Personal Bankruptcy: 7 Alternatives to Filing for Chapter 7

Bankruptcy. The word alone spells relief for some, yet sends shivers through others. The right to get relief from debt was important by the founders of America. They included bankruptcy in the U.S. Constitution at Article 1, Section 8.1 Of course, there are many disadvantages to bankruptcy.2 One is the extra harm to your credit standing for several years or longer. 

Here are seven alternatives to personal bankruptcy to consider and discuss with your attorney, financial advisor and lenders.

7 Alternatives to Filing for Chapter 7 or 13 Bankruptcy

Both Chapter 7 and 13 bankruptcies will impact your ability to borrow money for years. Loans will be harder to get and the interest rates will be higher.3 This means you will always pay more for less. If you would like to avoid bankruptcy, these 7 alternatives may help.

1. Credit Counseling

Before filing for bankruptcy, credit counseling is a legal requirement in most states, including Minnesota.4 With few exceptions, required counseling involves two classes: pre-bankruptcy credit and post-bankruptcy debtor.5 Aside from the course fees, the classes cost time.

You may find a non-profit credit counseling agency to meet this requirement. But some “free” credit counseling agencies get paid to encourage debt consolidation loans.6 What is a debt consolidation loan and is it a good idea? Good questions, which take us to our second alternative.

2. Debt Consolidation Loan

Whether a debt consolidation loan is wise or not depends upon circumstances. For some, a debt consolidation loan is advisable, for others, it is not. 

The biggest factor is the individual. If one could control their spending, they would not likely be looking to bankruptcy at all. Consolidating loans lower monthly outlays of cash. Be careful, though, as more borrowing could follow, burying you even deeper in debt.

Also, remember that a debt consolidation loan is still debt. The only difference is that with consolidation, the debts extend over a longer period of time. Too, the debt consolidation company may charge higher interest. Yet, even if the interest is lower, the total paid will be higher because of the time needed to service the debt. In most cases, a debtor ends up paying more rather than less.7

3. Debt Settlement

Another alternative to filing chapter 7 or 13 bankruptcy is debt settlement. Many companies offer debt settlement solutions for pennies on the dollar, even free. But “free” is not always free. 

In fact, the FTC warns that in some cases debt settlement is not a solution but a risk.8 Some companies that offer debt settlement are scams. Yet even legitimate debt settlement programs may be risky. Most require at least a 36-month commitment. And you send your money to them to service the program. Finally, creditors are still not obligated to settle. So, at the end of the program, you may still owe debts and be without the funds needed to pay it off.

If debt settlement is of interest, it’s best to negotiate directly with creditors. You may do this yourself or via an agent. Many creditors are happy to negotiate a settlement. But you may need to find extra funds by selling some items of value.

4. Liquidation of Assets

One way to get the funds needed to settle debt is to liquidate assets. Liquidation is selling items of value. The SBA offers tips for businesses that need to liquidate,9 and many of these apply to individuals.

The biggest takeaway from the SBA’s advice is to conduct an inventory of everything you own that has value. Then determine the best means by which to sell those items. For instance, with items of smaller value, you may decide to have a yard sale. Collectibles are often quickly sold through an online auction site like eBay. Larger items such as boats and motorcycles may sell best through classified ads. There are also a number of online marketplaces, like Facebook Marketplace, Nextdoor, and Offerup. Be sure to read each website’s best practices for safely selling on online marketplaces.

5. Let it Ride (Do Nothing)

Another alternative to filing bankruptcy is to simply do nothing … let it ride, as the saying goes. Some have tried this and saw their credit hit bottom. Once there, credit may never return to good standing. 

Doing nothing is dangerous. It could result in some creditors taking the debt to the courts.10 If a court rules in their favor, police can enter your home and seize items of value to sell at auction to cover the debt. By doing nothing you’re still doing something and you’re not likely to enjoy the outcome. Doing nothing is giving up control, which is seldom positive. 

6. Lifestyle Changes

Another way to avoid bankruptcy is to make lifestyle changes. Do you have a Starbucks coffee every morning before work? Do you like lunch at McDonald’s every day? Coffee and lunch from home even a few of those days each week will save money.

Of course this is not intended to disparage Starbucks, McDonald’s, or any place you enjoy. But our simple daily habits often amount to thousands of dollars a year.11 Thousands to use towards paying down debt.

7. Debt Management Planning

So, you’re in debt and considering bankruptcy, but did you plan for this? Of course not. In fact it takes ZERO planning to get into debt. Getting out of debt does take a plan. In fact, the great Ben Franklin said, “If you fail to plan, you are planning to fail.”

We couldn’t agree more. Before you mar your credit further with bankruptcy, why not make a plan? A Lundervold Financial advisor can help you look at your current financial situation and help you understand your options. The plan will match your current financial situation and lifestyle as best as possible. This way you can service your debt burden without it becoming too much of a burden on you and your family. 

If you agree, schedule time with Lundervold Financial right away. Call now 651-209-1906.

We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

Neither our firm nor its agents or representatives may give tax or legal advice. Be sure to speak with a qualified professional about your unique situation.

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[1] U.S. Constitution. As published on Criminal Justice Law. Accessed Jan. 23, 2021.

[2] Arnold Smith Law. “Advantages and Disadvantages of Filing for Bankruptcy.” Accessed Jan. 23, 2021.

[3] Jack R. Nerad. Car and Driver. Aug. 10, 2018. “How to Buy a Car After Bankruptcy.” Accessed Jan. 23, 2021.

[4] United States Bankruptcy Court District of Minnesota. “Credit Counseling Warning.” Accessed Jan. 27, 2021.

[5] Cara O’Neill. NOLO. “The Pre-Bankruptcy Credit Counseling Requirement.” Accessed Jan. 23, 2021.

[6] Federal Trade Commission. November 2012 “Choosing a Credit Counselor.” Accessed Jan. 23, 2021.

[7] Dave Ramsey. June 25, 2020. “The Truth About Debt Consolidation.” Accessed Jan. 23, 2021.

[8] Federal Trade Commission. November 2012. “Settling Credit Card Debt.” Accessed Jan. 23, 2021.

[9] Small Business Administration. “Liquidating Assets.” Accessed Jan. 23, 2021.

[10] Consumer Financial Protection Bureau. Feb. 2, 2018. “What may happen if I ignore or avoid a debt collector?” Accessed Jan. 23, 2021.

[11] Michael Schramm. USA Today. Oct. 10, 2016. “Money 101: How much is your Starbucks habit costing you? 7 tips to save on coffee.” Accessed Jan. 23, 2021.

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