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Alternatives to Bankruptcy: Information on options

Updated: Apr 1, 2023

Bankruptcy Alternatives: Information on Debt Settlement, Debt Consolidation, and Credit Counseling

Man thinking about bankruptcy options
Thinking about bankruptcy

Let's discuss three bankruptcy alternatives: debt settlement, debt consolidation, and credit counseling. Bankruptcy is a lawful way for people and companies to have their debts pardoned or reorganized. Although bankruptcy can offer help to those drowning in debt, it can also have adverse effects like adversely affecting your credit report and making it tough to acquire credit in the future. If you are considering bankruptcy, you should explore other possibilities that could be available to you.

Debt Settlement

Debt settlement is a process where you negotiate with your creditors to pay a one-time sum that is lower than the total amount owed. This could be a practical approach if you have a huge amount of debt and can't make your regular payments. However, it is essential to be aware that debt settlement can also cause bad outcomes, such as causing damage to your credit score and being subject to taxes on the amount of debt that is forgiven.

Pros of debt settlement

  • You may be able to pay off your debts for less. This is the main advantage of debt settlement. If you're struggling to make your monthly payments, debt settlement can help you get out of debt faster and save money.

  • You may avoid bankruptcy. Debt settlement can be a good option for people who are considering bankruptcy. It can help you avoid the negative consequences of bankruptcy, such as having your wages garnished or your assets seized.

  • You may stop collection calls. Once you've entered into a debt settlement agreement with your creditors, they will stop calling you to collect the debt. This can provide you with some much-needed peace of mind.

Cons of debt settlement

  • Your credit score will be damaged. When you settle a debt for less than you owe, it will be reported to the credit bureaus as a "charge-off." This will damage your credit score and make it difficult to get approved for loans or credit cards in the future.

  • You may have to pay fees. Debt settlement companies typically charge fees for their services. These fees can add up, so it's important to factor them into your decision before choosing debt settlement.

  • Your interest may keep accruing on other cards. Even though you eventually settle with one credit card, the debt increase on other non-settled cards has increased in the meantime completely wiping out your gain. If you have many creditors, the likelihood of success diminished because of the complexity of timing settlements to satisfy multiple creditors.

  • There's no guarantee that you'll be successful. There's no guarantee that your creditors will agree to settle your debt for less than you owe. If they don't agree, you'll still be responsible for paying the full amount of the debt.

Debt settlement is a serious decision that should not be taken lightly. It's important to weigh the risks and benefits carefully before deciding if it's the right option for you. If you're considering debt settlement, be sure to do your research and talk to a qualified financial advisor to get advice that's right for you.

Debt Consolidation

Debt consolidation is a process in which you take out a new loan to pay off your existing debts. The goal of debt consolidation is to simplify your finances by combining all of your debts into one monthly payment. This can be a good option if you have a high interest rate on your existing debts and can qualify for a lower interest rate on a new loan. However, it is important to be aware that debt consolidation does not necessarily reduce the amount you owe and may not be a good option if you have a poor credit score or are unable to qualify for a new loan. Using a 401(k) loan makes sense since the interest gets paid to you, but rarely does it ever financially wise to withdraw from a 401(k) to pay unsecured debt since a 401(k) is an exempt bankruptcy asset.

Debt consolidation can help simplify your payments and potentially lower your overall interest rates, but it's important to understand the pros and cons before making a decision.


  1. Simplify payments: Instead of making multiple payments to different creditors, you can make a single payment each month to the debt consolidation loan.

  2. Lower interest rates: Debt consolidation loans typically have lower interest rates than credit cards, which can save you money over time.

  3. Improve credit score: By consolidating your debts and making timely payments, you can improve your credit score.

  4. Fixed payments: With a debt consolidation loan, you have a fixed payment each month, making it easier to budget and plan.


  1. Longer repayment term: Debt consolidation loans may have a longer repayment term than your current debts, which means you could be paying more interest over time.

  2. Fees and charges: Some debt consolidation loans may come with fees or charges that increase the overall cost of the loan.

  3. Risk of more debt: Consolidating your debts doesn't eliminate them, and if you continue to use credit cards or other forms of debt, you may end up with more debt than you can handle.

  4. Impact on credit score: Applying for a debt consolidation loan could result in a temporary decrease in your credit score.

In conclusion, debt consolidation can be a helpful tool for simplifying your payments and potentially lowering your interest rates. However, it's important to weigh the pros and cons and carefully consider whether it's the right option for your financial situation. If you're considering debt consolidation, be sure to shop around for the best rates and terms and work with a reputable lender. And, as always, it's important to make timely payments and avoid taking on more debt in the future.

Credit Counseling

Credit counseling is a process in which you work with a trained professional to develop a plan to manage your debts. This can include creating a budget, negotiating with creditors to reduce your interest rates or monthly payments, and developing a plan to pay off your debts over time. Credit counseling can be a good option for those who are struggling to make their monthly payments and need help managing their debts. However, it is important to be aware that credit counseling may not be able to help you reduce the amount you owe or improve your credit score.

Your attorney can help

Often is comes down to the likelihood of success, the amount of debt and the consideration of your assets at risk. An attorney can help you review you situation so that you can make an informed choice.

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