Finding alternatives to bankruptcy and avoiding financial problems altogether should first be the goal for a debtor. A bankruptcy stays on a credit report for up to 10 years. The negative impact lessens with each passing year, but in order to re-establish credit, lending institutions will charge an exceptionally high interest rate. Personal bankruptcies are reaching record levels, which is not surprising, because consumer debt levels are also reaching record highs. Alternatives to should be considered because the FICO score (Fair Issac) is lowered tremendously. How does this affect a debtor? For example: on a $150,000 mortgage, someone with a good FICO score could get an interest rate of about 6% (depending on interest rate levels at the time). Someone with a high FICO score will be lucky to get a 9% interest rate. That works out to an extra $370 a month, over 7 years that equals an extra $31,000 paid in interest charges alone.
The FICO score is used for everything, from home buying and car buying, to insurance quotes, and rental deposits. Keeping a high FICO score by avoiding bankruptcy and instead finding alternatives should be explored. Before opting for giving up, it is recommended that a debtor try to get some help sorting through their options. There is an entire industry built on providing help to consumers who are overwhelmed with their debt. Some of the debt-help businesses are not exactly legitimate. It is advised to only work with debt counselors who have high ratings through a myriad of certified organizations. When alternatives to bankruptcy have been the decided plan of action, meeting with a debt counselor is the first step.
Debtors will lay out their financial situation, and if the debt counselor thinks the debtor can get out of debt within 5 years they will establish a repayment plan. All debts will be gathered together and consolidated, with only one monthly single payment to worry about. There will probably be a monthly fee for the service of repayment planning, but it is a small price to pay. Quite often debt counselors will attempt to lower the balances or interest charges with the creditors, sometimes they are able to forgive the debt altogether. In addition to setting up a repayment plan, they will also discuss programs and classes that can be enrolled in to learn some tricks for better budget and credit card management.
If the debt load is so large that the credit counselor doesn't think the debtor can be debt free within 5 years, then they will probably not offer any alternatives to bankruptcy that include a payment plan. Each creditor will be contacted to attempt a final paid in full balance amount that is a small percentage of what is actually owed. This is the last step and many creditors will opt for the lower percentage than force the debtor to file in which they will get nothing. Another aspect to consider is the effect it will have on the spouse's credit. Ideally, not having both debtor credit scores lowered is the goal. However, a divorce decree will stop any debt collectors from coming after the spouse.
Alternatives to bankruptcy should always be considered first. The financial and emotional impact of it is devastating. Work with a credit counseling agency to devise a plan to pay the way out of a financial hole. There are two types of major unsecured debts. They are credit card debt and student loan debt. It is recommended that a person who wants to declare bankruptcy for student loan debt, instead find alternatives because student loans will not be dismissed with a file for bankruptcy. Unless the debtor gets a court order for a hardship case, which is usually only in the situations of permanent disability, the student loan debt stays.
Alternatives when dealing with student loan debt abound. The student loan industry bends over backward to help find solutions that are manageable. They offer deferments, forbearances, financial hardship, loan consolidation, and a variety of other options that will lessen the burden of high monthly payments. If a home equity loan is an option, it is suggested to consolidate all credit card debt. Home equity loans offer a lower interest rate, much the same way a student loan offers. There are not as many deferment options with a home equity loan, but at least it is secured, unlike credit card debt. Having two flexible repayment plans only, will surely help when trying to manage a financial crisis. It is up to each person to pay off their own debt. A vow to pay a creditor is a vow to pay God (who owns everything). "When thou vowest a vow unto God, defer not to pay it; for he hath no please in fools: pay that which thou has vowed." (Ecclesiastes 5:4-5)
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