Money Talks, So Should You

Q&A: Are there alternatives to bankruptcy?

David John Marotta
by David John Marotta, NAPFA (@MarottaOnMoney)

If you can afford each month to pay 2 percent of your outstanding debt, you can probably avoid bankruptcy. But if you feel trapped by your finances, consider bankruptcy.

As strange as it may sound, bankruptcy is one of the benefits of capitalism. In traditional cultures, debt was passed from father to son. By not being able to escape the bondage of debt, people could become slaves permanently.

For those facing desperate financial circumstances, it is better to get professional advice regarding bankruptcy than to resort to desperate measures, either illegal or violent. Bankruptcy, although certainly not pleasant, can provide a way out.

READ: Does debt have a statute of limitations?

Here are some approaches to help you avoid bankruptcy:

  1. You can spend significantly less than you earn and pay off your outstanding debt. This is a herculean task of behavioral change. We all follow mindless spending scripts that we must change for new habits to take their place. 
  2. You can earn more money and keep your spending constant. Avoiding bankruptcy might be as simple as working a second job. Most small business owners get ahead by working 5 to 9 p.m. Why not use the second shift to get out of debt? Sometimes the secret of success is as simple as hard work.
  3. You can raise money and use it to pay down your debt. Hold a yard sale. Sell that second car. Downsize your house. Leave yourself a small emergency fund so you won't be scrambling for money if your car breaks down. The two assets we do not recommend using to pay down your debt are home equity and retirement accounts.

If you borrow against your home to pay off credit card debt, you are exchanging unsecured debt for a secured loan. Credit card debt is unsecured and therefore dischargeable during bankruptcy proceedings. A mortgage on your home or a home equity line of credit is secured against your house, and you could end up losing it.

READ: Would a collection agency contact my employer? 

Similarly, you may not be able to keep your retirement accounts during bankruptcy proceedings. Draining your retirement accounts only trades financial hardship now for financial hardship for the rest of your life. It is better to file for bankruptcy and have poor credit for 10 years than to be homeless and destitute in your golden years.

4. You can consolidate your high-interest loans into a single lower interest loan. This strategy will reduce your payments and may make it easier to get ahead on paying down your debt.

5. You can negotiate with your creditors and ask them to reduce the interest and fees. Some credit card companies are willing to do this rather than risk not getting anything. They will work with you to set up a payment plan and may also reduce your interest rate voluntarily.

6. You can seek the services of a credit counseling service that will work with you and your creditors to devise a more manageable repayment plan suited to your finances. Here are three options:

National Foundation for Credit Counseling

Clearpoint Credit Counseling Solutions


Regardless of what approach you are taking to avoid bankruptcy, you need help to get your budget under control, which you are unlikely to accomplish by yourself.


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David John Marotta, CFP, AIF, is president of Marotta Wealth Management, Inc. Marotta is a member of the National Association of Personal Finance Advisors (NAPFA), a fee-only professional association and a Dimespring knowledge partner.