How to get rid of debt without filing bankruptcy

When you’re overwhelmed with credit card debt, medical bills, or other financial obligations, it’s natural to feel anxious and unsure about your financial future. Especially if you don’t know where to turn for help. The thought of filing for bankruptcy may seem like the only way out. But there are quite a few reasons bankruptcy isn’t always the best option for getting your financial life back on track. In some situations, an alternative strategy might make better sense. 

You have choices. We’ll help you understand them.

Why would someone want to avoid bankruptcy?

Bankruptcy can get many people out of financial trouble quickly, but it can be terrible for others. It’s worth considering the pros and cons, in case you can choose another strategy to get rid of debt, such as consolidation or debt resolution. Here are some reasons people opt to not file for bankruptcy:

• Bankruptcy creates a public record, so your debt problems are out there for anyone to see.

• Private (non-government) employers are allowed to deny job offers due to bankruptcy. This is more likely in jobs working with money or sensitive information.

• Bankruptcy puts your finances in the hands of a judge. You don’t get any say in the plan.

• Bankruptcy can stay on your credit report for up to ten years.

• Many filers are forced into Chapter 13 bankruptcy (a court-supervised payment plan) because they earn too much for Chapter 7 (the “clean slate” bankruptcy). Fewer than half of Chapter 13 filers complete their plans.

• Chapter 13 bankruptcy takes up to five years to complete, and the monthly payments can be brutal.

• Bankruptcy can cause social or professional discomfort because it carries a stigma. 

• Chapter 7 bankruptcy requires filers to surrender certain property. Chapter 13 requires them to give up part of their income for several years. 

• Bankruptcy isn’t free. You’ll pay court fees, and most people pay attorney fees, regardless of whether you get any financial relief.

First things first—what to do when you can’t afford your bills

Financial problems are scary, and it’s easy to panic and make snap decisions. But smaller, short-term tactics might be all you need to recover and move on. 

As soon as you know that you’re in trouble, contact your creditors about a credit card hardship program. Let them know that you’re having problems making your payments and why. Tell them what you’re doing to solve the problem and what you need from them. 

They may offer you possible help such as:

• Forbearance—You’re allowed to miss payments or make partial payments for a limited time. When this period ends, you’ll pay the missed payments and accrued interest. 

• Deferment—Similar to loan forbearance, but there’s no catching up. At the end of the deferment period, you simply resume making payments. Missed payments and interest are added to your loan balance.

• Modification—The creditor agrees to change the terms of your agreement. That might mean a lower interest rate, a smaller payment, waiving fees, or even reducing the balance. 

If it’s a credit card account, you might lose the ability to charge on your card, or your account could be closed. The issuer may give you fixed monthly payments until you clear your balance.

Your track record with the creditor may impact the type of help you receive. If you’ve been consistently making payments up to now, they may be more inclined to offer assistance.

More bankruptcy alternatives

When you want to get rid of debt and regain control of your financial future without resorting to bankruptcy, you have options. They include:

• Repay debt faster with the avalanche or snowball method.

• Take a second job, work overtime, or start a side hustle.

• Sell stuff you don’t need and put the money toward paying down debt.

• Consolidate debt with a loan to reduce your payment and/or interest rate.

• Enroll in a debt management plan with a credit counseling agency.

• Negotiate with your creditors to accept less than you owe (debt resolution) or hire a professional company to help you.

You can combine tactics to supercharge your debt plan and pay off your debts. For instance, sell some things to reduce your balances and then consolidate what’s left. And if you take on a second job, you might make your debt go away even faster.  

Avalanche or snowball debt repayment

Look at your budget for ways to lower your spending and put more income toward debt reduction. (If you don’t have one yet, make a budget.) Enlist your family in looking for ways to spend less.

The debt avalanche or snowball methods require you to push as much extra money as you can toward paying off one credit card while making minimum payments on the rest.

Here’s how it works:

• For the avalanche, prioritize your debts by interest rate, highest to lowest. You’ll pay off the account with the highest rate first, then the next highest, and so on. 

• For the debt snowball, you’ll list your debts by balance, from smallest to largest. You’ll pay off the account with the smallest balance first, then the next smallest, and so on. 

• Keep making minimum payments on all other credit cards while paying as much as possible on the targeted account.

