You should be aware of all your options. Bankruptcy is not the best solution for everyone. If your financial problems look like they can be solved some other way, that alternative should be explored, looking closely at its advantages and disadvantages. Here are three bankruptcy alternatives, along with some of their risks:
1. Debt settlement: Once a debt goes into default or way past default, it may be able to be settled for much less than the amount due. This is especially true if the debt is getting old and has been bought by a collection agency.
But be aware of these risks or downsides:
- While a debt is in default, the accruing interest and fees can increase the balance very quickly. So even if you settle a debt at a relatively low percentage of the debt, the settlement amount may be more than you expected because the debt has gotten so large.
- There can also be important income tax consequences to debt forgiveness, potentially resulting in a major tax debt, greatly undercutting the money saved through the settlement.
- You need to come up with enough cash to make realistic offers to the creditors.
- Be extremely cautious of companies that specialize in debt settlement work because many are not legitimate. Negotiating with creditors along these lines is something that you can usually do yourself without an expensive middleman.
2. Debt consolidation: If you can almost keep up on your debt payments, but just need better payment terms, consolidating your higher-interest unsecured debt into another loan with lower interest might make enough of a difference.
The practical risks in this are huge:
- Converting unsecured debt into secured debt (credit card debt into a home equity line of credit, for example) changes debt that could be easily discharged in bankruptcy into debt that likely cannot. And it puts your home in danger.
- Unless the paid-off accounts are closed, you will have a strong tendency to use them again, getting you that much further behind.
3. Simply not paying your debts: People can sometimes simply stop paying their unsecured debts. If a person is not working, has no assets and is living off a stream of income that is protected (“exempt”) from creditors, this can be a sensible short-term, and possibly even long-term, tactic.
The risks here:
- Most likely you will eventually get sued by one or more creditors, and so you will need to know how to react and be prepared to do so.
- As your circumstances and/or the laws change, you could inadvertently become unprotected.
As you think about these three alternatives to bankruptcy, consider these basic principles:
1. When you meet with an attorney, that attorney works for you and legally and ethically is obligated to you and your interests. That’s true even during a free initial consultation. The attorney can’t advise you to pursue an option that is not really appropriate for you. In contrast, people who work on behalf of a single debt consolidation or debt settlement company are understandably motivated to sell you whatever service they offer.
2. You should get information and advice about your alternatives way before your situation becomes desperate. If you wait until the last minute, you could well lose some important maneuvering room, missing opportunities that could have saved you money or fulfilled your goals much better. Getting advice from an attorney early about your options often really helps.
The attorneys at The Law Offices of Roger Fuller are here to help you make a good decision, including about bankruptcy options. If you are in the Dallas area and have questions, please contact us. We provide a no-charge consultation. We have helped guide hundreds of Texans toward the best way to resolve their debts. Call The Law Offices of Roger Fuller at 214-516-6187.