Alternatives to Bankruptcy

Before filing bankruptcy a bankruptcy case, you should consider available alternatives to actually filing. Your first step should be to request credit reports from Equifax, Experian and TransUnion. These companies are the countries three largest credit bureaus and one or more of them will have you on file. Credit reports will identify your creditors and the amounts owed. Sometimes, when you discover exactly what you owe, your total debt situation may not seem so terrible.

Can I make Informal Payment Plans With My Creditors?

Once you know what you owe, you may want to create your own payment plan whereby you set up payment plans with one or more of your creditors. You will find that you can strike a better deal if you have cash. If your creditors agree to a payment plan, you should confirm your understanding in writing. As part of your negotiations, try to convince the creditors to delete unfavorable marks on your credit reports. If you are able to work out a payment plan, do your best to stick to it.

Creditors may want you to sign "consent judgments" or other legal papers spelling out the terms of your agreement to pay. Clark & Washington recommends that you avoid signing any contract or consent judgments with creditors without first speaking with an attorney since the paperwork you sign could contain admissions of certain facts or could waive rights.

What about Consumer Credit Counseling?

Another popular alternative to bankruptcy is Consumer Credit Counseling, a nonprofit organization financed by MasterCard and Visa. If your debt is not too overwhelming and you have decent income, CCCS may be able to create a payment plan that allows you to pay back your debts over time. CCCS has been approved as a credit counseling organization that offers pre-bankruptcy credit counseling to potential bankruptcy filers.

While CCCS is an excellent organization, they usually cannot help if you are behind on your car or house payment. They also may not be able to help if you owe credit card companies not affiliated with MasterCard or Visa. CCCS was created by credit card companies for the purpose of helping you in paying back all of your credit card debt. CCCS counselors are not attorneys and they are not required to discuss with you bankruptcy or other options.

What About Private Debt Counseling Companies?

There are other "credit counseling services" you may see in the phone book, advertised on a telephone pole or advertised through unsolicited mail. Some of these services offer to clear your credit file or to get you a new credit file. Often private credit counseling companies demand a large up front retainer and they promise more than they can deliver.  Recently several of these companies have been in the news when they have been sued by a State Attorney General for consumer fraud. Usually, these organizations are rip-offs and you should avoid them.

Do not be taken in by the term “non-profit” as meaning that the credit counseling company is performing a public service. Frequently a private debt counseling agency will operate as a “non-profit” while the owners profit handsomely through the “management” company that contracts to operate the non-profit. If you are considering using a private debt management company, be sure to check out its reputation with the Better Business Bureau and the Georgia State Department of Consumer Affairs.

Finally, you should realize that it will take a great deal of both discipline and money to pay off substantial credit card debt. For example, if you have $10,000 in credit card debt and you want to pay it off in two years, you will need to pay $520 per month; in three years, you will need $382 per month. If you wanted to pay off the $10,000 at $200 per month, it would take you over ten years. Credit card debt is especially stubborn to eliminate because of the high (18% to 20%) interest that keeps adding up.

Will Budget Reduction Plans Solve My Debt Problems

A visit to your local bookstore will reveal a number of well written guidebooks that offer help to debt burdened individuals. If your debt is not totally out of control, and if you have the discipline to modify your lifestyle (i.e. using public transportation instead of a private car), and if you are not facing lawsuit threats, then some of these programs can work.

The practical problem with budget based debt reduction plans has to do with time (your creditors will not hold off indefinitely) and lifestyle (are you really willing to significantly change how you live).

There is certainly no harm in trying a budget based debt reduction plan and if you do end up filing the changes in your budget will most likely be bankruptcy friendly.