Alternatives to filing bankruptcy

Almost every day, there are some people I advise NOT to file bankruptcy. If you live in the Northern District of Ohio and are thinking of filing for personal bankruptcy, here are some alternatives you should consider:

Consumer Credit Counseling:

If you have the ability to pay your debt, you may want to enroll in a consumer credit counseling program. Beware; the IRS and FTC are investigating many of these “non-profit” companies who actually operate to benefit insiders and not clients. They may take your money and not actually give it to your creditors, resulting in higher debt, garnishment and/or repossession for you.

If you feel that you can pay off your debt, we recommend you contact The Credit Consumer Counselling Service. This is a free service. Call 800-355-2227

Here are some links to other helpful information when considering CCC.

Learn how debt consolidation can help your situation:

Obtain the names of credit counseling agencies from the Association of Incependent Consumer Credit Counseling: or

Investigate the reputation of these credit counseling agencies with the Better Business bureau:

Know what questions to ask an agency before signing up for its services. Check out this FTC site.


Paying the debt off yourself:

Let’s face facts: you are always better off paying your creditors if you can. If you have the ability to pay off your debt yourself, you should put as much money as possible toward the debt with the highest interest rate. After resolving that debt, that money can be added to the payments you are making on the debt carrying the next highest interest rate, and so on. You may be able to pay off the debt quicker this way and have some sense of accomplishment as you pay off each debt.

Second Mortgage:

Many people take out a second home mortgage to pay off credit card or other debt. In doing so, they convert dischargeable unsecured debt to non-dischargeable secured debt. The banking industry understands this, and that is why they aggressively market second mortgages to people with unmanageable debt.

Although there may be tax advantages to using the equity in your home to pay off credit card debt, the homeowner is then faced with the prospect of paying back this debt or losing their home, and may continue paying the debt in a form of “indentured servitude” even if the loan is much higher than the home’s value. If you do this, make sure that you then don’t get back into more credit card debt.

Settling your debts:

Another alternative to bankruptcy that might be worth considering is to negotiate with your creditors and settle your debts for some fraction of what is owed. Often, creditors will accept 50-75% of the amount you owe them as payment in full.

The benefits of settling with creditors are that 1) you do not have to file bankruptcy 2) it is quicker and cheaper than consumer credit counseling 3) it is simpler and quicker than most chapter 13 plans and 4) it is not done in Bankruptcy Court, so you have more privacy about your finances.

The down side of this strategy is that your credit will still be negatively affected. It also requires that you have cash on hand. Finally, the creditor may issue a “1099” to the IRS on theory that debt which is forgiven is actually income to you.

You are a good candidate for debt settlements if you have a lump sum of cash to offer to your creditors (generally 50-75%), you feel strongly that you do not want to file bankruptcy and most of your debt is credit card debt.

Doing Nothing:

This is the one approach that everyone agrees is irresponsible. By doing nothing, most people continue to acquire debt they know they will never be able to repay. Some people continue making minimum credit card payments, watching the card balances actually increase each month, living in sort of “indentured servitude.” But worst, by not doing anything, you make it impossible to start financial recovery. You would be unable to start saving for important purchases like home, college expenses and retirement. Your wages could be garnished, your home or car repossessed and you could actually end up on welfare. Nobody wants this to happen. Congress thought this through carefully and passed the bankruptcy laws to help you escape this downward spiral and start fresh.