Bankruptcy isn’t right for everyone. Some debts, like student loans and most delinquent taxes, can’t be discharged in bankruptcy. Some people own valuable nonexempt assets that they would lose if they filed a chapter 7 bankruptcy. Some people have cash flow problems but are not yet facing a debt management crisis. You need to consider your options carefully before you decide to file bankruptcy.
Debt Management Strategies
Sometimes a little planning and will-power is all you need to make your debt manageable. Make a budget and stick to it. Stop using your credit cards, cut back on your spending, and devote more of your income to paying off debt. Give priority to paying off credit cards with high interest rates. Consider transferring balances on high interest rate cards to cards that offer a lower interest rate (but read the fine print and make sure you understand the transfer fees that the low interest card imposes). Consider talking to your bank or credit union about a debt consolidation loan or a home equity line of credit that you can use to pay your credit card debt.
Credit Counseling
Credit counseling classes can teach you how to make a budget and provide you with tips for living within your means. They can also help you plan a strategy for negotiating with your creditors. Make sure you find an affordable agency that isn’t doubling as a credit repair clinic or a debt negotiation service. They often charge high fees to perform services that you can do yourself for free, and many of them engage in unethical practices. Remember that money you pay to a debt management service is money you could be using to reduce your debt.
Negotiation With Creditors
If you just need some breathing room to get caught up with your payments, try negotiating with your creditors. If you’ve been a good tenant, maybe your landlord will let you delay a rent payment. If you’re paying high interest rates on a credit card, see if the credit card company will agree to lower your rate. Many credit card companies want to keep your business and will be willing to work with you if they think you might transfer your balances to a card that is offering you a lower rate.
If you have a car loan and haven’t missed any payments, your lender might be willing to extend the loan by a month or two, allowing you to miss a payment. Lenders are not eager to repossess your car — it’s a hassle and the car is often worth less than the balance of your loan — so they are usually willing to work with you to avoid a default of your car loan.
Utility Bills
If you live in a cold weather climate and your heating bill is out of control in winter months, ask your utility company whether it offers an amortization program. Many utility companies will estimate your yearly bill and will divide it into twelve equal payments so you can more easily budget the payment of your utility bills.
Student Loans
A number of plans are available that allow student loans to be restructured for debtors who face financial hardship. You might be able to extend the loan or to reduce your monthly payments. The plans that are available depend on the kind of loan you have. Federal loans and federally guaranteed loans usually offer the best options. Ask your loan provider about the repayment options that are available for your particular loan.
Tax Debt
If you owe a large amount of income tax debt, it might be possible to pay it in installments, although you accrue penalties and interest charges when you make an installment agreement. It might also be possible to negotiate a compromise that allows you to pay a reduced debt in a lump sum. The rules for compromising a tax debt are complex, so you should consult a tax attorney before you consider making a compromise offer.
