Bankruptcy can be an effective way to eliminate significant debt. At the same time, the process is time-consuming and often results in a debtor losing ownership of some amount of property. It will also hurt your credit and you will not be able to file again for at least 2-8 years (depending on the type of bankruptcy you filed).
For these reasons, you might want to consider other options first. These include: debt settlement, restructuring and consolidating your debt, selling property, and evaluating your income and expenses.
Debt Settlement
Sometimes simply reaching out to your creditors can resolve your debt situation. They may be willing to negotiate for a payment plan that will work for you. This might be in the form of lower interest rates or an increase in the amount of time that you have to pay off the debt.
Your creditors may also be amenable to accepting a lower lump sum payment to discharge the debt. But, this may require aggressive negotiation, so it can be helpful to have an attorney or credit counseling agency on your side.
Now, it’s important to note that, in some cases, a forgiven debt is considered taxable income. There are exceptions to this rule, but you should be aware of this possibility so that you aren’t surprised by a tax bill after your debt is canceled.
Restructure and Consolidate Your Debt
If your debt stems from a home mortgage, you may be able to obtain a lower rate through refinancing. You could also request a restructuring of the payments to allow you to pack back the loan over a longer period of time. If the lender agrees, this would result in lower monthly payments and help you avoid the need to file for bankruptcy.
Also, if you have built up any equity in your home, you might look into a home equity line of credit. These are often issued with lower interest rates than other debt options, such as credit cards. On that note, if you have credit card debt you could explore applying for cards with lower interest rates. However, make sure that you can transfer your balance without a penalty.
Sell Property and Downsize
Although not always the most desirable alternative, you could consider selling property you own to reduce or pay off what you owe. Here, you would keep complete control over what is sold and what is kept.
This is important because, in a bankruptcy, the trustee gets to decide what assets are used to satisfy your creditors. While some property is considered “exempt” from this process, you always have more control over what is sold if you exercise this option outside of bankruptcy.
With that in mind, one thing to consider for many debtors that are homeowners is downsizing to a smaller residence.
Evaluate Your Income and Expenses
Finally, it’s always a good idea to take note of where you are spending the bulk of your money and using credit. Creating a budget and tallying income and expenses is an important part of this process. There are free apps that can make this step straightforward and easy.
Once you have an accurate picture of your financial situation you might consider ways that you can increase your income. This might include developing a side hustle, taking a part-time job, or asking for a promotion.