Alternatives to Bankruptcy

  • Talk with your creditors. Your creditors may be willing to work out a modified payment plan. A creditor is not legally bound to follow through with the plan even if the creditor agrees to the plan. If you have a lump sum of cash you may try to negotiate an offer and compromise with all your creditors. The balance of the debt owed to each creditor will often be reflected on your credit record as a charge off. A charge off has a negative impact on your credit record. Make sure to investigate how settling with creditors will be reflected on your credit report.
  • Contact a credit counseling service. Credit counseling services are private or public organizations that work with you and your creditors to develop debt repayment plans. Such plans may require an up-front fee. Also, the plans require you to deposit money each month with the counseling service. The service then pays your creditors.Some nonprofit organizations charge little or nothing for their services. The creditors can choose to withdraw from acceptance of the terms of the repayment plan at anytime. If your debts are already in the hands of collection agencies, it may be too late to negotiate a repayment plan through credit counseling.
  • Obtaining a second mortgage or home equity line of credit is another alternative to bankruptcy. It is an alternative that you should be cautious of taking. When you consolidate debt with a second mortgage or home equity line of credit, you convert unsecured debt to secured debt. Under the bankruptcy law you can exempt from the bankruptcy estate, depending on each state, a certain amount of equity in your home.If you take out a second mortgage or home equity line of credit you create a secured debt which would not be discharged in bankruptcy with one exception. If the appraised value of your home is less than the amount of the first mortgage, then you may be able to discharge the amount of the second mortgage.

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