Is Using a Bankruptcy Alternative Less Harmful to Credit?

Every bankruptcy alternative should be explored prior to filing a personal bankruptcy petition. While bankruptcy can provide financial relief, stop creditor harassment, and prevent mortgage lenders from commencing with foreclosure action, bankruptcy might not be the best option. New bankruptcy laws require debtors to reorganize debts under Chapter 13 which can lead to further financial fallout.

To determine which bankruptcy alternative is best suited for your financial needs, it is best to consult with a financial planner. At minimum, utilize the Internet to become educated about each option. Common alternatives to bankruptcy include: budgeting, credit counseling, debt consolidation and debt settlement. Each has a set of pros and cons, so take time to thoroughly understand how these alternatives can help or hurt you.

One of the most affordable and under-utilized bankruptcy alternatives is budgeting. All that is required is a pencil and paper, along with a commitment to spend less than you earn. Many people live paycheck to paycheck and hope they do not encounter unexpected emergency expenses. While some individuals do not earn enough money to meet monthly financial obligations, many people facing bankruptcy arrived there because of poor money management.

In order to get a grasp on spending habits, individuals should commit to documenting every penny spent for a minimum of 30 days. From magazine subscriptions to online purchases and morning lattes to carry-out dinners; every expense must be included. The most effective way to document expenses is to record them in a small notebook or piece of paper. This simple procedure can rapidly reveal unnecessary expenses.

In order to eliminate debts through budgeting, debtors must engage in self-discipline and commit to eliminating frivolous spending habits. Debtors will need to thoroughly review living expenses and spending habits to create a successful get out of debt plan. The Internet is chockfull of personal budgeting tips and information and none of them cost a dime.

Another popular bankruptcy alternative is debt consolidation loans. This option is typically reserved for homeowners with good credit and accrued home equity. Debt consolidation requires homeowners to refinance their home mortgage loan and transfer outstanding debts into the new loan. In some cases, borrowers can obtain cash and use it to pay off credit cards and other outstanding debts.

Careful consideration should be given before entering into debt consolidation loans. Realize you will be placing your home at risk for foreclosure if you default on loan consolidation payments. Additionally, calculate the true cost of the loan. While home equity loans are assessed with much lower interest rates, they are usually repaid over an extended period of time. Compare home equity lines of credit vs. home equity loans to determine if this bankruptcy alternative is worth the risk.

Debt settlement might be a good alternative to bankruptcy for debtors with more than $10,000 in unsecured loans. Debtors are required to negotiate with creditors to reduce loan balances or interest rates. Borrowers can attempt to work directly with each creditor or retain the services of a professional debt settlement company. Companies offering debt settlement services require a start-up fee and monthly service fee until debts are fully repaid. Balances which are written-off will reflect poorly on debtors’ credit reports for up to ten years.

Last, but not least, individuals who do not understand how to manage their money might benefit from credit counseling. Most people that struggle with finances have never learned how to manage money or create a household budget. Credit counselors provide financial education and offer money saving resources. Many credit counseling organizations also assist in creditor negotiations to eliminate late fees and penalties, reduce outstanding balances, or obtain a lower rate of interest.

Personal bankruptcy can adversely affect your credit for years to come. Take time to investigate available bankruptcy alternatives or consult with financial experts. In today’s economy, your credit score can affect your ability to obtain credit, employment, health and life insurance. Do everything possible to improve and protect it.