The most prevalent alternatives available to debtors prior to filing for bankruptcy are as follows:
Interaction With Creditors
Early communication with a creditor is always optimal. Sometimes it is possible to negotiate a lower interest rate or a more expedient payment due date. A client may be able to pay only the debt interest for a month. These alternatives typically have no effect on your credit report. However, late payments do negatively impact your credit file and score, as payment history accounts for 35% of your score. Therefore, it is essential to communicate at the first sign of problem.
Consolidation
It may be possible to consolidate debts and have a lower payment over an extended period of time, but care must be taken. However, the consumer must be aware that the extended payback period will result in higher interest payments. In addition, I believe it is rarely a good idea to borrow your way out of debt, nor to consolidate unsecured credit card debt into a secured home equity loan. However, in the same way that communicating with a creditor does not affect your credit file, neither will debt consolidation.
Debt Management Programs (DMP)
When neither communicating with a creditor nor consolidating appear to be viable options, debt counseling should be considered. A debt-counseling agency may implement a Debt Management Program (DMP). Typically, repayment occurs within five years. Again, caution must be taken to avoid unethical agencies, and I advise checking with the Better Business Bureau and speaking with former customers. What is the agency's track record, how do they manage debt payment, and how accommodating are they? These should all be essential inquiries for any prospective agency. (For more information, see Specialized Needs in Debt Counseling and other articles on this site.)
Typically, counseling agencies do not report to credit bureaus. Nonetheless, if payments are mishandled by the agency and a payment is late, the creditor will likely notify the credit bureau. Therefore, it is crucial to ask the prospective agency the suggested key inquiries.
Negotiating
Debt reduction negotiations could be a possible alternative to insolvency. Once more, the consumer must exercise caution for multiple reasons. Any debt reduction exceeding $600 will generate a 1099, which the IRS will tax as additional income. Moreover, no creditor will reduce the debt owed unless they believe that is all they will receive. Therefore, your payments are two to three months behind, and your credit has been ruined.
Bankruptcy
There is also bankruptcy. Debt negotiation is an urgent measure that should be considered ONLY as a last resort. Your state-specific bankruptcy questions should be answered by an attorney.
However, be aware that bankruptcy stays on a consumer's credit report for 10 years. In addition, there are associated expenses. The filing fee is roughly $200, and attorney's fees vary but are not inexpensive. Additionally, two counseling courses are mandated by law. Before filing, a budget and credit counseling course is required, followed by a debt education course. Course fees range between $36 and $50 each.
Typically, a consumer will pursue Chapter 7 or Chapter 13 bankruptcy. Chapter 7 is prevalent if a consumer's income falls within the state's median income range and there is very little equity in their assets. Chapter 13 is required if the consumer has an above-average income or needs to protect the equity in a residence or other property. Upon court approval, Chapter 7 discharges the debt. In contrast, Chapter 13 is fundamentally a debt repayment plan. It is comparable to a Debt Management Program (DMP), except that it is court-ordered and the time limits are more flexible. Moreover, a DMP may not even appear on your credit report. And even if it does emerge, it must be eliminated within seven and a half years. It will remain on a credit file for a minimum of ten years.
What is your proper course of action? I'm unsure, and only the consumer can determine. Obtaining professional guidance from a counseling agency and, if necessary, a lawyer is the best course of action.""
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