Alternatives to Filing Bankruptcy in Ohio
In the US, there were 452,990 bankruptcies filed in 2023, compared with 387,721 cases in the previous year. [1] While in Ohio, in 2023, the number was 21,140 – out of these, 15,587 were filed under Chapter 7 and 5,485 under Chapter 13. [2]
When you are buried in credit card debt, medical bills, or other financial obligations, it is common to feel worried and uncertain about your future. This feeling is even worse when you do not know where to find help. Bankruptcy might seem like the only option, but it is not always the best solution for everyone. Sometimes, other strategies can work better.
Why Might Someone Avoid Bankruptcy?
Bankruptcy can quickly solve financial issues for some, but it can be harmful for others. It is good to think about both the good and bad sides of bankruptcy to see if another approach might be better for you. Here are some reasons people decide against filing for bankruptcy:
- Bankruptcy makes your debt problems public, so anyone can see them.
- Private employers can deny job offers because of bankruptcy, especially in jobs involving money or sensitive information.
- Bankruptcy puts your finances under the control of a judge.
- A bankruptcy can remain on your credit report for up to ten years.
- Many people who file are forced into Chapter 13 bankruptcy, which involves a court-supervised payment plan, because they make too much for Chapter 7. Less than half of Chapter 13 filers finish their plans.
- Chapter 13 bankruptcy can take up to five years to complete, with tough monthly payments.
- Bankruptcy can cause social or professional embarrassment due to the stigma it carries.
- Chapter 7 bankruptcy requires you to give up certain property, while Chapter 13 requires you to surrender part of your income for several years.
- Filing for bankruptcy is not free. You will have to pay court fees, and most people also pay attorney fees, even if they do not get financial relief. [3]
What to Do When You Cannot Pay Your Bills
Financial troubles can be frightening, and it is easy to make quick, rash decisions. But small, short-term solutions might be enough to help you recover.
As soon as you realize you are in trouble, contact your creditors and ask about a credit card hardship program. Explain that you are having trouble making payments and why. Tell them what you are doing to solve the problem and what you need from them. There are a few options your creditor may make available to you.
- Forbearance: With forbearance, you are allowed to skip payments or make smaller payments for a limited time. When this period ends, you will need to pay the missed payments and interest. (§ 682.211) [4]
- Deferment: Deferment is like forbearance, but you do not have to catch up on missed payments. When the deferment ends, you simply start making payments again, with missed payments and interest added to your loan balance. (§ 685.204) [5]
- Modification: The creditor may change the terms of your agreement (§ 1.1001-3 Modification). [6] This could mean a lower interest rate, smaller payment, waived fees, or reduced balance.
For credit card accounts, you might lose the ability to use your card, or your account could be closed. The issuer may give you fixed monthly payments until you clear your balance. Your history with the creditor can affect the help you get. If you have been making regular payments until now, they might be more willing to assist.
More Alternatives to Bankruptcy
When you want to escape debt and regain control of your finances without bankruptcy, there are several options. They are as follows:
1. Avalanche or snowball debt repayment
Check your budget for ways to cut spending and put more money toward debt. (If you do not have a budget, make one.) Get your family to help find ways to save money.
With the avalanche or snowball method, you focus extra money on one debt while making minimum payments on the rest.
Here is how it works:
- For the avalanche, list your debts by interest rate, from highest to lowest. Pay off the highest rate first, then the next, and so on.
- For the snowball, list debts by balance, from smallest to largest. Pay off the smallest balance first, then the next, and so on.
- Keep making minimum payments on all other debts while paying as much as possible on the targeted one.
- Each time you pay off a debt, you have more money to put toward the next one. [3]
The avalanche method might save you money by paying off high-interest debts first. But many people prefer the snowball method because it provides quicker wins, which can be motivating. [3]
2. Increase your income
Find ways to earn more money and put it toward reducing debt. Work extra hours if you get overtime pay. Take a part-time job or start a side business. Websites like Fiverr connect people looking for work with those willing to pay for help.
Post signs in your neighborhood to offer dog walking. Pet-sit, clean houses, or run errands.
You might also look for a better-paying job. Try to increase your income with higher pay by not switching jobs, but staying with the same employer.
3. Sell things
Jumpstart your debt repayment by selling things you do not need. It can be motivating to pay off a chunk of debt when starting fresh. Facebook Marketplace, eBay, Poshmark, OfferUp, and Craigslist are good options for selling items quickly.
If you own something valuable, sell it, replace it with a cheaper version, and use the difference to pay down debt.
Ways to Resolve Your Debt
There are some structured provisions that can help you resolve your debt as follows:
Consolidate Debt
Debt consolidation involves taking out a new loan to pay off existing debt. It is only worthwhile if the new loan has better terms than the current ones. You might also get a lower monthly payment than what you are currently paying. (Loan offers depend on underwriting conditions.) [3] [7]
Most people use collateral and pay about 10%-12% for a debt consolidation loan, which is much lower than the 25% interest rate they might pay to credit card companies. This means one payment to one place, making it cheaper and easier to manage. It can save a lot of money and looks like a great deal.
Three main types of debt consolidation loans are:
- Personal loans can help you consolidate debt with a fixed interest rate that might be lower than your credit card rates. However, your monthly payment might increase since personal loan payments are designed to clear balances in a few years. Credit card minimum payments, on the other hand, can keep you in debt for decades. [7]
- Home equity loans or lines of credit often have the lowest interest rates because you use your home as collateral. This makes the loan less risky for lenders. Home equity loans also have smaller monthly payments compared to personal loans because you get more time to repay. But stretching out repayment can cost more in the long run. Repay home equity loans as fast as you can. [3] [7]
- Balance transfer credit cards with zero interest can help you reduce balances quickly during the interest-free period if you qualify. You will pay a fee for each transfer, so calculate the interest savings and make sure they are higher than the fee. This strategy is risky and best used once. If you pay off cards with a balance transfer and then rack up balances again, you will be in worse shape. [3] [7]
Debt consolidation can backfire if you run up your account balances while paying off the consolidation loan. Consider closing credit card accounts after paying them off with the loan.
