Bankruptcy Alternatives and Their Success Rates
If you are deep in debt and struggling to get out of it, there’s a good chance that declaring bankruptcy has crossed your mind. After all, you’re reading this article.
That being said, there are many viable alternative to filing Chapter 7 or Chapter 13 bankruptcy, so you shouldn’t at all feel that it’s your only recourse. In fact, it could be that one of those alternatives is actually a better option for you.
Keep in mind, bankruptcy is going to have a massively negative impact on your credit score, not to mention knowing that you’re declaring bankruptcy can have a big psychological affect as you well.
And even if you do end up having to file for bankruptcy anyway, it will be a good thing that you took the time to explore your alternative options anyway.
But before we get into what these alternatives are, let’s discuss the two bankruptcy options that you have before you already.
The first is Chapter 7 bankruptcy. This is where you will be freed of all of your unsecured debt obligations, but in return, you will have to turn over non-exempt property to the government to be sold and then paid to your creditors. This is the better bankruptcy route to take if you lack income or assets, but it’s also of course a last resort option.
The second choice is Chapter 13 bankruptcy. This is where you your disposable income will be turned over to the trustee, and you will be put on a payment plan to repay the debt. This is the better choice to take if you have monthly income coming in so you can get your debts repaid. Chapter 13 bankruptcy is also often referred to as a wage earner’s plan.
That being said, both Chapter 7 bankruptcy and Chapter 13 bankruptcy are going to cause your credit score to take a huge hit. It is always best to talk with an experienced bankruptcy attorney to discuss your options.
Let’s talk about those alternative choices now:
Credit Counseling and Debt Management Plans (DMP)
Your first choice will be to seek credit counseling with a counseling agency, who can then work with you to develop a debt management plan (DMP).
Under a debt management plan, you will be making payments to your credit counseling agency, who will then send the money to the creditors. The agency will also most likely try to lower your interest rates with your creditors as well so you’ll pay less.
A debt management plan is certainly a viable option for getting out of debt, but that doesn’t mean it’s your best option. For one thing, your creditors have to agree to the plan when the counseling agency reaches out to them, and chances are good that some of them will agree to the plan while others won’t. Therefore, the DMP can help you get rid of some of your debt but not all of it.
Furthermore, if you miss out on a payment (even accidentally), the counseling agency may terminate your plan or your creditors may immediately choose to withdraw.
The success rate for completing a debt management plan among other people in debt is also rather small, at around twenty to thirty percent on average. Often times this is due to people or families having very tight budgets and not bringing in enough income to actually pay the monthly payment.
The best way to determine if a DMP is the best course of action for you to take will be to schedule a counseling session with a credit counseling agency. This session should last an hour or two and a counselor will thoroughly overview your financial situation and discuss with you your best options. If a DMP is a good option for you, the counselor will be sure to let you know.
Consolidate Your Debt
The next alternative choice will be to consolidate your debt. There are a number of ways you can conduct this method as well.
The first will be to transfer the debt of your credit card to a balance transfer credit card with no interest rate for a limited period of time (usually this will be twelve to eighteen months). This will then enable you to make monthly payments towards paying off your debt and without having to pay interest.
Another choice will be to use a debt consolidation loan, which simply combines multiple debts into a single loan. You will still owe the same amount of debt, but you may be able to secure a lower interest rate as well to help save you money. This also simplifies your debt as you only have to make a single payment rather than multiple, similar to a debt management plan.
The next choice will be to seek debt settlement, which may be your best alternative to bankruptcy if your debt is delinquent, but there are still a number of disadvantages to it that we will cover now.
With debt settlement, your creditors will simply forgive a part of your debt. This obviously translates to you saving cash, which is a good thing. But at the same time, you can be sure that your credit score will take a hit since your report will show that the debt was paid for less than what was originally agreed upon.
Furthermore, you will have to pay taxes on the amount of debt that is forgiven because the government will treat it as revenue. So to put this into perspective, if your creditors forgive $10,000 of your debt, that’s $10,000 that will be taxed as normal income.
Last but not least, a debt settlement company will charge you a very high fee for their services, and there’s no guarantee that they will be able to convince each of your creditors to forgive a part of your debt.
In many ways, debt settlement is similar to debt consolidation. With both options, you have to re-negotiate your debt with your creditors, and you can save money whether it be by reducing or entirely eliminating your interest rate or through having a portion of your debts forgiven.
That being said, the terms ‘debt settlement’ and ‘debt consolidation’ should never be treated interchangeably like they sometimes are.
One positive thing about debt settlement is the fact that it has a slightly average higher success rate over debt management plans like we talked about previously.
According to the TASC, or the Association of Settlement Companies, there is an average 45% success rate of debt settlement plans. However, this figure does not take into account the number of people who pay debt settlement companies only for a few months only to bail on the program before all of the debt has been paid.
