If you’ve struggled with debt for a prolonged period of time, you may feel like bankruptcy is the only option. Despite the long-term repercussions, bankruptcy can provide you with immediate debt relief. However, there are plenty of alternatives for covering your debts, such as selling your house in cash, renegotiating with lenders, and more.
What exactly are these options? And which one is best for you?
The Problems With Bankruptcy
Bankruptcy makes all your financial problems go away, right?
Unfortunately, this is a common misconception. There are many different types of bankruptcy that you can file, depending on your circumstances, and not all of them discharge your debt. In a typical Chapter 7 bankruptcy, you may be able to discharge some or all of your unsecured debts, but there are certain types of debts that are not dischargeable. For example, alimony, child support payments, certain types of taxes, some student loans, and other forms of debt may stick with you even after you file for bankruptcy.
Assuming you are successful in discharging your debt in bankruptcy, there are other problems with pursuing this route. The most significant influence is on your credit score; your bankruptcy is going to be a black mark on your credit report for many years, limiting your ability to take out loans, get approved for an apartment, and in some cases, get a job.
This influence on your credit is temporary; as long as you commit to good financial habits, you can restore your credit back to normal after several years. But for most people, this is a debilitating outcome that can lead to a significantly reduced quality of life – and cripple your financial future.
Needless to say, it’s best to avoid bankruptcy unless it’s your last available option.
Bankruptcy Alternatives for Getting Rid of Debt
So, what steps can you take to get rid of debt without filing for bankruptcy?
Practicing good personal financial habits can help you chip away at your debt bit by bit, but if you’re reading this type of article, this option may no longer be feasible.
These options, in contrast, can provide you with immediate and sometimes powerful results.
- Sell your house. Selling your house could be the best decision available to you, assuming you own a home. Even if you’re still making payments on your mortgage, you probably have significant equity in the home already. If you sell your home in cash, you’ll almost immediately gain proceeds that you can use to pay off the rest of your mortgage; you can use whatever money is left over to pay off your other debts. Depending on how much equity you had, you may have tens of thousands of dollars in spending power. If this influx of cash isn’t enough to pay off all your standing debts, make sure you prioritize the debt associated with the highest interest rate.
- Sell other property. If you don’t own a house, or if the proceeds from your house aren’t enough to pay off your biggest debts, consider selling other property you may have. That could mean selling a car, selling collectibles, or selling electronics you don’t need. You may have to make some hard sacrifices, but you can likely raise enough money to pay off at least some of your debts.
- Negotiate with creditors. Next, consider negotiating with creditors. Many consumers are unaware that they can simply call up a credit card company and negotiate for a better repayment plan. Depending on the circumstances, you may qualify for a lower interest rate, a specific repayment plan, or even some level of debt forgiveness.
- Consolidate your debts. If you can’t negotiate with creditors, consider consolidating some of your debts. The idea here is to pay off some debts by taking out other, more favorable debts. In doing this, you can find more favorable terms and better interest rates, enabling you to pay off your debts more reliably.
- Use a credit counseling agency. Some consumers with debt benefit from utilizing a credit counseling agency. Credit counselors exist to help consumers manage their debts, and they may be able to negotiate with creditors on your behalf to reduce what you owe or come up with a repayment plan.
- Consider becoming judgment proof. A person is considered “judgment proof” if their income or assets can’t be obtained in satisfaction of a judgment. In most areas, there are many exempt forms of “essential property,” such as your house and its primary furnishings, your clothes, your food, and income you get from Social Security and unemployment. If you’re judgment proof, creditors won’t be able to pursue you for payments of your debt. This isn’t ideal, and technically, it’s not a strategy that allows you to pay off your debt, but it’s worth considering in some situations.
- Specific types of bankruptcy. Remember that not all types of bankruptcy are identical. Chapter 13 bankruptcy, for example, has a much smaller impact on your credit score and financial future; instead of discharging your debt entirely, it’s a way to restructure your debt. Think of it as a legal compromise between you and your creditors. Your most important strategy is talking to a lawyer so you can better understand the legal options available to you.
Toward a Debt-Free Future
If you do manage to pay off all your debt, you should still take initiative in preventing yourself from accumulating more debt in the future – or making any lingering debt problems you have worse.
- Avoid taking on more debt. Avoid taking on more debt if you can help it. Save up an emergency fund so you can tap into it instead of relying on loans or credit cards for emergency expenses. And definitely don’t go into debt for frivolous purchases.
- Reduce your expenses. Try reducing your living expenses. Making cuts to entertainment expenses, cooking instead of eating out, and moving to a smaller house or a cheaper neighborhood could collectively help you save hundreds to thousands of dollars a month.
- Increase your income. Work to increase your income. Taking on a second job or learning skills for a higher position or side gig could be exactly what you need.
- Pay down your existing debts. With fewer expenses and more income, you’ll have more extra money each month; use this to pay down any existing debts you have (and save for your future beyond that).
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