Bankruptcy vs. Alternatives

Protect your assets from your creditors. If you qualify for federal law bankruptcy relief, you are entitled to tremendous protections for your property and peace of mind (see "What is Bankruptcy" for further detail). However, there are alternatives that are worth comparing to bankruptcy. They are budgeting, making more money, credit counseling plans, home equity loans, and borrowing money from your retirement account.‚Äč

Increase Income

Sometimes budgeting only works to an extent. It is sometimes not feasible to get a second job or to move the family to another school district associated with a lower cost of living, etc.. Further, many spouses are already out working and children are not of working age.

Income can also be gained by selling off what you have worked hard to obtain. You may be able, if you have time and can afford to do so, to go back to school for a degree, etc.

Credit Counseling Plans

Credit Counseling Plans typically allow you to make a single monthly payment to them. In return, they pay each credit card company directly. The payment you make may be less than what you would otherwise owe each month. They may even negotiate reduced interest rates, extensions, and forgiveness of late fees. However, you may wish to consider the following:


1. Credit counseling plans look bad on your credit report. In fact, most mortgage brokers, bankers, and finance people will tell you that credit counseling plans
looks just as bad on your credit report as a bankruptcy.


2. Bankruptcy is an established system of procedures and regulations backed by the full weight of the federal government. Credit counseling is controlled by credit card companies and otherwise only loosely regulated.


3. Consumer Credit Counseling places people into plans they can't afford, thus leaving families worse off by taking away from necessities such as a home or car payment or items needed for children which should be paid BEFORE credit card or similar debt.


4. If you later file bankruptcy, each payment on a credit counseling plan is a WIN for the credit card companies because it is money owed on a debt which would have likely been eliminated under federal bankruptcy law.


5. The Credit Counseling service can offer the plan to you for free because they are receiving payment from credit card companies. Credit Card companies would not provide such payments if they were not in a better position than in bankruptcy.


6. Bankruptcy may help you start rebuilding your credit faster than consumer credit counseling since you eliminate debt and are thereby able to afford new debt.


7. Credit Counseling Plans can do nothing for secured creditors, judgment creditors, or certain delinquent taxes...only bankruptcy can.


8. Although Credit Counseling Plans claim to be not-for-profit, many simply pay huge salaries to executives or overpay for goods or services to affiliated for-profit companies.

Budgeting

Preparing a proper budget, for some people, helps them identify items purchased which they don't need and can eliminate. Such persons can thereby reduce their monthly expenses. With enough income in excess of expenses, debt can decrease over time. For an individual in the right situation, budgeting may help fix the problem and remove the need for bankruptcy or any other alternatives to bankruptcy.

Borrowing from your federally protected Retirement Account

In short, if you are thinking about taking money that you intend to retire and grow old on and which creditors cannot touch and paying off debt you could likely have discharged in bankruptcy, think twice. As the saying goes, you may be missing the forest from the trees. In other words, you are needlessly destroying the protection and security such accounts are afforded under the law. Further, you may be required to needlessly pay stiff penalties.

Home Equity Loan

Home equity loans, when available, can be valuable. However, the problem is that nobody ever gets out of debt by borrowing money. Further, a home equity loan typically trades unsecured debt with secured debt. The result is that, if you don't repay on time, the creditor can now take away your home even though that equity was probably safe from creditors before. Stories abound of people who attempted to get out of debt by obtaining a home equity loan only to have their home later foreclosed because they missed a couple payments on that loan when they otherwise could have covered their housing expense. Further, a home equity loan solution may mean postponing retirement or no longer having a source of money to pay for a child's college later on.