Alternatives to filing for bankruptcy

Evan Crosby
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What happens when you find yourself in financial trouble and owe more money than you can actually afford to repay?

Chapter 7 and Chapter 13 personal bankruptcy laws provide a legal remedy for borrowers who have insurmountable debt that are facing financial ruin. However, there are steep financial costs, even if you mange to get some or all of your debt forgiven. For example, your credit score will take a dramatic hit. In fact, depending on your score, it will likely drop by at least 150 to 200 points.

Furthermore, a Chapter 7 bankruptcy will stay on your credit report for seven years, while a Chapter 13 bankruptcy will remain on your credit file for ten years. Therefore, you will have a much harder time getting approved for credit. Plus, it might even be harder for you to get a job as many employers run credit checks on applicants.

Before filing for bankruptcy, you should consider one of these viable alternatives to help protect your credit-worthiness.

1. Cut your expenses

One of the top reasons why people have financial trouble is because they fail to live within their means. In other words, they overspend. Therefore, your first option to avert bankruptcy should be to reduce your expenses as you likely can find things in your budget to cut back on.

For example, if you have a habit of running through the Starbucks drive-thru every day after work, you can save money by just brewing your own coffee at home. If you are someone who likes to eat out all the time, cooking your own meals at home would be more economical. Sometimes you can ask your service providers -- such as insurers, cellular providers, and cable/internet companies -- for a discount on your monthly bill.

The goal is to find enough ways to save money so that you can avoid bankruptcy court.

2. Refinance your mortgage

Sometimes people can't afford their mortgage payments -- because they "bought more house" than they could really afford -- so they consider bankruptcy as an option. However, if you are struggling to make your home loan payments, you should see if you can refinance your mortgage to reduce your interest rate and monthly payments.

That way you don't risk losing your home and 100+ points off your credit score.

3. Try to find a way to boost your income

Many Americans struggle to get by on just one income so they get second jobs, as well as side hustles to help them make ends meet. Before filing for bankruptcy, see if you can find a way to increase your income. For example, you could try to get a better-paying job -- or even a second job on evenings and weekends. There are also a number of remote jobs and online business opportunities available. Some people get side hustles delivering groceries and takeout food to customers.

4. Consider a debt settlement company

Another option that might keep you out of bankruptcy court is working with a debt settlement company.

For example, let's say that you have $10,000 of credit card debt that you are unable to pay off. A debt settlement company will attempt to work out a deal with the credit card company for an amount that you can afford to pay off -- say, $5,000 instead of $10,000. Creditors are often willing to consider debt settlement plans because they can at least recoup a portion of what they are owed.

Furthermore, they know that they probably won't get any money from you if you end up filing for bankruptcy.

5. Consider borrowing money from friends or relatives

As an absolute last resort, if you have generous family members or friends with more stable finances, see if any of them are willing to lend you money to avoid bankruptcy. However, there are some pitfalls that come with asking friends and family for money. For instance, it can strain relationships -- especially if people think that you are just trying to use them. Therefore, you want to demonstrate that you are serious about getting your financial house in order -- and that you will make every effort to repay them for the loan.

While it might be a long shot, it's still a shot worth taking if it can keep you out of bankruptcy court.

In short, filing for bankruptcy shouldn't be your first option when you run into financial difficulties. If your money problems are due to you overspending, find ways to cut back. If you have an expensive home loan payment, see if you can refinance your mortgage to lower your payment. You can also try boosting your income by getting a second job or side hustle. If you are struggling with high-interest debt, consider using a debt settlement company. Only ask for a loan from friends and family as a last resort.

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I help consumers understand the issues that impact their money, technology, and world.

Kansas City, MO

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