usually that’s made monthly. However, there are risks to debt consolidation that should also be considered, including a hit to your credit score, potential fees, and the risk of not securing a good interest rate. What’s more, if you secure your debt consolidation loan with collateral and fail to pay the loan back, your collateral could be seized. 

On the other hand, in addition to consolidating your debt into one monthly payment, you may also be able to secure a lower interest rate and may be able to pay off your debt faster. 

Debt Settlement

An alternative to debt consolidation is debt settlement. Sometimes called debt adjustment or debt relief, debt settlement is the process of settling your debt with a creditor. In other words, you and the creditor will negotiate a debt settlement agreement in which you will make a lump-sum payment to the creditor in exchange for the creditor forgiving a portion of your debt. 

Usually, debt settlement plans range from paying off between 10 and 50 percent of the owed debt, although this can vary. While the idea of settling your debt and being able to walk away from creditors after a one-time lump-sum payment may sound ideal, there can be some risks to debt settlement.

One of the biggest risks of debt settlement is using a debt settlement company to manage the negotiations process and help you to settle the debt. While a debt settlement company may be effective at achieving a settlement, they may also charge a large fee to do it. Indeed, fees average between 20 and 25 percent. 

Another risk is that the IRS considers forgiven debt as taxable income, which means that you may have tax consequences for pursuing debt relief.

Finally, in order to start the debt settlement process, it’s often recommended to stop making payments on debts altogether—continued payments may reduce negotiating power. Failing to make payments can severely harm your credit score. It’s best to talk to a professional about debt settlement before pursuing it as an alternative to bankruptcy. 

Mortgage Refinancing

If you are a homeowner who has fallen behind on your house payments or is at risk of falling behind on your house payments because of other debt obligations, one recommended course of action is speaking with your mortgage lender about the possibility of refinancing or restructuring your mortgage loan. You may be able to secure lower monthly payments by doing this. 

It’s important to remember that in most cases, your mortgage lender will want to work with you to help you make payments; it is not in their best interest for you to default on payments and go through the foreclosure process either. 

Other Alternatives to Bankruptcy

When a person is facing severe amounts of debt, debt consolidation, debt settlement, and mortgage refinancing tend to be the most effective alternatives to bankruptcy. However, depending on your situation, you might also consider:

• Borrowing money from family or friends
• Selling personal assets for cash
• Taking up a second job for extra income
• Enrolling in a credit counseling course
• Making budgetary and lifestyle changes

What will work best for you will depend on the specifics of your financial situation. It’s always a good idea to speak with a professional first.

Should I File for Bankruptcy?

If you have exhausted all of the alternatives to bankruptcy, it may be time to start thinking about bankruptcy as the best option. Bankruptcy for individuals can provide a clean financial slate and help you to move forward, although there are consequences, including serious harm to a credit score. If you are thinking about filing for bankruptcy or want to learn more about bankruptcy and alternatives to bankruptcy, reach out to an expert who can review your situation and provide a professional opinion.