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What are some Alternatives to Bankruptcy?

Updated: Feb 16, 2021

Alternatives to Bankruptcy for Secured and Unsecured Debt

Bankruptcy is a big step to take. While the process is not meant to be punitive, there are times where it might feel like it. Bankruptcy is designed to help you get through a tough time and give you a fresh start. However, during the process, you may need to make hard decisions and even must accept some unpleasant realities about what assets need to be sold to pay off creditors.

For many people, once they see the level of debt they are in, they automatically assume that they must file for bankruptcy to get out from under the pressure of owing money. Bankruptcy is not always required, and in some cases, it is not even recommended. There are many options to consider before going down the road of deciding if Chapter 7 or Chapter 13 bankruptcy is the way to go. We are going to discuss a few of these alternatives.

The details here are going to be at a very high-level, so while it is good to review these options, your best bet is to call our office and schedule a free consultation. Kamini is offering video consultations, so you do not have to worry about entering an office building or meeting face-to-face during these uncertain times.

Not all debt is the same. There is “unsecured debt,” such as credit cards or medical bills, and there is “secured debt,” such as a mortgage. The difference between unsecured and secured debt is that with secured debt, the borrower has put something up as collateral, such as the home that the mortgage is paying off. If the debt goes unpaid, the holder of the secured debt has the option to take possession of the collateral and sell it to pay off what is owed. This is called a foreclosure.

Unsecured Debt Options

Debt Settlement

Debt Settlement is when a creditor agrees to accept less than the full amount owed to settle a debt that is legally owed. Debt Settlement is generally used to settle a debt owed to a single creditor, such as a credit card company or hospital for a medical bill. The process takes quite a bit of time, and the interest and penalties are still accruing while you are negotiating. In the end, you may be able to settle the debt by reducing it by a significant amount.

Not all companies will consider Debt Settlement, and even if they consider it, they are not obligated to accept any offer of a settlement. If companies do accept a reduced amount, you will still owe taxes to the IRS for the amount forgiven.

Another downside of a settlement is the impact to your credit score for seven years. However, bankruptcy also has a negative impact on your credit. Chapter 13 remains on your credit for seven years, while Chapter 7 remains for ten. Generally, after filing a Chapter 7 or Chapter 13 bankruptcy, your credit score will go up even while you are in the process of bankruptcy. With a negative effect on your credit being a result of most of the options, it is a part of the process that you are going to have to consider regardless of the direction you take.

Just remember that with bad credit, your credit score is already negatively affected. Filing a bankruptcy shows that you are doing something to fix your credit, which is seen as a positive step in the right direction.

Debt Consolidation

The alternative of Debt Consolidation is when you put all of your eggs in one basket. You are taking multiple bills and consolidating everyone into one monthly bill with one payment. There are different ways to consolidate your debt. You can take out a loan to cover all the debt and then pay back the loan, or you can work with a Debt Consolidation Company. With Debt Consolidation, you are not taking the Credit Report hit you are with a Settlement or a Bankruptcy, but in some ways, consolidation is one of the hardest ways to go in reducing debt.

With Debt Consolidation, you are required to pay a fee to the debt consolidation company while at the same time making a monthly payment to them to set aside to use to pay your creditors if they reach a settlement with them. It is very risky as while they are negotiating to settle, your creditors can still pursue legal action against you and even obtain a judgment against you. Sometimes the debt consolidation companies are unable to reach a settlement with your creditor, which would leave you in the same position as were you before you started. Another negative aspect of Debt Consolidation is that you will have to pay taxes on the forgiven amount.

Debt consolidation requires an extremely high level of personal discipline. You must be willing to set a serious budget and stick to it. You also must refrain from using any credit cards as not to keep burying yourself further is debt, and you must realize that it is also a long process.

With Debt Consolidation, you are still going to pay the full amount owed, but you will be able to cut down on the interest and penalties that have been piling up as long as you pay the monthly amount on time.

Secured Debt Options

Loan Modification

Loan Modification is when you reach an agreement with your mortgage company to change the terms of your mortgage. The terms that might be changed include the length of the loan, the interest rate, or payment amount. The goal is to reduce the monthly payment to make it affordable in a way acceptable to the bank to reduce or remove the risk of foreclosure.

Loan Modification might be an option if you have fallen behind on your mortgage payments and are unable to refinance. The first thing a modification does is to resolve your delinquency status with the mortgage company. Load Modification does impact your credit, but not to the same level of foreclosure, and it allows you to stay in your home.


Refinancing is when you receive a completely new loan with new terms and agreements. Refinancing can be an option if you are current with your mortgage, or you are just starting to have issues with payments. Refinancing is an option when you are more proactive with your situation and can start to make moves before you fall too far behind on payments. Once you fall behind, the option of refinancing becomes difficult, or you may be ineligible.

Short Sale

A Short Sale is when you sell your home for less than the amount due after falling behind on payments. All the proceeds from the sale will go to the lender, and the mortgage payments come to an end. With a Short Sale, once approved by the lender, the sale legally satisfies your obligation, and no further mortgage payments are made. There are other terms and conditions involved which may have financial ramifications, so it is essential to work with Kamini Fox to have the terms professionally and adequately negotiated.

Short Sales also will negatively impact your credit score, but you will be able to get back into the market and purchase a home faster than you would be able to do so after a bankruptcy.

Short Sales are not always an option. You will have to provide financial proof that you are unable to catch up on your payments, and your current financial situation makes it difficult, if not impossible, to remain in your present loan without heading to foreclosure.

To go over your options, call Kamini Fox at 516-493-9920.

If you are in a situation where you are buried in credit card debt, or your financial situation has changed, you may be able to seek an alternative before moving into bankruptcy. If you have lost your job or were forced to make a change where your income has been drastically reduced and has caused you to fall behind on mortgage payments, there are things you can do to improve your situation without filing bankruptcy.

When you call Kamini Fox for a consultation, she will review your overall situation and provide counsel on your options and what is the best way to proceed in your case.

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