Difficulties With Three Common Bankruptcy Alternatives

6 May 2015 by Jonathan Phillips

If you are contemplating filing for bankruptcy, then you have probably been advised to try other alternatives first. The problem with these alternatives is that they do not guarantee bankruptcy prevention, and they also have their drawbacks. Here is an overview of three bankruptcy alternatives, and their possible drawbacks:

Debt Consolidation

If you are contemplating bankruptcy, then one of the options you may be advised to explore is debt consolidation. This is where you transfer your debt to one creditor so that you make regular payments to one entity instead of multiple creditors.

It looks like a good idea on the surface, but it also has its potential pitfalls such as:

• Loss of collateral – When you consolidate your debts, you may be required to pledge collateral for the new debt. If you fail to pay the consolidated debt, then you lose your pledged asset, which may even be your house.
• Increased interest – The new debt may result in a longer repayment plan, which means you pay more money in the long run.
• High interest rates – If you don't have an asset to pledge for your new single debt, then you may get an unsecured loan. However, it is likely to come with a high-interest rate, and your payment may not differ much from the original (multiple) payments.

Mortgage Restructuring

Another possible way of avoiding bankruptcy is mortgage restructuring, especially if mortgage payments are a big part of your debts. This frees up some of your money to pay other debts. Restructuring involves negotiating with your lender for a new repayment plan that makes your payments affordable. The main restructuring scheme is run by the federal government – the Home Affordable Modification Program (HAMP), but other lenders also have their programs.

Unfortunately, you can't rely on these programs to save you from bankruptcy because you may not meet the eligibility requirements that include proof that:

• You have stable income
• The property is your primary residence
• Your financial problems are caused by legitimate difficulties (such as death in the family)

Besides, the restructuring process can take an awfully long time, and it's unlikely that your lenders will be that patient.

Sacrifice and Pay the Debts

You may also be advised to pay the debts by making real sacrifices, asking family members for contributions and even selling your assets. This advice hinges on the assumption that you have willing and moneyed family members and valuable assets to sell. If you don't have access to these things, then it might not help you. Moreover, you may not raise enough money to pay off the debts, in which case your sacrifice will only be a band-aid approach to the bankruptcy while delaying the inevitable.

Therefore, before you try a bankruptcy alternative, make sure that it is something that you can follow through. Ensure that you are not just delaying your bankruptcy, but preventing it. If the alternatives don't seem viable, then contact a bankruptcy lawyer as soon as possible to start the process. For more information about the process, contact a lawyer or visit websites such as http://timgeorgelaw.com.

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