Debt Management Plan (DMP)
Debt management programs help reduce interest rates on credit cards to around 8%, making it easier for people to manage their finances. Usually, credit card interest rates are about 16.7%, but if you miss payments, they can go up to 20%-30%. For example, if you owe $5,000 and lower the interest rate from 25% to 8%, your monthly interest payment drops from $105 to $33, giving you an extra $72 to pay off the debt faster.
Counselors from nonprofit agencies look at your income and expenses to create a monthly payment plan that fits your budget.
In Ohio, these programs are helpful because your credit score does not matter for signing up, and you can be debt-free in 3-5 years if you make your payments on time. If you leave the program, the higher interest rates come back.
Debt management plans from nonprofit agencies cover unsecured debts like credit cards, but not secured debts like houses or cars. This program is good for anyone in Ohio with high-interest credit card debt, as it lowers interest rates and helps pay off the debt over time. [7]
Debt Settlement
Debt settlement involves getting creditors to accept less than the full balance as payment. Debt settlement lets a person pay off their debt for less than the total amount owed. Typically, this involves making a lump-sum payment after saving money for 2-3 years in an escrow account.
Negotiations with creditors are done during this period to get them to agree to the reduced payment plan. While this option can be appealing, it is a slow process and can hurt your credit report for seven years. Additionally, the IRS treats forgiven debt over $600 as taxable income, which must be reported. [7]
Debt resolution usually has better outcomes than Chapter 13 bankruptcy. While both can affect credit scores, research shows that credit scores recover faster after debt resolution. It also takes less time than Chapter 13 bankruptcy or a DMP (24-48 months versus 36-60 months). Plus, people using debt resolution are less likely to need it again, unlike many Chapter 13 filers who end up filing more than once. [7]
Anyone in Ohio with large amounts of debt who is looking for a way out without declaring bankruptcy might find this option worth considering. For example, if you owe $50,000 in credit card debt, reducing it to $25,000 can be very appealing, though the process can be lengthy and complex. [7]
Take Away
Dealing with debt can feel pretty tough, and sometimes it might seem like filing for bankruptcy is the only way out. But there are actually many options you can look into. By checking out these alternatives, you might find one that suits your needs better and helps you avoid the lasting effects of bankruptcy. It’s about finding the right fit for your situation and goals, which can make a big difference.
Each option has its own pros and cons, so it’s smart to weigh them carefully. Talking to a financial advisor or a credit counseling service can give you advice that fits your situation. Exploring these strategies can help you tackle debt in a way that is less damaging to your future.
If you want to explore your alternatives to bankruptcy in Ohio, call Richard West today.
FAQs
There are various ways to handle debt besides declaring bankruptcy. You might consider a debt management plan, debt settlement, or a debt consolidation loan. These strategies can help you manage or reduce your debt without the need for bankruptcy.
Filing for bankruptcy can make your financial issues public, potentially affect job opportunities, and place your finances under judicial oversight. It also remains on your credit report for up to ten years and can carry social stigma and high costs.
You should try contacting your creditors to discuss a credit card hardship program. They might offer solutions like forbearance, deferment, or modifying your loan terms to make payments easier.
The avalanche method involves paying off debts with the highest interest rates first. The snowball method focuses on paying off the smallest balances first. Both strategies help reduce debt over time.
Yes, you can repay at least a part of your debt by selling items. Platforms like Facebook Marketplace, eBay, and Craigslist can help you sell things quickly.
Debt consolidation involves taking out a new loan to pay off multiple debts, usually at a lower interest rate. This makes payments simpler and can save money, but you need to qualify for the loan and avoid creating new debt.
A DMP lowers interest rates on credit cards to about 8%, making payments more manageable. It requires working with a nonprofit credit counseling agency to create an affordable monthly payment plan.
Debt settlement means negotiating with creditors to pay off a debt for less than what you owe, usually through a lump-sum payment. While it can reduce debt, it takes time, can hurt your credit score, and involves fees and taxes on forgiven debt.
Sources:
[1] Bankruptcy Filings Rise 16.8 Percent. (2024b, January 26). United States Courts. https://www.uscourts.gov/news/2024/01/26/bankruptcy-filings-rise-168-percent
[2] Bankruptcy Filing Trends in Ohio. (2024). https://abi-org.s3.amazonaws.com/Newsroom/State_Filing_Trends/2024/Filing_Trends_Ohio.pdf
[3] How to get rid of debt without filing bankruptcy | Achieve. (n.d.). Achieve. https://www.achieve.com/learn/resolve-debt/how-to-get-rid-of-debt-without-filing-bankruptcy
[4] 34 CFR § 682.211 – Forbearance. (n.d.). LII / Legal Information Institute. https://www.law.cornell.edu/cfr/text/34/682.211
[5] 34 CFR § 685.204 – Deferment. (n.d.). LII / Legal Information Institute. https://www.law.cornell.edu/cfr/text/34/685.204
[6] 26 CFR § 1.1001-3 – Modifications of debt instruments. (n.d.). LII / Legal Information Institute. https://www.law.cornell.edu/cfr/text/26/1.1001-3
[7] How To Get Out of Debt. (2024, April 22). Consumer Advice. https://consumer.ftc.gov/articles/how-get-out-debt
