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Exploring Alternatives to Bankruptcy: Financial Options for Homeowners

By Thomas O'Shaughnessy | March 21, 2024

If you’re struggling financially and unable to pay your bills, you may have considered filing for bankruptcy. Filing for bankruptcy gives you a fresh start, but it stays on your credit report for up to 10 years — resulting in consequences for years to come. After filing for bankruptcy, it's difficult to borrow money for large purchases, and if you’re a homeowner, you could lose your house. With such serious repercussions, it's important to consider any alternative before filing for bankruptcy.

Debt consolidation

Debt consolidation involves combining your various debts into one payment. This is helpful because it eliminates the stress of remembering multiple different due dates. Instead, you can focus on one. In addition, combining your debt often leads to a more favorable interest rate, which makes your payments more manageable.

If you have significant equity in your home, it might be possible to consolidate your debt using a home equity loan or a home equity line of credit. However, there are risks to using home equity for debt repayment. For example, the bank could foreclose on your home if you don’t pay. Understand the pros and cons before applying for this type of loan.

Debt management plans

With debt management plans or debt settlements, you work with a debt management company that calls your creditors and negotiates lower payments on your behalf. In some cases, the company may ask you to stop making payments to bring your creditors to the negotiating table. But all those late payments will negatively affect your credit, which can take years to repair. With such poor credit, you may not receive a competitive interest rate for another home or car purchase for quite some time.

Borrowing money

It might seem counterintuitive to borrow more money when you’re facing bankruptcy. However, responsible borrowing options can help you get caught up on your bills. Ask family members if they're willing to offer you a loan. Pay them back as soon as possible, though, or else you'll risk damaging your relationships.

Transferring high-interest debt

If you have high-interest debt with large payments, another option is to apply for a balance transfer credit card. While this won’t eliminate your high-interest debt, it enables you to move the balance to a card that offers an introductory 0% APR for a set period of time. 

Moving your balance to a 0% APR card for a set term can lower your monthly payments and help you pay down your balance faster since your payment will go entirely toward the principal. Moving your debt can also improve your cash flow, enabling you to allocate more money to other payments you might be behind on, like your mortgage.

Increasing income

If you’re able, working a side gig or a second job can help you increase your income to pay your bills and avoid bankruptcy. Working another job might be exhausting, but you don’t have to do it forever. Even temporary extra work can help you get into a better financial position faster.

Consider making lifestyle changes as well. Frugal hacks — such as making coffee at home, bringing lunch to work, and cutting subscription services — can save you hundreds of dollars a month. Again, you don’t have to cut out the fun things forever. Temporarily reducing your discretionary spending can infuse your budget with some much-needed cash.

Sell your home

If you’re unable to increase your income quickly or consolidate your debt, consider selling your home. While it might seem like a last resort, selling your home when you’re facing bankruptcy could help. 

If you have equity in your home, selling it could free up much-needed cash. Selling would also eliminate the stress of being late on your mortgage payments and prevent you from having a foreclosure on your credit report.

You can even find real estate agents who are willing to work for a reduced commission, which means you get to keep more of the profits after selling your home. 

Once your home sells, consider living with a family member while you get your finances in order. Renting is another option, too. While renting might be costly, the benefit is you won’t have to worry about unexpected maintenance costs or real estate tax bills. Plus, if you sell your house in time to avoid foreclosure, you can use the time you’re renting to improve your finances and save to buy another home sometime in the future.

Types of bankruptcy for homeowners

If there is no alternative to bankruptcy, many homeowners will likely worry about whether they will lose their house or be forced to sell. However, there are two types of bankruptcy — Chapter 7 and Chapter 13 — that allow homeowners to keep their homes if they meet certain criteria. 

Chapter 7 bankruptcy

Filing for Chapter 7 bankruptcy is like wiping the slate clean and starting over. This can be a relief if you’ve been living with the stress of debt for a long time. 

The downside is that to start over, you will likely have to sell some of your assets as part of the process. Sometimes, this means losing your house, but not always. It depends on how much equity you have, what state you live in, and whether your mortgage is current. 

Chapter 13 bankruptcy

With Chapter 13 bankruptcy, you work with a court to create a plan to pay off your debt through regular installments over a few years. But to qualify, you have to earn a regular income.

The benefit of Chapter 13 bankruptcy is that you can keep your home if you agree to a repayment plan. The catch is that you cannot be late on your payments or you risk losing your plan and your home. 

Next steps

To learn more about the next steps, contact a bankruptcy attorney who can review your financial situation and advise you on which option would benefit you the most. Some states require you to take a credit counseling class or a debtor education course before filing for bankruptcy as well. 

While bankruptcy can help relieve financial pressure in some situations, it is not a cure-all. There are some types of debt, like student loans and child-support back payments, that cannot be erased with bankruptcy. 

A trusted attorney can review your current debts, assets, and income to help you decide how to proceed.

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