Avoid Bankruptcy – 4 Bankruptcy Alternatives
A review of bankruptcy alternatives and options
Avoid bankruptcy? How did we get here?
You’re not a bad person. Of course you want to avoid bankruptcy. You didn’t choose this path. Life happens. Maybe it’s COVID, the disaster which was the year 2020, a job loss, divorce, an injury, or more than one of these. Regardless, this wasn’t the way it was supposed to be. And the one thing you know for sure is you want to avoid bankruptcy.
As a Los Angeles bankruptcy attorney for about twenty years, I get it. No one wants to do this. In fact, it’s the person who is excited and eager to meet with me to file bankruptcy that stands out as atypical. Most everyone wants to avoid bankruptcy.
There’s apprehension, fear, feelings of guilt and failure. Parents raise us to never quit, society shames us, and there’s a stigma with the b-word (someone hits the black area on the Wheel of Fortune and the crowd goes “aw”). You don’t want bankruptcy. There must be some bankruptcy alternative. There has to be a better way.
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Let’s go over some options: bankruptcy alternatives
There are always options. None of them might be pretty, and all may be imperfect, but there are always options.
Some bankruptcy alternatives may not apply to everyone. For example, not everyone has a house they can refi, or a rich uncle to borrow money from to pay back debt. So, let’s look at this from the big picture: to tackle your debt, there are pretty much two categories of bankruptcy alternatives. The first is to cash out something you’ve got to pay the debt off, and the other is to make payments on the debt using your income.
Put differently, one is to lose something and keep your income, the other is keep everything and give up some income.
Before we start a quick note: all of these options have pros and cons. All have flaws, and maybe your mind will go right to the bad part and rule it out immediately. That’s not fair to yourself. Unless a fairy godmother unexpectedly appears with a pot of gold, there’s always a downside.
The challenge is to acknowledge it, then see the upside of a given option. And then, as unemotionally as you can, try to weigh each one, given your priorities (five people can reach five different results based upon how they weigh things, and their own priorities). So, bring your uniqueness to this, start and identify your priority (or priorities) and then assess each option with how in line it is with those.
1. Stay Current
It may sound obvious, but it’s an option. Stay current on your debt, and you avoid bankruptcy. It might be the option you’re doing now. Or likely is an option you were doing at some point before. And clearly, staying current on your debt’s minimum payments is a pro, since it helps your FICO score and feels good since you’re on-time.
But there’s a con to keeping up on the bills. You may not think of it, but there’s a bad part to staying current and paying your bills on time. And it’s the same exact thing that brought to this website when searching “avoid bankruptcy” or “bankruptcy alternatives.” The bad part is, it’s expensive to pay these minimums each month, or maybe you can no longer afford it due to job loss, cut in hours, or divorce. The stress of making the cards’ minimum payments each month is a negative, particularly when you can use those hundreds of dollars for food, rent, or both.
2. Stop Paying
Now this really doesn’t seem like an option. But it is. For a while. It may go against every fiber of your being, but not paying your credit cards each month is a bankruptcy alternative in the realm of possibilities. The cons come screaming at us: you’re not keeping your word and doing what you said you would (paying part of your balance per the terms of the cardmember agreement). You’ll get creditor harassment. Angry phone calls. Scary and threatening notices in the mail. And all of these are of course bad.
However, not paying the credit card minimum payments each month also has a positive side. Suddenly, there’s extra money. And if you’re reading this page, you probably need that money. Not for vacations and luxuries, but for basics like health insurance and gasoline. At some point, we prioritize our spending, realizing that each dollar of income is precious. In the hierarchy of expenditures, housing and a roof over our head comes before the Visa bill (or it should).
This isn’t suggested lightly, and is not something we’re even recommending. But it is an option. The short-term relief of having extra cash to pay for necessities will, with time, turn into long-term additional stress of collection calls and harassment. Even worse, given enough time, credit cards and collectors can take you to court for your unpaid balances and sue you with a lawsuit.
And a lawsuit summons and complaint, ignored and given enough time, can turn into a court judgment. Then, also given time, a judgment can turn into a wage garnishment on a paycheck, a lien on a house, or empty your bank accounts with a bank levy. These are all bad results, extremely bad. The good news is, credit cards aren’t going to sue someone for missing a credit card payment, or even three. There can be a short-term benefit to not paying, but let’s be clear: it’s not a long-term solution (or not one most people would feel comfortable with).
3. Negotiate Your Debts
A third option to avoid bankruptcy is to negotiate your debts, with some sort of debt settlement. We’ve all seen commercials on TV for debt settlement, usually with the IRS, and have heard that debts can be bought back for pennies on the dollar. And who wouldn’t want to get a 97% discount on their debt as a bankruptcy alternative?
