We’re living in a time of great uncertainty, and a lot of people are having trouble paying all their bills on time. If you’re one of those people, there’s no shame in it! Financial troubles can get anyone down, even millionaires.
If your financial woes have you thinking about bankruptcy, you have some important decisions to make. Before you file the paperwork in court, it's wise to consider alternatives that may help you keep your credit intact and give you more financial opportunities in the future.
But first, let’s acknowledge some of the problems that come with being in a lot of debt. As you’re probably familiar, having multiple debts can mean being bothered by your creditors (the people to whom you owe money) with phone calls, email, and snail mail. It can also mean that you’ve maxed out your lines of credit, leaving you no options for emergencies. In the most extreme cases, big debts can also mean that your creditors take money right out of your paycheck or tax return before you even see it (a practice known as garnishment).
If you’re ready for all this to stop so you can regain control of your money, consider the following options.
Sometimes, the debts that get away from us can be for small things like unexpected deferred interest charges on store credit cards. Other times, they could be for seemingly unavoidable expenses such as car payments or emergency medical bills.
Regardless of how you got into debt, you may be able to get a break from your creditors by getting on a monthly repayment plan.
If this looks like it might be an option for you, keep in mind that you could find yourself in big trouble if you miss even one payment. If you had chosen a bankruptcy, that might not be the case because you would have legal protections against future attempts to collect those debts.
If your creditors don’t seem interested in a repayment plan, you might be able to get a break by offering to pay a lump sum that is less than the total amount you owe. Your creditor might be willing to forgive the entire debt and let you get on with your life. You can even ask them to remove any negative marks on your credit report if you pay on the spot (but they don’t have any legal obligation to do so).
One way to get a handle on overdue debts is by getting a new loan. It seems counterintuitive to take on more debt at this point—we know—but stick with us.
If you get a new loan, you could use the funds to pay off all your outstanding accounts. Then, you’d have just one monthly payment instead of several. In addition, you might benefit from a lower overall interest rate.
Another cool benefit of debt consolidation versus bankruptcy is that when you get a new loan, your financial troubles stay out of the public record and have less impact on your ability to get credit cards or a home loan in the future. With a bankruptcy, on the other hand, records are filed in public courts (and those records are very difficult to remove), and the bankruptcy stays on your credit report for several years.
We should note that some people have been abused by pie-in-the-sky promises from dishonest debt consolidation lenders. The wrong consolidation loan could extend your repayment period and increase your total cost over time. Use extreme caution, and make sure you read (and understand) all the disclosures and paperwork before you finalize any deal.
We can’t promise that credit counseling would be any more fun than, say, marriage counseling or physical therapy. But just like those other interventions, credit counseling can be a necessary step for moving forward. In fact, most kinds of bankruptcy REQUIRE credit counseling before you’re allowed to file.
To find a credit counselor licensed in your state, see this list from the U.S. Department of Justice. You can also find FAQs from the department.
Credit counseling usually includes an initial meeting where you receive educational tools and resources, such as budgeting and housing advice. You can also expect a thorough review of your credit report.
As a last resort, your credit counselor may offer a debt management plan (DMP). If you were enrolled in a DMP, you would make one single monthly payment to the credit counselor, who would then use it to pay off your debts. Unless you enroll in a DMP—in which case you could be charged fees—your first credit counseling session should be free.
As with consolidation loans, there are a few challenges to be aware of when it comes to credit counseling. If you miss even one payment on your DMP, you may be required to repay your debts in full.
Then, there's the risk of choosing the wrong help. It’s definitely best to find a non-profit company. You should also make sure the service you’re using is accredited by the National Foundation for Credit Counseling and has good reviews.
One of the worst things about unruly debt can be the constant calls, emails, and letters from your creditors. We’ve been there, and there’s nothing worse than feeling like you have to avoid your phone and inbox in case of more bad news.
With a bankruptcy, your creditors have to stop calling you. But even if you don't go that far, there may be ways to regain control.
One of your best tools is the Fair Debt Collection Practices Act, a federal law that prohibits abusive behavior from debt collectors. They can’t:
The law has some limitations—for example, it only applies to debt collection agencies and not to your original creditors. And the law allows debt collectors to reach out to your spouse, parents, and cosigners unless you tell them to stop in writing.
We aren’t credit counselors here at Castle & Cooke Mortgage, but we uncovered some remedies that may help. According to the law, you have the right to tell credit bureaus to stop contacting you and your family by sending them a letter. You can also document illegal behavior and file a complaint with the Fair Trade Commission (FTC) and state agencies (and be sure to send a copy of your complaint to the debt collector and your original creditor). If things get really bad, you could even sue the debt collector.
On the topic of state agencies, be aware that rules about debt collection differ by state. A licensed credit counselor will know the specifics in your area.
In some cases, you could have huge debts that you may never be able to repay. If you live simply and don’t have a lot of income or property, you may be judgment-proof. In other words, you may have no assets that a creditor could seize, so suing you for the debt would be pointless.
If you are in this situation and choose to do nothing, your credit could still take a big hit and your debt would stay on the books. That could have big impacts for your ability to get a loan in the future. However, you can’t be thrown in jail just for owing a lot of money, and your creditors can’t take away things you need such as basic clothing, ordinary household furnishings, personal effects, food, or some kinds of government benefits.
We mentioned it above, but it’s worth repeating: there are a lot of companies in the debt settlement industry that may not have your best interest at heart. Always avoid for-profit debt settlement companies, and watch out for scams. You’re a good person, and you deserve the chance to get on with your life without being taken advantage of.
It's also important to know that even if you select some of these bankruptcy alternatives—specifically consumer credit counseling—your credit could still be negatively affected. Our experts tell us that some loan programs out there consider credit counseling much like they would a bankruptcy. If you're being considered for a loan from one of these programs, your lender would still require the counseling company to approve the loan and document an acceptable payment history before approval is possible.
If you have questions about debts, bankruptcy, and home loans, a licensed Loan Officer may be able to help. Keep your head up, keep your eyes open, and best of luck!