Being in debt can seem all-consuming. But before you decide bankruptcy is your only way out, consider other alternatives that not only help you recover your credit score over time, but help you work toward a more debt-free life.
Here are other options to look into before you turn to bankruptcy.
Consolidate Your Debt
Consolidating your credit card debt means transferring your balance to a card with a 0% introductory APR. This allows you to avoid paying high interest fees for typically 15–21 months, while simplifying your repayment by rolling multiple balances into one. With a more streamlined repayment system, your on-time payments and lower balances can help your credit score over time.
Tapping Your Assets for Debt Relief
Liquidating your assets means selling things like your home, car, or other valuables to free up cash for debt repayment. Keep in mind that proceeds from the sale may be subject to capital gains tax, which can eat into the relief you sold your belongings for. Beyond the financial side, some assets carry sentimental value, which is worth weighing before you decide this route is right for you.
Talk to Your Creditors
The best time to call your creditors is early on, when you realize you're struggling. But reaching out no matter what is a good way to get started on helping yourself out of debt. When you talk to them, ask for a hardship plan, lower payment, payment arrangement, or a settlement offer.
Borrowing Against Yourself
If you have a solid retirement plan, you can often borrow up to 50% of your vested balance. This way, you're only borrowing against yourself. You'll typically have to pay it back within five years with interest, but the interest just goes back into your retirement. However, if you lose or leave your job, you could be required to pay it back in full before you're ready.
Be Wary of Debt Settlement Companies
Debt settlement companies can be tempting since they work directly with credit card companies to significantly reduce what you owe. Unfortunately, what seems too good to be true often is. Debt settlement companies are often for-profit organizations that charge high fees, up to 15% to 25% of your enrolled debt. Typically, these companies advise you to stop paying on your debts during negotiations, leading to penalties and negative marks to your credit score. Creditors are under no obligation to settle, and if they don’t, you now owe more money than you did starting off.
Try Credit Counseling and Debt Management
Before deciding your options, consider talking to a credit counselor through a nonprofit certified credit counseling agency. Credit counselors provide free credit counseling and can help you create a budget that works for you. They can also enroll you in a debt management plan, allowing them to negotiate with your lenders to reduce your interest rate and consolidate your loans into one affordable monthly payment.
While deciding which method will work best for you, knowing that you have alternatives to bankruptcy can help you make the right decision for getting out of debt.