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Looking for alternatives to bankruptcy? Fortunately, there are plenty of options. One example is home co-investment, which isn’t a HELOC or a reverse mortgage and doesn’t require monthly payments. In this article, we’ll explore this and other alternatives.
1. Debt Settlement
One alternative to bankruptcy is debt settlement. If your debt becomes unmanageable, this option can help you move forward. Debt settlement and bankruptcy share many similarities.
Debt Settlement involves negotiating to lower your debt to less than the original amount owed, allowing a portion to be forgiven. For example, if you owe $100,000, debt settlement could reduce it to $50,000.
Now lets look at what the debt settlement process looks like.
Understand the Process
During debt settlement, you typically work with a debt settlement company to guide you through the process. It’s important to research and choose the right company for you needs.
Here’s how it works: The debt settlement company acts as a link between you and your creditors. They will set up escrow account where your funds are collected. The company consolidates your payments and negotiates with creditors to lower your debt. You can then accept or decline the settlement and new payment plan. Once accepted, you start making payments to the creditors until your debt is paid off.
While debt settlement can be beneficial, it’s important to consider the potential downsides. For instance, debt settlement can negatively impact your credit score. It’s crucial to weigh the pros and cons based on your situation.
Understand the Fees
Debt settlement is a common alternative to bankruptcy, but it’s important to consider the costs and fees involved. Debt settlement companies often charge fees based on the enrolled debt or the saved amount. Check the FTC’s guidance and your state attorney general‘s insights for specific regulations in your state before proceeding.
Fees are a crucial factor in debt settlement. Many companies charge between 15-25% of the enrolled debt, which can vary significantly in costs.
Additionally, debt settlement companies may only operate in specific states due to varying regulations. Many debt relief providers offer free evaluations, which can be helpful informational sessions to explore your options.
Analyze The Debt Relief Companies Reviews
Another important consideration is the reviews of the debt relief company you plan to work with. While many companies have positive reviews, negative reviews can provide insight into their operations. We only work with 2-3 debt relief firms due to the high number of negative reviews many companies receive.
While debt settlement is a common alternative to bankruptcy, debt management can be a better option for preserving your credit score, although it might come with higher monthly payments. Let’s dive in.
2. Debt Management
Another alternative is debt management. This involves working with a company, such as credit counseling or debt consolidation, to help manage your debts. Debt management doesn’t involve lending you more money or settling your debt. Instead, it helps lower your interest rate from 22% down to 7% and waive certain fees. This allows you to put more money towards your monthly payments and pay off your debts faster.
Now lets look at what the debt management process looks like.
Understand the Process
When you meet with a debt management counselor, they will review all your debts and estimate a repayment plan, typically over three to five years. A monthly payment is set up, which you pay to the agency, and they handle paying your creditors. This simplifies your payments and helps you pay off your debts faster.
However, there are cons to consider. Credit counseling and debt management agencies often charge service fees, which can add to your costs. Additionally, you must close all your credit cards to avoid accruing more debt, which can impact your credit score.
While debt management can be a good option, it’s important to understand all the costs and implications before proceeding.
3. Debt Payoff Planning
Let’s go over each one of the snowball and avalanche to get a better understanding of it and compare.
Debt Snowball Method
The snowball method is when you start by listing all your debts from smallest to largest. Then from there, you start paying off your smallest debt first and make your way to the largest. This is one of the more common methods used because of how motivating it can be. When you start seeing your debts being paid off it can become encouraging to keep on going until the end.
Debt Avalanche Method
The avalanche method is when you list your largest interest to your smallest interest debt. Then you start off with the minimum payment on all your debts. Though once you start paying them off you use those funds towards paying off the highest-interest debt. From there you will keep on going with the same routine until you have paid off all your debts.
4. Home Co-Investment
Bankruptcy exemptions can help protect your assets from Chapter 7 bankruptcy. That said, one of the biggest challenges with bankruptcy is when your home has equity that is well above your state’s bankruptcy homestead exemptions. For example, let’s say you have $200,000 in home equity and the homestead exemption in your state is $50,000. You have $150,000 above the exemption, so if you file Chapter 7 bankruptcy, you may lose your house. If you file Chapter 13 bankruptcy, your Chapter 13 payment plan may be too expensive. You also may be in a position where you cannot get a HELOC or do a reverse mortgage.
This is a challenge for many people, so there’s something called home co-investment where a company will invest in your home for a share of equity in your home. So, when you sell your home, you will get some of the equity, and the home co-investor will also yield a profit from the equity.
The benefit is that you can access equity in your home debt-free.
If you are interested in this option, you need to understand whether your home would be eligible. To check eligibility, you can use this link which will show you eligibility and how much you may be able to unlock. If you use this option, please consider reading all the pros and cons of this option and read through the costs. For example, for this option, there may be a lien that is put on your house. You may also consider reading how long you have until you would have to share the equity back with them and how much equity you would need to share with them.
5. Debt Consolidation Loan
You can also look into a debt consolidation loan as another alternative for you. Basically, a debt consolidation loan is a loan that combines all your debt into one. Since it is just one loan now, you will only have to deal with one payment. For example, let’s say someone has 5 credit cards and $10,000 owed each, so $50,000, and let’s say payment is $500 per month. So your average interest rate is 18%. What Debt consolidation can do is; a $50,000 loan – $475 per month and the interest rate is down to 15% now.
