11 steps to get out of debt without bankruptcy

Individuals applying for home loans often face trying situations in which they somehow struggle to pay off their mortgage dues. And, on failure to make their payments, most of them look forward to filing for bankruptcy. But Bankruptcy is not the only way out of debts, rather it's the last option that debtors often consider.

It is a common perception that bankruptcy wipes out all debts and gives a fresh start to most individuals. This prompts them to file for bankruptcy without thinking how it can affect their credit rating. Therefore, it is better if you can think of ways to repay your credit rather than file a petition for bankruptcy. There are a 11 steps which if followed can help you to eliminate your debts.

• Make plans to reduce your expenses:
  Consider all the bills that are yet to be paid. You should also take into account the expenses and interest rates for secured debts like home loan or car loan. Try to reduce your expenses in other areas by eliminating the items which you no longer require. Make timely payments on credit card debts and specially your mortgage since this is a secured debt and if you default, you may lose your property.
  
  
• Start off with an allowance system:
  When you are in multiple debts, what you can do is to start an allowance system. Withdraw minimum amount from whatever check you receive. You should restrict all your expenses to the amount received through the check.



• Take assistance from your family:
  Consider taking help from your family members and involve them to fix up their expenses on the basis of the allowance system. Cooperation among family members will further help you to cut down your expenses.



• Sell off your assets:
  You can obtain some cash if you sell off the assets, which you don?t require anymore. These assets may include some antique pieces, old dresses or collectibles. Cash acquired through this method helps to pay off at least a part of your debts.



• Debt Consolidation Loans:
  This option allows you to take a home equity loan in case you are to pay off credit card debts. But while you consider your home equity as security for the debt, be careful in paying it off. In case you are unable to pay off your equity loan, you may lose your home.



• Debt settlement services:
  Debt settlement services help you to negotiate with your creditors and settle your debts for less than what you owe. You can take help from an attorney in order to negotiate with your creditors so that your unsecured debts can be settled for up to 75% of the balance owed. The creditors may waive the interest rate or a part of the principal balance so that you can make the payments. But you cannot settle secured debts like home mortgage, auto loan, student loan or any tax debt.



• Take help from credit counselors:
  In case you find it difficult to deal with your debt payments with respect to your budget, take help from credit counseling services. They can also help you out with a loan repayment plan and negotiate with your lender so that you can be free of debts soon. Although a debt management plan does have a negative effect on your credit report, yet it is better than bankruptcy. On the other hand, it will also suggest ways to repay your debts.



• Negotiation with the creditors:
  In case you are not keen on taking up a debt management plan, you can yourself negotiate with the lenders. But then, you will have to keep a record of all your accounts - whether they are open or almost near the limit, or if the account has been closed and passed on to collection agents for debt collection. Generally, collection activities start off when your loan is due for 120 to 150 days and in case you don't have a good credit score, the collection actions may begin within 90 days from the due date.


In case collection actions are yet to begin, you can try and convince your creditor to allow low interest payments or waive the interest till you can accumulate savings for future repayment of debts. You may be allotted some time to reorganize your finances but this depends on your financial resources and your bill paying history. But if your account has been taken over by collection agencies, you can pay the collectors an amount equal to their incentive against collection actions.

Whether you go for a low interest or no-interest repayment plan with the collection agencies, make sure that out carry out the legal formalities. This keeps you updated on the financial data sent to credit bureaus and helps you to take measures whenever a problem arises.

Generally, debt collection activities get listed on your credit report for 7 years or so. Therefore, in order to retain your creditworthiness you can make efforts so that your collections notation display that the account was settled with no balance at all. You may also ask your creditor to take the notation off your credit report. They may do so if you can pay them the entire loan balance.


• Supplement primary income with a part-time job:
  When you are in severe debts, and unable to clear all your dues, a second source of income can be of great help. With an alternative source of income, you can save at least a certain percentage of your earnings while you pay down your debts.



• Follow a 30 month payback plan:
  When you are severe debt problems consider paying off at least one or two of them by taking up a 30 month repayment plan. Or else, you can negotiate with the lender or creditor for a low rate or a longer term.



• Installment order:
  This allows you to pay back your debts as per the order given by the Court. This helps you to clear your dues without being concerned of any legal action, while the order is in effect. This is a favorable option because now your creditors will have to accept the arrangement till the court appoints someone to monitor the payment of debts.

Bankruptcy is thus not the only option left out in case you are incapable of paying your creditors. Intelligent and quick thinking can help you to come up with several other ways by which you can be free from debts. A quick glance through the options listed above will help you choose the right way to avoid bankruptcy and therefore prevent your credit profile from getting a negative impact.

Related Article

• Is bankruptcy the last option?