Q: What alternatives are there to filing bankruptcy?

A: Although the new bankruptcy law makes filing bankruptcy more difficult and less attractive, luckily, there are more alternatives to bankruptcy today than ever before. The four methods explored here are negotiating with your creditors, using a bankruptcy attorney, debt settlement, and debt management.

One way of dealing with crippling debt is to simply ask your creditors what they can do for you. Can they lower or eliminate your interest rates? Forgive late-payment fees you may have already racked up? Put your debts into "forbearance" for a few months while you get yourself back on your feet? If you're asking yourself, "Why would my creditors agree to any of this?", the answer is because they know if you file bankruptcy, they will get little or nothing. Helping you avoid bankruptcy by coming to more favorable terms can be vastly preferable to many creditors than going through bankruptcy proceedings to recover what they're owed. You would be surprised how easy many creditors can be to work with.

A similar, but slightly different option is to use a bankruptcy attorney to help you settle one or more of your debts. Let's say you owe a company $10,000, and they're threatening to take you to court to recover it. You could hire an attorney to draft a letter stating that you are considering filing bankruptcy and asking if they would be willing to settle the debt for less than the full amount. Often, a company will agree to settle for 10-30% of what they're owed if they think you might declare bankruptcy otherwise.

More dramatic is the practice known as debt settlement. Under a debt-settlement arrangement, you stop paying your bills, and instead, pay a debt-management company. They don't remit payment to your creditors (as under debt management/ credit counseling, discussed below), but instead, put your money in escrow. When you've achieved a certain balance or your creditors begin to turn up the heat, your debt-management company offers to settle the debt on your behalf, using the money you've saved up in escrow. This can damage your credit, but not as badly as bankruptcy.

A less aggressive alternative to bankruptcy is debt management, also commonly referred to as "credit counseling" (although, technically, debt management is just one aspect of credit counseling, which is a much broader term). Under this practice, your debt-management company (also sometimes known as a debt-consolidation company) works out deals with your creditors to lower interest or forgive fees, etc., and you pay the debt-management company, who then remits payments to your creditors. You can normally save significantly on interest charges by using a debt-management firm, but more importantly, you get the ease of making just one payment per month, instead of several. Although debt management can be temporarily harmful to your credit, it's much better in the long run then falling totally behind on your bills and having no other solution but bankruptcy.

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