Bankruptcy can be embarrassing, and it creates difficulty in obtaining additional credit in the future. So most people do their best to avoid it. Sometimes bankruptcy is unavoidable, but there are alternatives you can try first. Not all options are suitable for everyone.
Two common options are:
- Debt consolidation: Get one big loan, and use it to pay off all your smaller debts.
- Debt restructuring: Negotiate with your creditors to alter the terms of the original agreement. This often involves the creditor “settling” for a lesser amount. Many “debt settlement” companies offer to do the negotiating for you.
You can negotiate with your creditors on your own or enlist the help of a lawyer or debt settlement company. Payments can be either a lump sum or a payment plan.
Benefits of Debt Consolidation or Restructuring
A debt consolidation loan can save you money and reduce your stress. It offers several advantages over trying to pay off individual debts, including:
- Potentially a lower interest rate
- Convenience of only one monthly payment
- The monthly payment may be lower than the total of your individual payments
As long as you have a steady income, a restructured settlement plan may be able to:
- Reduce your debt owed to as little as 40 cents on the dollar, sometimes even less
- Save your house or other large asset if you are at risk of losing it in a bankruptcy
Having only a few creditors can increase your chances of success with negotiations, as this makes it more likely they will all agree to your plan.
Risks of Debt Consolidation or Restructuring
Potential pitfalls with a consolidation loan include:
- You still owe all the money
- They are usually secured loans, so your previously unsecured debt, like credit cards, is now secured
- You may need a co-signer
- If your income falls and you cannot make payments, you just end up in default to a different creditor and file bankruptcy anyway
Debt restructuring plans can greatly reduce the amount you owe, but they have a high failure rate and you still face a high probability of filing bankruptcy. It can be difficult and time consuming to negotiate with your creditors on your own. Debt settlement companies can help, but using one comes with its own risks.
Risks involved in debt restructuring:
- All your creditors must agree to it. If even one will not work with you, it can cause your whole plan to fail, especially if the creditor files suit.
- Debt negotiators often advise you to stop making payments on your credit cards, which wreaks further havoc on your credit score.
- An unforeseen setback can derail your plan. If you lose your job or incur more unexpected debt, you may find yourself unable to complete your repayment plan. This could cause your entire debt to become due in full immediately.
- Debt negotiators often require hefty upfront fees, which are non-refundable. If negotiations fail, or you become unable to keep up with payments, they keep their fee and you are back to square one.
- Many states don’t license debt settlement companies. Some companies are credible, but many are dishonest at best, providing inflated statistics on success rates and savings.
Because it is difficult to evaluate companies and plans on your own, it may be in your best interest to discuss your situation with a lawyer familiar with bankruptcy law, who can evaluate your particular circumstances and advise you of your options, including finding a trustworthy settlement program.