Bankruptcy Alternatives

A. Iowa Bankruptcy Alternatives- If you are trying to avoid filing bankruptcy.

The banking (primarily credit card) industry wants consumers to believe there are a lot of bankruptcy alternatives; ways to avoid bankruptcy and deal with debt, other than filing personal bankruptcy. That is true, but they don’t tell you that many of these methods to avoid bankruptcy actually lead to greater profits for the banks and more pain for the consumer.

First, reasonable personal bankruptcy alternatives and then the unreasonable personal bankruptcy alternatives preferred by the banks.

Reasonable personal bankruptcy alternatives

Paying it off Yourself:
If you have enough income, you should select the credit card with the highest interest rate and pay as much as possible on that card while making minimum payments on the others. Work your way through all your cards this way. Unfortunately, by the time they are considering personal bankruptcy most debtors do not have enough income for this.

Consumer Credit of Des Moines:
If you have enough income to pay your debt, you may find that a consolidated payment through a consumer credit program helpful. A recent study indicated that only 3-4% of the people who take the pre-bankruptcy credit counseling classes are eligible for repayment through a Consumer Credit program; the vast majority of people who are considering bankruptcy just don't have enough income. We encourage you to avoid distant online firms and try and use local offices instead. Many so called “non-profit” consumer credit firms are actually designed to benefit insiders and they rip clients off left and right, so use a local office.

Debt Compromise:
If you have access to enough money to pay off around 50% of your debt you may be able to settle your debt for less than the full amount owed. Again, many distant online firms will take your money and not settle any debt. Use caution in getting help with debt compromise. A local attorney is often your best bet. Many people sign up with distant debt settlement websites hoping to avoid personal bankruptcy and end up being ripped off.

Unreasonable Alternatives to personal bankruptcy:

Home Equity Loans:
Second and Third mortgages, home equity loans and lines of credit are very popular with banks. This is because they want you to convert debt you could discharge in personal bankruptcy to non-dischargeable mortgage debt. That way if you cannot make the payments later they can take your home and sell it in order to recover the money they are owed. So if you are considering filing personal bankruptcy just remember that if you get more debt on your home instead it could result in loss of your home later.

Consolidation Loans:
Some people will take on more debt in order to pay down their credit cards. If you have the ability to pay the loan off reasonably quickly it could work, but most people do not and continue to struggle, unable to pay for other basic needs due to the high consolidated payment. Worse, many go right out and charge up their credit cards again resulting in a bigger problem. In some cases, consolidated debt cannot be discharged in bankruptcy.

Robbing Peter to Pay Paul:
Too often we see clients who attempt to avoid personal bankruptcy by playing a shell game with credit cards, using one card to pay down another through balance transfers and cash advances. Banks also encourage this practice because it turns old (dischargeable in personal bankruptcy) debt into new (non-dischargeable in personal bankruptcy) debt. If you file personal bankruptcy after making these transfers you may have to pay that money back. Unless you are planning to win the lottery, robbing Peter to pay Paul never works for long and only causes problems when you finally do file personal bankruptcy.

The Ostrich Approach:
Too many debtors simply take the “Ostrich Approach”, burying their head in the ground and trying to avoid personal bankruptcy. They hope nothing bad will happen if they do nothing. Unfortunately, they usually end up being sued and their wages and/or bank accounts garnished or having their home foreclosed. Filing personal bankruptcy can stop this before it starts.

B. Bankruptcy Alternatives- If you do decide to file bankruptcy

The primary consumer chapters are Chapter 7 and Chapter 13

Chapter 7 bankruptcy is also referred to as “liquidation” or “straight bankruptcy”. Under Chapter 7 you discharge all debt that can be discharged, usually credit card, medical and other miscellaneous debt. Most Chapter 7 debtors will choose to repay some debt like mortgage debt or car loans. As a rule you cannot discharge secured debt and still keep the secured asset, although there are some exceptions for debt like second mortgages in some areas of the country. Many debtors prefer Chapter 7 bankruptcy because there are no payments to be made.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy involves repayment of part or all of your debt for up to five years. Some debts that you will keep may gain more favorable treatment under Chapter 13 bankruptcy. You may also be able to incorporate back payments on your home into a Chapter 13 repayment plan.  My colleague Nancy Thompson is terrific for Chapter 13 bankruptcy here in Des Moines, Iowa.

Keeping the home & keeping the cars?

Home- If you owe more than your home is worth or you simply cannot make the payments, it may be best to surrender. Most people who want to keep their home when filing bankruptcy do so.

Cars- If you owe more than your car is worth or cannot afford the car payments, your bankruptcy may be the best way to get relief from that debt. Many people who file bankruptcy do keep their car and continue the payments.

by Jeff Mathias, Des Moines, Iowa bankruptcy attorney, 4800 Mills Civic Parkway, West Des Moines, Iowa 50265. Tel: 515-261-7526, Toll Free 1-800-997-1395.