Alternatives to Bankruptcy

Many times a bankruptcy can be avoided through assessment of your financial situation, refinancing of current debt or debt negotiation. The following are possible alternatives to bankruptcy:

Refinance/Consolidate Debt
Debt consolidation goes hand-in-hand with debt planning. Before consolidating debt, you have to know exactly what your debt is, and only then can you evaluate the best way to proceed with consolidation. Debt consolidation can be accomplished through refinancing current debt or obtaining alternate financing at a lower interest rate. Obtaining a home equity loan to pay off high interest credit cards is one example of debt consolidation. Not only do you get the benefit of lowering your monthly payments overall, you may also get the benefit of deducting the interest on the home equity loan from your income taxes. The key to debt consolidation is to use your credit resources wisely. It will do no good to consolidate your debt if you simply run up the balances on your credit cards again.

Debt Negotiation
Many creditors are willing to negotiate the amount they are owed, write-off the balance of the debt owed and allow you to pay the new, lower amount of the debt. Although this can be a viable solution for some, in most instances the creditor wants payment in full of the negotiated balance. For example, if you owe $3,000 on a credit card and the creditor agrees to take $1,000 as full payment, they want the $1,000 paid in one lump sum payment within a very short period of time. BEWARE of debt settlement companies that say they can wipe out your debt for minimal monthly payments. Most of these companies charge exorbitant fees that they take up front before they even begin negotiating with your creditors. This can put you at risk for lawsuits, judgments and garnishments. Please note that any reduction in debt is taxable income, unless it is done through bankruptcy law.

Business Debts
Business debts can also be negotiated, similar to personal debts. Most business owners, especially small business owners, are required to sign what is called a “personal guaranty” of the business debts. This means the business owner, or anyone else that has personally guaranteed the debts of the business, will be held liable for the debts they have guaranteed if the business fails to pay those debts. If you are a business owner, you should always carefully review what you sign on behalf of the business. Many individuals have had to file for bankruptcy simply because of the personal guaranties they have signed on behalf of their businesses.

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