Debt-heavy persons often see bankruptcy as the only option to getting rid of excessive debt. To them, it means no more nasty calls from collectors and no more hassles, which has an undeniable appeal to persons facing overwhelming debt. In fact, bankruptcy is a life-changing experience and a word sending chills up the spine. It affects many aspects of the debtor’s life, by ruining their credit, making it impossible or at least difficult to keep credit cards, and taking valuable possessions. The bankrupt finds it hard to get on different necessities such as getting insurance, renting a car, or buying a home. It is not surprising that financial advisors see declaring bankruptcy as a last resort, and a desperate one at that, when debt consolidation, credit counseling, budgeting, and other efforts to eliminate debts have failed.
Bankruptcy is the worst option for many if they have other options to explore. Moreover, there are some cons of insolvency that make it a less preferred option compared to others. First, those who have nonexempt property (property which does not fall into any of the exempt categories) can expect to see this sold or liquidated as to pay creditors back. Such property may include vacation homes and family heirlooms, for example. Second, bankruptcy becomes part of the bankrupt’s public record and credit history for up to ten years. While the bankrupt is protected under law, he/ she may be discriminated against by employers, financial institutions, and other entities. You have surely seen loan applications having this question included – have you ever filed for bankruptcy? Some of them do not ask whether you have filed in the last couple of years. So, once you declare insolvency, you are regarded as high risk and untrustworthy. Your reputation suffers as well.
These are all valid reasons not to file for bankruptcy, but is there more to it? What if your partner or spouse was unaware of your debts, with you didn’t asking for advice or opinion? Financial problems can and do ruin relationships. Then, what if you sold some possessions, worked two jobs, and cut on spending – would you avoid declaring bankruptcy? If you answer ‘yes’ to this, it may be a good time to come up with a plan. Being financially disciplined will help you get on the right financial track.
There are several alternatives to insolvency, among which debt settlement and debt consolidation. Debt consolidation involves applying for a loan as to pay multiple debts. The benefits of consolidation are paying only one loan, fixed interest rate as opposed to variable rate, and lower interest rate. Debtors can consolidate unsecured loans by obtaining an unsecured loan. Oftentimes, however, the provision of collateral is required, with debtors being offered a secured loan.
Debt settlement is another way to avoid bankruptcy and get rid of debt. It is also known as debt negotiation and debt arbitration, as well as credit settlement. This procedure aims at debt reduction and both the lender and debtor agree to regard a reduced balance as full repayment of the loan. There are differences between debt settlement and debt consolidation. Those who opt for debt consolidation make payments to the consolidator. The latter passes the payment to the creditors and takes a fee for this. With debt settlement, the debt settlement company takes a fee out of the monthly payment, and the rest is put into a special purpose or a trust account. Until settling, the creditors do not get anything. Keep in mind that if you choose this option, creditors will not agree to negotiate with you if you continue making your monthly payments.