Debt can feel overwhelming, and sometimes you can get into debt so deep that climbing back out seems impossible. While filing for bankruptcy is always an option, it's highly damaging to your credit score and can stay on your credit history for up to 10 years. Fortunately, bankruptcy isn't your only option.
Here are five alternatives to bankruptcy that are worth considering:
Debt Consolidation
One way to consolidate multiple debts is through a debt consolidation loan, which entails rolling everything into a single loan with one fixed monthly payment. This simplifies repayment and often comes with a lower interest rate than what you're currently paying. Staying consistent with payments can also help boost your credit score over time.
However, debt consolidation comes with its own risks to watch for. For example, credit card balance transfer fees often run 3% to 5% of the amount transferred.
Liquidating Assets
Selling your property and valuables can help you earn the money needed to pay down your debt. But this can also be challenging when parting with beloved items, whether it’s your home or a pricey heirloom.
Negotiating Directly With Creditors
You can opt to take matters into your own hands and negotiate with your credit lender to see if they can put you on a hardship program, lower your interest rate, or offer payment deferral.
Borrowing Against Retirement
Many retirement plans allow you to borrow up to 50% of your vested balance, but it usually has to be repaid within five years with interest. While you’re only paying interest back to your retirement account, the risk comes if you lose or leave your job. You could be required to pay the loan back in full before you are ready. Defaulting will leave you owing not only taxes but also a 10% penalty.
A Word of Caution on Debt Settlement Companies
Debt settlement can sound too good to be true, with promises of wiping out a significant portion of your debt. However, debt settlement companies are often for-profit organizations that charge high fees, often 15% to 25% of your enrolled debt. To get creditors to negotiate, debt settlement companies typically advise clients to stop paying on their debt completely in hopes of forcing creditors to reduce the amount owed. During this negotiation process, your loans will fall into default, resulting in negative hits to your credit score. If creditors refuse to settle, you’ll now owe more money than you started out with.
Debt Management & Credit Counseling
Seeking credit counseling can not only help get you on track for debt repayment, but a counselor can also help you decide which method is right for you. They may enroll you in a debt management plan, which allows them to negotiate with your lenders to reduce your interest rate and consolidate your debts into one affordable monthly payment, paid back over three to five years.
Before you decide bankruptcy is your only option, reach out to a certified credit counselor for advice on how to move forward toward a debt-free life.