When these people are taken into account, the success rate falls to around 34% of people who end up settling their debt in a debt settlement program.
Yes, simply selling one of your property can be a viable alternative to filing bankruptcy. When you file Chapter 7 bankruptcy, your property will be reviewed by a trustee, who will then decide what, if anything, you will liquidate or sell in order to settle your claims.
But what if you could avoid this from happening to begin with? You can avoid it to begin with by taking action to sell your property to begin with to pay back your debt.
For instance, is there a second or third car that you don’t use that you could sell? Do you have any items of high value? Could you sell your house and property and move somewhere cheaper?
These are the kinds of questions that should be asking yourself, because if you’re like most people, chances are good that you have several thousand dollars worth of property that you can sell and use to pay back all or a portion of your debts without having to follow any of the other choices.
At the very least, selling your property to pay back your debt should be preferable to being forced to surrender your property to the trustee when you file for bankruptcy.
Default On Your Debt
In the event that you have nothing valuable, such as no property to sell, and no income, then one option on the table will simply be to stop paying your creditors.
Even though your creditors will attempt to collect the debt, they have to abide by all state laws as well as the Federal Fair Debt Collection Practices Act. Under this act, your creditors are not allowed to ‘abuse’ you in any way such as calling or contacting you multiple times a day or attempting to trick you into paying your debt.
In fact, if a creditor does ever violate the Fair Debt Collection Practices Act, you will be able to seek monetary damages.
In the event that you do simply stop paying your creditors, and keep in mind that this is going to hurt your credit score when you quit paying the minimum monthly payments, your creditors will most likely attempt to collect the debt via a court judgment.
If you have no income and only exempt property, or property such as furniture and Social Security and clothing, you will become ‘judgment proof.’ This means that the creditor will be unable to legally collect your property, and they will likely then write off the debt as a business loss if they see that collecting your debt is impossible; otherwise, they may opt to sue you.
Take note that defaulting on your debt will appear on your credit score for seven years and will cause irreparable damage during that time. If other creditors see that you defaulted on your debt, chances are almost certain that they will not loan to you.
This is why defaulting on your debt is only a last resort option, and even then, it may not be your best choice. If you do default on your debt, be fully prepared to reap the consequences.
Your last real alternative to bankruptcy will be to simply make sacrifices. In other words, cut back on your spending habits. Set a budget and cut back on eating out, going to the movies, buying coffee, and other things.
Of course, minimal sacrifices won’t mean much. You need to make real sacrifices, such as actually forcing yourself to make all of your own meals and cancelling your Netflix or gym memberships. Each dollar you save will add up, and you actually have to commit to using it to pay back your debts.
You can also opt to receive counseling on your current financial situation to help get your finances back on track as well. At the counseling session, make it clear to the counselor that your top priority is to have your budget rearranged so you can avoid bankruptcy at all costs.
And if you do decide to file bankruptcy, a pre-filing credit counseling course such as the one CC Advising provides is required before you can file bankruptcy anyway, so it is good to take the course and have a one on one session with a credit counselor who can assess your situation professionally.
For many people, this is the only real change that is needed: cutting back, saving money, and using that money to pay back their debt. That being said, if you owe an extraordinarily large amount of debt, then this option probably won’t be enough. It can certainly help, but further action will likely be needed such as using one of the above alternatives.
In conclusion, bankruptcy is hardly your only option if you are heavily in debt and there appear to be no recourses.
That’s really what you should take away from this article if nothing else. But remember, just because you choose one of those other options doesn’t necessarily mean that you are going to get out of debt.
As we saw, the success rates were hardly anywhere near one hundred percent, which means that getting out of debt is going to require you to take action to actually get it all paid off.
There are many circumstances where filing bankruptcy may be your best option. That’s why it makes sense to speak to a bankruptcy attorney to get a full view of your options. A credit counseling session such as the one CC Advising provides is required to file bankruptcy as well, so you may as well take the session, and get it over with. Certified credit counselors are required to advise you on any other options you may have to resolve your debt issues.
- Ultimate Guide to Credit Counseling, The First Bankruptcy Course
- How Credit Counseling and Debt Management Plans Really Work
- Pre-Bankruptcy Credit Counseling Requirement
- Credit Counseling Pre-Filing Briefing and Other Information Required to File Bankruptcy
- Credit Counseling vs Chapter 13
- Credit Counseling vs Credit Repair
- Credit Counseling vs Debt Management
- Avoid Getting Ripped Off by a Credit Counseling Agency
- Bankruptcy Alternatives and Their Success Rates
- Ultimate Overview of Bankruptcy - Difference Between Chapter 7 and Chapter 13
- Divorces, Finances, and Bankruptcy
- Bankruptcy Stigma Is Not What You Think
- How To Hire A Bankruptcy Attorney
- Famous People Who Have Filed For Bankruptcy
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- Coronavirus COVID-19 and Bankruptcy
- Bankruptcy Exemptions Explained