While filing for bankruptcy relief is a constitutional right, there may be more productive ways out of a debt mess. People in steep debt are subject to so much overwhelm, they don’t realize help is out there. Though it might take some resolve to stay the course, there are other plausible paths forward.
Certified nonprofit credit counseling
The first, sensible step in strategizing how to conquer your debt would be to speak with a strategist. Such a person is a credit counselor who can be found at a licensed and accredited nonprofit credit counseling organization. Your counselor will provide a comprehensive review of your financial situation at no or low cost, and together you’ll come up with a plan that’s a fit.
Debt consolidation
To get on top of unsecured debt such as credit card debt, student loans and high-interest personal loans, one way forward is to get a single loan at a lower interest rate. With that loan you bring the other accounts to zero and have one monthly payment to make.
Variations on this theme include using a balance transfer credit card, home equity line of credit, home equity loan or cash-out refinancing. The financial tools tied to the equity in your home do have a downside, and that is, failure to meet terms risks foreclosure.
Debt management plan (DMP)
If a consolidating loan isn’t the right option, your credit counselor can help set up a DMP. The counselor negotiates with creditors to obtain a significantly lower interest rate (roughly 8%) and an agreed 3-5-year payment period. Downside: You’ll have to close your credit card accounts and will not be allowed new lines of credit such as a car loan or a house remodeling loan for the life of the repayment plan.
Debt settlement
Here, you negotiate with creditors to settle for less than what’s owed. The leverage you have whether you negotiate on your own or are represented by a debt relief company is that the creditors are better off retrieving partial payment rather than no payment if you’re forced into bankruptcy.
If you have back taxes, you can pursue an “Offer in Compromise” with the IRS and settle for less than what’s owed. If you have a distressed business, you can sidestep bankruptcy in New Jersey with an assignment for the benefit of creditors, an established tool that effectively reorganizes the company and makes the creditors whole.
In the end, bankruptcy may be the right choice, but it’s a very big ding. It has consequences. So, take heart, there are many other options, many creative responses to this difficult situation.
