Understanding Bankrutpcy Alternatives

Excessive debt has become a global crisis affecting people from all walks of life. Many factors contribute to acquiring too much debt. The majority of people dealing with debt became caught in the credit card trap. For the most part, credit cards are easy to obtain. All you need is acceptable credit and a moderate income. Before you know it, credit card companies are sending pre-approval credit card offers with limits in the thousands. Instead of tossing credit card offers, many people complete the application, and the vicious cycle begins.

It doesn’t take long for debt to become overwhelming. When this happens, many people choose bankruptcy as their way out of debt. Yet, filing bankruptcy has serious and lasting consequences. For this matter, consumers should consider bankruptcy alternatives. Besides, because of modifications made to bankruptcy laws, filing is not as easy as it used to be. This encourages consumers to find other ways of remedying their debt problem. The following includes a few possible bankruptcy alternatives.

Consolidate Debts

Debt consolidation is a bankruptcy alternative that has made is possible for millions of people to become debt free. Consolidation is a method of combining all outstanding debts into one loan. Because most debt consolidation loans have lower interest rates, consumers pay less and have the opportunity to repay creditors within a few years.

There are several debt consolidation options. Owning a home makes obtaining a debt consolidation loan easy. Simply refinance your existing mortgage and borrow money from your equity, or apply for a home equity loan. Both options involve tapping into your home's equity to acquire funds. Funds are received as a lump sum, and can be used to payoff individual creditors.

Credit Counseling

Another bankruptcy alternative is debt management or credit counseling. Many people avoid credit counseling because of rumors that such services may have a damaging effect on credit. However, if you are contemplating bankruptcy, worrying about acquiring bad credit is somewhat of a contradiction. In fact, credit counseling may save your credit score. In some instances, agencies will report third party assistance to the credit bureaus. If so, upon reviewing your credit report, some lenders may deny a credit application based on this information. Still, the long-term effects of filing bankruptcy are far worse.

Debt Settlement

Debt settlement is a bankruptcy alternative that should be reserved as a last resort. The best way to maintain a good credit rating is to repay debts to creditors in full, and in a timely manner. Failure to do either will result in a negative rating. With a debt settlement, creditors do not receive the full debt amount owed to them. Instead, arrangements are made for the debtor to settle the account for a lesser amount. For example, if you owe $2000 on a credit card, and become unable to keep up with regular payments, the credit card company may agree to settle for $1000. While debt settlement reduces your obligation to creditors, it is extremely damaging to your credit score. Still, this bankruptcy alternative is a much better option than filing a chapter 7 or chapter 13.