Bankruptcy: What Are My Alternatives?

As vulnerable as it feels to owe large sums of money to various institutions, why are some debtors content to exist in their deficit yet terrified of “severe” options like declaring bankruptcy?

Two common reasons it boils down to fear of embarrassment and surrendering control of finances.

Because as out of control as financial affairs have to get for bankruptcy to be on the table, living in pre-debt relief feels like we’re still steering the ship. With bankruptcy, there’s a courtroom, lawyers, filing costs, a formal liquidation or court-ordered repayment plan—things get serious and a debtor must obey.

If you need serious help with debt but have envisioned — and shuttered at— a courtroom scene, a judge and all the potential social avoidant situations that could arise, consider these alternative routes.

DIY Repayment Strategy

Trying to avoid bankruptcy usually involves working with a company that provides a particular type of debt-assistance service, but why jump to conclusions if you can figure out a way to make the math work in your favor? Repayment plans like the debt avalanche, which advises to pay minimums on all debts and allocate the rest to the highest interest rate, can save a lot of money.

But if a plan provides motivational support, that’s good, too.

The debt snowball approach works in reverse of the avalanche method. Debtors pay minimums on all their balances but focus what they have left on their lowest overall balance. This strategy might not save money in interest, but it gives the sense of progress as the number of balances slowly diminish. You can also incorporate a variety of approaches, like the debt snowflake strategy, which focuses on a small-but-frequent practice of contributing extra money to debt to lessen one-time payment amounts and accelerate momentum.

Debt Management

Debt management companies charge modest monthly fees in exchange for momentarily taking the reins of your financial life. Enrolling in a debt management program can result in lower interest rates and reduced payment amounts. Good programs will also provide education to inform future positive behavior. And to participate, you only need to make one monthly payment. The management company distributes it to your creditors from there. However, you should know that enrolling in a debt management program may extend payment length, hurt credit and impact future borrowing ability.

Debt Consolidation

Debt consolidation, like the first two alternatives, won’t save you any money on your principal balance. But a personal loan, balance transfer, or home equity loan could simplify your monthly repayments, and potentially, lower your overall interest rate.

Considering that the national annual percentage on interest-bearing accounts is over 15 percent, and plenty of credit card users accrue balances with APRs as high as 25 percent, it’s a safe bet to assume consolidation would at least save some money on interest—in addition to providing the convenience of only worrying about one debt to repay. But credit scores will take a dive because old debt will be closed and a lot of new debt, viewed less favorably by creditors, will take its place.

Debt Settlement

People choose to declare bankruptcy because they want their debts forgiven. Debt settlement produces a similar end result but through widely different means. Instead of filing a bankruptcy motion, hiring an attorney, appearing in court, etc., — you’ll hire a company that’ll negotiate with your creditors to settle debts for lower lump-sum amounts.

Companies like Freedom Debt Relief only collect fees when a debtor has agreed to pay a debt at a reduced amount. While debt settlement may impact a credit score, it may help you get out of debt faster. This is because for the program to work, a debtor needs to have fallen behind and given creditors reason to assume a lower repayment offer is better than no offer (i.e., bankruptcy).

Borrowing Money from Family, Close Friends

Steering clear of bankruptcy, especially if for fear of public image, is awfully conflicting if the people in your life are in a position to help. Evaluate your current options, including bankruptcy, and then ask yourself how bad it would be to ask loved ones to help dig you out via a no-interest loan and modest repayment plan. Even if nobody is in a position to help, just airing your financial turmoil can alleviate some of your anxiety and stress.