Wednesday, October 24, 2012

Alternative Bankruptcy Concepts

When people experience severe financial problems, they might wonder if bankruptcy is their only option. What many people do not realize that several options to alleviate financial strain exist to aid them. These bankruptcy alternatives increase in intensity, starting with simple do-it-yourself budgeting to working with professional agencies to act as the middleman between you and your creditors to get you out of debt.

Consumer Options

    Two different types of bankruptcy alternatives exist: self-led options and the professionally managed route. The self-led options start with radically changing your income and/or spending habits to live well within your means and eliminate your debt without filing for bankruptcy. Pick up a second job or freelance on the side to earn extra income to put toward your debt. Eliminating nonessentials from your monthly budget, such as cable television, weekly manicures, "retail therapy" and other excessive spending also frees up more money to pay off your debts.

    Negotiating with your creditors is an additional option, usually done in conjunction with radically changing your lifestyle and budget. Many creditors are more willing to negotiate with their debtors for reduced payments or even a stay on payments for a few months in severe cases like unemployment.

Professional Help

    Professionals are available to assist you in avoiding bankruptcy. Credit counseling provides a counselor to review your finances and help you draft a budget, a plan to pay off your debt and support for when you have questions. For more intensive help, you can sign up for a debt management plan (DMP) with either a credit counseling firm or a reputable debt management company. It also works with you to create a budget and debt payment plan. However, with a DMP, you pay your monthly alloted debt payment to the company managing your DMP, and it pays your creditors. Finally, for the most severe cases, consider credit consolidation, which is when you take on a loan at a lower interest rate than your current debt, use the principal to pay off your credit card debt and pay the one consolidation loan payment each month.

Benefits

    If you follow through with any of these plans, they can get you out of debt and sometimes faster than if you had filed for bankruptcy. The do-it-yourself alternatives to bankruptcy will not further damage your credit score. In fact, it typically improves within a year or two of starting the plan since you are lowering your debt ratio and total percentage of available credit used. Any of the plans will improve your credit score long-term if you stick with it and stay out of debt. From a purely psychological standpoint, paying off your debt alleviates what Americans report as the No. 1 stress in their lives, according to Psychology Today.

Considerations

    The core of these alternative bankruptcy concepts is an effective way to get out of debt without destroying your credit score, but also to change the habits that got you into debt in the first place. While getting out of debt is important, changing habits is vital. Professional services like credit counseling and debt management will help you with resources and advice to better manage your money to keep you living within your means and out of consumer debt.

Expert Insight

    Avoiding bankruptcy is ideal if it is at all possible. Financial problems are psychologically draining and worsen everything from relationship satisfaction to work performance according to Psychology Today. Bankruptcy, while an option to alleviate financial struggles, is a very stressful experience ranked among the most stressful situations a person can go through according to the Holmes-Rahe Stress Scale. If bankruptcy can be avoided, it is best to do so for your financial and psychological health.

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