What are some bankruptcy alternatives?
Budgeting
Let’s start with the basics. Many times, all it takes to get you back on track financially is some sound discipline combined with a careful planning of your monthly budget. We realize that many people reading this article have already gone way past the point where their financial problems can be solved with a simple budgeting plan, but we want to make sure we have not overlooked the more simple solutions.
Allowing family members to help you
Obtaining help from a family member can be a lifesaver, of course, but make sure that this is the best option for you. Your family member must be willing to do so without coercion, and he or she must be able to do so without bringing about additional financial hardship. Also, ask yourself whether receiving money from family will truly solve your problem or whether it will simply delay the inevitable and force you to declare bankruptcy anyway. Remember also that family relationships can be strained where money is involved.
Selling any non-exempt assets
Remember that the bankruptcy laws in most states will protect certain assets as exempt from the liquidation process. These exempt assets usually include your primary residence (up to a certain value), a vehicle, and pensions.
If you own nonexempt assets, that is assets that you would lose anyway if you file Chapter 7, you might want to look into selling these items in order to pay off your creditors as much as possible.
Transferring credit card balances
Many people are interested in transferring their credit card balances to a new account with a lower interest rate. This may be worth looking into, but this kind of balance transfer is unlikely to solve your debt problems. What you are really doing is taking out a new loan to pay off your current load of credit card debt.
You should also know that if you initiate a balance transfer but end up filing for bankruptcy anyway, the credit card companies may accuse you of fraud and try to prevent your debts from being eliminated.
Home-equity loans
Many people look to avoid bankruptcy at all costs, and one of the most common methods they use to avoid bankruptcy is the home equity loan. At first glance, this might seem like a great bankruptcy alternative, but you must remember that your home will be on the line in the future. You are simply trading in some of your home’s equity in order to pay off your credit card balances. There are several reasons why you should be extremely careful when looking into home-equity loans.
First of all, you’re putting your home at risk when you decide to go for a home equity loan instead of filing for bankruptcy. In most cases (and assuming that you don’t own a million-dollar mansion), your house would be protected under state bankruptcy laws. If you take out this loan, however, bankruptcy will not wipe out your new obligation to the bank or mortgage company. You’ll still have to pay off your home equity loan even if other debts end up being eliminated in bankruptcy.
Think about it: your credit card debts could have been wiped away by filing Chapter 7 bankruptcy, and your home would not have been made vulnerable to creditors. Instead, choosing to go with a home loan first has now put your home in jeopardy.
Also think about the monthly payment plans. If you have trouble paying off your credit card bills each month, you’ll probably have some difficulty paying the loan as well. In addition, many people have a serious problem with disciplining their spending. If this root cause doesn’t change, you could cash out some of the equity in your home and end up accumulating credit card debt all over again!
Reverse mortgages
Reverse mortgages are designed to give senior citizens access to the equity in their homes without having to repay any loans at all. This sounds like an incredible deal and a great alternative to declaring bankruptcy, but how exactly is it accomplished? Very simple, the loan does not have to be repaid until the owner moves or passes away. At this point, the home is turned over to the lender unless someone pays the loan!
If you’re an older homeowner and simply want to live a more comfortable life, you may want to consider the reverse mortgage, especially if you don’t have any heirs to worry about. If you do wish to leave your home to your son or daughter, someone will have to repay this loan at some point.
You also want to study the details carefully in order to make sure that the reverse mortgage will not negatively affect your Social Security benefits or other kinds of income.
Cashing in your retirement plans
Once again, cashing in retirement funds seems like a feasible solution for a person who wants to avoid bankruptcy at all costs. However, the consequences could be far worse than those you would have faced by simply filing for bankruptcy protection! In most cases, your retirement and pension plans would be protected from creditors if you filed for Chapter 7 protection. As was the case with the home-equity loan above, you are simply putting up your hard earned assets in order to pay off unsecured credit card debts and other kinds of debt that would normally be wiped out in bankruptcy.
Even worse, many people end up filing for bankruptcy anyway. Only at this point, they no longer have the savings or retirement plans they once did. You should also consider seriously the tax consequences involved. For example, if you lose your current job, you may be required to repay any loan from your retirement plan immediately. If you don’t pay the loan back, you may have to pay a lot more in taxes.
Understanding when bankruptcy is the right option
It’s never easy to decide whether bankruptcy is the right option for you and your family. As you can see from the options above, many of the so-called alternatives to bankruptcy end up having serious and not so obvious negative effects on your life for years to come. At the same time, you don’t want to end up in bankruptcy court filing a petition for a relatively small debt problem that could have been solved more easily.
Be sure to discuss your options carefully with a good bankruptcy attorney.