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Alternatives to Bankruptcy

Congressional mandates have made bankruptcy less powerful as a tool for financial rebirth, but even in its heyday it should only have been viewed as something you do as a last resort. There are disadvantages. Too many people comply with the advice of less-than-objective debt counselors and sincere-but-ignorant friends, and in doing so part with essential assets like their homes and pensions, only to wind up in bankruptcy (where those kinds of assets may have been protected) anyhow.

Bankruptcy isn't necessarily the best solution for you -- and -- there are alternatives.

Filing bankruptcy has definite downsides, and sometimes a different strategy is more appropriate for your situation or your personality. Take a look at some of the pitfalls of bankruptcy and alternatives such as using your home equity or pension to pay your debts.

Tip # 1 - Choosing which bills to pay first (if at all)

When you can't pay everyone, you need to invest your money where it does the most good or avoids the gravest of problems. Dribbling out money to the most aggressive collectors without an overall plan is a mistake. Certain payments should be at the top your priority list. Here are 7 top and 7 lowest financial priorities.

Top 7 Priority Pay Priorities
  • Rent or mortgage (if you intend to  keep home)
  • Utilities
  • Essential vehicle
  • Fines, if nonpayment would land  you in jail
  • Child support and alimony
  • Income taxes
  • Student loans
Top 7 Lower Pay Priorities
  • Credit Card debt
  • Loans from finance companies
  • Medical bills
  • Non-essential (2 nd Car) payments
  • Maintenance fees on other properties
  • Contributions to schools & organization
  • Subsidies for family and friends

It's no accident that credit cards, loans from finance companies, and medical bills don't make the cut in this list. That's because these types of creditors must sue you and obtain a judgment before they can take any of your property. Besides, these kinds of debts can be wiped out if you end up in bankruptcy. And, many people try and pretend they are not in financial trouble so they waste valuable cash assets on maintenance, charities, and supporting families that they can ill afford.

Tip # 2 -- Keep matters in perspective

Keeping that perspective when a bill collector is bullying you isn't always easy. Amid all your personal financial turmoil, debt collectors give you crummy advice because all they care about is wringing as much as possible out of you, as soon as possible, and with the least amount of effort on their part. Your decisions must be based on reason and guided by what's best for you and your family and not on what makes for a happy debt collector. Remember, however, that the most obnoxious collectors act the way they do because they really don't have any other weapon to use against you. It is hoped that you plan to talk to a bankruptcy lawyer before making these decisions, but if you're not quite ready to take that step, you may want to start by asking yourself two questions. What can this creditor do if I don't pay? And then, will I be able to escape this debt altogether if I eventually decide to file bankruptcy?


Tip # 3 - Decide early on whether to pay your mortgage

Although you'll probably want to make your mortgage payments if you decide to file bankruptcy, it isn't necessarily a given. Whenever your home is worth less than what you owe on it, you may just want to save the money for a deposit on a new place to live, knowing that eventually the mortgage holder will foreclose and kick you out anyway. However, if you intend to keep your home, be sure to maintain insurance and pay real estate taxes. If you don't, the lender may be able to foreclose even if you're making your payments.

Tip # 4 -- Consider your car payments

As is true with your house, the question to ask about your car is whether it is worth less than you owe on it. You'll have to make your car payments if you want to keep it. And even if you decide to surrender the vehicle, your problem may not be cured. Most car dealers sell surrendered vehicles at wholesale prices, leaving you liable for any balance due on the loan. Try selling the vehicle yourself to raise enough to pay the loan in full and satisfy the entire obligation. If that doesn't work try getting someone to "lease to own" by taking over payments for a period of time or for the balance of the loan.

Top # 5 -- Deal with alimony and child support

The consequences for neglecting those obligations are serious, possibly even criminally serious if you're jailed for contempt of court. Many judges have adopted a zero-tolerance approach toward deadbeat parents.

Tip # 6 -- Pay your taxes

You need to pay current income taxes, and probably those from the last three years. Taxing authorities can make your life miserable if you don't, and penalties for not paying add up at an astonishing rate.

Tip # 7 -- Negotiating with your creditors


If you can find someone who actually has the authority to negotiate, you may be able to cut a deal that works to everyone's satisfaction. But if your creditor is a large institution, you'll have difficulty getting beyond the bean counters and paper pushers; that is, if you even get past the answering machines. You're more likely to succeed if your creditor is a small organization. Regardless, attempting a non bankruptcy solution is worth the effort. If you genuinely are considering bankruptcy, unsecured creditors may agree to settle for a pittance simply because when you do actually file they'd otherwise receive nothing. The success of this kind of strategy depends on convincing your creditor that you're truly prepared to file bankruptcy. The best way to accomplish that is to hire a well-known bankruptcy specialist to handle the negotiation. That way, the creditor knows that you're serious. But, don't ever bluff or threaten bankruptcy unless you're truly prepared to turn in that direction.

Tip # 8 - Considering credit counseling services

You can find a number of outfits in the phone book, at your company, on base, or online that offer credit counseling. Some counselors are very good. But if a person's situation is truly hopeless, they should immediately refer that person to a competent bankruptcy attorney. There are some counselors who believe talking people out of filing bankruptcy is their duty. They vigorously push repayment plans, which often are doomed to fail. Additionally, they often fail to have the principal amount of your debts reduced and don't help much in extending payments on secured debts.

Warning - Although some debt servicing organizations offer valuable assistance, they're also allied with creditors and have an institutional bias against bankruptcy, even when it's in your best interest. You can also check your local phone book for debt counselors, but be very careful. Some are nothing more than marketing fronts for companies trying to lend you more money.

Tip # 9 -- Ignore your creditors

Sometimes doing absolutely nothing makes perfect legal and financial sense, but using that tactic needs to be a conscious and intelligent decision that is not a result of your refusal to face the music. Whenever you live simply, have little income or property, plan to maintain that lifestyle indefinitely, and don't give a flip about your credit rating, doing nothing may just be the wisest course. You can't go to jail for failure to pay debts (other than support obligations and criminal fines). Creditors can't strip you of basic necessities, such as clothes and food. A good part of your income, as well as Social Security benefits, welfare, and Unemployment are inaccessible. You can be sued, of course, but even bill collectors can't extract blood from a turnip.

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