Debt begets more debt over time. Paying back the original amount owed is challenging enough on its own—but on top of that, there’s interest to consider. Rest assured you’re not alone if you feel like your debts are hanging over your head like a persistent storm cloud. After a while, you may even start to believe that bankruptcy is your only way out; a chance to wipe your slate clean.
But before declaring bankruptcy, consider these three lower-impact financial solutions.
Consequences of Bankruptcy
The primary upside to declaring bankruptcy is the discharge consumers receive, meaning debt collectors can no longer attempt to collect on most or all of their previous debts. Essentially, bankruptcy is a legal process meant to eliminate significant debt. For some, this represents a chance to start rebuilding their finances.
But it’s important to understand both the pros and cons of bankruptcy before pursuing this course of action. Here are a few consequences to keep in mind before filing:
- Attorney and filing fees: Typical filing costs for Chapter 7 and Chapter 13 bankruptcy exceed $300, not including attorney fees if you decide to hire a lawyer.
- Credit damage: Consumers will experience a drop in their credit score and may have trouble getting approved for credit for months or years afterward.
- Diminished privacy: The personal information you must file with the court is publicly accessible.
- Possible property loss: While some property may be exempt, you may have to surrender other assets.
These consequences illustrate why it’s worthwhile to explore all your options before proceeding with bankruptcy—a valid but last-ditch strategy for debt elimination.
1. Debt Consolidation
When you’re juggling multiple debts, keeping due dates and interest rates straight can be half the battle. Debt consolidation aims to simplify your overall financial outlook by rolling multiple high-interest debts into one lower-interest payment. A consumer with five high-interest credit card balances could take out a fixed-rate personal loan to pay them off, then focus instead on repaying the loan in installments.
It’s worth noting, however, that debt consolidation is a viable option for consumers with solid enough credit to qualify for a low-interest loan and whose debt does not exceed half their income.
2. Debt Settlement
Debt settlement is a relief strategy for substantial debt that will take a toll on your credit score yet is ultimately less extreme than bankruptcy. The goal is to get creditors to agree to accept less than the amount originally owed through negotiation. Some people choose to attempt negotiations on their own, but many choose to work with a debt settlement company for access to consultants and trained negotiators.
Here’s how it works in a nutshell: Consumers deposit a certain amount monthly into a special FDIC-insured savings account. Once enough funds have accrued, negotiators reach out on your behalf to try to reach a settlement agreement that’s less than the amount you owe. Creditors will often agree to a settlement because it’s better than getting nothing from their point of view.
The key is working with a reputable debt settlement company so as to avoid scams. According to the Federal Trade Commission, consumers should avoid these red flags:
- Up-front fees before settlement occurred.
- Sweeping guarantees about eliminating debt.
- Failure to explain the consequences of ceasing communications with creditors.
- Promises to make collection calls and lawsuits stop.
- Guarantees debts can be paid off for pennies on the dollar.
Consumers can look up reviews and testimonials for industry leaders like Freedom Debt Relief to ensure legitimacy and find out more information before enrolling.
3. Cash-Out Refinancing
Homeowners may be able to perform a cash-out refinance, which entails refinancing your existing mortgage and taking out additional cash to repay debts. You can then focus on paying back your mortgage over a longer period of time at lower interest rates.
Consumers can bounce back from bankruptcy, but it’s smart to explore these three debt relief solutions before deciding.