There can be a number of different reasons to seek an alternative to bankruptcy. And let's face it, no one wants to file bankruptcy.
With the new bankruptcy laws in place, not only is it more difficult to qualify for Chapter 7 Bankruptcy (often called liquidation bankruptcy) it can be more expensive. And if you don't qualify for Chapter 7, then likely your next option is Chapter 13 Bankruptcy, which is referred to as reorganization bankruptcy. Under Chapter 13, you are required to repay some of your debts over a 5 year period.
This comes as a surprise to many folks as most people think bankruptcy means wiping your financial slate clean. The reality is, it is not that simple. And that's why finding a viable alternative to bankruptcy can be a life saver for people.
If you are considering bankruptcy, I think it is fair to assume that you have debt problems. And really, your "goal" or desire if you will, is to solve those debt problems and get on with your life. You just want to find the fastest, most cost effective, least "detrimental to your credit report" method of achieving your goal. Am I right? And having a bankruptcy filing on your credit report for 7 to 10 years is going to make the "get on with your life" portion of your plan more difficult.
So what is your best alternative to bankruptcy?
In short, debt settlement (often called the "new bankruptcy") is the process of negotiating one time lump sum settlements with your creditors in order to pay off your debts. Often times you can have your debts reduced by 50% to 70%. And unlike Chapter 13 bankruptcy that can last up to 5 years, a typical debt settlement program lasts from 12 to 36 months, at which point all of your debts are settled.
Here is a more in depth look at how debt settlement works, what it costs, and how it may affect your credit.
First of all, debt settlement is something that you can either do yourself, or hire a professional to do for you. Like anything, there are pros and cons to each. Nevertheless, the process is very similar. Below will describe the process as if you hired a professional debt settlement company to act on your behalf.
Once you decide to try and settle your debts and you enter a debt settlement program, you will stop making payments to your creditors (if you have not stopped already). At the same time, the debt settlement professional who is working on your behalf will be contacting your creditors to inform them that they are acting on your behalf to negotiate a settlement of your debts. After this, the negotiating process begins...
Now, in order for the debt settlement process to work, you need to have at least some money with which to pay off the negotiated settlement amount(s) down the road. Therefore, once you stop paying your creditors, you need to start paying yourself. In other words, you need to set up a separate savings account into which you will be making payments on a regular basis. The goal here is to start building up a "war chest" if you will, so that when the time comes to actual pay off your debts, you will have the money.
For example, let's say you have a credit card debt of $10,000, and the debt settlement company working for you negotiates a $3,500 payout. Even though it is a 65% reduction in the debt, which is great, if you don't have the money what good will it do you? Don't worry too much about this right of the bat though. You will have time to build up your settlement funds before you need them. As I said earlier, sometimes the negotiation process can take 12 to 36 months which allows you time to slowly build your savings. Keep in mind as well that if you have more than one debt/creditor, you won't have to pay them all off at once. It will happen in stages.
One of the biggest benefits of using a debt negotiation strategy as an alternative to bankruptcy is that you avoid having a bankruptcy on your credit report. But, that does not mean that your credit will not take a hit.
Once you stop paying your creditors, this will show up on your credit report, and, you FICO score will suffer as well. But it is still better than bankruptcy in this regard.
And here is another important tip.
When you do finally reach a settlement amount with your creditor, make sure that you ask for the following in your settlement agreement. Instead of having the creditor say "Settled" on your credit report next to your debt, have them state instead state "Account Paid" or something to that effect. What you don't want is other creditors, present and/or future, knowing that you did not pay back a debt in full.
When you hire a debt settlement firm to act on your behalf, there are fees involved. These can vary from firm to firm, but they usually involve a small upfront fee to open the file, as well as a percentage of the savings realized as a result of the settlement or a percentage of your overall debt. It is in your best interest of course to have most of the fees based on how well the debt negotiator performs on your behalf. Having said that, avoid debt companies that want large up front fees.
Before you consider bankruptcy, or debt settlement as an alternative to bankruptcy, I recommend that you speak to a bankruptcy lawyer as well as a debt settlement company. Get both perspectives, find out the costs of each and then make a decision.