What's The Trouble With Bankruptcy Alternatives?

Trouble With Bankruptcy Alternatives

Most people dread filing bankruptcy, that’s why they try to exhaust all of their options before they make a trip to a bankruptcy attorney.  Unfortunately for many debtors who try to avoid bankruptcy, bankruptcy alternatives are not beneficial for their circumstances.  Why is that?  Below we examine a few of the most common problems with bankruptcy alternatives:

One of the first things that a debtor does in his/her attempt to avoid bankruptcy is try to consolidate their debt. The most common method of consolidating debt has been the home equity loan.  The problem with the home equity loan is that it often turns unsecured debt into secured debt by securing the loan with the debtor’s house. If the debtor has trouble paying the new loan they could possibly lose their home to foreclosure by the creditor.  Bankruptcy is often a better choice because bankruptcy discharges unsecured debt while helping the debtor stop foreclosure .

Debtors who have large credit card balances often try to work with debt settlement companies to pay “pennies on the dollar” for their debts.  The problem with this bankruptcy alternative is that even if they are able to reduce the amount of credit card debt they owe in a settlement, they still need to pay taxes on the forgiven portion of the debt.  If the debtor had reduced or discharged the unsecured debt in bankruptcy, they would not owe the IRS taxes on the forgiven portion of the debt.

And finally, many debtors who want to avoid bankruptcy think that ignoring their debts is the solution.  While a small portion of the population can effectively use this method because they have no income and no assets, it is not feasible for most people.  If you ignore your debts you could face lawsuits and wage garnishments that only bankruptcy can stop.