5 Ways to Avoid Bankruptcy
The decision to file bankruptcy is a difficult one and may have long term effects on a person’s ability to obtain credit in the future. Therefore, one should consider other alternatives to bankruptcy prior to filing. In fact, the bankruptcy code requires all consumer debtors to engage in pre-bankruptcy counseling before filing a petition.
Sale of Assets
Another common way to avoid bankruptcy is a sale of assets and either using the proceeds to pay down debt or to avoid further monthly payments. It is a form of consumer downsizing. For example, for some households, a second car isn’t an absolute necessity. If there is equity in the vehicle, the equity can be used to pay debts. Even when there is not, the debtor may save several hundred dollars per month in car payments, taxes, insurance, and registration fees.
Before any assets are sold, the person should seek advice to determine which assets are exempt from creditors and which are not. Some assets cannot be attached or taken by creditors to pay a debt. The nature and amount of the exemption is both in the federal bankruptcy code and state law, so exemptions can vary from state to state.
Home Equity or Consolidation Loan
Taking out additional debt to pay outstanding debt can sometimes be a “Robbing Peter to Pay Paul” situation. But there are times when it can be advantageous. Home Equity loans normally have a lower interest rate and a longer repayment term than a credit card or other unsecured personal loan. Another source for a lower interest loan may be through a 401k plan, or other retirement plan.
A credit card with a $15,000 balance at 10 percent interest would have a monthly payment of $388 per month, if paid over four years. The same balance in a home equity loan at 4 percent interest paid out over 10 years would be approximately $151.00 per month.
Care should be taken before taking out a second mortgage or borrowing against retirement assets. The person must make a determination of whether payments can be made on the debt, even through a lower interest rate and/or extended payments.
If the debt causing the financial crisis is modest and temporary a second job may be enough to pay down the debt. A part time job even at a lower wage will earn a few hundred dollars a month and may be sufficient to stave off a modest financial crisis, especially if it is used in combination with other alternatives.
Consideration of Exempt Income or Assets
Some individuals may not have income or assets that a creditor may seize. Social Security and many retirement benefits cannot be garnished by creditors. Other assets, such as a home, a means of transportation, retirement benefits and clothing may be exempt from process. In other words, some people maybe judgment proof.
In those situations, a bankruptcy may not be necessary. On the other hand, creditors will still be permitted to contact a debtor and demand payment, and the debts will remain outstanding.