Alternatives to Bankruptcy

Bankruptcy is the final financial safety net for consumers and businesses. Federal bankruptcy law gives people or businesses who have gotten deeply in debt a way to pay all, part or none of the debt and begin again with a clean slate. It also may help creditors recoup at least a percentage of the monies owed them.

The long-term effect of the bankruptcy on the debtor, however, is a damaged credit history that can hinder future attempts to get a loan, a credit card, or a mortgage. Therefore, bankruptcy should be the solution of last resort. Alternatives exist to help a person or business in financial straits settle the debts and avoid bankruptcy.

The first option is to speak directly with the creditors to see if they are willing to accept a smaller cash payment to settle the debt or to stretch smaller payments over a longer period of time. A business's credit manager is the person to contact. For past due accounts, contact the collections

If the debts involve several creditors, a financial or consumer credit counseling program can help by setting up a budget for the debtor, negotiating with creditors, and designing a repayment plan acceptable to all.

Several credit counseling sources exist, both non-profit and for-profit organizations. Universities, county extension agencies, credit unions, housing authorities, and banks often offer such services for little or no fee.

For-profit counseling centers charge a fee, and vary in their effectiveness. Non-profit centers receive part of their funding from creditors, lowering the fees to the debtor. However, some of these programs may favor the creditor in designing the repayment plans. A little research will help determine which counseling program fits the situation best.

Consumer Credit Counseling Services (CCCS) are non-profit programs located across the U.S. to help individuals get on the right financial track. They assist the debtor in budgeting and establishing a repayment plan agreeable to creditors.

Under such a plan, the debtor may still have to pay interest charges on the debts. However, creditors may waive, or dismiss, the interest charges when a CCCS repayment plan exists. The debtor makes a monthly payment to the CCCS, who in turn pays the creditors. The organization may charge a small monthly fee.

To find the nearest Consumer Credit Counseling Service office, check the telephone directory or call the National Foundation for Consumer Credit toll-free at 1-800-388-2227.