Avoiding bankruptcy: Alternatives for digging out of card debt
Drowning in debt? Consider these options to restore your financial health
covering entrepreneurship, small business and personal finance
If you’re swimming in credit card debt and struggling to keep your head above water, someone may have hinted that you consider bankruptcy.
If you’re averse to the idea of filing for personal bankruptcy protection, consider alternative steps for digging out of debt and putting your finances on solid footing.
Digging out of debt: One size doesn’t fit all
The medicine may be bitter at first and could vary, depending on your circumstances and commitment to making the necessary lifestyle changes. The reward – healthy finances and peace of mind – should make it worthwhile.
“There’s no one option that’s the best option,” says Dani Adelstein, founder of fee-based, for-profit New York debt settlement firm JXD Financial. “This is about taking control of your life; also about having accountability for your own life.”
Debt attorney Leslie Tayne, founder of New York-based Tayne Law Group, who also negotiates client debts and payments, sees bankruptcy as an option only in the direst situations. “The alternatives are so, so effective,” she said.
Getting ready to take action
As a first step, take advantage of your right to get a free copy of your credit report annually – either via AnnualCreditReport.com or CreditCards.com – and find an expert to help you assess your financial circumstances.
National Association of Consumer Advocates Executive Director Ira Rheingold recommends working with a nonprofit financial counselor to analyze your debt to find out whether you really owe what creditors say you do.
“Understanding your financial situation may be the most important thing you can do,” he said.
With a clear picture of how much you really owe, the next step is to choose the strategy that best fits your situation. Here are some approaches worth considering:
Options to dig your way out of card debt
- Sell valuable assets. Move to a more affordable home or downgrade to a modest used car.
- Move to a less expensive place. Explore states or countries with a much lower cost of living.
- Get a second job. Put your expertise and spare time to good use.
- Secure a personal loan. If a home equity loan is not an option, a family loan might help.
- Negotiate with creditors. You can do this by yourself or through a professional agency.
Sell valuable assets.
Selling your house or car may seem extreme, but may be a resourceful way to pay off debt and avoid bankruptcy court.
- If mortgage payments are too big, consider selling, moving to a more affordable home and trimming debt with sale proceeds.
- If you have an expensive car, you can sell it, buy an inexpensive used car in its place or go without for a while if you live in a place where walking, commuting or car-sharing services are viable alternatives.
Too many people have a “keeping-up-with-the-Joneses mentality,” Adelstein said. They have “too much home, too expensive car, not enough money for their month, so to speak.”
Debt-laden consumers are typically reluctant to sell their homes, however. “People are too emotionally attached to material items,” said Tayne. “They say, ‘I don’t want to sell my house, I’ve been there for 30 years.’”
If you’re spending more than a third of take-home income on housing, you’re out of budget and not in a healthy relationship with that house, she said. “People think that buying a house or staying in a house is the be-all, end-all. I really wish people would take my advice sometime and sell their house.”
Consumers often end up in debt by turning to credit cards when costly housing tightens their cash flow, she notes. “You can’t stop the bleeding with a credit card.”
Selling a home can be a good step, “especially when you consider that the credit card debt is just going to increase exponentially because of the interest,” says certified financial planner Rick Kahler, president of Kahler Financial Group.
Move to a less expensive place.
People who can work remotely might consider moving to a less expensive region, Kahler said, noting that living costs are much lower in Panama and Costa Rica, and that nine U.S. states avoid taxing either income or, specifically, wages.
“I have overspending clients that live in places like New York City” who could move to South Dakota, he said. If they can do a virtual job, maintain the same income and cut expenses in half, “that frees up a ton of money,” Kahler said.
Selling a house can take months, however, so it’s not necessarily the quickest tactic.
Get another job.
Video: How a side hustle can help you pay down debt
“I’ve known people who have worked three jobs to pay off debt,” Kahler said.
“Working a second job is huge,” Adelstein said. Using your expertise and spare time to make extra money can help you trim down card debt without changing your lifestyle dramatically, experts say.
If you're considering this alternative, see "Tips, tools for setting up a side gig to get out of debt" for further advice.
Secure a personal loan.
Your credit score may rule out a regular home equity loan or second mortgage, and you may recoil at the thought of taking on new debt.
A low-interest family loan, however, can help relieve you of high-interest credit card debt. Borrowing from family or friends can backfire, however, if done carelessly. Family members should treat loans in a business-like manner, experts say, with paperwork recorded and stamped at the courthouse.
“It’s just really messy business not to treat a family loan seriously,” Kahler said.
See CreditCards.com’s 6-step guide to borrowing from friends, family for further information and advice, including a sample promissory note for loans to family, friends.
Negotiate with your creditors.
You might be able to negotiate a plan with your credit card company to lower or eliminate interest, trim your monthly payment and, possibly, reduce your balance.
“You only have so many resources and rather than not pay a creditor at all, give them a call and tell them what you can pay,” Kahler said. Insolvent consumers may have more leverage than they realize, he said.
If you sold your home or car, consider negotiating a lower, lump-sum payoff amount, Kahler suggested.
Consumers can try to negotiate themselves, work with a nonprofit credit counseling service or turn to a for-profit professional (one who is transparent about fees and doesn’t require upfront payment).
Video: The basics of debt settlement
“All we do is negotiate unsecured debt for consumers and business owners,” said attorney Tayne, who aims to cut client debt by about half and eliminate interest.
Negotiating alone can be problematic for consumers, said Tayne, who may spend more than an hour on the phone checking on a client account. “Good luck getting through to a creditor and understanding what that creditor is telling you.”
Letting a professional negotiate on your behalf
Working with a for-profit firm does carry a price. The industry charges an average of 20 to 25 percent of the total debt, said Adelstein, who charges 15 percent, building the fee into clients’ new monthly payments. His clients typically pay 55 percent of their original debt, including his fees.
Tayne, who also works her fee into clients’ monthly payments, charges 39 percent of debt savings – or about 19 percent of the original debt, if settled for half – which she said is in line with legal services.
Working with a nonprofit counselor
Nonprofit credit counselors may be able to help you lower your interest rate and monthly payments and potentially waive certain charges through a debt management plan, which consolidates debts and helps you pay them off in three to five years.
Nonprofit DMP fees could run from $25 to $35 a month, but could be higher or lower, depending on the agency, National Foundation for Credit Counseling spokesman Bruce McClary said. Know that your cards will most likely be canceled once you enter into a DMP.
Wherever you turn, ask how the plan might affect your credit report and score.
Trimming unnecessary costs: Replacing ‘wants’ with ‘needs’
- Anyone trying to improve finances should assess which expenses represent “wants” versus “needs.”
- You can replace restaurant meals, expensive vacations and a lavish wedding with home-cooked meals, budget-friendly trips and modest but memorable nuptials. A do-it-yourself kitchen update of new paint and lighting may need to suffice for now.
- While the lifestyle changes involved in tackling your debt and avoiding bankruptcy may be challenging, you may gain the energy and positive outlook needed to build your business or look for a new job. When clients are following a new, easier plan, Tayne said, their situation almost always turns around.
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