What alternatives are there to filing bankruptcy?
Credit counseling and debt repayment services
With the explosion of consumer credit in recent years, there has been a
proliferation of credit counseling and debt repayment services. Almost all claim
to be nonprofit agencies dedicated to helping the public. These services offer
to negotiate with each of a debtor’s creditors for a lower monthly payment. The
debtor then sends a lump sum each month to the service, which is then
distributed among the creditors, usually on a monthly basis.
One disadvantage is that it can be difficult to find a good credit counseling
service. Further, approximately 40 percent of debtors using such services fail
to complete their debt repayment plans, and usually end up worse off financially
than when they started. A debtor’s credit rating may be significantly damaged if
the debtor is treated as delinquent over the entire life of the repayment plans.
Finally, if less than entire amount of the debt is paid and the remaining amount
is forgiven, there could be some negative tax implications.
Debt renegotiation
If a client, for example, has only one small creditor, the client may be able to
resolve the problem through negotiation, either by paying a reduced lump sum or
by making reduced payments over some period of time. Business creditors tend to
be more pragmatic and thus more willing to negotiate. Credit card issuers can be
difficult to negotiate with, especially if the client’s account is current.