The truth is, you can get a discount on your debt, and negotiation is indeed an option. But you’re not going to get it for pennies, or likely, even dimes on the dollar. Realistically, if done right, you can do debt negotiation for closer to quarters on the dollar. That’s the reality.
Once we’re clear about what the likely outcome is, let’s examine the pros and cons of debt negotiation and settlement. First, the upside is obvious: saving money. If you could save, just to pick a number, 40% on all your credit card balances, we can agree that’s a good thing. And you avoid bankruptcy.
However, there are, like all things, drawbacks with debt settlement. First, the credit card companies are less likely to accept payments if they’re giving you a discount and cutting a deal on the debt. That is, they’re going to want lump sums of money for the agreed-upon settlement. So, let’s say you’re trying to settle debt of $40,000 in balances. You should be prepared to have about $20,000-$30,000 ready to buy it back cheaper.
You can settle one or two accounts for a few thousand dollars, but when an unpaid account gives you a lawsuit, it won’t matter that you spent money on a different card. You should be prepared to settle all accounts to avoid the bad things in option 2 above.
Second, negotiating debts takes time. There’s typically a lot of back-and-forth, and debt haggling and rejection. Your first offer from a credit card in debt negotiation is likely to be “the full amount.” To which you gulp, (or laugh), and then hang up the phone in dejection. However, with persistence, skill, and of course, the ability and resources to pay a lump sum settlement, it’s possible. (and yes, we’ve successfully arranged for many debt settlements, contact us if you’re interested).
Third, a debt settlement can result in a 1099 for tax purposes. If you’re going to shave $10,000 of a credit card bill, that’s potentially $10,000 of income to be reported to the IRS and FTB for tax purposes next year. Hooray, you avoid bankruptcy, but now you owe the government a debt you may not be able to afford, and can’t discharge in bankruptcy. Unless you budget right for this, you can end up with a new debt of thousands of dollars to the IRS. And that’s bad. Talk to your tax professional for more details on debt forgiveness resulting in tax consequences.
4. Debt Consolidation Program
Another way to avoid bankruptcy is to enter into a debt consolidation program. You know what this is, we’ve all seen the ads. “Avoid bankruptcy and pay $20 a month for all your bills!” It sounds too good to be true, because it probably is. It sounds wonderful until you understand how it works, or doesn’t. But it does avoid bankruptcy.
The problem is, these companies get your payments and don’t distribute them. They hold onto them, and then try to negotiate your debts for a debt settlement. Because you’re paying something so incredibly low (pro!), it takes forever to get enough to settle an account, while the others get unpaid (con). And this typically results in a lawsuit. To which you ask the middleman company, what will you do to stop the law suit, and they say they can’t, you have to go file bankruptcy.
So in trying to avoid bankruptcy, the debt consolidation company will suggest to stop the lawsuit that their “solution” caused you must file bankruptcy.
And if you’re going to investigate consolidating your debt (and you should at least research it), you should ask the company how this affects your credit. The answer is, negatively. Because again, the accounts won’t be “paid as agreed” but late or, more likely, delinquent and unpaid.
A final “con” is that these companies rarely get you to the finish line, because the credit card lawsuit always comes first. Debt consolidation success rate is very, very low.
Summing up bankruptcy alternatives
So there you have it: the different ways to avoid bankruptcy. None of them are perfect, and maybe few of them are even possible, given your current financial situation. And of course bankruptcy has its own pros (e.g.: debt forgiveness) and cons (e.g.: bad credit). In short, as we started off with, the options all boil down into two basic categories.
Will I Ever Get Credit Again? Credit After Bankruptcy
One of the biggest reasons to avoid bankruptcy is the hit on one’s credit. Is there credit after bankruptcy? A typical Chapter 7 bankruptcy will show up on a credit report for 10 years. This seems like an eternity to be without credit. We’ve been conditioned to feel we need a good credit score to function in our society.
But, yes, Virginia, there is credit after bankruptcy. And you don’t have to wait ten years to rebuilt and have a good FICO score.
What happens is this: once there’s a bankruptcy, it goes on your credit report. But then something else happens: credit cards start reaching out to you to solicit you to become their customers and apply for a new credit card. High interest rates, maybe even a small security deposit is needed. But the point is, the chances to rebuild start almost immediately.
Accept just one, maybe two, of these offers. And start using the credit cards, but in a very managed, measured, and strategic manner. Charge a tank of gas, pay it off. Maybe some groceries, pay half of it off, then the other half the following month. Something magical happens: you’re establishing credit after bankruptcy. Your FICO score goes back up. Within two years, your credit can be higher than it is today.
Yes, the bankruptcy is there for many years. Credit, though, it all about what are you doing lately. And lately, you’re going to be responsible and controlling your accounts. And, as counter-intuitive as it may seem, you can have better credit after bankruptcy than you do before it.
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We know this is something you don’t want to do. Contact us, and let’s set up a time to go over options and see how best to avoid bankruptcy.