Filing for bankruptcy is usually the last resort for someone to get relief from financial difficulties. If you are dealing with excessive debt, you might be considering this solution.
Every situation is different. It may be best for you to file chapter 7 or chapter 13 to relieve your financial hardship. However, there are other options.
If you are facing difficult financial circumstances, this guide shares some of the best alternatives to bankruptcy so that you can get back on your feet.
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What Are the Best Alternatives to the Bankruptcy Process?
While declaring bankruptcy is a legitimate way to manage financial hardship, it’s not always the best option. It can help you eliminate unsecured debt, but it will impact your creditworthiness.
Your goal should not be short-term relief. Instead, you should focus on getting your finances back on track and improving the likelihood of achieving long-term financial goals.
Here are the top bankruptcy alternatives to help you manage your financial obligations.
1. Debt Consolidation
Debt consolidation can be one of the more popular ways to avoid filing for bankruptcy. Keep in mind that the devil is in the details, so you’ll want to read the fine print.
The first option is a debt consolidation loan. With this solution, you work with an agency that puts all of your indebtedness except for student loans into one loan.
This can negatively impact your credit as it adds another new account to your profile and increases your credit utilization. The agency may also charge high fees to extend the loan.
You want to avoid these loans, if possible.
The second option is to work with a credit counseling agency that acts on your behalf with creditors.
This is the route I took when repaying my $25,000 in credit card debt. The agency charged a minimal fee, and they negotiated with creditors to lower the interest rates on my credit cards.
They were able to get two banks to lower their rate to zero and the highest one to five percent. This allowed me to speed up the repayment process because so little was going to interest.
If you can commit to not getting into debt again, this is a fantastic way to avoid bankruptcy. Just make sure to find a not-for-profit agency that won’t charge exorbitant fees.
It’s also a fantastic option if you’re on a fixed income. Read our guide on how to save money fast on a low income to identify other ways to reduce spending.
2. Earn Extra Income
A side hustle is a perfect alternative to bankruptcy, especially if the issue is a lack of funds to repay debt. When I was repaying debt, I used various side gigs to earn funds to reduce what I owed.
A second job might not be desirable, but the extra income can help get your head above water.
There are countless ways to make money on the side, and many require minimal skills. Find one or two choices that work for you and devote all of the cash you earn to paying off debt.
If you have the time, choosing an on-demand gig job is a fantastic way to earn cash on the side.
Delivery driver jobs are a popular way to make extra money. Most gigs are flexible, allow you to earn tips, and pay weekly.
DoorDash is our favorite platform to deliver restaurant meals. You can work on your own schedule and even request instant payouts if you need funds immediately.
Driver compensation varies on numerous factors. This can be an immense help in attacking your debt. It can even help you build a small emergency fund to help for future needs.
3. Attack Your Debt
Too much debt can cause bankruptcy. It’s easy to allow it to incapacitate you, but creating a debt management plan is a fantastic way to avoid insolvency.
Each situation is different, so you want to come up with a plan that works for your situation. Plus, it will likely involve using several of the options in this post.
You will hear terms like debt avalanche and debt snowball to attack your indebtedness. Both work, so you need to choose the strategy that is best for you.
Here is how the debt avalanche works:
| Step | Action |
|---|---|
| 1 | List your debts by balance size |
| 2 | Make extra payments on the higher interest rate debt |
| 3 | Pay the minimum on all other debts |
| 4 | Repeat the process until you become debt-free |
Here is how the debt snowball works:
| Step | Action |
|---|---|
| 1 | List your debts by balance size |
| 2 | Make extra payments on the smallest balance |
| 3 | Pay off the smallest balance |
| 4 | Apply extra payments to the next smallest balance |
| 5 | Repeat the process until you become debt-free |
It doesn’t matter which method you choose. Making timely payments is what matters most. Given that bankruptcy filings were up 13 percent in 2023 vs. 2022, according to US Courts.gov, it’s essential to take action.
You may experience pain in the beginning, but it will lead to long-term financial health.
4. Negotiate With Your Creditors
Negotiating your debt is one of the best alternatives to bankruptcy. Creditors would rather receive something instead of you paying them nothing.
The first step is to call all of your creditors to see what compromises they are willing to make.
Make a spreadsheet of every debt that you owe, the contact information for each creditor, and the interest rate. Then, call each one to see if they are willing to negotiate.
Remind them of your history with them and be courteous. If the first representative won’t work with you, don’t be afraid to call the following day and speak with another representative.
Not all creditors will offer the same thing. Some may lower your interest rate for good, others for several months, and some may require you to agree to a repayment plan.
Work with each one to come up with steps that work best for you. Remind them that it’s also in their best interest to work with you.
Any reduction in rates will help you save money on interest and kill your debt quicker.
5. Get on A Budget
A budget is the best tool to manage your personal finances. I was introduced to budgeting by the debt counseling agency I worked with.
It may seem impossible to start a budget, but it’s quite simple. You want to write down everything you earn and all of your expenses.
This will help you identify where your money goes each month and improve your chances of reaching financial stability. You can even do this with free budget software tools.
Many of these programs connect with your bank account, so much of the process is automated.
Empower is our favorite resource to manage your finances. It helps you budget and even includes a net worth tracker so that you can visualize your progress. Better yet, it’s free to use.
If the app isn’t for you, read our guide on the top Personal Capital alternatives to manage your money.
