Are there Alternatives to Bankruptcy?
Chances are you’re already struggling with your debts if you are wondering about alternatives to bankruptcy. Yet nothing else provides such fast, profound and permanent relief as does federal bankruptcy protection, nor is any other relief more cost-effective.
Preying on the pervasive shame some individuals associate with the process of bankruptcy, numerous organizations have sprung up overnight to take your money in attempts to help you “avoid bankruptcy.” Some are more reputable than others, but each offers at least one of several alternatives.
“Debt Consolidation” is when you “consolidate” all your outstanding debts into one loan, ideally at a lower payment and interest rate than the combined loans. Debt consolidation can be costly because of the interest that accumulates over the usually extended duration of the new loan. And if you give up the equity in your home to grant a mortgage for the loan, you have to wonder whether you’re actually going to be any better off.
“Debt Negotiation” is an aggressive (and potentially dangerous) alternative to bankruptcy. These are the agencies that advertise late at night and who promise drastic debt reductions. Left out of these proclamations is that after paying the fees for the service, the customer often pays an amount equivalent to the debt by the end. Typically under these programs, the debtor makes large monthly payments, which pay the service fees first. After the service has collected its fees, it holds subsequent payments in “trust,” which build up until the service can negotiate with one creditor at a time in the hopes of a reduction. However, the savings can be taxable, a negative entry can be made on your credit report for the compromise, and the remaining creditors are free to continue harassment and law suits.
Unfortunately, these programs often lead the unsuspecting deeper into debt after paying significant fees to the company. A recent article cautions to watch for the following indicators when contemplating enrollment in a consolidation or debt management plan:
- High up-front or monthly fees for enrolling;
Pressure to make so-called “voluntary contributions,” which is just another name for fees; - Failure or refusal to send free information about the offered services unless you first provide personal financial information, such as credit-card account numbers and balances;
- Attempting to enroll you in a debt-management plan without spending time reviewing your financial situation;
- Offering to enroll you in a debt-management plan without first counseling you in budgeting and money-management skills;
- Demanding that you make payments into a debt-management plan before your creditors have accepted you into the program;
If you still feel like giving debt management a try, it is advised that you make sure to:
- Choose your company through the National Foundation for Credit Counseling;
- Understand exactly how much the service will cost;
- Know whether the fee is paid before any money goes to creditors;
- Know what interest rates you will be paying the creditors;
- Find out how long it will take to completely pay down the debt; and
- Find out how your creditors will report your account to the credit bureaus.