Alternatives to Bankruptcy
At R. West & Associates Inc., we consider bankruptcy to be a “last resort” solution for people with financial problems. During your free first consultation, we’ll review your financial situation and help you determine whether you can avoid going bankrupt.
Before considering the alternatives, it’s important to first determine your ability to pay your debts. Whichever alternative you choose, you want to know you can handle the new payment obligations.
Contact your creditors
This is a simple first step that won’t cost you anything. Talk to your creditors about your change in circumstances, and explain why you can’t make your payments. Try to work out a payment plan that works for you. If you can negotiate a payment plan agreement, make sure it’s in writing and you understand your obligation. Creditors are generally prepared to work with you.
Consolidate your debt
Talk to your bank/lender about consolidating your debt into one manageable loan. You should consider a consolidation loan only if you are confident you can afford the monthly repayment amount. If the lender is insisting on personal guarantees from friends or relatives, or collateral (household assets, car, and so on) as security for the loan, this may not be the best option. If you default, you and your co-signor may be worse off than before obtaining the loan.
Before agreeing to a consolidation loan:
- Ask for the interest rate being charged for the loan and how many payments will be required to pay off the loan.
- Ask if an early repayment penalty exists.
- Find out the terms of default and ensure you understand what will happen if you do default on repaying the loan.
- Read the loan agreement and ensure you understand it. Consider getting independent advice.
Negotiate an informal proposal (settlement)
If you have a fairly small amount of debt and only a few creditors, you may be able to negotiate a payment plan that will allow you to pay your creditors in an orderly way. We recommend that you get the terms of agreement in writing and ensure you understand the default terms.
Pool your debt through a credit counselor
A repayment program through a credit counselor allows you to pool all of your unsecured debt (excluding government debt). Usually, you make monthly payments to retire the full amount of the debt, with no interest or a reduced interest charge, over a period of time. (The maximum length is usually 5 years).
Debt pooling is similar to a consolidation loan in that you usually only make one monthly payment. The advantage is that your interest cost is greatly reduced, you’re not providing any additional collateral, and no co-signor or guarantor is required. Debt pooling may be a good idea if you can pay off the entire debt in a reasonable amount of time.
For debt pooling to be successful, it is usually necessary to obtain credit counseling and eliminate the use of credit cards in the future. Debt pooling does affect your credit rating, and a fee may be charged.
It’s important to deal with a credit counselor face-to-face. Most reputable parties do not charge an initial fee for advice. Many companies offer financial help, but while their “promises” of relief and settlement terms can be extremely appealing, they give you no guarantees of performance. Make sure the company you choose is licensed, and check their complaint history. Ask yourself if what they are promising sounds too good to be true.