Debt Relief Alternatives To Filing Bankruptcy: What You Need to Know

Many of the services promoted as “alternatives” to bankruptcy do not provide real debt relief. They often offer ineffective solutions and take advantage of the fear that people may have of filing for bankruptcy. Some of the non-bankruptcy debt relief solutions you may encounter are described below.

 

Credit Counseling/Negotiation with Creditors

If you have enough income and if the total amount of your debt is low enough, you may– either on your own or through a service that you hire and pay– try to get your creditors to agree to reduce your payments and lower your interest rate.

Keep in mind:

  • You must continue making payments and paying interest until the debt is paid in full.
  • This solution depends on whether your creditors will agree to it.

 

Debt Consolidation Loans

A debt consolidation loan is a new loan from a different lender to combine and pay the debts you already owe. If you are already struggling to pay the debts, you should consider whether simply lumping them into one loan and one payment will really help.

Keep in mind:

  • You still owe the same amount (or more), and you must still pay interest on it.
  • If you allow yourself to be talked into securing the loan with the equity in your home,  you have then burdened your home with debt you might otherwise have been able to bankrupt, and you may lose your home if you are unable to pay the new loan.

 

Non-Bankruptcy Debt Settlement

If you have enough money to offer a lump sum, creditors or debt collectors may agree to take less than the full amount owed and forgive the remaining amount of the debt.

Keep in mind:

  • The amount of the debt forgiven by the creditor must be reported by the creditor on a 1099 to the IRS and will be treated as taxable income to you.
  • In contrast, debts that are discharged in a case filed under federal bankruptcy law are never taxable income to you. This is an important difference between non-bankruptcy and bankruptcy debt relief.  

 

The Bottom Line on Alternatives to Filing for Bankruptcy

These approaches may sometimes work. They often do not. Even when they do, the cannot begin to offer the same relief and results available to you in bankruptcy. Knowledge is power– if you have the facts and information, you can compare these choices and make your own decision about what is best for you.
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