What are the three alternatives to filing bankruptcy? 

When you’re in debt, you need to review all options. This can be difficult, though, since most attorneys are not certified credit counselors or certified debt arbitrators. When the only tool you have is a hammer, everything looks like a nail! For you to be SURE you have the right solution to your debt problems, you need to explore alternatives to bankruptcy, in addition your options in chapter 7 and chapter 13. But, how can you do this?

Most of the time, you’ll need to make an appointment with a credit counselor, and a debt arbitrator, and a debt management company to get the specific details on these different non-bankruptcy alternatives. Why all three?
Because they are all different, and it’s not likely you’ll get the kind of detailed and specific information you need about all three options from a single individual.

When exploring your alternatives to bankruptcy, you’ll probably discover that whoever you talk to, they’ll recommend the program that they sell. And, they won’t be able to give you a fair comparison of their program with the others.

There are three main alternatives to bankruptcy. Credit counseling, debt settlement or debt arbitration, and debt management plans all have benefits and drawbacks. Lets take a look at the main features of each of these alternatives to bankruptcy.

Credit counseling vs. Bankruptcy

Credit counseling is generally a free service, designed to help you better understand your budget and spending habits. Credit counselors are trained to help you see what you are overlooking. Spending unwisely, paying bills in a way that is not financially helpful to you, and understanding your relationship with money are all topics of discussion with credit counselors.

While you can pay your debts down more quickly with the help of credit counseling, it is considered the least effective alternative to bankruptcy.  As I am a certified credit counselor, I can confidently tell you that it is helpful, but not adequate to address serious financial stress in most cases.

Debt Management Plans vs. Bankruptcy

There are more debt management plans available today than ever before.  Most of these are online, they have no local offices. One local office I have worked with for over 30 years is Graceworks. They’ve developed relationships with many creditors and can usually give you an accurate prediction of the savings they can obtain for you, and what your monthly payment might be.

In a debt management plan, you will pay these firms to negotiate with your creditors to attempt to get either a reduction in the amount you owe, or your interest rate, or both. Not all creditors will agree to participate. Car creditors and home loans will not. Some credit cards, like american express, routinely refuse to participate. You cannot force a creditor to cooperate. This alternative to bankruptcy is more effective than credit counseling, but less powerful than bankruptcy.

Debt Settlement vs Bankruptcy

Debt Settlement is a more aggressive form of non-bankruptcy debt relief.  In this program, you will pay monthly into the trust fund of the debt settlement company, to build up a settlement fund. Neither you nor the settlement company will make any payments to the creditors you select to put into the program. Again, not all creditors will participate, but in debt settlement, you are attempting to FORCE the creditor to take less than you owe, or else you will refuse to pay.

Debt settlement can be effective to obtain reduction in debt up to 50% or more.  But, as an alternative to bankruptcy, it carries the most risk.  Debt settlement often results in the consumer getting sued. This creates a serious problem for the consumer. These debt settlement companies are not lawyers, and cannot represent their clients in court. In fact, they cannot even help with legal advice! These alternatives to bankruptcy often fail, costing thousands of dollars and years of wasted time.

Frequently, clients come to me with lawsuits. They were in debt settlement programs, sometimes for years. They are really upset when I explain to them that they qualify for a chapter 7. These clients waste thousands of dollar and sometimes make payments for years only to finally file bankruptcy.  Many of these client should NEVER have been in any payment program in the first place. The qualified for NO payment, in chapter 7.

Tax consequences for alternatives to bankruptcy

Any time a creditor forgives any debt, either principal or interest, they will send you a 1099 at the end of the year. You are normally required to pay tax on any debt that is “written off” by the creditor. When evaluating the benefit of alternatives to bankruptcy, remember that there is a potential tax consequence.

We offer a free consultation to discuss discharge of tax and all of your debt.

And we can help you truly and fairly evaluate your alternatives to bankruptcy.

Call (937) 748-1749 (Dayton/Springboro) or (614) 852-4488 (Columbus).

Call today, you’ll sleep better tonight.