Consider These Alternatives to Bankruptcy for Different Situations
The word “bankruptcy” has a lot of negative stigma attached to it, but usually is a reasonable solution for people with debt they can’t afford to pay off. However, it’s not always the best solution for every individual or business. Many factors go into the decision you will ultimately make, and a good bankruptcy attorney can help you put together a plan before you take action. Alternatives to bankruptcy generally (but not always) involve payment of the debt in full. Here are some alternatives that are useful to consider when trying to figure out the best way to get back on track financially:
1. Payment Plans with Multiple Small Creditors
When you owe debts to multiple creditors, a good strategy is to make minimal payments to all accounts and pay as much as you can (up to your budgeted total) to the smallest account until paid off. Then redirect those funds to the next smallest account and continue the process. For example, if you have ten accounts and can afford $100 then send $5 to nine of the accounts and $55 to the 10th until it is paid off. After that send $5 to the remaining 8 accounts and $60 to the 9th, etc.
2. Payment Plans with One Large Creditor
Try to negotiate a payment plan over time. Even if the creditor sues you, most creditors will agree to a payment plan. If you get sued, a creditor could garnish bank accounts and wages, so ask the creditor for a written “Covenant Not to Execute” in exchange for your commitment of timely payments. The covenant is their agreement NOT to garnish your wages and bank accounts while you make payments.
3. Negotiate a Lump Sum Payoff
Most creditors will negotiate a lump sum payoff if the account has been charged off or is seriously past due. That lump sum payoff could be as low as 20% of the outstanding balance or could be as high as 75%. Keep in mind that if the amount not paid is more than $600 then the creditor will report this to the IRS and you may owe income tax on that forgiven amount. The best time to settle for a lump sum payoff is in March, June, September or December and understand that the creditor who accepts your offer is going to want the money immediately.
4. Pay Off State Taxes Before Federal Taxes
The Oregon Department of Revenue is much more aggressive than the IRS. If you owe both, pay down the state taxes as quickly as possible. Call the IRS to set up an “Installment Agreement” but do NOT offer them a specific payment amount. Tell them you are struggling, and ask the agent for the minimum amount they will accept. You can always pay more, especially after you have paid off the state tax debt.
5. Reform Your Student Loans
If your student loans are in default it is possible to reform the student loans and get them back into good standing. Once in good standing you may qualify for one of the many income based repayment plans available.
6. Default on Your Mortgage
If you do not qualify for a loan modification and cannot afford the home it is almost never a good idea to “short sell” the property because this may result in taxable income to you of the amount not paid at closing. That being said, you still have a right to sell your home even if the lender has initiated a foreclosure against you.
Talk to an Attorney First
If you’re considering bankruptcy or plan on taking action with any of the above steps, talk to a bankruptcy attorney first. Many bankruptcy attorneys will give you a free consultation where you can discuss your situation and put together a plan to pay off your debts. If you’re in the Portland, Oregon area, feel free to schedule an appointment with me, and I will point you in the right direction, whether you plan on filing for bankruptcy or not.