Debt is created when our spending exceeds our income. For many consumers, incurring and trying to pay off debt is a way of life. Eventually, this habit leads to more debt being accrued than being paid each month. When you’ve gotten to this point, there seems to be no option but bankruptcy.
In some cases, this is true, but bankruptcy is a big decision that will remain on your credit for up to 10 years. Before you decide bankruptcy is the only option for you, consider these alternatives. You may be able to make a plan that will work for you.
Make more and spend less. If your bills are overwhelming but not creating an immediate financial crisis, you may be able to tighten your budget by cutting out spending, like brown bagging lunch instead of eating out, cutting the cable, canceling phone services and more. Working extra hours at your current job or taking a second job can increase the money coming in and make it easier to pay those bills. Selling off as many possessions as you are willing and applying that money to paying off debt will help you reach goals faster.
Consolidate your debts. You can’t borrow your way out of debt, but you may be able to take out a loan, generally secured by your house, that will replace your outstanding loans. Since the loan is secured, it will generally have a lower interest rate which results in lower payments. Making one payment per month, rather than several is easier for many people to manage. Be aware that by doing this, you are converting unsecured debt, which may be eliminated in a bankruptcy, with debt that cannot be eliminates. If you fail to make your payments, the lender can seize your house.
Contact your creditors directly. Calling a creditor and asking for a revised payment plan may help you out. This can include asking for a lower interest rate, longer terms, forgiveness of a portion of the debt, or a combination of the three. Some creditors will be willing to work with you, because it means they will still receive at least a portion of their money, rather than risk losing it all if you declare bankruptcy.
Settle your debt. Debt settlement agencies work with your creditors to reduce the total amount you will have to repay. When done properly, this can be a good solution and help you avoid bankruptcy. Once again it’s important to do your homework. Some agencies may not be totally upfront about their practices and end up costing you more and damaging your credit further. Do be aware that your credit continues to be poor while working with a settlement agency and won’t begin to improve at the earliest until after all the debts are settled.
Read this list again. If you’ve read this list and thought, “That won’t work for me,” take the time to read it again and really consider each of the options. Be open to each possibility and think about how each would impact your life. You may find that a combination of these suggestions will be the most workable solution for you.