The decision whether to file bankruptcy requires you look at alternative ways of achieving your goal to be financially free from debt. There are several approaches and each achieves the result you’re looking for, with varying effects on credit scores.
Debt Repayment seems like a no brainer and it’s what we should all strive for given the means to do so. However, debt repayment on general unsecured credit card debt is the lowest budget priority and when there is no money left over, they should not be paid. Sticking to a strict budget takes discipline, but the effort will pay off when the debt is eliminated without filing for bankruptcy. I recommend Dave Ramsey’s program based on his book, Total Money Makeover for eliminating debt through repayment.
Debt settlement is where you negotiate with creditors to pay less than what you owe on the debt. Normally, the debt is already delinquent having a negative impact on credit scores. Negotiations of a debt can save you 50% of what you owe. There is a pitfall to settling debts for less than is owed. One pitfall is that you may end up owing income taxes on the cancelled debt. Another pitfall is that your credit score may take longer to improve when debts are settled when the creditor updates information with your settlement payment.
A #protip here is to be sure you’re legally obligated to repay any debt before doing so. In every state, there are laws that limit the time in which a creditor can take legal action called a Statute of Limitations. In California the statute of limitations on a written contract (a debt you signed for like a credit card application) is four (4) years. After that, you’re no longer legally obligated to pay the debt, unless the creditor has sued you and obtained a judgment in a court of law. Getting help from a Credit Counseling Agency is helpful for those who aren’t comfortable negotiating with their creditors.
Sometimes doing nothing may be the right approach. If you’re on social security disability, or you don’t own anything of value then creditors are not likely to be able to collect anything from you. If you’re “judgment proof” you may not need to repay your debts or file bankruptcy. This strategy does not work for family support obligations, or taxes though.
Not so helpful alternatives to bankruptcy include home mortgage refinancing to pay off debts, or consolidating debts. Essentially taking out a new loan to pay off old debts doesn’t get rid of the debt. However, these may be wise moves if it lowers the interest rate or gives you an income tax write-off like a mortgage on a home. Otherwise, more debt is not the answer.