That way you aren’t as stressed paying different loans back and lose track. Getting a debt consolidation loan also may lower your interest rate as we see in the example. Although to get a debt consolidation, it does depend on your credit and how much you want to combine your debt. One thing to mention is to not worry about your credit score/report. It won’t hurt it! A debt consolidation loan can become more manageable for you to use if this aligns more with what you are looking for.
6. Borrowing/Withdrawing From Your 401k
In 2024, we are adding the option that some people are considering which is borrowing or withdrawing money from their 401k to pay off debt.
While this is an option, 401k, and other retirement investments may be protected when filing bankruptcy, so that may be something to consider.
To help people thinking about borrowing from their 401k, we built a 401k early withdrawal calculator to help you estimate whether you may lose money borrowing or withdrawing early to pay off debt and avoid bankruptcy.
7. Help From Family or Friends
An alternative you can do is to also ask for help from your family and/or friends. Sometimes in certain financial situations, this might be an option you should consider. Most of your family and friends don’t ever want to see you financially struggle. So it never hurts to ask to borrow money as a loan or to even donate to you. The worst thing to happen is if they say no. From there you can move on to the next friend or family member who you are close with that may help you out. Just remember that it never hurts to ask.
8. Increasing Income
Boosting your income can be a helpful option. Consider taking on a second job, like working at a local retail store or restaurant, to bring in some extra money. Take some time to explore online job listings or ask around in your community. Jobs that offer tips can be especially rewarding.
If you have a car, driving services like Uber, Lyft, or Doordash might be a great fit. These opportunities let you work on your own schedule, making it easier to fit around your existing commitments. Plus, you can earn extra tips by delivering food or giving rides, helping you build up your income in a flexible way.
Freelancing is also another option you can look into. Such as using Upwork to find small job opportunities to do for others. Such as re-writing articles, proofreading an essay, or doing a few sketches for someone. Again, it is nice to look into this if you are on your own schedule.
9. Decreasing Expenses
You should also look into decreasing your expenses you may not even use or have better offers. Check for any subscriptions you may have. Such as Netflix, Hulu, HBOMax, STARZ, and Apple TV to see if you are really using all of it. If you aren’t using those subscriptions, delete them and only stick with one subscription for now.
You can also decrease your expenses by not going out as much to eat, like take-out food. Instead, cook at home, it will save you money over time. If you love coffee, maybe stick with at-home coffee instead of going to Starbucks in the morning every day. You will save a ton of money by not spending your money at takeout places. It might be hard at first but worth the sacrifice.
You should also look into your cell phone service provider and see if you are getting the best offer. In fact, look into other providers as well and see which one is more beneficial for you financially. Such as T-Mobile vs AT&T and Verizon ($40 deduction per month and unlimited GB vs 2 Gb). Just cutting back on these few expenses can make a big difference financially for your future.
10. Mortgage Refinancing
There are 3 common options when looking a mortgage refinancing
- HELOC
- Second Mortgage
- Cash Out Refinance
With 2024 mortgages rates, you may lose money though going through this option if you are locking a 7% interest rate when your current home loan interest rate is under 3%.
Now even though it is not the most common alternative, mortgage refinancing could be a good idea. How mortgage refinancing works is when the homeowner acquires a new mortgage loan and replaces their previous one. For instance, let’s say the mortgage is $500,000 worth and $300,000 owed → You have $200,000 in equity. Then you refinance your mortgage for $400,000 and get $100,000 in cash. It is nice because now you have more funds and also save more on your mortgage interest. Though here is the problem → $400,000 loan now, so your monthly payment is higher. Also, let’s say you had 20 years left on a 30-year loan. Now, with a $400,000 loan, you are back to a 30-year loan. Definitely doesn’t sound fun, but it could still be of use as an alternative.
11. Doing Nothing
I would generally not recommend this option, but what can happen if you have debt and stop paying? Well, nothing good and it will just get worse. Doing nothing will cause creditors to possibly sue you for unpaid debt. They will sue you when they think they can start collecting the debt. Such as your property, the amount of debt you still owe, state laws on garnishment, and statutes of limitation.
If you are being sued there are a few things you can try and do before going to court. For instance, you can try and settle your debt on your own. Though you also have to remember you can still be sued in debt settlement programs. If you are, in court most judges will be lenient depending on your case with a valid reason. However, it is always a good idea to try and resolve the issue before heading into court.
If a judge goes against you, a few things may happen. The debt collector can attempt four different ways. For example, Wage garnishment of a paycheck, Levy/garnishment of a bank account, Lien on property or assets – Home mortgage, and Continued normal collection practices. This is why you should never get to this point of “doing nothing” because that will become the biggest mistake of your life.
Conclusion
You may have experienced a recent financial hardship, but do not want to pursue bankruptcy. You are not alone. Many people are looking into avoiding bankruptcy. You also may have many options. Hopefully, you understand some aspects of 10 different bankruptcy alternatives.
Take the bankruptcy alternatives calculator below to see the costs and compare the pros and cons.
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