What Are Your Alternatives to Filing Bankruptcy: A Credit Crisis Crash Course

According to a recent Times article, Downturn Pushes More Toward Bankruptcy, March 2010 marked the highest month of bankruptcy filings since the financial crisis started, with almost 6000 bankruptcy petitions filed each day on average. This marks a 9 percent increase from th e month before, and a 38% increase year over year.  In all, 130,000 people filed for bankruptcy in March.

Some of the most common reasons that individuals file for bankruptcy include:

  1. Unemployment
  2. Foreclosure
  3. Divorce
  4. Disruptive Health Problems

As a result of last year’s weakened economy, and its repercussions (the unemployment rate is still rising, as are foreclosure numbers) the amount of people exposed to these situations has grown larger than in the past. In addition, credit is becoming much less readily available than in prior years as banks tighten their lending policies. The result? You have more and more people who are turning to bankruptcy as a last resort. But bankruptcy laws, as a result of the 2005 act, are more stringent than ever before, not to mention it’s an incredibly damaging process.

Here are some alternatives to filing bankruptcy that troubled consumers should consider first.

Reduce Your Spending. It may sound simple but if you aren’t behind on payments yet, and you’re not that far behind the amount of money you need to pay your monthly bills, see if you can you reduce some of your expenses. Areas that many people find they can cut costs include forgoing cable TV, cancelling the gym membership, riding a bike for a commute, and ceasing to eat out.  Small changes in lifestyle can easily add up to an extra couple hundred dollars a month.

Get Consumer Credit Counseling. If you have already damaged your credit by falling behind on payments, and you aren’t able to find the money by cutting expenses, consider going through Consumer Credit Counseling Services (CCCS).  CCCS will give you a plan for paying off your debts as if you were in a Chapter 13 bankruptcy without ever filing a bankruptcy.

Consider Debt Consolidation. Debt consolidation is probably the most well-known relief option and it is essentially when you use one overarching loan to pay off all your other debts.  Professional debt consolidation companies restructure consumer payments by combining all money owed to their creditors into one lump sum. The consumer then makes a single payment each month to the consolidation company. This is a particularly good option for someone with a lot of credit card debt owed to various companies since these usually carry high-interest rates. Sometimes, debt consolidation companies can discount the principle amount of the loan or renegotiate a lower interest rate but you will be paying back a majority of the debt you owe.

Try for Debt Settlement. Debt settlement (also known as Debt Resolution) is when a debtor and creditor agree on a reduced balance that will be regarded as payment in full. Professional debt settlement companies contact creditors on a consumer’s behalf to negotiate down their overall debt amount. Successful debt settlement programs can eliminate up to 70% of the original debt owed. Creditors are willing to accept this solution because they figure recouping some payment is better than none at all, which would be the result if a debtor filed for bankruptcy.  Also, as a result of the recent financial crisis, banks applying for assistance from the federal government through the TARP fund, are dealing with a liquidity crisis themselves. This makes debt resolution more palatable because it offers banks a chance to increases their cash reserves. Debt settlement should be considered if a debtor has missed several payments already or does not have the funds available to make anymore future payments. With job losses at historic highs, these scenarios make it unlikely a debtor will be able to catch up. While your credit score will be affected by a debt settlement program, it won’t be affected as negatively as a Chapter 7 or Chapter 13 filing and will start to recover almost immediately assuming you don’t accrue new debts. I’ll discuss the impact of debt settlement vs. bankruptcy on your credit score in a future post.

It takes approximately ten years to recover from a bankruptcy filing, during which time you likely won’t be eligible for any credit (that includes student loans, mortgages, and credit cards) which can be a difficult pill to swallow.  Seriously considering if you have any alternatives to bankruptcy is something everyone in a personal financial crisis should consider.

The Joshua Just Blog is written by Joshua Just, CEO and Founder of Diversified Investments. An experienced leader in the market place, Joshua Just has founded several successful firms in the areas of real estate, aviation, litigation & financial management.

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