What Are Bankruptcy Alternatives?
What you are about to read may stop you making the biggest mistake of your financial life.
In today’s debt ridden society many people are in severe financial difficulties, often for reasons outside their control. Bankruptcy for many, is the last step in a long road of financial pressures but many opt for this solution too early and without considering suitable bankruptcy alternatives. Whilst bankruptcy may get rid of the immediate pressures it isn’t necessarily the end of the problems.
When you file for bankruptcy your life becomes an open book for the court appointed bankruptcy officials. They will pry into all aspects of your life and you will be required to provide all your financial information, including bank accounts, savings, investments and assets. Anything that can be sold or converted to cash, including your family home and any valuable contents, will be disposed of and you may still have part of your income deducted from your salary to pay some of your debts.
But there are bankruptcy alternatives that may be less painful for many. Here I’ve listed bankruptcy alternatives
Negotiate with your creditors
When you get into difficulties you should contact your creditors as soon as possible. Contacting them sends a signal that you want to repay them.
Lenders are anxious to get their money back and sometimes they will go to great lengths to help you. They may be prepared to re-finance your debt to have it paid over a longer period with lower installments.
They will often be prepared to reduce or freeze the interest rate and will even cut the balance owing up to 75%.
Refinance your mortgage
If you have a property, which you own outright or on a mortgage, there is the real possibility of you being able to refinancing your debts using a secured mortgage or re mortgage.
Refinancing your debts involves taking out a new mortgage, or an additional mortgage. Some lenders will lend up to 125% of the property value allowing you to pay all your outstanding debt and may even have some spare cash to treat yourself.
As the new loan is repayable over a long period of time (often 25 - 35 years) the monthly repayments are significantly lower than with short term debt and should be far more manageable
Refinance your debts using a debt consolidation loan
Debt consolidation is where you take a new unsecured loan and use the funds to pay off your outstanding debts. Debt consolidation loans are repayable over a longer term at a relatively low interest rate and as a result the monthly repayments are lower. If the loan is secured on your property then the interest rate and payments may be even lower.
Sell your home and downsize
One of the easiest ways to get out of debt is to sell your house or apartment and downsize or move into rented accommodation. The surplus cash can then be used to pay your debts and you can continue with your life without the pressure.
Selling up and moving home is, however, a difficult and often painful option. If you do sell however. you can determine the price and remain in control. If the house falls into bankruptcy, you lose control and the house may be sold by your mortgagor at auction for a price often considerably less than the price you can obtain in a normal sale.
A formal arrangement with your creditors
A formal arrangement with your creditors can often be negotiated by specialist debt management companies and is filed with the courts. These arrangements are for 5 years. You pay an agreed amount each week or month to the debt management company and it is then divided between your creditors. While you continue to pay they are prevented from approaching you.
After the 5 year period is over any balance still owing is wiped out and you are free to live your life free of debt. If however you break the arrangement the normal result is bankruptcy.
As you can see, there are several sound bankruptcy alternatives for you to choose from. Everybody is under financial pressure from time to time, however you should not compound your problems by declaring bankruptcy too soon. Instead, choose the bankruptcy alternative that sounds the best for your particular situation and start working to repair your credit now.
Using a bankruptcy alternative means that in a few years you will have rebuilt your credit and will be back on track, whereas with bankruptcy it could be ten years before you can get back to normal.
How to Repairing Your Credit
If you are just getting started on the process of repairing your credit, one of the big questions is whether to do it yourself or commit to using a lawyer or credit repair service. If you feel that doing it yourself will get the job done right, I am going to have to agree with you. Many credit repair services will charge you a monthly fee and you will have no idea what you are getting. I have known several people to try repair services and be extremely disappointed. I am not saying they are all bad, but if you were charging a monthly fee, do you think you would be racing to get the job done quickly?
We will get started in finding out how damaged your credit is, and then prepare a game plan to begin the healing process. It would be difficult to prepare a halftime comeback if you didn’t even know what the score was. But what if I told you there were three scores and they may all be different? Don’t despair it will make sense in a minute.
There are three major consumer credit reporting agencies, and each one keeps a file on you called a credit report. This report contains information such as name, address, social security number and other personal information about you. The biggest section of this report keeps a history of all your current and past trade lines. This information will have the name of the lender, account numbers, and payment history information that other lenders will look at to see if you make your payments on time or have ever had late payments. Noted will also be approved limits and the type of credit, installment or revolving, and the status of the loan (open, closed, paid, and inactive or whether it’s been sent off to collection).
The next section of your report, Public Record, will have the most impact on your scores. This is the section that lists any tax liens, bankruptcies, foreclosures or other judgments against you. If you are lucky this section will be clean. If not there are actions that can be taken to help clean up this section of your report. In a later article I will touch on some of these advanced credit repair techniques. Just know that if done correctly you will not have to wait 7 to 10 years for these items to drop off your report.
The last section is Inquiries. Each time you apply for credit, a lender will pull a copy of your credit report to gauge your credit worthiness. Each lenders formula on how to approve you will be slightly different, but will most likely be checking your report, your FICO score and looking at your income statements. Each inquiry into your credit actually counts against you and will knock a few points off your score. However, if you pull the report yourself, this is considered a soft inquiry and will not have any impact.
Lenders will begin reporting on you to the bureaus once you have established a loan and begun making payments. Because this is a voluntary system for lenders, you will not know which if any of the reporting agencies a lender is submitting data to. For this reason you will find that your credit report will be different as well as your credit score at each of the 3 big credit bureaus. So to begin with you will need a copy of your report and score from each credit bureau. I recommend looking for a package deal that will contain a combined report from all three bureaus and your FICO scores too, as most lenders will use this score to grade you by.