Keep in mind budgeting is not just a one-time endeavor. Managing it through financial hardship and beyond will help you in the long run and go beyond merely making ends meet.
Read our guide on how to stop living paycheck to paycheck to learn where to start.
6. Cut Spending
Reducing expenses is the natural progression of budgeting. When I first got on a budget, I was shocked at how much I was spending on needless things.
You may experience the same thing. It’s important to enjoy life, but you also want to amass funds to knock down debt and build your credit back over time.
Go through every expense and determine if you truly need it. If you do, look for ways to reduce the cost. If you don’t, cancel the service or spending and use it to repay debt.
Consult our guide on ways to lower your monthly bills for ideas to cut costs to throw at your debt.
As you progress in repaying your debt, put some of the recouped funds in your savings account to start a small emergency fund.
If you need an option to open a savings account, CIT Bank is an excellent choice. The online bank offers competitive rates and has minimal balance requirements.
7. Refinance Your Mortgage
Refinancing your mortgage is another potential bankruptcy alternative to free up funds. You can go in one of two directions with this choice.
The first one is a cash-out refinance to gain extra breathing room.
A cash-out refinance uses the equity in your house to get access to money. Typically, refinancing is promoted as an option for money to use for home renovations.
*Related: Need to rebuild your credit? Check out our guide on where to get a credit builder loan to see if they’re a viable option.*
However, they don’t tell you what you actually have to use it for. In this case, you use the money to pay off your debts.
This does come with risk since it shifts the debt from other lenders to your mortgage. It could be worth it for you, but make sure to do the math.
On the other hand, a traditional refinance lets you potentially lower your interest rate and free up more funds to go towards debt repayment.
You don’t have to stay with your original loan servicer. Instead, you can shop around to refinance.
During times of a rising interest rate climate, this likely won’t be one of the better debt relief options. Only pursue it if you have a higher rate than what’s currently available.
8. Personal Loan
Are you asking yourself, “How can I get out of debt without filing bankruptcy?” If so, a personal loan might work for you.
But, it doesn’t come without its hurdles or impact on your credit history.
If you’re struggling with debt, you likely won’t be able to secure loans from a traditional bank. You will need to use a website like SoFi.
SoFi may allow you to get funds via an unsecured loan. They have no fees and competitive rates.
If you can’t get a loan via SoFi, you may want to consider a website like Prosper to take advantage of peer-to-peer lending.
This will allow you to borrow funds from people, and you repay them at a specific interest rate.
Regardless of the path you choose, the lender will look at your credit report to make a decision.
9. Do Nothing
A final alternative to filing bankruptcy is to do nothing. This should be the absolute last option since it doesn’t come without significant risk.
It will be ruinous to your credit score, and you may surrender any goodwill you might receive from creditors.
A few things may happen if you choose to do nothing, including:
- Wage garnishment of a paycheck
- The creditor may sue you or try to reclaim any property backed by secured debt
- Levy against your bank accounts
- Lien on your property or eligible assets
Doing nothing can be a tempting option, especially when the situation looks dire. However, it typically only makes the situation worse and results in more harassing calls from creditors.
It’s better to take the situation head-on and act. While this will hurt in the beginning, it will lead to success and help in preserving your credit score in the long run.
Is Debt Management Better than Bankruptcy?
A debt management plan is often better than opting for a liquidation bankruptcy (chapter 7) or chapter 13. But, it largely depends on how the repayment plan is classified.
A bankruptcy is disastrous to your financial life. It stays on your credit report for at least seven years, if not closer to a decade.
Worse, it will harm your credit score tremendously, hindering you from achieving other financial goals.
A debt management plan that is utilized correctly can avoid many of these risks. Your credit score will decline in the short term, but it will rebound as you make timely payments.
If you avoid additional debt in the future, you won’t experience the same dire circumstances vs. filing for bankruptcy.
But, you must ensure a debt management plan isn’t too costly. You should also make sure it isn’t reported as a loan. Otherwise, it can harm your credit.
As with anything in personal finance, due diligence is essential before choosing debt management.
Bottom Line
Filing for bankruptcy is a huge, life-altering decision. Before making the decision to do so, exhausting every other avenue to avoid it is in your best interest.
Ultimately, none of us want to be in debt. However, we don’t ruin our credit either. As a result, you should research other options first.
Dealing with significant indebtedness is overwhelming. Take things one step at a time, and you will greatly increase your chances of success in eliminating your debt.
What are your first steps when dealing with a large debt?
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I’m John Schmoll, a former stockbroker, MBA-grad, published finance writer, and founder of Frugal Rules.
As a veteran of the financial services industry, I’ve worked as a mutual fund administrator, banker, and stockbroker and was Series 7 and 63-licensed, but I left all that behind in 2012 to help people learn how to manage their money.
My goal is to help you gain the knowledge you need to become financially independent with personally-tested financial tools and money-saving solutions.
Two words. Dave Ramsey.
While I’d agree that Dave Ramsey has helped a lot of people – the sentiment that he’s the only option out there is misguided. While many of his ideals are ones we’d stand behind, the simple fact is he doesn’t work for everyone. The point here is that there are many options out there to kill debt and avoid declaring bankruptcy. He doesn’t hold the secret to doing so. It really doesn’t matter, for the most part, what people facing this problematic situation do so long as they’re actively working to pay off debt.