• Every time you pay off one account, you’ll have more money available each month to put toward the next debt. 

The debt avalanche method might save you money because you’re paying off the most expensive debt first. However, many choose the snowball method because it could give you a quicker win, which is motivating.

Increase your income

Find ways to raise your income and put the extra money toward reducing your debt. Work longer hours if you get overtime pay. Take a part-time job or start a reselling business on the side. Sites like Fivrr connect people looking for work to those willing to pay for help.

You can get paid for your opinion (try FocusGroup) or earn on survey sites like MyPoints or Survey Junkie. Put up signs in your neighborhood and walk dogs. Pet-sit, clean houses, or run errands. 

You might also look to upgrade your main job and find one that pays more. Research shows that employees tend to get better pay increases by switching jobs than by staying with their employers. 

Sell things

Jumpstart your plan with a lump sum by selling things you no longer need. It can be very motivating to unload a chunk of debt when turning over a new financial leaf. Facebook Marketplace, eBay, Poshmark, OfferUp, and Craigslist are just a few options available to sell unwanted things fast. 

If you own a luxury item, you can sell it, replace it with an economy version, and put the difference toward paying down debt. 

Consolidate debt

Consolidation means getting a new debt consolidation loan and using it to pay off your existing debt. It only makes sense to consolidate if your new loan has better terms than the accounts you pay off. You might also get a lower monthly payment amount than what you’re currently paying. (Loan offers are based on underwriting conditions.)

There are three main types of debt consolidation loans:

• Personal loans can help you consolidate your debt with a fixed interest rate that may be lower than the rate you’re paying on your credit cards. However, your monthly payment might increase. That’s because personal loan providers design payments to wipe out loan balances in a few years. Many credit card issuers, meanwhile, set minimum payments very low, which can keep you in debt for decades. 

• Home equity loans or lines of credit usually come with the lowest interest rates because you pledge your home as a guarantee that you’ll repay the loan. Pledging your home makes the loan less risky for lenders. Home equity loans also have smaller monthly payments compared to personal loans because you’ll usually get more time to repay the loan. That said, stretching out debt repayment can cost you more in the long run, even if your interest rate is lower. If you go this route, repay your home equity loan as fast as you can. 

• If you qualify, balance transfer credit cards with zero interest can help you knock down your balances quickly during the interest-free period. You’ll pay a fee for each transfer, so you’ll need to calculate the interest savings and make sure it’s bigger than the fee. This strategy can be risky, and it’s best used on a one-time basis. If you pay off your cards with a balance transfer and then run up the balances on those cards again, you’ll be in even worse shape than before.. 

Debt consolidation can hurt you if you run your account balances back up while paying a consolidation loan. Consider closing the credit card accounts when you pay them off with the loan. 

Debt management plan (DMP)

Debt management plans are offered by credit counseling firms. They contact your credit card companies and may negotiate lower interest rates and payments for you. The balances aren't reduced. Every month, you make a single payment into your plan and your credit counselor distributes it among your creditors. 

One downside of DMPs is that you usually have to close your credit cards. That can be inconvenient and damage your credit score. DMPs also have a low completion rate (21%), because they’re not easy. The monthly payment is higher than the minimum payments on your credit cards, and you’ll need to make a firm commitment for the duration of the plan. If you miss a payment, your creditors can withdraw their cooperation.

Debt resolution

Debt resolution involves getting your creditors to accept less than the entire balance as payment in full. You can try negotiating yourself with creditors or hire a professional debt resolution company. 

Debt resolution clients tend to experience better outcomes than Chapter 13 bankruptcy filers. While both processes can impact credit scores, research shows that credit scores tend to recover faster and more fully after debt resolution than they do with bankruptcy. And on average, debt resolution takes less time than e

ither Chapter 13 bankruptcy or a DMP (24-48 months vs 36-60 months). Finally, people who use debt resolution have a far lower chance of needing to use it again—while many more Chapter 13 filers end up filing more than once.

Bankruptcy can be the best way to get rid of debt for some, but not all. It’s smart to look at bankruptcy pros, cons, and alternatives before pulling the trigger. 

Talk to a professional debt consultant to sort out your most viable options.

This article should not be construed as legal advice.